Senators propose massive mutual fund changes
By Marcy Gordon
Associated Press
WASHINGTON — In a sweeping response to mutual fund scandals, senators are proposing to outlaw long-standing practices by fund companies and brokerage firms that they say create conflicts of interest and drive up costs to investors.
The proposals, which would significantly change the way mutual fund companies conduct business with investors and the brokers who sell funds, are part of new bipartisan legislation detailed yesterday that also would mandate clearer information on fees and operations.
Its backers — Sens. Peter Fitzgerald, R-Ill., Susan Collins, R-Maine, and Carl Levin, D-Mich. — called it the most sweeping legislation of its kind since enactment of the 1940 law that governs the nation's mutual fund industry.
The three senators are in the early stages of gathering support for the legislation and indicated formal drafting may not occur until early summer. But already consumer groups and a respected industry expert, Vanguard Group founder and former CEO John Bogle, have endorsed the measure. Bogle, who has called for a major overhaul of the fund industry, described the measure as "the gold standard in putting mutual fund shareholders back in the driver's seat."
The House in November overwhelmingly passed legislation requiring, among other things, that mutual fund companies disclose more information about fees and operations. But the measure is not as far-reaching as the new Senate proposal — which would, for example, ban fund companies from making special payments to brokerage firms for steering investors toward certain funds. That proposal is certain to draw fire on Wall Street, where investment houses receive billions of dollars from the mutual fund industry to sell its funds.
"We're taking the brokerage community off the gravy train," Fitzgerald said at a news conference.
The Securities and Exchange Commission, which has been making a series of changes in rules governing the fund industry, is expected to propose tomorrow the same ban on such payments to brokers.
Fitzgerald said the SEC has been doing "a pretty good job ... getting more and more aggressive" but that legislation is needed to fully resolve the problems.
In another radical move, the new proposal would abolish the practice of allowing mutual funds to use shareholders' money to pay for advertising and marketing costs.
The SEC, meanwhile, promised "relief" to investors from mutual fund abuses by early summer through its ongoing rule changes.
SEC officials hadn't yet reviewed the new Senate proposal, agency spokesman Herb Perone said. "We hope that their efforts are consistent with the initiatives already underway" at the SEC, he said.
Sen. Richard Shelby, R-Ala., chairman of the Senate Banking Committee — which has primary jurisdiction over mutual fund legislation — did not endorse the proposal. He has said he first wants to hear from all interested parties.
"I would expect to take into consideration all of the various legislative proposals that have been offered in the Senate when determining what action is necessary to protect American investors from abusive practices in the mutual fund industry," Shelby said in a statement.
The Investment Company Institute, the fund industry's lobbying group, said it supported some provisions of the new measure but also criticized what its leader called "many ill-defined new legal standards that could change mutual funds' essential structure."
"These changes could produce major dislocations and unintended consequences that would deter innovation, diminish competition, breed litigation and as a result, harm current and future generations of mutual fund shareholders," ICI President Matthew Fink said.
