(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.)

Financial Services Committees Approves Mutual Fund Reform Measure

The House Financial Services Committee has approved a bill to increase the level of mutual fund transparency and import Sarbanes-Oxley Act-type corporate governance reforms into the investment company industry. The Mutual Funds Integrity and Fee Transparency Act, H.R.2420, is intended to provide investors with more complete and useful information about the fees they pay. It would also direct the SEC to issue rules requiring funds to provide investors with improved disclosure.

By increasing the level of transparency, the bill would give investors access to enhanced information with which to compare the costs of different funds and other financial products to help them make informed investment decisions. In addition, the bill would enhance corporate governance and management integrity by establishing several new requirements to strengthen mutual fund corporate governance and management accountability.

The bill was introduced by Rep. Richard Baker, chairman of the capital markets subcommittee. The SEC has expressed support for the bill, which keys off of a comprehensive Commission report on the operation of mutual funds and how they disclose information to investors that was recently submitted to the subcommittee in response to a number of questions posed earlier to the SEC by Rep. Baker.

The measure would require all mutual funds to abide by the same audit committee standards required of exchange-listed companies under the Sarbanes-Oxley Act. The measure also builds on Sarbanes-Oxley by furthering the independence and accountability of mutual fund directors.

The full committee approved a manager's amendment, introduced by Chairman Michael Oxley that would require funds to disclose fees, in dollar amounts, on a hypothetical $1,000 investment. It would also require notification in brokerage account statements that fees have been deducted, and would mandate the disclosure of portfolio turnover rates in a way that facilitates comparison among funds. The Oxley amendment would also impose fiduciary duties on board directors to review revenue sharing arrangements and require new recordkeeping of so-called "soft dollar" transactions.

Amendments offered by Rep. Baker would codify SEC rules requiring the disclosure of votes cast on behalf of shareholders as well as the policies and procedures for proxy voting. The Baker amendments would also require each fund to have a code of ethics and a chief compliance officer. Finally, the Baker changes enhance transparency by requiring fund managers to disclose any holdings they have in the funds they manage and brokers to disclose whether they have received extra financial incentives to sell a particular fund or class of shares.