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The mutual fund industry, which has remained relatively free of major scandal since the adoption of the Investment Company Act of 1940 (the 1940 Act), recently has become the subject of direct congressional scrutiny. Many may have believed that mutual funds would be able to focus exclusively on their businesses, including their current compliance responsibilities, following the extensive rulemaking that resulted from the Sarbanes-Oxley Act of 2002. However, lawmakers and regulators alike have decided to consider certain issues specific to the fund industry. A key question is whether there is sufficient support for recently proposed legislation or will the SEC take action on its own to address Congress' concerns. Either way, it appears that more regulation is on the horizon.
On June 11, 2003, Richard Baker (R-La.), Chairman of the House Committee on Financial Services' Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, introduced new legislation designed to increase transparency of mutual fund fees and costs and strengthen corporate governance and management integrity at mutual fund companies. After holding hearings on June 18 (2) and making several significant revisions to the original bill, the full Committee approved H.R. 2420, the Mutual Funds Integrity and Fee Transparency Act of 2003 (the Bill) on July 23, 2003. (3)
The Bill will go to the House floor for a vote, which, as of the date of this article, had not been scheduled. However, it is unclear whether the Bill has the congressional support needed to become law. In fact, a companion bill bas not been introduced in the Senate. In a letter to SEC Chairman William Donaldson, dated July 30, Congressmen Baker and Michael Oxley (R-Ohio), the Committee's Chairman, urged the SEC to implement, as quickly as possible, those provisions of the Bill that do not require legislative action. The Congressmen asked the SEC to provide a report, by October 1, outlining the SEC's progress on the request.
Improved Mutual Fund Disclosure
The Bill would direct the SEC to issue rules requiring funds to provide investors with improved disclosure in the following areas. This information would have to be presented in a document other than the prospectus or statement of additional information (SAI):
* For each $1,000 of investment, the estimated dollar amount of operating expenses a shareholder bears; (4) * Portfolio turnover rate, in a manner that facilitates comparison among funds, and disclosure that alerts investors to the implications of a high turnover rate; * Payments by any person, other than the fund, …