PALM DESERT, Calif. - The Securities and Exchange Commission may be searching for a new chairman, but that will not prevent it from pursuing new initiatives, including a new rule proposal it expects to issue by June 30, according to Paul Roye, director of the division of investment management for the SEC.

The rule proposal is aimed at increasing disclosure in funds' annual reports as well as streamlining disclosure of portfolio holdings, Roye said. It tops a list of SEC initiatives Roye announced here last week that include everything from a concept release on actively-managed exchange-traded funds to a sweep and inspection of Internet advisers to determine if their products should be regulated like funds. The initiatives signal that work will continue at the SEC even though the regulatory body lacks a chairman.

"While new initiatives will await consideration by a new SEC chairman during this interim period, registration statements and disclosure documents will be reviewed, exemptive applications and no-action and interpretive letters will be processed and necessary rule making will proceed," said Roye. "The dynamics of the securities markets and the investment management business do not permit us to stand still."

The new rule proposal is intended to improve management discussions of performance in funds' annual reports, Roye said. The proposal is likely to require funds to use plain English in their discussions of funds' performances, he said. The proposal may also seek new presentation standards for fund fees and expenses based on some of the recommendations the SEC made in its study of mutual fund fees, said Roye. The SEC's fee study recommended that shareholder reports publish the fees and expenses of a $10,000 investment, based on the fund's historic performance. The study also recommended that shareholder reports include a figure based on a fixed rate of return to allow an easy comparison of expenses among a variety of funds.

The new rule proposal will also recommend streamlined presentations of funds' portfolio holdings in shareholder reports, Roye said. Currently, funds have to list their entire holdings twice a year in shareholder reports, but the SEC may propose that funds list only their top 50 holdings. It may recommend waiving the requirement altogether for index funds, Roye said. If investors or their intermediaries wanted full disclosure of the holdings, they could request a listing, he said.

"Our goal here is going to be to provide information to investors that they desire, when they need it while avoiding information overload," he said. "Our consideration of this issue requires us to balance the needs and desires of various types of investors against imposing undue burdens or causing adverse impacts on funds and endangering their investment strategies."

Although the proposal would seek to streamline the disclosure of portfolio holdings, it may also seek to increase the frequency of that disclosure to quarterly from semi-annually, Roye said.

Roye made his comments here at a mutual fund conference sponsored by

the Investment Company Institute and

the Federal Bar Association, both of Washington, D.C.

Another major initiative the SEC announced is the development of a concept release on an actively-managed exchange-traded fund. The SEC is seeking the fund industry's comments and ideas on the development of such a fund, he said. The SEC wants to determine what purpose such a product might serve, the cost advantages it would offer and how the product would operate, he said. By issuing a concept release, the SEC hopes to be well prepared when a firm actually files an exemption request for an actively-managed exchange-traded fund, he said.

"The possible evolution of [exchange-traded funds] will present complex and novel issues for the staff's consideration," he said. "We want to insure that any regulatory approval of actively-managed exchange-traded funds is in the public interest and consistent with the protection of investors."

The release is intended to generate a variety of ideas on the possibility of an actively-managed exchange-traded fund, he said.

"We will then be in a better position to evaluate any proposals for these types of products as they are presented to us under the exemptive process on a case by case basis," Roye said.

The office is currently meeting with Internet advisers that offer online portfolio products and is analyzing whether the products should be regulated under the Investment Company Act of 1940, he said.

"Fundamentally the issue is whether or not in buying these baskets you're creating a separate security," he said. "The argument is because of odd lots and fractional shares, it is somehow a separate security and your fortunes are interwoven with the success of the enterprise that is sponsoring that service."

The SEC's decision to investigate Internet advisers has been welcomed by the ICI, which in July requested that the SEC consider whether the Internet advisers' products should be regulated under the Investment Company Act of 1940.

"In our view, they are functionally equivalent to mutual funds and therefore should be regulated under federal securities laws," said Amy Lancellota, senior counsel with the ICI. "Why shouldn't investors in these products, which are functionally equivalent to mutual funds, receive the same important protections that mutual fund investors receive under the 1940 Act?"

In addition, fund managers that offer hedge funds are being closely monitored, Roye said.

"These new opportunities raise conflict of interest issues and the potential for abuse," he said. "Management arrangements for hedge funds can be structured to directly enable portfolio managers to participate in the created profits by the funds that they manage."

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