The U.S. Securities and Exchange Commission has adopted several measure to beef up mutual fund disclosure and it is proposing other changes, including a possible ban on soft-dollar commissions.

The SEC adopted several rule amendments that are intended to improve the disclosure that mutual funds provide to their shareholders about their costs, portfolio investments, and performance. The amendments will require funds to disclose fund expenses borne by shareholders; quarterly disclosure of portfolio holdings; they will require fund reports to include a tabular or graphic presentation of a fund’s portfolio holdings by identifiable categories; and, funds will have to include management’s discussion of fund performance in their annual report to shareholders.

The SEC also proposed amendments that would require fund shareholder reports to discuss the basis for the board of directors’ approval of any investment advisory contract. It also proposed an amendment that would prohibit funds from directing commissions from their portfolio brokerage transactions to broker-dealers to compensate them for distributing fund shares. Comments on these proposals are due in 60 days.

The Securities Industry Association came out in support the SEC’s moves, although it said it would study the commission’s proposed ban on directed brokerage arrangements. “SIA has strongly advocated greater transparency, tough enforcement actions, and reforms to ensure that mutual-fund investors’ interests are well protected,” said SIA president Marc Lackritz. “The SEC took important action today in support of our shared commitment to mutual-fund reform.

We look forward to reviewing the commission’s proposals and continuing to work with Congress and the SEC to bring about effective regulatory reform.”

Also, the SIA, joined by the Financial Services Roundtable, the American Bankers Association, the American Council of Life Insurers, and the American Insurance Association sent a joint letter to the SEC on its proposed “hard close” time for mutual-fund pricing to prevent late trading. While supportive of the SEC’s efforts, the associations advocate a hard close at the intermediary level (broker-dealer, retirement plan administrator, etc.), rather than at the mutual-fund level. They say that this alternative would effectively protect millions of mutual-fund investors from late trading without disadvantaging those who purchase shares through a broker-dealer or other intermediary. The association’s proposal would also provide an effective, tamper-proof, electronic order time-stamping system.

“We applaud the SEC for this important initiative to deter late-trading,” said Lackritz. “Establishing the hard close at the intermediary level improves on the original proposal and benefits investors. We encourage the commission to complement it with other means to enable investors to receive current pricing.”

A copy of the joint trade association letter to the SEC is available at http://www.sia.com/2004_comment_letters/pdf/SEC02-06-04b.pdf.
http://www.sec.gov/news/press/2004-16.htm