Fund Democracy Insights

Resource Materials

July 2001

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The July 2001 issue of Fund Democracy Insights analyzes business and regulatory issues created by the use of differential pricing by mutual funds, including the feasibility of using mutual funds as investment options for Social Security private accounts. This issue also discusses how Vanguard "manages" its index funds to beat the market, the problems posed by the increasing complexity of the terms and conditions of fund ownership, and the latest developments regarding multimanager funds.

A Special Edition of Fund Democracy Insights provides excerpts from the late Commissioner Paul Carey's speeches on mutual funds and fund-related topics.

Table of Contents - July 2001

From Progressive to Differential Pricing . . . . . . . . . 1

The Sauter Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Taking the "Mutual" Out of Mutual Fund . . . . . . . 8

Social Security Private Accounts . . . . . . . . . . . . . . . 9

Breaking News: Multimanager Funds . . . . . . . . . . . 11

Worth Reading on the Internet . . . . . . . . . . . . . .. . . 12

Special Edition : Commissioner Paul R. Carey on Mutual Funds

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Links to resource materials (.pdf files require Adobe Acrobat for viewing):

From Progressive to Differential Pricing

• Vanguard Index Trust Registration Statement (May 4, 2001)
• Letter from W. Hardy Callcott, Sr. Vice President and General Counsel, Charles Schwab & Co., Inc., to Jonathan G. Katz, Secretary, SEC (Mar. 31, 2000) (commening on proposed privacy rules and estimating costs of compliance)
• John Hechinger, Cutting the Cord: Fidelity to Restrict Access to Frequent Phoners, Wall Street Journal (Mar. 26, 1999) (discussing costs of providing services by personal telephone representatives and decision to terminate access for certain customers) (abstract only)
• Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 22528 (Feb. 27, 1997) (proposing to increase hypothetical account size in fee example from $1,000 to $10,000; see Section II.A.3.a.)
• Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) (increasing hypothetical account size in fee example from $1,000 to $10,000; see Section II.A.2.)
• Vanguard to Introduce Low-Cost Admiral Shares, In the Vanguard (Autumn 2000) (general information about Admiral Shares; noting that expense ratios of Investor Shares may rise)
• Vanguard Expands Low-Cost Admiral Shares Program (May 14, 2001) (announcing addition of Admiral Shares class for 8 new funds, bringing total funds offering Admiral Shares to 28, and nothing that expense ratios of Investor Shares for five funds had increased one basis point)

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The Sauter Factor

• William J. Bernstein, Selection Skill, Transactional Skill, Efficient Frontier (Fall 2000)
• William J. Bernstein, Tangled WEBS, Efficient Frontier (Spring 2000)
• Lee T. Kranefuss, CEO, Individual Investor Group, Barclays Global Investors, interview with Virginia Munger Kahn, Mutual Fund Café (Nov. 2000)

Taking the "Mutual" Out of Mutual Funds

• Nanette Cuccia, Customer Valuation Analytics, Customer Relationship Management Services, Pyramid (mutual fund consulting firm discusses customer relationship management)
• Registration Statement for Vanguard Index Trust (Apr. 23, 1996)(providing specific disclosure designed to mitigate potentially misleading effect of use of $1,000 hypothetical account in fee example)

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Social Security Private Accounts

• President's Commission to Strengthen Social Security, Executive Order 13210, 66 F.R. 22895 (May 2, 2001)(.pdf file)
• Kelly Olsen and Dallas Salisbury, Individual Social Security Accounts: Issues In Assessing Administrative Feasibility and Costs, Employee Benefit Research Institute (Nov. 1998)(.pdf file)
• Administrative Aspects of Investment-Based Social Security Reform, National Bureau of Economic Research (2000) (John Shoven, ed.) (collection of papers discussing administrative costs of Social Security private accounts) (table of contents only)
• Lawrence H. Thompson, Administering Individual Accounts in Social Security: The Role of Values and Objectives in Shaping Options, Urban Institute (Jan. 1999) (discussing administrative costs of private Social Security accounts and systems used in Australia, Chile, U.K., Sweden)
• Evaluating Issues in Privatizing Social Security, National Academy of Social Insurance (March 1998) (.pdf file)
• Report of the 1994-1996 Advisory Council on Social Security, Volume 1: Findings and Recommendations (Jan. 1997)

