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Thursday, March 28, 2002

RULES & REGS
Five Fingered Fund Reform

by: Sean Hanna, Editor in Chief

Matthew Fink, president of the March 25, 2002 took his opening remarks at the 2002 Mutual Funds and Investment Management Conference held in Orlando, Florida this week as a chance to explain a five-pronged legislative agenda for the industry. Much of this agenda looks similar to the ICIs outline of a year ago.

Notably absent from the industry laundry list was any mention of competing products commonly called folios. In recent years, the ICI has wanted those products regulated like funds. The pressure on the industry, however, has deflated along with the dotcom bubble.

Instead, the ICI is putting market timers, disclosure, tax relief, governance and investment advice for 401(k) participants at the top of its legislative and regulatory agendas.

401k Disclosure

Perhaps the most controversial of these proposals is the ICI's call for increased disclosure. Fink wants regulators to increase the disclosure requirements in 401(k) plans to the level of funds. For 529 college savings plans he called for requirements that investors be told of the tax advantages of investing in the state plan where they are residents.

The fund industry argument is that these 401(k) retirement products often offer separate accounts, commingled funds, insurance products such as annuities and bank products that do not have the disclosure requirements of registered mutual funds. In the 401(k) market, the plan sponsor is deemed the buyer of the investment product and is typically considered an institutional investor exempt from disclosures required in the retail market. This fight will likely meet opposition from asset managers deriving income in these markets from non-fund products.

Advertisements and Prospectuses

Fink also called for changes in disclosure requirements in fund advertisements. He noted that the now-mandated performance information dated to the most recent calendar quarter is often outdated in print publications. The ICI is calling for the SEC require performance advertisements to disclose how information updated to the most recent month-end can be found through a Website or toll-free phone number.

On the market timing issue the trade group is seeking protection for fund firms that restrict shareholders from moving in and out of funds quickly or that levy fees on those shareholders. The industry argument is that short-term shareholders increase costs for others. A number of funds have taken this path while others, notably Vanguard with its Admiral shares, have taken the inside-out approach to the same end and cut fees for long-term shareholders.

He also called for the ending of the requirement that funds send a printed list of all holdings to shareholders twice a year. This requirement produces millions of unread pages and wasteful printing and mailing costs," argued Fink. The ICI would prefer fund firms to be able to list only their largest holdings. Industry analysts such as Morningstar and Reuters that rely on the disclosures to supplement their research are fighting this change the hardest.

To make disclosures more usable, he called for non-controversial graphical features such as pie charts breaking out the fund portfolio by industry sector, market capitalization, and geographic region to be mandated in disclosures.

Fink also resisted the call by groups such as FundDemocracy.com for an increase in the number of times per year funds must make disclosures from twice per year.

Taxing Capital Gains

The industry also is seeking changes in the tax code that would spare fund investors from paying capital gains taxes until they sell their holdings. A bill to that effect died from lack of attention in the last Congress. That bill did not seem to arouse opposition; rather it lacked constituents to navigate it through the Capitol's shoals.

Fink noted that the disappearance of the budget surplus might increase the difficulty of getting the bill through Congress.

Corporate Governance

The ICI is exploring possible legislative and regulatory changes needed in the market based on the revelations resulting from the Enron collapse, said Fink. "The Enron bankruptcy has prompted a large number of additional legislative and regulatory proposals in this area, and we are carefully reviewing and monitoring them. As in the past, we will examine these matters with the goal of best serving the interests of mutual fund shareholders."

"I have no doubt that this approach will lead us to continue to press for improvements in market structure, issuer disclosure, and corporate accountability," Fink added.

401k Advice

The ICI continues to call for the passage of legislation allowing full-service retirement plan providers to offer in-house investment advice to plan participant. The ICI's continued support comes despite a shift by Fidelity Investments. In recent weeks word has spread that Fidelity no longer actively supports the Boehner advice bill in the House. That is the bill supported by the ICI.

The change of heart at Fidelity is not as much of a surprise as it may seem since all of the large employer groups show only tepid support for the bill at best. Those groups represent the majority of Fidelity's clients when measured by assets.

Employers provide more support to the Senate version of the bill offered by Jeff Bingaman (Bingaman-Collins). That bill provides fiduciary relief to plan sponsors rather than an exemption for plan providers and asset managers.

There has been talk this week that Senator Bingaman may add a provision to his bill allowing bundled providers an advice exemption for managed accounts offered to participants. The trial balloon is being floated by the Senator to measure the provisions support among asset managers and sway their support from the Boehner bill.  

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