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Thursday, June 12, 2003

Baker Targets Funds

by: Sean Hanna, Editor in Chief

Congress is going after the fund industry with a new bill. The action came just a day after the SEC submitted its 120-page report on expenses and fees in the fund industry to Congress. The Mutual Funds Integrity and Fee Transparency Act of 2003 (HR 2420) is sponsored by Republican Richard Baker of Louisiana. Baker is chairman of the House Capital Markets Subcommittee.

Baker has three broad goals that he hopes the legislation can achieve: to provide investors with more complete and useful information about the fees that they pay, to strengthen director oversight of soft-dollar and certain distribution arrangements and to enhance corporate governance and management integrity. The bill would also apply the audit committee and auditor provisions of last year's Sarbanes-Oxley Act to fund firms.

Unlike much recent legislation created in Washington, this bill is not a response to any specific event or scandal. Rather, the fund industry appears to be being singled out because of its size and reach. What is not clear yet, is how much support the bill has in the House.

"Mutual funds are the investment tool of choice of the growing millions of ordinary. working families participating in the markets and providing the liquidity vital to the function of our capital markets and the growth of our economy," said Baker in a statement introducing the bill. "It's only proper that Congress make sure that they get the facts they need to make informed investment choices and that their money is being managed in the most professional manner possible."

Baker also said that the subcommittee has scheduled a hearing about the bill for next Wednesday, June 18.

For the fund advisors, the bill represents a new reach by Congress into their own operations. Currently, funds must disclose information about expenses and fees paid by the investment company. The new legislation would expand the disclosure to expenses paid by the fund advisor also.

Fund advisors would have to disclose revenue sharing and directed-brokerage commissions paid to gain distribution for the fund, even if the advisor and not the investment company makes the revenue sharing payments. The advisor would also have to disclose compensation of portfolio managers and soft dollar arrangements.

These disclosures would have to be made quarterly. Fund firms would have to make the disclosures in a separate document from the prospectus.

If enacted, the disclosures could have widespread repercussions inside the industry as now veiled practices are laid out for all to see. Not only would the disclosures open the industry's kimono to investors and the media, it would also enable fund firms and distributors to compare their distribution agreements directly to those of their rivals.

The legislation also takes aim at directors. It would require fund advisors to submit an annual report to directors on revenue sharing, directed brokerage and soft dollar arrangements. It would also create a fiduciary obligation for directors to supervise these arrangements and to ensure that they are in the best interest of the fund.

The Baker bill would also require that two-thirds of directors be independent and that the board chairman be independent. Family members of company officials and those with business relationships with the company would not be counted as independent.

A section-by-section summary of the bill put together by Rep. Baker is available here.  

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