Congress Moving on Mutual Funds

Since the mutual fund scandals broke six months ago, Congress has been largely hands-off with regards to reform efforts, but that is changing fast.

The Chairman of the Senate Government Affairs Committee, Susan Collins (R-Maine), testifying before the Senate Banking, Housing and Urban Affairs Committee on Tuesday, said “the SEC made a good start” on reform with disclosure proposals that would require funds to show costs-per-thousand dollars in shareholder’s reports.

“I believe, however, that Congress should go further,” said Collins. In legislation co-sponsored by Senators Peter Fitzgerald (R-Ill.) and Carl Levin (D-Mich.), the Maine Senator seeks to have cost disclosures “personalized to an extent practical,” and published at least annually on an account statement—where it is widely believed the average investor focuses most of his attention.

Collins stressed the importance of cost disclosure over other industry problems, such as market timing and late trading, saying the impact of the former on investor assets will be much greater over time. When comparing a high-flying fund with expenses of 1.5 percent to a less flashy fund with .5 percent expenses, Collins says most investors would chase the higher-returning fund even though “the other, by the end of [the investor’s] career, would have returned 35 to 40 percent more money.”

Collins did bow to what many in the industry have taken issue with, that is, the difficulty of calculating the true costs of mutual funds to customers. Some expenses that contribute to the cost determinant—the expense ratio—aren’t visible to investors. For instance, mutual fund trading costs, which include bundled expenses like research and distribution expenses as well as directed brokerage arrangements, are not included in a fund’s expense ratio.

“Like a bank statement that tells a customer how much he was charged for individual services, a mutual fund statement should tell that person what his actual share of the fund’s fees were,” said Collins.

Collins quoted the American Enterprise Institute’s Shadow Financial Regulatory Committee, a group of the country’s top economists, which said “Although market fluctuations may swamp the impact of fund expenses on short-term returns, such expenses become much more significant in determining differential returns among funds over a number of years.”

Using General Accounting Office data, Chairman Collins said the cost of generating and reporting personalized data would be 65 cents every year for each fund account, after a one-dollar initial cost.

Collins concluded her remarks to the Senate Banking Committee by applauding the SEC’s efforts of late while emphasizing that “leaving matters to the SEC alone would be…an insufficient response” to the problems in the mutual fund industry. She then urged the Committee, which has held several meetings with independent panels of industry experts in the past months, “to report mutual fund reform legislation as soon as possible, so that it can be enacted prior to adjournment.” The 108th Congress’ expected adjournment date is October 1st, 2004.