The SEC has put forth three proposals that could drastically change the way mutual funds are sold.

Two of the proposals seek greater disclosure about costs borne by investors, and the third seeks to ban directed brokerage, a longstanding practice in which fund managers pay brokerages selling their funds.

Regarding directed brokerage, the SEC’s stance is crystal clear: In a staff report made public on February 11, it recommended that directed brokerage be abolished. SEC Commissioner Harvey Goldschmid stated that he “could find no redeeming quality” in the practice.

Directed brokerage, of course, has been accepted for some time, so long as the payment arrangements were fully disclosed in prospectuses. But Paul Roye, the SEC’s director of investment management, says that despite such disclosures, directed brokerage has “become unmanageable,” and that “existing conflicts of interest, left alone, wouldn’t be resolved in the interest of the fund.” In addition, directed brokerage negatively affects trade execution and hides distribution expenses, among a host of other things that hurt investors, Roye says.

Louis Harvey, president of Boston-based research company Dalbar Inc., says eliminating directed brokerage would be a boon to smaller brokerage firms. “It levels the playing field for firms without institutional brokerage capability,” he says, adding, “It’s an enormous step forward.”

John Freeman, a professor of legal and business ethics at the University of South Carolina, likewise applauds the SEC proposals, while noting they have been too long in coming. “Free markets simply don’t work where there’s deceptive marketing and conflicts of interest,” Freeman says. He adds that the SEC has not been moving as quickly as state regulators to remedy these practices. “I’ve got slugs in my garden faster than the SEC,” he says.

Jeff Keil, vice president at fund rating service Lipper, also supports the directed brokerage proposal, but he adds that he would like to see more effort to educate investors about “fees, commissions, costs and such, and how they can severely diminish an account balance.”

Adds SEC commissioner Paul Atkins, “A one-percent annual fee will reduce an account balance over 10 years by 18 percent, but I doubt many shareholders know this, and that’s a problem.”

As such, the SEC is floating two other proposals to ratchet up disclosure requirements—in investment advisory contracts and quarterly reports, respectively—and make it easier for investors to understand the fees they are charged and how a fund’s underlying costs can affect their returns. Such disclosure, the SEC says, will help investors evaluate and compare funds.

Brokers think a good portion of the SEC effort is bunk. One UBS broker interviewed for this article voiced a common refrain: “Disclosure is good, but the average person, as long as they’re making money, doesn’t care about what they’re paying.”

True as that may be, the SEC points out that the most popular subject of investor complaint in 2003 was brokerage fees, commissions and administrative costs.

Under one SEC proposal, all fund costs would be displayed in dollar amounts paid by the client on a $1,000 investment. Shareholders then will be able to easily determine the fund’s worth, and to even do some comparison-shopping of other funds. Management’s discussion of the fund’s performance would also be required in annual shareholder’s reports.

If performance is sub-par, investors could refer to documents provided by the directors that disclose the advisor’s stated strategy, the nature and extent of his service under the contract and his fees, in detail. The SEC believes advisors would thus be more accountable for their results and directors would be more careful of approvals.

Still, many don’t see the increased disclosure helping investors.

“Investors aren’t going to read all this stuff,’ says Harvey. “Instead of stopping impropriety, they’re adding clutter and ambiguity.”

The SEC will take comments on the proposals through April 26.