As Deadline Looms for Comments on SEC Mutual Fund Rule, Investor Group Urges Repeal of 1980 'Temporary Rule' Allowing Mutual Funds to Use Investor Assets for Marketing Expenses; Calls for Individualized Fund Cost Disclosures in Pre-Sale Documents 3/17/2004
From: Sean Crowley, 202-478-6128 or scrowley@mrss.com, for RestoreTheTrust.com WASHINGTON, March 17 -- One month before the April 12 deadline for comments on the SEC's proposed rule for the mutual funds, the leader of the first grassroots campaign Web site solely dedicated to representing individual investors today sent a letter to SEC Chairman William Donaldson urging the agency to kill its 1980 "temporary rule" that allows mutual funds to use investor assets -- instead of the funds' assets -- for marketing expenses. "We concur with recent Senate testimony by the Consumer Federation of America that the mutual fund market lacks three key characteristics needed to effectively discipline costs: transparent disclosure, meaningful price competition, and ... regulatory policing of the worst abuses," wrote Pamela Gilbert, co-founder of RestoreTheTrust ( http://www.RestoreTheTrust.com ) and a former Consumer Product Safety Commission executive director. "While fund companies often reduce management fees as fund assets hit certain benchmarks, they have clearly not fully passed along the economies of scale that have come with a rapidly growing asset base." Gilbert applauded the SEC's proposal to amend rule 12b-1 under the Investment Company Act of 1940 that would prohibit mutual funds from directing commissions from their portfolio brokerage transactions to broker-dealers to compensate them for distributing fund shares. SEC attorney Edward Siedle has estimated that nearly 75 percent of the fund industry's $6 billion in trading commissions pays for distribution via these arrangements. "We oppose any watering down of this prohibition because of the huge positive impact it could have on tens of million of mutual fund investors," Gilbert wrote. "We concur with the Consumer Federation of America that this abusive approach to mutual fund sales harms some investors directly -- by channeling them into funds with higher costs and poorer performance than they might otherwise have purchased." When the Commission proposed the mutual fund rule on Feb. 11, it also adopted amendments that require mutual funds to disclose expense in shareholder reports associated with an investment of $1,000. "The reality is that no one reads shareholder reports pre-sale, which means this proposal will do nothing to introduce meaningful price competition into the mutual fund marketplace," Gilbert added. "Dollar amount cost disclosure is good, but applying it to a hypothetical $1,000 account means the amount will look quite small." "We join the Consumer Federation of America, Fund Democracy, Inc., U.S. Public Interest Research Group, Consumers Union and Consumer Action in strongly supporting individualized dollar cost disclosures that should be provided in the quarterly or annual account statements that show the shareholder's account balance and transaction activity, concluded Gilbert. "Putting cost information in dollar amounts side-by-side with information on the fund's gains or losses for the year is the key to helping investors to put those costs into perspective." --- Following is the text of a letter from Pamela Gilbert, co- founder of RestoreTheTrust.com, to SEC Chairman William Donaldson, regarding comments on the SEC's Feb. 11 proposed rule amendment for mutual funds: March 15, 2004 The Honorable William Donaldson Chairman Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Comments on SEC's Feb. 11 proposed rule amendment for mutual funds Dear Chairman Donaldson: I'm writing to comment on the Commission's February 11 vote to adopt enhanced mutual fund expense and portfolio disclosure and proposal to prohibit brokerage commissions to finance distribution. I am a former Executive Director of the Consumer Product Safety Commission and Co-Founder of RestoreTheTrust.com, the first grassroots campaign website solely dedicated to representing individual investors. The www.RestoreTheTrust.com website was launched in July 2002 at the height of the accounting scandals. Thanks in part to 55,000 email letters from RestoreTheTrust.com investors in support the Sarbanes accounting reform bill, Congress passed and President Bush signed this much needed legislation into law. In January, RestoreTheTrust.com launched a new campaign on behalf of investors to help clean up the recent scandals in the mutual fund industry that are pilfering billions in profits from 95 million investors, half of all U.S. households. RestoreTheTrust.com has setup an email program for investors at www.RestoreTheTrust.com, so they can send letters to comment on the SEC's proposed rule amendment posted in the Federal Register by the April 12 deadline. We concur with the January 27 Senate Government Affairs Committee testimony by the Consumer Federation of America Legislative Director Travis Plunkett: "...that the mutual fund market lacks three key characteristics needed to effectively discipline costs: transparent disclosure, meaningful price competition, and, absent those two characteristics, regulatory policing of the worst abuses." We applaud the Commission for its proposal to amend rule 12b-1 under the Investment Company Act of 1940 that would prohibit mutual funds from directing commissions from their portfolio brokerage transactions to broker-dealers to compensate them for distributing fund shares. We oppose any watering down of this prohibition because of the huge positive impact it could have on tens of million of mutual fund investors. As you know, nearly 50 percent of mutual fund transactions that are conducted between broker-dealers and retail investors and 14 of 15 Wall Street brokerages the Commission recently investigated had received cash from funds, and that 10 of the 15 had received revenue-sharing payments in the form of commissions for trading stocks for the funds' portfolios. SEC attorney Edward Siedle has estimated that nearly 75 percent of the fund industry's $6 billion in trading commissions pays for distribution via these arrangements. As the CFA noted in its Senate testimony: "This abusive approach to mutual fund sales harms some investors directly -- by channeling them into funds with higher costs and poorer performance than they might otherwise have purchased. The long- term costs of a poor selection can be measured in the added thousands or tens of thousands of dollars that might have been earned from a lower cost, higher quality fund.... if funds got out of the business of competing to be sold, and brokers' compensation came directly from the investor and did not depend on which fund they sold, then brokers might begin to compete on the basis of the quality of their recommendations, and funds might have to compete accordingly, by offering a quality product and good service at a reasonable price." You also sought additional comment on the need for additional changes to rule 12b-1, which the SEC adopted temporarily in 1980 so funds short of assets could use shareholder assets instead for certain marketing expenses. We concur with CFA's testimony that: "While fund companies often reduce management fees as fund assets hit certain benchmarks, they have clearly not fully passed along the economies of scale that have come with a rapidly growing asset base." For these reasons, Rule 12b-1 should be repealed. The Commission also adopted amendments that require mutual funds to disclose expense in shareholder reports associated with an investment of $1,000. The reality is that no one reads shareholder reports pre-sale, which means this proposal will do nothing to introduce meaningful price competition into the mutual fund marketplace. Dollar amount cost disclosure is good, but applying it to a hypothetical $1,000 account means the amount will look quite small. We join the CFA, Fund Democracy, Inc., U.S. Public Interest Research Group, Consumers Union and Consumer Action in strongly supporting individualized dollar cost disclosures that should be provided in the quarterly or annual account statements that show the shareholder's account balance and transaction activity. Putting cost information in dollar amounts side-by-side with information on the fund's gains or losses for the year is the key to helping investors to put those costs into perspective. Sincerely yours, Pamela Gilbert Co-Founder RestoreTheTrust.com |