Rules aim to keep mutual funds safe
By John Waggoner
USA Today
Accounting fraud. Bad stock research. The financial industry has been in so much trouble lately that you might have to sit through a Senate hearing to use an ATM card.
To comment on pending Securities and Exchange Commission rules, visit www.sec.gov and click on "proposed rules" in the Regulatory Actions section.
After all the scandals, the Securities and Exchange Commission has issued a stream of new rules, and proposals that will change the mutual funds you buy and how you invest in them. If you're interested in how your funds operate, let the SEC and other regulators hear your opinions.
Give the SEC your opinion
Compared with, say, Enron, the fund industry's woes might seem like small potatoes. Nevertheless, an estimated 52 million U.S. households own mutual funds. The industry manages $6.4 trillion in assets, $2.7 trillion of which is in stock funds. The SEC, whose Division of Investment Management oversees the funds, has been looking at ways to improve regulation, presumably to head off any disasters.
The SEC kicked off its round of regulation with a rule that will make mutual funds disclose how they vote their proxies in corporate elections. Another proposal, which deserves support, would have funds disclose their holdings quarterly. It never hurts to know what you're buying.
The SEC has also asked for comments on the creation of a mutual fund self-regulatory organization, or SRO, much like the National Association of Securities Dealers, which oversees the brokerage industry.
Why a so-called SRO? The SEC's Division of Investment Management has 578 employees to watch more than 8,000 mutual funds and 7,000 large investment advisers. Together, funds and advisers control $21 trillion. That's one employee per $36 billion in assets. An SRO might increase oversight.
Still, it is a bad idea. Some of the most troubled financial industries have SROs. And the SEC's oversight, so far, has been effective.
A better proposal would be to increase the SEC's staff. President Bush's budget proposal would increase the Division of Investment Management to 734, a 27 percent increase. That's a good start.
The SEC and the National Association of Securities Dealers are also investigating problems with fund sales charges. Funds that charge an upfront commission, or load, typically charge smaller commissions for larger orders. MFS Capital Opportunities, for example, charges 5.75 percent on a $10,000 investment. Plunk down $100,000, however, and you pay 4 percent. Each step is called a breakpoint.
Negligent brokers sometimes don't give investors their breakpoint discounts, and some funds may not keep proper tabs on brokers. If you suspect a breakpoint problem, contact your broker. If you get no satisfaction, complain to the NASD: www.nasdr.com.
Finally, Rep. Michael Oxley, R-Ohio, has asked the government accounting office to investigate mutual fund fees. The average diversified U.S. stock fund charges 1.51 percent of assets for expenses. Funds with high expenses, or even average expenses, can shave thousands of dollars from your returns over time. So it's in your best interests to pay as little as you can. And, because funds are run for the benefit of shareholders, not fund managers, it's also the fund's duty to keep fees as low as possible.
But a good chunk of the average fund's expense ratio doesn't go to the fund manager. It pays for selling shares, either through brokers or advertising.
John Waggoner is a writer for USA Today.
