Mutual funds should be required to report their fees in dollar figures in their semi-annual reports to shareholders, according to a Securities and Exchange Commission study on fund fees issued last week.

The long-awaited study follows a similar report issued by the General Accounting Office last summer.

The SEC's report also found that mutual fund fees have steadily risen since 1970, but have fallen in three of the last four years. Using asset-weighted expense ratios, the study found that expense ratios rose from 0.73 percent in 1979 to 0.99 percent in 1995, but dropped three years in a row to 0.91 percent by 1998 and then rose to 0.94 percent in 1999. However, the study does not take into consideration changes in sales loads, which may influence the outcome of the study. For instance, many funds have decreased or eliminated front-end sales loads, which are not included in the funds' expense ratios, and replaced them with 12b-1 fees, which are included in the funds' expense ratios, the study said.

The SEC's report, however, is more specific than the GAO report, which was unable to measure the extent to which fund advisers experienced economies of scale.

And while both reports recommend that funds use a dollar figure to disclose their expenses, the reports differed on where and how often these should be disclosed. The SEC report recommended a dollar figure based on a hypothetical investment amount and return be used in semi-annual reports to shareholders, while the GAO report recommended the industry report each individual's costs based on their particular investments.

"We recommend that, because the recommended information could be disclosed in various ways, the Commission should evaluate the most effective way of disclosing fees and expenses that investors incur, taking into account the cost and burden that various alternative means of making such disclosures would entail," the SEC's report said.

The study suggests one method in which the additional information could be presented. Data could be provided in a table format showing the costs incurred by a shareholder who invested a standard amount in the fund that earned a standard return. Because the investment and return would be standardized, the only variable in the table would be the fund's expenses, which would make it easy for investors to compare similar funds, the report said.

Although disclosing shareholder costs in dollar amounts is a good idea, the SEC should have followed the GAO's suggestion of including that information in quarterly, not semi-annual, reports, said Mercer Bullard, president and founder of Fund Democracy LLC of Chevy Chase, Md., and former assistant chief counsel at the SEC's division of investment management.

"Disclosure of dollar amounts is a great development," he said. "But my criticism is it shouldn't be limited to semi-annual reports. It should be put in the document that everyone opens and looks at, which is the quarterly report, not the one that everyone immediately throws out, which is the semi-annual report. It's almost as if they are trying to put it in a place where investors won't see it."

The report also recommends that the Commission continue to emphasize independent directors' responsibilities in monitoring fund fees and expenses.

"Fund directors, should, for example, attempt to ensure that an appropriate portion of the cost savings from any available economies of scale is passed along to fund shareholders," the report said.

The Commission should also consider revising rule 12b-1 under the Investment Company Act of 1940, in order to accommodate changes in the mutual fund industry in the 20 years since the rule was enacted, the report said.

While the report makes several recommendations, it does not indicate what action, if any, the SEC will take. The SEC will consider whether to adopt any of the recommendations, said an SEC spokesperson, who requested his name not

be used.

It is impossible to say what impact the report will have on the Commission's future rule making, said Geoff Bobroff, president of Bobroff Consulting, of East Greenwich, R.I. With a new administration moving into the White House and the SEC undergoing a change in leadership, it is unclear how the new report will be used, he said.

The SEC should be careful not to let its desire to raise investors' awareness of fund fees make fund documents overly burdensome, Bobroff said. If the SEC requires funds to publish fees and expenses in the format it is recommending, it runs the risk of putting so much information in the semi-annual reports that investors will be more confused than informed, he said.

"I guess where I'm at a loss is how do we get out of this quagmire of more and more disclosure because it seems that once that Pandora's box is opened, it's hard to get out of," he said.

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