Portfolio Disclosure

Fund Democracy Initiatives: Portfolio Disclosure

UPDATE

On January 17, 2001, the SEC adopted the misleading names rule, 3 years and 11 months after the rule was proposed. The rule adoption is a testament to the power of investor advocacy, and a tribute to the hard work of the 14 petitioners and other investors who urged the SEC to take final action.

Over the last twenty years, mutual funds have become Americans' investment vehicle of choice. Between 1980 and 1999, the percentage of US households investing in mutual funds grew from 6% to 49%. Today, 88 million Americans in 51 million households own mutual fund shares. The central role of mutual funds in ensuring the financial security of tens of millions Americans has made it more important than ever that investors have the information they need to make the right investment decisions.

Under current law, however, mutual funds are required to disclose their portfolio holdings only twice each year. Although funds are free to disclose their holdings more frequently, few do so. In fact, 18 of the 25 largest fund complexes fully disclose their portfolio holdings only semiannually. These 18 complexes represent more than 50% of mutual fund assets.

Of even greater concern is that current SEC rules facilitate various portfolio abuses. Funds use misleading terms in their names that suggest that the fund is investing in a particular type of security, when in fact the funds often have no more than 65% of their assets invested in that type. Fund managers claim to invest according to a particular investment style or in a particular asset class, while actually timing the markets to improve their performance relative to their purported peer groups. As a result, shareholders often unwittingly assume substantial financial risks, with potentially dire consequences for all Americans’ financial security.

Investors also are victimized by fraudulent practices known as window dressing and portfolio pumping. Window dressing occurs when portfolio managers add high-performing stocks to, and remove low-performing stocks from, fund portfolios just before the funds make their portfolio holdings public. This practice is intended to lead investors to believe that the managers picked winners and avoided losers during the period covered by their portfolio reports.

Portfolio managers also "pump" their portfolios by buying stocks that their funds already hold at the end of the quarter or the end of the year in order to give their funds’ performance a one-day boost. This practice inflates the fund’s performance results, which under SEC regulations are calculated and advertised on a quarterly and annual basis. Portfolio pumping also may adversely affect investment performance for 401k and other retirement plan participants, who frequently buy shares at the end of each quarter.

Finally, investors require portfolio information in a way that is easy to access and analyze, yet electronically filed information about portfolio holdings is not provided in an optimal format for analysis.

To address these problems, Fund Democracy has petitioned the SEC to adopt rules requiring that mutual funds: (1) publicly report their portfolio holdings on a monthly basis within 60 days after the end of each month, with exceptions granted by the Commission on a case-by-case basis; (2) use names suggesting that they invest in a particular type of security only if 85% of their assets are invested in that type of security; and (3) post portfolio holdings on the Internet in a format that is easy to download and analyze, and provide paper copies of this information upon request. The Financial Planning Association filed a petition on June 28; the Consumer Federation of America, Consumer Action and nine other consumer groups filed a petition on August 9; and the National Association of Investors Corporation filed a petition on October 12.

On December 21, the AFL-CIO filed a petition with the SEC asking it to adopt rules requiring mutual funds to disclose more information to investors about funds' portfolio holdings and how fund managers vote shares of portfolio companies. With the filing of its petition, the AFL-CIO not only added considerable weight and credence to the parade of petitions that have called for more frequent and more accessible fund portfolio disclosure, it also set the stage for an equally important initiative that promises to garner broad support among investor, employee, professional, consumer, and corporate governance groups.

The AFL-CIO's call for disclosure of fund proxy policies and voting records furthers a longstanding effort by America's investors to hold publicly-traded companies accountable for their corporate policies. The explosive growth of socially conscious mutual funds demonstrates that fund shareholders want to know, as stated by the AFL-CIO's Bill Patterson, if their funds' "philosophy of ownership fits with the investors'."

The AFL-CIO's press release is available on its web site. To obtain a copy of the AFL-CIO's petition, call 202-637-3900. The petition should be available at Fund Democracy's web site some time after the holidays.

