The Securities and Exchange Commissioners came up with additional new requirements for mutual funds in an open meeting Wednesday. The meeting was the fourth in recent months at which the five commissioners voted on new rules intended to solve issues raised by the fund scandals first uncovered in September.

All five commissioners voted to approve all of the new rules brought today by the SEC's Division of Investment Management. The rules cover fee disclosure, portfolio disclosure and disclosure of additional information about the relationship of the fund and its investment advisor.

Chairman William Donaldson also said that he expects the SEC staff to issue final rules on the proposed regs now in public comment by April. Those proposed regs passed the commissioners in December.

He also said that the commissioners would hold a meeting on February 25 to vote on rules designed to combat market timers, including a rule requiring redemption fees on shares held less than five business days. At a later meeting scheduled on March 10 the commissioners will consider rules requiring more disclosure to shareholders on the portfolio manager's relationship to the fund.

The rules proposed today cover disclosure of fees, portfolio holdings and advisory agreements.

If they are approved in current form, fund firms would be required to disclose fees in a "dollars and cents" format. The disclosure would provide a cost per $1,000 invested. Thus, a fund company with 150 basis points of expenses would list costs of $150 per $1,000 invested. Those costs would be adjusted using a hypothetical annual five percent return.

Donaldson said that the SEC has "wrestled for years" with the problem of how to present this information and that the proposal made today will not be the last word on the subject.

A hint of where the commission's thinking is headed came at one point when Commisioner Atkins asked the staff testifying why the SEC should not require a detailed itemized breakdown of the costs borne by the shareholders. "The notion of getting an itemized account statement showing all of the shareholder's expenses is not unappealing," he said.

Paul Roye, director of the Investment Management Division, explained that the staff recommended that the aggregate fee be disclosed after weighing the costs and benefits of more detailed disclosure.

"While we wanted to enhance investors understanding of what it costs to be in the fund ... the alternative that would require the itemization of that information on individual account statements would result in additional costs and additional complexity," he explained, adding that many of the statements are produced by intermediaries and not the fund firms.

He added that the staff also is seeking to enable shareholders to use the disclosed expense information to compare funds, and an individualized expense statement would not help them to do that.

"If you got individualized expense information on your account statement, it would certainly tell you how much you paid, but it would not help you compare one fund to the other," said Roye.

In a follow-up, Commissioner Glassman suggested that the SEC ask for comment on a requirement that the fee information be disclosed in investor statements so that they can find it more easily.

In the area of portfolio disclosure, the commissioners approved proposed rules that would increase the frequency of the reports to four times a year from two times currently. However, fund firms will be able to submit a summary portfolio disclosure that would only require them to list the 50 top holdings or all holdings making up more than one percent of the portfolio.

The summary disclosure would also require funds to use illustrations such as tables and graphs to make the information more readable.

Donaldson asked the staff if they received feedback from investors about the proposed changes in portfolio information. A staff member answered that "we did receive feedback from some individual investors and some investor advocates."

In a follow-up question, the a commissioner asked if the considered the objections of fund firms that worry the information will be used to trade against them. The staff answered that the 60-day delay in the release of the portfolio information should protect the funds from "predatory" traders. Roye added that a government study showed that the 60-day lag should prevent front running.

"Some of the most vociferous opponents of the proposal in the early days after the allegations of selective disclosures are now disclosing their portfolios voluntarily," explained one staffer.

Finally, the commissioners approved a rule that would require investment companies to explain in the annual report's management discussion to shareholders why the fund board hire, or recommend hiring, an investment adviser for the fund and how well the advisor is performing. That rule is a response to criticism that fund boards often hire a company affiliated to the fund advisor to manage the portfolio rather than competitively bid out the mandate.

Roye said that he hopes the proposed rules would lead to fund boards considering contracts with advisors more carefully.

The board would be required to discuss the material factors that were considered in the negotiating of the advisory contract. The disclosures would be made in the statement of additional information and proxy disclosure reports. The fund must discuss both the funds approval of the advisor and the amount paid to the advisor. It would also have to discuss the investment performance of the fund and the advisor and the extent to which economies of scale will be realized by the funds. Finally, the board would have to disclose whether it relied on comparisons with other types of clients when negotiating the agreement.

Some of the commissioners, however, worried that disclosure would be turned into boilerplate by fund firms. To keep that from happening, the staff said that it reviews each disclosure.

Each of the proposals is now subject to a public disclosure period. 

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