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Nazareth Calls for Reforms in Mutual Fund Disclosure

In remarks before the Mutual Fund Directors Forum in Washington, D.C., Commissioner Annette Nazareth questioned whether all of the SEC's attempts to improve the disclosure available to investors have achieved the desired results. She believes that investors have difficulty understanding mutual fund fees. Since investors do not fully comprehend the impact of the fees, Nazareth said market forces fail to adequately constrain them and investors are hampered in their ability to make decisions in their best economic interests. She hopes to consider further reforms in the near future.

One project underway is a streamlined, short-form disclosure document for mutual fund investors. The current prospectus is not serving investors well, according to Nazareth. She noted that a proposal on point of sale disclosure has not been acted upon, and believes the issue should be revisited as part of the mutual fund disclosure reform initiative. It makes sense to consider whether broker-dealers should be required to provide a streamlined prospectus, in her view, along with specific cost and conflict of interest information at the point of sale.

Nazareth also believes the SEC should take a hard look at 12b-1 fees. At a minimum, she said the SEC should determine whether the distribution costs for mutual funds should be priced more explicitly. Investors do not appear to understand the charges, she explained, which may be partly due to their payment by reduced returns. The more investors understand these charges, the more market discipline will be imposed, she said.

The SEC should also consider asking Congress to amend Investment Company Act section 22(d), according to Nazareth, to end mandatory retail price maintenance. Market developments have eliminated the rationales that prompted the enactment of the provision, in her view. She believes the elimination of the provision would have a positive impact on mutual fund costs since it would introduce price competition among dealers. If these changes are made, Nazareth suggested an evaluation period to determine the impact of mutual fund fees and costs. If the desired results have not been achieved, she said the SEC should consider additional changes. The industry is too important and the effects of the costs on returns are too large for the SEC not to respond, she said.

Jacquelyn Lumb