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Fund
Democracy Comment Letter on Portfolio
and Fee Disclosure (Feb. 14, 2003)
On February 14, 2003, Fund Democracy, on behalf of itself and the Consumer Federation of America, submitted a comment letter to the SEC regarding the agency's proposal to improve mutual fund portfolio and fee disclosure. The SEC's proposal represents, in part, the culmination of a 2.5 year effort by consumer, investor, employee and professional groups to reform fund portfolio disclosure rules.
The SEC's portfolio disclosure proposal will both reduce disclosure costs and provide important information that investors need to make informed investment decisions. The SEC's proposal to require disclosure of actual fees in dollars also holds great promise, but the proposed implementation of this concept needs substantial improvement, as discussed further below.
If you would like to comment on the SEC's proposal, send a email message to rule-comments@sec.gov (insert "File No. S7-51-02" in the subject line), or mail a letter to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609 (refer to File No. S7-51-02). Althought the comment period on the rule formally ended on February 14, the SEC probably will consider any comments received up to the date that it takes final action on the rule.
Portfolio Disclosure
On December 18, 2002, the SEC proposed to require mutual funds to disclose their portfolios quarterly on the SEC's website. Current rules require only semiannual disclosure. The proposal came 2.5 years after Fund Democracy and 15 other consumer, investor, employee and professional groups petitioned the agency to improve fund portfolio disclosure. (The petitions also asked the SEC to adopt a rule prohibiting misleading fund names, which the SEC did on January 17, 2000.)
The SEC also proposed to allow funds to send a summary schedule of holdings to shareholders. Funds currently are required to send to every shareholder a complete list of the fund's portfolio holdings. These documents can exceed 30 pages in length.
These reforms will benefit shareholders by providing them with information they need to make informed investment decisions while also substantially reducing the costs of disclosure. Although monthly disclosure of holdings, as requested by the petitioners, would be more beneficial than quarterly disclosure, the SEC's proposal is a significant step in the right direction and a major victory for America's mutual fund shareholders.
Fee Disclosure
The SEC proposed to improve fee disclosure by requiring that funds provide, in shareholder reports, the actual dollar amount of expenses paid on a $10,000 investment. Current rules require only that such disclosure appear below the fee table in the prospectus.
The SEC's proposal responds to recommendations made by the Government Accounting Office in June 2000 (available online at www.gao.gov). The GAO recommended that the SEC require funds to disclose to shareholders, in their quarterly statements, the actual amount of dollars that they paid in expenses during the period.
The disclosure of actual fees in dollars will be a major improvement in fee disclosure rules. The current disclosure in the prospectus shows fees as a percentage of assets and as a hypothetical dollar amount. While the prospectus disclosure provides a useful way to compare fees when choosing among different funds (but for the exclusion of fund's portfolio brokerage costs from these figures), the rules are not an effective means of driving home the importance of fees to an investor's actual performance.
Disclosure of actual fees in dollars will help shareholders understand the true costs of owning funds, allow them to make more informed investment decisions, and promote price competition in the fund industry.
The SEC's proposal, however, will not fully realize the potential benefits of dollar disclosure of fees. Shareholders generally do not read shareholder reports, whereas they typically pay careful attention to their quarterly statements. Dollar disclosure of fees therefore should be provided in quarterly statements. Providing dollar disclosure in quarterly statements would have the added advantage of providing fees in dollars adjacent to disclosure of their account balances in dollars, where dollar disclosure of fees will have the greatest impact.
Furthermore, the proposed calculation method will require an additional step for shareholders to determine what they actually paid in fees. They will have to estimate their own fees by dividing their account balances by $10,000 and then multiplying the result by the hypothetical dollar amount of fees. It would be far more effective to provide shareholders with a dollar amount that directly reflects the amount they actually paid in fees.
Fund Democracy
February 16, 2003