(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Key Senators Back Mutual Fund Reform Bill

A bi-partisan bill requiring greater disclosure and accountability from the mutual fund industry has been introduced by Sen. Daniel Akaka and co-sponsored by governmental affairs committee ranking member Sen. Joseph Lieberman and Sen. Peter Fitzgerald, chairman of the financial management subcommittee, of which Sen. Akaka is the ranking member. The Mutual Fund Transparency Act, S.1822, is intended to strengthen the independence of fund boards of directors and enhance the transparency of fund financial transactions.

Separately, Sen. Lieberman sent a letter to SEC Chairman William Donaldson suggesting additional reforms, including a strict time deadline for trades to arrive at the mutual fund and the naming of compliance officers who would report directly to the independent directors. The senator wants a response from the SEC by November 24, 2003.

The bill would strengthen the independence of mutual fund boards of directors by tightening the definition of independence and by requiring that 75 percent of the directors be independent. It also prohibits the board from making decisions that require a vote of a non-independent director.

The bill would also require that mutual fund boards have nominating committees comprised solely of independent directors, so that directors are not chosen by management. In addition, the measure would require brokers to disclose to investors the amount of compensation they will receive due to the transaction, instead of simply providing a prospectus. Currently, brokerage commissions have to be disclosed to the SEC, but are disclosed to individual investors only on request. The bill ensures that commissions will be included in a document that investors actually have access to and utilize.

The bill additionally requires that brokerage commissions be counted as an expense. Since expense ratios fail to take into account the costs of commissions in the purchase and sale of securities, investors are not currently provided with an accurate idea of the expenses involved.

According to Sen. Akaka, this provision will create a powerful incentive to reduce the use of soft dollars, which involves the bundling of services or products into brokerage commissions. If commissions are disclosed as an expense, he reasoned, the use of soft dollars will be reflected in higher commission fees and overall expenses, which will make it easier for investors to see the true cost of the fund and compare the expense ratios of funds.

Also enhancing transparency is a provision requiring the SEC to develop rules to disclose the compensation of portfolio managers employed by the investment adviser of the company to manage the portfolio of the company, as well as their ownership interest in the company.

Finally, the bill mandates three studies as part of initiatives to improve mutual fund oversight and transparency. The first two ask the SEC and the comptroller general, respectively, to look at financial literacy among mutual fund investors and at mutual fund advertising in order to determine how relevant information can be made clearer and more readily understandable to the average investor.

The third study required by the bill relates to the formation of a mutual fund oversight board to take over the frontline efforts of mutual fund regulation from the SEC, while remaining under Commission oversight. The board, whose members would be selected by the SEC, would have inspection, examination, and enforcement authority over mutual fund boards of directors, as well as rulemaking authority. It would be funded by assessments against mutual fund assets.

Sen. Leiberman's letter to Chairman Donaldson emphasized that the SEC must close the "loophole" that allowed so many brokers and mutual funds to circumvent the law on late trading. The senator believes that imposing a hard deadline of a time at which trades must be into the mutual fund may be the solution to this problem. Investors must also receive clear information about the fees they are actually paying to participate in mutual funds.

The senator queried why investors should not receive monthly statements detailing the fees they actually paid to the fund during that time period, similar to the finance charge information that credit card consumers get. He also suggested that funds be required to provide comparative fee information. Other reforms would involve limiting the number of boards on which any one member can serve.