On January 18, 2001, the International Brotherhood of Teamsters filed a petition asking the SEC to adopt rules requiring mutual funds to disclose more information to investors about funds' portfolio holdings and how fund managers vote shares of portfolio companies. The Teamsters' filing demonstrates the increasing importance to mutual fund issues to America's workers.

The prompt adoption of these rules is imperative for the financial security and protection of America's investors. If you agree, let Chairman Unger know, or even better, submit your own rulemaking petition to:

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

re: SEC File No. 4-439

Please feel free to use Fund Democracy's petition, detailed supporting memorandum, or other documents related to the petition to help you organize and express your views.

On October 12, Fund Democracy sponsored a symposium on portfolio disclosure and other mutual fund disclosure issues. Find out more about the Symposium, or listen to the archived webcast of the Symposium.

For press accounts related to the petitions, see Aaron Lucchetti, Are Mutual-Fund Investors Better Served by Less Data? Wall Street Journal at C1 (June 28, 2000); Vicky Stamas, Groups Petition the SEC to Expand Mutual Fund Disclosures, Bloomberg News (June 28, 2000); Debate: Funds Ignore Internet, Feed Investors Stale Data, USA Today (July 7, 2000)(including response by Matt Fink, President, Investment Company Institute); Activists Prod SEC on Disclosure of Mutual Fund Holdings, American Banker (Aug. 11, 2000); Mercer Bullard, SEC Prepares to Battle Portfolio Pumping and Window Dressing, TheStreet.com (August 16, 2000); Sara Hansard, AFL-CIO Joins Consumer Groups on Disclosure: Fund Fight Widens, Investment News (Aug. 21, 2000); Opinion, Taking Sides: Disclosure Demands Echo Across Industry, Investment News (Aug. 21, 2000);)Mercer Bullard, Mutual Fund Portfolio Disclosure in the Internet Era, wallstreetlawyer.com (Sep. 2000); Vern Hayden, Ex-Sec Official an Effective New Voice for Fund Owners, TheStreet.com (Oct. 4, 2000); Mercer Bullard, Shining the Sun on Mutual Fund Portfolios, Journal of Financial Planning (Oct. 2000); Melynda Dovel Wilcox, The Naked Truth, in Ahead: What's Next For Your Money, Kiplinger's Personal Finance (Nov. 2000); Mercer Bullard, Be Aware of Fund Finagling, Mutual Funds (Nov. 2000); Sara Moore, How Does Your Fund Really Invest Your Cash? Family Money (Nov./Dec. 2000); Bill Barnhart, Cries Increase to Disclose Fund Holdings, Chicago Tribune (Nov. 19, 2000); David Hoffman, Halt! Who Goes There? A Fund by Any Other Name Could Violate the Law, Investment News (Nov. 20, 2000); Sara Hansard, SEC Probing Funds for 'Portfolio Pumping,' Investment News (Nov. 27, 2000); Judith Burns, SEC Expected to Toughen Rules on Mutual Fund Names, Dow Jones Newswires (Dec. 1, 2000); Editorial, SEC Must Move Disclosure to the Top of Its Agenda, Investment News (Dec. 11, 2000); Charles Jaffe, Making Mutual Funds Live Up to Their Names, Boston Globe (Dec. 25, 2000); Vicky Stamas, AFL-CIO Wants More Mutual Fund Disclosure, St. Louis Post-Dispatch (Dec. 26, 2000) (Bloomberg News); Bill Barnhart, Year-End Rallies Usually a Facade, Chicago Tribune (Dec. 28, 2000); FPA Joins Fight for Fund-Name Accuracy, Financial Planning (Jan. 1, 2001); Judith Burns, Securities Regulators Probe 'Portfolio Pumping' at Funds, Wall Street Journal (Jan. 15, 2001); Gail Liberman, Is Your Fund Living Up to Its Name? CNBC.com (Mar. 9, 2001); Amey Stone, Laggards of the Net Age: Mutual Fund Data, Business Week Online (Mar. 15, 2001); Craig Tolliver, Fund Managers Blamed For Losses: Window Dressing Draws the Blinds on Tech Stocks, CBSMarketWatch.com (Mar. 30, 2001).

Top