SEC Offers Disclosure Suggestions

WASHINGTON — In a bid to boost the public’s faith in Wall Street, securities regulators are moving forward with plans to have mutual funds disclose more detailed information about the fees that investors often pay without knowing it.

The Securities and Exchange Commission also is considering plans to make brokers clearly inform investors about payments the brokers may receive from the funds they recommend to clients.

The suggestions were included in a 120-page SEC report released Tuesday by Congress, which wants the mutual fund industry to be more forthcoming about hidden costs to investors.

Rep. Richard H. Baker, the Louisiana Republican who heads a key House financial subcommittee, said the SEC report points to several areas “that would seem to require congressional action.”

The SEC first floated its plans to increase fee disclosure requirements for mutual funds in December. But Tuesday’s detailed response to Congress amounted to a road map of where regulators may be headed on several fronts related to fees, disclosure and governance of funds, which are held by just under half of U.S. households.

Although mutual funds have not been implicated in the corporate scandals of the last year or so, observers have warned that some fund industry practices are confusing to investors and could lead to conflicts of interest.

SEC staff said Tuesday that the agency is exploring ways to require increased disclosure of a practice known as revenue sharing, in which brokers may receive payments from the same funds they market to investors.

The SEC chairman, William Donaldson, has publicly voiced his support of such disclosure, increasing the possibility that regulators will move forward on an issue that has been smoldering for years.

Under an approach now being considered, brokers would have to inform customers about payments they receive from mutual funds when a customer purchases shares of the fund.

In addition, regulators revealed that they may restrict the use of “soft dollars” -- the practice of paying extra commissions to Wall Street firms in return for research and other services. Critics of the practice say it opens the door for conflicts of interest, while potentially inflating costs shouldered by individual investors.

“Soft dollars create conflicts of interest,” said Paul Roye, director of the SEC division that overseas mutual funds.

The SEC also detailed its approach to fee disclosure: Mutual funds would lay out in semi-annual reports how much the management fees would be in a hypothetical $10,000 account with a 5% return. The SEC staff contends that such an approach would help investors by allowing them to compare the cost of fees charged by different funds.

An alternate proposal, preferred by some shareholder advocates, would require funds to tell investors in their quarterly account statements how much they actually paid in fees.

Some fund companies offered tentative support Tuesday to the SEC report.

“Certainly on our first look at it we would commend the SEC for what appears to be a reasoned and responsible response” to Congress, said Anne Crowley, a spokeswoman for Fidelity Investments in Boston.

At Vanguard Group, another major mutual fund company, initial reaction also was favorable. A spokesman said the SEC review “will go far in restoring investor confidence and trust in the mutual fund industry.”

But the SEC staff’s push for a fee disclosure approach that is based on a hypothetical $10,000 account -- rather than telling each investor what he or she actually pays in fees each quarter -- was criticized.

Mercer Bullard, a professor of securities law at the University of Mississippi and former assistant chief counsel at the SEC, said that only a sophisticated minority of investors follow semiannual reports closely and that they already know how to analyze fund costs.

The SEC staff approach “will just add to the expense of preparing semiannual reports and accomplish nothing for investors,” said Bullard, who founded Fund Democracy, a shareholder advocacy group.

Fees for stock mutual funds have gone up during the bear market, even as returns plunged, although there are different ways to measure such costs and the amounts may vary considerably among funds, said Russ Kinnel, director of fund analysis at Morningstar Inc., a Chicago-based investment research firm.

Although the amount of fees may trouble some, regulators appear most interested in having them clearly reported.

“The degree to which investors understand mutual fund fees and expenses is a significant source of concern to us,” Donaldson said last week, adding that such costs should be “readily understood” and that investors should be aware of any conflicts of interest a broker may have in offering mutual funds.

Baker, whose subcommittee would prepare new legislation on mutual funds, signaled that such action was likely.

“It is imperative we in Congress take every step to ensure investors have all the information they need, provided in a useful format, to make informed investment decisions,” he said.