The Securities and Exchange Commission Tuesday issued a report indicating that increased transparency in the $6.4 trillion mutual fund industry is necessary, but hinted that large scale changes are not likely due to their impracticality.

The report was issued in response to a letter sent to the SEC by Capital Markets Subcommittee Chairman Richard H. Baker (R-LA) back in March requesting information on a number of topics relating to mutual funds. In the 120-page report, the Commission responded to Baker’s questions on expense ratios, competition among mutual funds, the opacity of portfolio trading costs, soft dollar commissions and conflicts of interests. It also addressed the adequacy of the disclosure in shareholder reports, revenue-sharing payments facilitating the distribution of fund shares and other issues.

"With over 90 million Americans investing in mutual funds, it is imperative we in Congress take every step to ensure investors have all the information they need, provided in a useful format, to make informed decisions," Baker said in a statement. "We must ensure that the conflicts of interest that contributed to investor losses in other sectors of the securities industry are not allowed to exist in the fund industry."

One of the main topics in the report was the disclosure of fees. The Commission said that while transactional fees in mutual funds are "relatively transparent," ongoing fees are less evident because of the way they are accounted for. Additionally, only a small percentage of mutual fund investors understand what they are being charged or the impact fund expense ratios have on their returns.

The SEC proposed additional disclosure of ongoing expenses late last year, but said it was also considering the General Accounting Office’s June 2000 proposal. However, from the SEC’s commentary, it appears the GAO’s proposal is less likely.

During the March meeting, several witnesses testified about the opacity of portfolio trading costs and made suggestions about how to approach additional disclosure, the SEC said.

"Although proposals to quantify transaction costs are attractive in theory, it is difficult to see how they could be feasible," the SEC wrote in its report. "Even if a detailed regulatory regime were imposed on the operational procedures that funds use to effect portfolio transactions, the resulting estimates of transaction costs would appear to lack the attributes of uniformity, reliability and verifiability that are the hallmarks for recording operations results in financial statements."

In response to the SEC’s report, The Investment Company Institute issued a statement, saying that it supports "strong, appropriate regulation." It also said that to help bolster investor confidence and to service the interests of mutual fund investors, it will work with Congress and the SEC "to make our strong system of regulation even stronger."

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