SEC Initiatives Affecting Mutual Funds

Late Trading, Market Timing, and Selective Disclosure of Portfolio Holdings

On December 3, the SEC proposed rule amendments requiring that an order to purchase or redeem fund shares be received by the mutual fund, its primary transfer agent, or a registered securities clearing agency by the time that the fund establishes for calculating its net asset value (usually 4:00 p.m. EST) in order to receive that day’s price.
Also on December 3, the SEC proposed enhanced disclosure requirements relating to: (1) a fund’s market timing policies and procedures; (2) its practices regarding “fair valuation” of its portfolio securities; and (3) its policies and procedures with respect to disclosure of its portfolio holdings.
On February 25, the SEC proposed rules requiring a mutual fund to impose a mandatory redemption fee of 2% on the sale of fund shares within five days of the original investment, with certain limited exceptions.
On April 13, the SEC adopted, with certain modifications, the disclosure requirements that were proposed on December 3.

On December 3, the SEC adopted a rule that requires a fund to: (1) adopt comprehensive compliance policies and procedures, which must be approved by the fund’s board; (2) conduct an annual review of its policies and procedures; and (3) designate a chief compliance officer, who must report to the fund’s board at least annually.
On January 14, the SEC proposed a rule that would require registered investment advisers to adopt and enforce codes of ethics applicable to their supervised persons. The code would have to include certain minimum provisions, including reporting of personal securities holdings and transactions in mutual funds managed by the adviser or an affiliate.
On May 26, the SEC adopted, with certain modifications, the adviser codes of ethics proposal.

On December 17, the SEC issued a concept release seeking public comment on issues relating to disclosure of mutual fund transaction costs.
On January 14, the SEC proposed rules requiring broker-dealers to provide their customers with targeted information, at the point of sale and in transaction confirmations, regarding the costs and potential conflicts of interest that arise from the distribution of mutual fund shares.
On February 11, the SEC proposed an amendment to Rule 12b-1 under the Investment Company Act of 1940 that would prohibit mutual funds from using brokerage commissions to pay broker-dealers for selling fund shares.

On December 17, the SEC proposed amendments requiring mutual funds to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads.
On February 11, the SEC adopted amendments requiring mutual funds to: (1) disclose semi-annually the dollar amount of fees and expenses paid by shareholders; and (2) increase to quarterly the frequency with which they disclose their portfolio holdings.
Also on February 11, the SEC proposed amendments requiring a mutual fund to disclose in its annual reports to shareholders the reasons supporting the directors’ decision to approve the fund’s investment advisory contract.
On March 11, the SEC proposed amendments requiring enhanced disclosure regarding portfolio managers, their incentives in managing a fund, and the potential conflicts of interest that may arise when they also manage other investment vehicles.
On May 26, the SEC adopted amendments to Form N-1A that require mutual funds to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads. The adopted amendments are substantively identical to those proposed by the SEC on December 17.
On June 23, the SEC adopted amendments requiring a fund to disclose the reasons supporting the directors’ decision to approve the fund’s investment advisory contract. The adopted amendments are largely the same as those proposed by the SEC on February 11.

July 12, 2004