- The Washington Times - Wednesday, February 11, 2004


Federal regulators are moving closer to banning payments by mutual fund companies to induce brokers to sell certain funds — a practice critics say creates conflicts of interest and drives up investors’ costs.

The Securities and Exchange Commission also voted yesterday to adopt new rules requiring funds to provide investors a twice-yearly “shareholder report” with fuller information on fees and expenses. The report will include the dollar amount of fund expenses paid by shareholders on a $1,000 investment.

The SEC, which has been making a series of changes in rules governing the mutual fund industry, is promising that dramatic reforms protecting investors from abuses will be in place by early summer.

The agency has been under pressure to act from investor advocates and lawmakers — who are pushing legislation to overhaul the fund industry — as evidence continues to mount that ordinary shareholders are being hurt by trading and marketing abuses.

“It has become painfully clear that the practice of directing … [fund money] to a broker or dealer as compensation for distribution of the fund’s shares presents opportunities for abuse” in recent years, SEC Chairman William H. Donaldson said.

The practice is all the more troubling, he said, “because its impact is hidden from investors.”

Underscoring the proposal’s far-reaching effect, Mr. Donaldson said: “This one is going to hit them where it hurts.”

The planned ban on incentive payments to brokers is one of the most radical proposals affecting Wall Street investment houses and the mutual fund industry. The funds have been ensnared in a scandal since revelations in September of trading practices that favor some big investors to the detriment of ordinary shareholders.

Since then, top executives of several big fund companies have been charged; dozens of companies are under investigation.

The SEC says the move is part of a major rule-writing effort meant to rebuild confidence in the fund industry among the 95 million Americans — half of all households — who entrust about $7 trillion to it.

The proposal will be submitted for public comment for 60 days and is likely to be adopted by the agency afterward.

The new disclosure will “enable investors to determine the amount of fees they paid on an ongoing basis, as well as to compare the amount of fees charged by other funds,” said Paul Roye, head of the SEC division that oversees the mutual fund industry, before the vote.

An annual fee as low as 1 percent can cut an investor’s returns by 18 percent over 20 years, noted Commissioner Paul Atkins.

Also under the new rules, fund companies would be required to give investors more information every quarter about the stocks in which the funds invest.

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