SEC Responds to Congressional Request For Information on Fund Industry Issues

Washington, DC, June 11, 2003 – The SEC recently published a letter from its Chairman William Donaldson—and a memorandum prepared by the agency’s Division of Investment Management—that responds to a request from Congress for more information on mutual fund industry practices.

Background
Earlier this year, following a hearing on mutual fund practices, Richard H. Baker (R-LA), Chairman of the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, sent a letter to the Securities and Exchange Commission soliciting the SEC’s views on various mutual fund issues.

In response to Chairman Baker’s request, the SEC sent Donaldson’s letter and an SEC Division of Investment Management report discussing a variety of mutual fund issues. The report made the following points, among others:

It is not clear that the overall cost of owning mutual fund shares has increased.
Requiring average fee and expense disclosures has several advantages compared to requiring individualized fee disclosures for each shareholder.
Although disclosure of portfolio transaction costs can be improved, it would appear that estimates of such costs cannot be made uniform or verifiable.
Congress should require a majority of independent directors on all fund boards and narrow the definition of independent, but the need for an independent chairman is questionable.
Advisers should keep better records of the use of soft dollars, but independent directors are in a better position than fund investors to monitor soft dollars.
Additional disclosures regarding compensation of portfolio managers, sales charge breakpoints, and revenue-sharing payments could be useful, although the SEC notes that revenue-sharing payments generally have no direct impact on fund shareholders because they are not fund expenses.