(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.)

SEC to Consider Fund, NYSE Rulemaking

The SEC is scheduled to consider rulemaking initiatives concerning mutual funds and SRO corporate governance. Initially, the Commission will consider whether to approve a proposed rule change by the New York Stock Exchange to amend and restate its constitution to reform the governance and management architecture of the exchange. Proposals on enhanced breakpoint disclosure by funds will also be discussed. Finally, the SEC will consider whether to issue a concept release on mutual fund transaction costs.

NYSE Corporate Governance

The SEC will consider whether to approve sweeping changes to the corporate governance structure of the New York Stock Exchange. According to the NYSE, the objectives of the new corporate governance structure are to 1) place responsibility for governance, compensation and internal controls, as well as for supervision of regulation, in the hands of an independent board of directors and 2) separately preserve the existing engagement of the broker-dealer community and listed company community with the NYSE. The exchange intends to accomplish this goal by creating a board of executives that will include executives of major public and private "buy-side" entities as well as smaller members of the exchange.

When the exchange submitted the rules, SEC Chairman William Donaldson stated that " the proposal represents a significant rethinking of the structure that has existed at the NYSE and addresses the issue of independent oversight of the exchange's regulatory structure." The chairman added at that time that "the Commission will continue to consider further market-wide reforms, including governance and regulatory reforms, in the coming months as it proceeds with its broad review of market structure issues."

Breakpoint Disclosures

The agency will also consider whether to propose amendments to Investment Company Act and Securities Act Form N-1A that would require an open-end management investment company to provide enhanced prospectus disclosure regarding breakpoint discounts on front-end sales loads.

Breakpoint discounts are volume discounts applied to the front-end load charged to investors who purchase Class A mutual fund shares. The extent of the discount depends upon the amount the customer invested in a particular mutual fund family. Typical breakpoint discounts apply to purchases at $50,000, $100,000, $250,000, $500,000 and $1 million, although some funds provide a breakpoint at $25,000.

The SEC is considering rulemaking in light of examinations by the SEC, NASD and the NYSE of 43 registered broker-dealers that sold mutual funds with a front-end sales load. These reviews revealed that many investors were not receiving correct breakpoint discounts on their mutual fund purchases. The assessments showed that most firms did not uniformly deliver appropriate breakpoint discounts to customers, as discounts were not delivered in about one of five eligible transactions. The average amount overcharged per transaction was $243, and ranged up to $10,000. NASD estimates that at least $86 million would be owed to investors for 2001 and 2002.

Concept Release on Fund Transaction Costs

The SEC will also consider whether to issue a concept release on mutual fund transaction costs. The release would seek public comment on whether mutual funds should be required to 1) quantify and disclose to investors as a separate line item the amount of transaction costs they incur, 2) include transaction costs in their expense ratios and fee tables or 3) provide other quantitative measures or additional disclosure that would provide investors an indication of the level of the investment company's transaction costs. The release also would seek comment on whether mutual funds should be required to record transaction costs or the portion of those costs that represent soft dollar benefits as an expense in their financial statements.