(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.)

House Leaders Ask SEC to Adopt Mutual Fund Reform Rules

House Financial Services Committee Chairman Michael Oxley and Capital Markets Subcommittee Chairman Richard Baker have requested the SEC to use its regulatory authority to implement provisions of their mutual fund reform bill that do not require legislative action. In a letter to SEC Chairman William Donaldson, Reps. Oxley and Baker asked the Commission to conduct rulemaking, as quickly as possible, to increase the transparency of mutual fund fees and costs and strengthen corporate governance and management integrity at fund companies. The legislators requested a progress report from the SEC on the rulemaking initiatives by October 1, 2003.

Last month, the Financial Services Committee approved the bill, Mutual Funds Integrity and Fee Transparency Act, H.R.2420, which would increase the level of mutual fund transparency and import Sarbanes-Oxley Act-type corporate governance reforms into the investment company industry.

The House leaders want the SEC to issue rules improving mutual fund fee and expense disclosures, including the estimated amount, in dollars for each $1,000 of investment in the fund, of the operating expenses that are borne by shareholders. The rules should also require disclosure of the structure of the portfolio manager's compensation and the portfolio turnover rate, as well as information on the fund's soft dollar, directed brokerage, and revenue sharing arrangements. In addition, the lawmakers want disclosure about breakpoint discounts.

Similarly, they want SEC rules requiring the adviser to submit an annual report to the fund's board detailing soft dollar, directed brokerage, and revenue sharing arrangements; and, in turn, the board should be subjected to fiduciary duty to review such arrangements.

The SEC should further augment fund governance by decreasing the maximum number of directors who may be interested persons from 60 percent to one-third of the board. Also, the legislators want the SEC to require funds to inform their directors of significant deficiencies identified by the Commission.

Finally, remarking on recent proxy reform measures under SEC consideration, the congressmen asked the Commission to indicate how it intends to ensure that mutual fund shareholders are given the same rights as other corporate shareholders as the rulemaking process evolves. This concern evidences a sense of the committee that funds should not be treated differently from other companies.