House Introduces Bill to Strengthen Fund Disclosure

Capital Markets Subcommittee Chairman Richard H. Baker (R-LA) introduced a bill Wednesday that would require funds to disclose operating expenses and portfolio transaction costs and have directors crack down on soft-dollar and revenue-sharing arrangements. The bill takes into account the recommendations that the Securities and Exchange Commission issued Tuesday calling for more transparency in the fund industry (see MME 6/11/03).

If passed, the Mutual Funds Integrity and Fee Transparency Act of 2003 would require funds to disclose operating expenses in dollar amounts and reveal portfolio transaction costs in a way that will allow investors to compare them among various funds. Funds would also have to inform investors of breakpoint discounts they might be eligible for. The act would also require investment advisors to provide a report to directors every year on revenue-sharing, directed brokerage and soft-dollar arrangements.

The bill would strengthen corporate governance by requiring two-thirds of all board directors, including the chairman, to be independent. It would also disallow any person with business or family relationships with the investment advisor to serve on the board, and it would direct the SEC to require funds to disclose how their portfolio managers are compensated.

Finally, it would apply Sarbanes-Oxley requirements for greater auditor independence to mutual funds by placing the selection of the auditor in the hands of the audit committee rather than the independent members of the board. It would also require all members of the audit committee to be independent and give them the authority to hire independent counsel if they deem necessary.

"Mutual funds are the investment tool of choice of the growing millions of ordinary, working families participating in the markets and providing the liquidity vital to the function of our capital markets and growth of our economy," Baker said in a statement. "It’s only proper that Congress makes sure that they get the facts they need to make informed investment choices and that their money is being managed in the most professional manner possible."

The subcommittee is scheduled to hold a hearing on the legislation next Wednesday.

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