SEC Responds to Congressional Request for Information on Fund Industry Legislation

Washington, DC, July 11, 2003 - The SEC recently responded to a request from Rep. Paul E. Kanjorski (D-PA) for more information on mutual fund industry issues.

Background
Kanjorski, member of the House Subcommittee on Capital Markets, Insurance, and Government, requested the information following a hearing on H.R. 2420, the Mutual Funds Integrity and Fee Transparency Act of 2003.

The SEC’s Division of Investment Management responded with a letter and report addressing several specific questions asked by Kanjorski. The report made the following points, among others:

The SEC staff cannot estimate the cost of compliance with the full range of disclosures contemplated by H.R. 2420, but notes that an Institute survey of industry participants estimates that the initial costs of implementing the required disclosure would reach $200.4 million, with annual, ongoing costs of $65.7 million.
Disclosure of a fund’s portfolio transaction costs may be useful to fund directors, but may not be suitable for inclusion in disclosure documents provided to the investing public.
Fund governance practices have improved over the past few years as a result of several developments, including the 1999 guidelines developed by the Institute’s advisory committee and the SEC’s 2000 fund governance rules.
The fund prospectus serves an important function as the basic disclosure document for potential fund investors, but may be overwhelming to some investors.
It may be more effective for funds to distribute a fund profile—rather than a full prospectus—to existing shareholders who purchase additional shares.
The staff will consider the potential impact on small funds of any regulatory requirements and implementing provisions of H.R. 2420, in order to minimize the cost burden.

The SEC’s report also expressed the staff’s concern regarding a proposal to include actual dollar disclosure of expenses on account statements, noting that:

it might be difficult to explain to shareholders the nature and limitations of the expense estimate without significantly cluttering the account statement;
the estimated figure could significantly understate or overstate an investor’s actual expenses;
because account statements are distributed quarterly, an investor might mistakenly assume that the expense estimate represents expenses for one quarter, rather than one year;
the fund’s expense ratio is already available in fund prospectuses, and the expense disclosure proposal would permit investors to compare dollar amounts of fund operating expenses, rather than expense ratios, which some investors may find more difficult to understand;
the proposal would not permit investors to make comparisons across funds because it would be based on an individual shareholder’s quarter-end account value; and
the benefits that shareholders would receive from the estimated expense figure might not outweigh the costs of its calculation and disclosure, which could be considerable.