WASHINGTON (AP) — Federal regulators are moving closer to
banning payments by mutual fund companies to induce brokers to sell
certain funds — a practice that critics say creates conflicts
of interest and hurts investors.
The Securities and Exchange Commission also voted yesterday to
adopt new rules requiring funds to provide investors a twice-yearly
“shareholder report” with fuller information on fees
and expenses. The report will include the dollar amount of fund
expenses paid by shareholders on a $1,000 investment.
The SEC, which has been making a series of changes in rules
governing the mutual fund industry, is promising that dramatic
reforms protecting investors from abuses will be in place by early
summer.
The agency has been under pressure from investor advocates and
lawmakers who are pushing legislation to overhaul the fund industry
amid growing evidence that ordinary shareholders are hurt by
trading and marketing abuses.
“It has become painfully clear that the practice of
directing … (fund money) to a broker or dealer as
compensation for distribution of the fund’s shares presents
opportunities for abuse” in recent years, SEC Chairman
William Donaldson said.
The practice is all the more troubling, he said, “because
its impact is hidden from investors.”
Underscoring the proposal’s far-reaching impact, Donaldson
said, “This one is going to hit them where it
hurts.”
The proposal will be submitted for public comment for 60 days
and likely adopted by the agency sometime afterward. The new
disclosure will “enable investors to determine the amount of
fees they paid on an ongoing basis, as well as to compare the
amount of fees charged by other funds,” said Paul Roye, head
of the SEC division that oversees the mutual fund industry.
Also under the new rules, fund companies will be required to
give investors more information every quarter about the stocks that
the funds invest in.
New legislation by several senators also would outlaw the
practice of fund incentive payments to brokers and other industry
practices, significantly changing the way mutual fund companies
conduct business with investors and the brokers who sell them
funds.