[13577]
June 4, 2001
TO: BOARD OF GOVERNORS No. 26-01
PRIMARY CONTACTS - MEMBER COMPLEX No. 38-01
PUBLIC INFORMATION COMMITTEE No. 16-01
SEC RULES COMMITTEE No. 42-01
RE: GAO REVIEW OF THE SEC FEE STUDY
As we previously reported, in June 2000, the General Accounting Office issued a
comprehensive report on mutual fund fees. The report included several alternative
recommendations for requiring personalized fee disclosure in fund quarterly account
statements.1 In December 2000, the Securities and Exchange Commission’s Division of
Investment Management issued a report on mutual fund fees, which identified approaches the
SEC staff proposes to take in response to the GAO’s recommendations.2
There has recently been a series of correspondence regarding the SEC Fee Study among
Representative John D. Dingell, the Ranking Minority Member on the House Committee on
Energy and Commerce, the GAO and the SEC. These letters are attached and are summarized
below.
The GAO’s Assessment of the SEC Fee Study
Rep. Dingell requested that the GAO evaluate the SEC’s findings and recommendations.
In its response, the GAO states that the results of the SEC staff report “generally corroborate the
findings of our own report,” including that the fees charged by the largest funds declined
during the periods studied. The GAO also notes that the SEC report included
recommendations regarding after-tax returns and fund governance, which have already been
enacted, as well as a recommendation that the Commission consider reviewing the
requirements of Rule 12b-1 in light of changes in fund marketing and distribution since the
rule’s adoption in 1980. The GAO states that “these actions should help provide important
information to investors and could enhance oversight in the mutual fund industry.”
1 See Memorandum to Board of Governors No. 38-00, Primary Contacts – Member Complex No. 45-00, Public
Information Committee No. 26-00, and SEC Rules Committee No. 94-00, dated July 5, 2000 (transmitting GAO
Report: “Mutual Fund Fees: Additional Disclosure Could Encourage Price Competition”).
2 See Memorandum to Board of Governors No. 5-01, Primary Contacts – Member Complex No. 6-01, SEC Rules
Committee No. 3-01, dated January 12, 2001 (transmitting SEC’s “Report on Mutual Fund Fees and Expenses”).
2The GAO then addresses the SEC staff’s analysis of the GAO’s recommendation calling
for additional disclosure of fee information. In its report, the GAO recommended that mutual
fund investors’ quarterly account statements include the specific dollar amount of the fees they
paid, or alternatively, an estimate of the amount of fees deducted from their fund shares. As an
additional alternative, the GAO recommended that funds could report to investors the dollar
amount of expenses paid by shareholders for preset investment amounts, such as $1,000.
The GAO states that, “[a]fter considering the costs and benefits of the recommendations
in our June 2000 report, the SEC staff’s report recommends a variation of one of the alternatives
we discussed.” Specifically, the SEC report proposed requiring funds’ annual and semiannual
reports to present a table showing the cost in dollars associated with an investment of a
standardized amount (such as $10,000) that earned the fund’s actual return and incurred the
fund’s actual expenses paid during the period. In addition, the SEC staff suggested that the
Commission could require that this table also present the cost in dollars, based on the fund’s
actual expenses, of a standardized investment amount that earned a standardized return (such
as 5 percent).
The GAO observes that while the SEC staff’s recommendation “will improve fee
disclosures . . . it may be less effective in increasing investor awareness and spurring additional
price competition among funds because it would be provided to investors less frequently and in
reports that may receive less investor attention than account statements.” The GAO further
suggests that the SEC staff’s proposed disclosures will not provide investors with information
showing “either precisely or approximately the dollar amount of fees they paid on their own
fund shares.” The GAO maintains that receiving the account–specific fee information as they
recommend would be more likely to increase investors’ awareness of the fees they pay.
Although the GAO recognizes the high cost of its proposal and that the SEC staff’s proposal “is
probably the lowest cost option,” the letter reiterates the GAO’s belief that the SEC staff’s option
“may not provide as much benefit as similarly low cost alternatives due to the placement in
annual and semiannual reports.”
The SEC Staff’s Comment Letter to the GAO
The GAO shared a draft copy of its letter to Rep. Dingell with the SEC, and Paul Roye,
Director of the Division of Investment Management, responded on April 27, 2001. In its
response, the SEC states that their proposed approach “would provide additional information
about fund fees, provide it in terms of dollar amounts, and provide it in a standardized manner
that would facilitate comparison among funds.” The SEC staff “disagrees with the [GAO’s]
assertion” that this approach would not “provide investors with information showing either
precisely or approximately the dollar amount of the fees they paid on their own fund shares.”
While the SEC staff recognizes that account statements are an important source of information,
and are provided more frequently than shareholder reports, the staff maintains that “additional
fee information would be more appropriate in shareholder reports, alongside other key
information about the fund’s operating results, including management’s discussion of fund
performance.” The staff notes that this would allow shareholders to evaluate the costs they pay
against the services they receive and “encourage investors to consider information about the
dollar amount of fund fees in their decision-making process.”
3The staff’s letter states that the SEC and GAO both recognize that there are various
alternatives for providing additional fee information to fund investors, which would impose
varying degrees of administrative difficulties and additional costs on the industry and,
ultimately, investors. The SEC letter also notes that both the GAO’s initial fee study and its
letter to Rep. Dingell acknowledge that the GAO has not gathered comprehensive data on the
costs of implementing personalized fee disclosure on account statements. The letter states that
the staff will have to take into account the costs and burdens of the various alternatives for
improving disclosures of mutual fund fees and expenses.
Rep. Dingell’s Follow-up Letter to the GAO and SEC
Rep. Dingell concludes that while it would be ideal if the SEC could conduct a pilot
program that tested both alternatives, realistically “that may not be feasible, given practical
considerations and the strong industry opposition to the GAO's proposal.” Rep. Dingell
therefore determines that the “SEC’s variation, with modest enhancements and a strong
investor education program would address the intent of the GAO’s recommendation and
deserves an opportunity to prove that it can be effective.” However, he notes that if price
competition remains a problem and the complaints continue, the SEC should consider “other
approaches, including the GAO’s quarterly–report recommendation.”
Craig S. Tyle
General Counsel
Attachments
Attachment no. 1 (in .pdf format)