[16271]
July 8, 2003
TO: BOARD OF GOVERNORS No. 34-03
CLOSED-END INVESTMENT COMPANY MEMBERS No. 54-03
DIRECTOR SERVICES COMMITTEE No. 12-03
FEDERAL LEGISLATION MEMBERS No. 11-03
PRIMARY CONTACTS - MEMBER COMPLEX No. 53-03
PUBLIC INFORMATION COMMITTEE No. 22-03
SEC RULES MEMBERS No. 86-03
SMALL FUNDS MEMBERS No. 30-03
RE: ACTION ON H.R. 2420, MUTUAL FUNDS INTEGRITY AND FEE TRANSPARENCY
ACT OF 2003
At this writing, it is expected that the Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises, chaired by Richard Baker (R-LA) will act on HR 2420, “The
Mutual Funds Integrity and Fee Transparency Act” (see Institute memo dated June 11, 2003)1
on Thursday, July 10. The Institute and its members have been working to effect changes in the
legislation, as described in Institute testimony (see Institute memo dated June 20, 2003)2in the
following areas:
o Independent Chair - It is neither necessary nor appropriate to require mutual funds to
have an independent chairman of the board. In many cases, a person needs to be
intimately familiar with the operations of a company in order to be an effective
chairman, and a management representative is often in the best position to do this. In
addition, the combination of regulatory mandates and industry corporate governance
best practices make an independent chair unnecessary.
o Location of Disclosure - The specifics of how certain items should be disclosed, and in
which document they should appear should not be dictated by legislation. We are
particularly concerned with the legislation’s presupposition that prospectus disclosure is
not sufficient for any of the items covered. Under the securities laws, the prospectus is
the legal document required to include all of the important information that is necessary
to assist an investor in making an investment decision. Congress should not
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inadvertently discourage investors from viewing the prospectus as the most important
disclosure document.
o
o Estimated Operating Expenses - The provision in the bill relating to fund operating
expenses seems to contemplate disclosure of expenses on an individualized basis. The
SEC’s report noted that there were serious problems with this approach, including
significant costs and logistical complexity, lack of comparability and lack of an effective
context for investors to evaluate the expenses shown. While a requirement to disclose
estimated fund expenses might reduce the costs and complexities associated with
individualized cost disclosure, albeit to a relatively small extent, it would run the risk of
confusing and misleading investors by including an imprecise number in a document
that otherwise contains very exact and precise numerical data. And, it still would result
in disclosure of information that would make it difficult for investors to make
meaningful comparisons.
o Board Oversight of Revenue Sharing - While the Institute believes that it is entirely
appropriate for directors to review soft dollar and directed brokerage arrangements, we
do not believe that it is necessary or appropriate for boards to review revenue sharing
arrangements. These payments are, by definition, not made by the fund. They are made
by a fund’s underwriter or adviser out of its own resources to compensate financial
intermediaries who sell fund shares. In addition, fund directors are not permitted to
take distribution expenses into account when determining whether a fund’s advisory fee
is reasonable.
Since certain provisions in the legislation have proved controversial, it is possible that
the Subcommittee markup will be delayed until agreement is reached.
We will keep you informed of further developments.
Matthew P. Fink
President