GAO Asks Funds to Disclose Fees in Dollar Amounts

The House Committee on Financial Services released a General Accounting Office report Monday calling for far greater fund transparency.

The GAO wants funds to tell investors exactly how much they are paying in fees, in dollar amounts, in quarterly statements. The GAO report acknowledges that this could be costly for the industry, citing an Investment Company Institute estimate that annual costs could top $66 million a year. But the GAO counters that on a per-investor basis, the cost would be a mere 35 cents per account. In addition, the GAO acknowledges the Securities and Exchange Commission’s concern that the expense of divulging expenses to individual shareholders could prove to be too onerous and expensive of a task, and the SEC’s suggestion that funds could divulge expenses based on a $10,000 investment.

However, the GAO argues that telling investors how much they are paying in exact dollars is standard practice in other financial service sectors. "Currently, mutual funds disclose information about the fees and expenses that each investor pays on their mutual fund shares as percentages of fund assets," the GAO report notes. "Most other financial services disclose the actual costs to the purchaser in dollar terms."

The GAO office would like fund companies to disclose their receipt of 12b-1 fees and how this might cause a conflict of interest with the brokers who sell their funds. As well, the GAO notes that when the SEC began allowing complexes to use fund assets for marketing and distribution efforts through 12b-1 fees in 1980, such fees were supposed to be imposed only temporarily. "The fees have, instead, evolved into an alternative way for investors to pay for the services of broker/dealers and other financial intermediaries from whom they purchase fund shares," the report notes.

The GAO wants the SEC to look into, and disclose, whether soft dollars encourage fund companies to trade shares more frequently than they normally would, or with brokerages that charge higher fees, thereby increasing shareholder costs. Furthermore, some fund companies might use soft dollars to reduce their own expenses, the GAO says. Although the SEC issued a rule three years ago asking fund complexes to reveal soft-dollar practices, the rule has yet to be acted upon, the GAO attests.

The office would also like fund companies to disclose their overall trading costs, as well as whether revenue-sharing encourages brokers to push funds with such an incentive over other funds that might be more suitable for investors.

Finally, the report explores the debate on whether independent directors are doing enough due diligence to select investment advisors with the lowest fees. "Very few mutual funds change their investment advisors. Less than 10 funds have changed their primary investment advisor in the last 10 years," the report notes. As a result, the GAO is calling upon the SEC to provide more information on investment management practices, both to directors and investors, so that they can be better informed as to the oversight of fund boards.

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