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The Honolulu Advertiser
Posted on: Thursday, March 13, 2003

Regulators examining fees of mutual fund companies

By Maura McEnaney
Bloomberg News Service

WASHINGTON — The cost of owning the largest U.S. stock funds increased 11 percent between 1999 and 2001, the steepest rise in more than a decade, a government study found.

The average expense ratio on large stock funds increased in 2001 to 0.7 percent, or $7 for every $1,000 invested, from 0.63 percent, according to a report by the U.S. General Accounting Office.

Regulators are examining fees charged by mutual fund companies and brokerage firms after corporate accounting and management scandals at businesses such as WorldCom Inc. shook U.S. investors' confidence in the stock market. Share prices in 2002 fell for a third straight year, resulting in the worst performance of U.S. equity funds in almost three decades.

"Are investors getting a fair shake?" Representative Michael G. Oxley, R-Ohio, chairman of the House Financial Services Committee, said at a congressional hearing yesterday. "Recent data indicate that the answer is 'no.' "

The hearing comes a day after a report from the U.S. Securities and Exchange Commission, National Association of Securities Dealers and New York Stock Exchange found that investors weren't receiving the discounts due them when buying funds that carry up-front sales fees. The study said that investors buying funds through broker-dealers were overcharged about one-third of the time.

The GAO was asked by Congress to update a 2000 report because of concerns that investors were being charged too much.

Higher expense ratios coincided with a 15 percent drop in industry assets, the GAO report said. Total assets held by U.S. stock funds fell to $3.4 trillion in 2001 from $4 trillion in 1999, according to the Investment Company Institute, the mutual fund industry's trade group.

Management fees are based on the size of a fund, and generally fall as a fund gets bigger, the study said. However, of the 43 stock funds examined by the GAO, 61 percent had expense increases as assets rose.

Expense ratios include management fees, or the amount the fund's investment adviser charges for running it, mailing expenses and accounting costs. They also include so-called 12b-1 fees, which are distribution costs paid out of the fund's assets.

Mutual funds must disclose fees charged to investors in a table within their prospectus. They also must provide details of their after-tax returns.

The SEC is proposing that fund firms change the way they provide expense information in semiannual shareholder reports. The agency also is requiring them to disclose how they vote shares in proxy voting contests.

Stock funds' average expense ratios generally decreased over the past decade, falling from 0.74 percent in 1990, the GAO study said.