Listen closely, the SEC something rare these days on Thursday -- praise from a member of Congress. The kind words were provided by Senator Peter Fitzgerald (R. Illinois) in response to what he considers the quick enactment of a lengthy list of reforms of the mutual fund industry. Many of the 17 reforms cited by Fitzgerald had been resisted by the fund industry that is concerned over increasing compliance cost and complexity.
Fitzgerald said he still believes Congress should enact some reforms that he claims only Congress can do, such as tightening the definition of independent directors, eliminating soft dollar arrangements and clarifying the fiduciary duties fund directors owe fund shareholders. He praised the SEC for moving quickly on so many of the reforms within its power to enact.
"The SEC deserves great credit for putting in place many of the provisions included in my bill – provisions that will mean greater transparency, increased competition, and lower fees for investors," Fitzgerald said. "I urge Congress to continue to push for reforms of the industry after I leave the Senate and am hopeful that the SEC will move ahead on its own with other improvements."
Fitzgerald highlighted the 17 pertaining new rules that addressed pieces of the Mutual Fund Reform Act of 2004 (MFRA), that he sponsored in February 2004. He also noted that the SEC is still reviewing another eight possible rules that had stemmed from the legislation.
"Although many of them don’t know it yet, investors in America gained billions of dollars in 2004 because of the smart, tough-minded approach Chairman Donaldson and the commission have taken to the problems in the mutual fund industry," Fitzgerald said. "The extra transparency will reduce the amount of fees investors will pay, and, compounded over time, will mean significantly larger retirement nest eggs."
Fitzgerald said that the MFRA provisions mirrored in rules the SEC has adopted are:
- Independent Directors. The SEC now requires that a mutual fund board be comprised of at least 75 percent independent directors.
- Independent Chairman. The SEC now requires that fund board chairman be independent.
- Better disclosure. The SEC now requires disclosure of costs in actual dollars and cents, based upon a hypothetical $1,000 investment.
- Over-extension of Fund Directors. The SEC now requires fund directors to perform an annual self-evaluation of their effectiveness, including consideration of the number of funds they oversee and the board’s committee structure. This rule reflects the MFRA provision directing the SEC to study whether service on multiple boards can compromise a director’s independence.
- Fund Adviser Code of Ethics. The SEC now requires that registered investment advisers adopt a code of ethics.
- Chief Compliance Officer. The SEC now requires funds and investment advisers to appoint a chief compliance officer answerable directly to the board.
- Compliance Procedures. The SEC now requires funds and investment advisers to develop comprehensive compliance policies and procedures.
- Mandatory Consideration of Economies of Scale. The SEC now requires funds to discuss the selection of fund advisers and fee agreements in several shareholder communications, and to consider whether economies of scale are benefitting investors. Fitzgerald’s bill would require consideration of economies of scale as part of directors’ and advisers’ fiduciary duty.
- Disclosure of Portfolio Manager’s Compensation Structure. The SEC now requires disclosure, for each type of compensation a portfolio manager receives, of the specific criteria for determining that compensation.
- Disclosure of Portfolio Manager’s Ownership of Fund Shares. The SEC now requires disclosure of a portfolio manager’s ownership of shares in the fund.
- Disclosure of Portfolio Manager’s Personal Trading in Fund. The SEC now requires advisory personnel to report their securities transactions, including transactions in any mutual fund managed by the adviser.
- Disclosure of Proxy Votes. The SEC now requires disclosure of the fund’s proxy voting record .
- Disclosure of Breakpoint Discounts. The SEC now requires that funds disclose in their prospectuses the availability of and eligibility for breakpoint discounts.
- Fair-Value Pricing. A mutual fund is already required to engage in fair-value pricing of its basket of securities. The SEC has, however, not only publicly emphasized the critical importance of fair-value pricing as a deterrent to unfair arbitrage, but also initiated numerous examinations to assess the actual practice. Moreover, the SEC now requires disclosure in the fund prospectus of the fund-specific circumstances under which the fund will use fair value pricing.
- Prohibition of Directed Brokerage. MFRA prohibits certain practices that give rise to unacceptable conflicts of interestincluding directed brokerage, soft-dollar arrangements, and revenue sharing. Not only did the concept of prohibition gain substantial currency in the public and regulatory debates, but the SEC actually did prohibit one of these practicesdirected brokerage.
- Market timing procedures. The SEC now requires funds to disclose in their prospectus the policy on frequent purchase and redemption of fund shares, or a statement articulating why a policy is not in place.
- Restriction on selective disclosure. The SEC now requires funds to disclose their policies and procedures regarding disclosure of portfolio holdings and restricts funds’ abililty to selectively disclose them.
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