Funds Face Rising Disclosure Demands

"I believe that this industry has not adequately measured up to its responsibilities to mutual fund investors," Bogle says in recent testimony to the Financial Services Committee.

First, Bogle says, the Investment Company Act of 1940 should be amended to establish an express fiduciary duty on the part of fund managers to place the interests of fund shareholders ahead of the interests of fund managers and underwriters.

Second, Bogle says, funds should disclose costs to investors in terms of dollars rather than a percentage of the investment. This, he says, would help investors become aware of the "truly punishing penalty of high expenses."

Bogle also calls for more complete disclosure of where the expense money goes, including salaries of senior officers, marketing, advertising, operations and administration.

Once this information is disclosed, he says, the behavior of fund managers will change.

"It will lead to substantial reduction in costs and will therefore materially enhance the returns that shareholders receive," Bogle says.

Paul. G. Haaga Jr., the current chairman of ICIs board of governors, says many aspects of H.R. 2420 would indeed benefit investors, including enhanced independence of fund boards, independent audit committees and additional disclosure in certain areas.

But Haaga says ICI does not agree that funds should disclose the estimated dollar amount of operating expenses borne by each shareholder.

"We question both the practicability and the necessity of this requirement," he says.

Mutual fund investors, he says, already receive significant disclosure about fund fees and expenses.

Moreover, the SEC has proposed a rule that would further enhance disclosure by requiring funds to disclose the costs in dollars of a $10,000 investment in the fund, he adds.

"The Institute believes that the SEC should proceed with its proposal and that Congress should study the effectiveness of the new fee disclosure initiative in development before mandating yet another related and costly disclosure requirement," Haaga says.

Paul Roye, director of the SECs division of investment management, says the SEC supports the goals of H.R. 2420, particularly enhanced disclosure and increased independence of fund directors.

But he urges Congress to preserve the SECs flexibility to determine appropriate standards through the notice and comment rulemaking process.

Reproduced from National Underwriter Life & Health/Financial Services Edition, September 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.