Three U.S. Senators have introduced new legislation aimed at reforming the $7.4 trillion mutual fund industry, a bill that not only would stamp out abusive trading practices but also overhaul the hidden fee structure imposed on shareholders.

Sponsored by Sen. Peter Fitzgerald (R-IL), Sen. Carl Levin (D-MI) and Sen. Susan Collins (R-ME), chairman of the Senate Governmental Affairs Committee, the new bill is called the Mutual Fund Reform Act of 2004. It would require a total fund expense ratio to include portfolio transaction costs and rationalize 12b-1 fees by treating broker compensation as a shareholder expense.

The bill would also require disclosure of actual individualized expenses and prohibit revenue sharing, soft dollars and directed-brokerage practices.

Sen. Collins said that the new legislation would "significantly overhaul the arcane and opaque structure of fees and expenses that has prevented meaningful price competition among the approximately 8,200 mutual funds that are offered to investors."

"We’re taking the brokerage community off the gravy train," Fitzgerald told reporters yesterday. "There’s nothing wrong with an honest load, but funds should call a load a load, make it account-based, and not disguise it."

The Investment Company Institute issued a statement yesterday saying it needs time to evaluate the bill. However, the ICI expressed initial concerns that it contains many "ill-defined new legal standards . . . that could produce major dislocations and unintended consequences that would deter innovation, diminish competition, breed litigation and – as a result – harm current and future generations of mutual fund shareholders."

The reforms outlined in the new bill mirror proposals already put forth by the Securities and Exchange Commission, such as a point-of-sale disclosure for brokers, revamping the boardroom and establishing a code of ethics for fund executives. The Commission is scheduled to meet Wednesday to discuss the merits of a proposal that would overhaul the 12b-1 rule.

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