Fund Disclosure Change Backed
Investors in mutual funds would get detailed information on the managers of fund portfolios under a new proposal opened for public comment by federal regulators as they target fund industry abuses.
Members of the Securities and Exchange Commission voted 5 to 0 at a public meeting Thursday to tentatively adopt new requirements for fund companies to disclose the identities of members of portfolio management teams as well as their compensation and whether they own shares in the funds they manage.
The SEC commissioners also adopted new requirements for the special reports that companies must file with the agency to disclose significant developments. The changes shorten the time period in which the reports must be submitted and add new developments that will trigger a report, including a restatement of earnings and the sort of off-the-books transactions that figured in collapsed Enron’s accounting scandal.
The mutual fund disclosure proposal is meant to shed greater light on portfolio managers, their incentives in managing a fund and their potential conflicts of interest when they manage multiple fund portfolios.
The new information “may assist fund shareholders in gauging whether the portfolio manager’s financial interests are in harmony with their own,” said SEC Chairman William H. Donaldson. He added, however: “We need to be mindful that, taken too far, this type of disclosure could seriously intrude on the privacy of portfolio managers.”
The agency will seek a solution that provides needed information to investors without serious privacy violations before it formally adopts new rules following a period of public comment, Donaldson said.
Also on the mutual fund front, the SEC is considering alternatives to a proposal designed to curb after-hours trading in fund shares because it could hurt investors in 401(k) and other retirement plans. The agency also is widening its inspections of mutual fund firms and trading to root out abuses, the head of the SEC’s inspections office said at a hearing Wednesday of the Senate Banking Committee.
“Our goal is to improve examiners’ ability to identify and scrutinize transactions and arrangements that place the interests of fund shareholders at risk,” Lori Richards testified. “Today, examiners are increasing the frequency and depth of ... reviews for high-risk firms.”
Ordinary fund investors have lost billions of dollars from special trading deals for big-money customers and fund company insiders, regulators say. Some 95 million Americans -- half of all households -- invest about $7 trillion in mutual funds, which are the primary vehicle for retirement savings and college funds.
The long-standing practice of fund companies making such special, often undisclosed, payments to brokers creates conflicts of interest and drives up costs to investors, critics say.
The SEC last month proposed to ban such incentive payments altogether. The agency also has proposed to crack down on illegal after-hours trading in mutual funds by imposing a “hard cutoff” of 4 p.m. Eastern time for pricing of fund shares.