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Breaking Developments: Multimanager Funds

• In the Matter of Hillview Investment Trust II, Investment Company Act Release No. 25055 (June 29, 2001) (order granting exemption and denying requests for hearing filed by Fund Democracy and Institutional Shareholder Services on ground that issues had been previously considered by the Commission, and declining to address substantive claims made by petitioners)
• In the Matter of Vanguard Index Funds, Investment Company Act Release No. 24789 (Dec. 12, 2000) (order granting exemption and denying request for hearing filed by Standard & Poor's, and specifically addressing and rejecting each substantive claims made by requestors)
• In the Matter of Chase Manhattan Bank, NA, Investment Company Act Release No. 23186 (May 14, 1998) (order granting exemption and denying request for hearing filed by Inner City Press/Community on the Move, specifically addressing and rejecting each substantive claims made by requestors, and finding that requestors did not qualify as "interested persons" with standing to request a hearing)

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Worth Reading on the Internet

• Financial Advisor Opinion Poll on Disclosure, Harris Poll conducted for MetaMarkets.com (May 2001) (finding that two-thirds of advisors believe that having complete lists of fund portfolio holdings more often than twice per year would benefit their ability to monitor and manage their clients' mutual fund holdings) (.pdf file)
• The McGraw-Hill Companies, Inc. v. Vanguard Index Trust and The Vanguard Group, Inc., 00 Civ. 4247 (S.D.N.Y. Apr. 5, 2001) (order finding that Vanguard's license to use S&P 500 trademark does not extend to exchange-traded funds because such ETFs create a "new financial instrument") (.pdf file)
• Letter from U.S. Representative John D. Dingell to Arthur Levitt Jr., SEC Chairman and David M. Walker, GAO Comptroller General (Jan. 10, 2001) (questions SEC staff proposal that dollar amount fee disclosure be provided in annual and semiannual reports rather than in quarterly statements, as recommended by GAO)
• Customer Relationship Management Roundtable: Mutual Funds, moderated by Annette Cuccia, President, Pyramid (summarizes roundtable sponsored by mutual fund consulting firm; discusses omnibus and supermarket accounts, data mining, CRM technologies)

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Special Edition: Commissioner Paul R. Carey on Mutual Funds

• Mutual Fund-Related Speeches by Commissioner Carey:
  • "Mutual Fund Performance Advertising: Is It in Overdrive?" remarks at The SEC Speaks in 2001, sponsored by The Practicing Law Institute, Washington, D.C. (Mar. 2, 2001)
  • "Social Security Privatization," remarks at the Women in Housing and Finance Conference, Washington, D.C. (Jan. 31, 2001)
  • "The Independent Counsel Requirement of the Fund Governance Proposal," remarks at the Fall Meeting of the ABA's Committee on Federal Regulation of Securities, Washington, D.C. (Nov. 10, 2000)
  • Remarks at the Investment Company Institute Procedures Conference, Washington, D.C. (Dec. 9, 1999)(discussing disclosure of fund proxy voting records)
• Other Speeches by Commissioner Carey:
  • "Technology, Capital Markets and the Digital Divide," remarks to the Hellenic Republic Capital Market Commission, Capital Markets Training Program, Athens, Greece (Dec. 6, 2000)
  • Remarks to the SEC/NASAA 19c Conference, Washington Court Hotel, Washington, D.C. (Apr. 3, 2000)(discussing coordination between federal and state securities regulators)
• See also:
  • Mercer Bullard, SEC Commissioner Saw the Future of Mutual Funds, TheStreet.com (June 16, 2001)

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This page was last updated on July 1, 2001.