Mutual fund disclosure is a hot topic these days, and U.S. government bond funds are among the latest to attract the scrutiny of the Securities and Exchange Commission.

To avoid misleading investors, any mutual fund "whose name implies a policy of investing in U.S. Government securities" should provide more prominent and explicit disclosure of their investments in debt issued by Freddie Mac, Fannie Mae, and the FHLBs, the SEC wrote in an Oct. 17 letter to the Investment Company Institute.

In the mutual fund rulebook, a fund's name must be consistent with 80% of its investments, but a number of funds that have "federal" or "government" in their names allocate more than 20% to Freddie Mac, Fannie Mae or FHLBs. In fact, some 51 funds with the words "federal" or "government" in their names have over 50% of their assets combined in Freddie Mac and Fannie Mae, according to the most recent Morningstar data. Lord Abbett Ltd Dur U.S. Govt Secs A holds a total of 96% combined in securities issued by the two agencies.

Whereas U.S. Treasuries are backed by the government, Freddie Mac and Fannie Mae are not, making them riskier investments. Meanwhile, Freddie Mac was rocked by scandal earlier this year when accounting irregularities surfaced, and the company is still putting the pieces back together.

"The reason this is being brought up is because of the increased scrutiny of Fannie and Freddie and to stop any problems before they even start," said Scott Berry, a bond fund analyst with Morningstar. "Funds have already been disclosing their holdings in detail in annual and semi-annual reports, so it's not as though they were trying to keep this secret."

 

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