Mutual Funds: Greater Transparency Needed in Disclosures to Investors
GAO-03-763
Published: Jun 09, 2003. Publicly Released: Jun 16, 2003.
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Highlights
The fees and other costs that investors pay as part of owning mutual fund shares can significantly affect their investment returns. As a result, questions have been raised as to whether the disclosures of mutual fund fees and other practices are sufficiently transparent. GAO reviewed (1) how mutual funds disclose their fees and related trading costs and options for improving these disclosures, (2) changes in how mutual funds pay for the sale of fund shares and how the changes in these practices are affecting investors, and (3) the benefits of and the concerns over mutual funds' use of soft dollars.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| United States Securities and Exchange Commission | To promote greater investor awareness and competition among mutual funds on the basis of their fees, the Chairman, SEC should increase the transparency of the fees and practices that relate to mutual funds by considering the benefits of additional disclosure relating to mutual funds fees, including requiring more information in mutual fund account statements about the fees investors pay. |
Closed – Implemented
With rules that became effective on May 10, 2004, SEC now requires that mutual funds disclose in their reports to shareholders fund expenses borne by shareholders during the reporting period. Mutual fund shareholder reports will be required to include: (1) the cost in dollars associated with an investment of $1,000, based on the fund's actual expenses and return for the period; and (2) the cost in dollars associated with an investment of $1,000, based on the fund's actual expenses for the period and an assumed return of 5 percent per year. SEC is also proposing in separate rules still out for comment that broker-dealers provide disclosures at the time of sale on the fees paid by fund purchasers. After considering placing additional disclosures in quarterly statements, SEC choose to expand the existing disclosures in shareholder reports instead.
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| United States Securities and Exchange Commission | To promote greater investor awareness and competition among mutual funds on the basis of their fees, the Chairman, SEC should increase the transparency of the fees and practices that relate to mutual funds by evaluating ways to provide more information that investors could use to evaluate possible conflicts of interest resulting from any revenue sharing payments their broker-dealers receive. |
Closed – Implemented
SEC is in the process of evaluating ways to best provide investors with information about the revenue sharing practices that could create conflicts of interest between broker-dealers that market mutual funds and investor customers. A draft rule that would require broker-dealers to disclose the extent to which they receive revenue sharing payments from mutual fund advisers in point of sale and trade confirmation documents has been issued, undergone a public comment period, but is currently being held as SEC staff across various divisions study how best to use various disclosure regimes to provide information on this and other issues to investors.
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| United States Securities and Exchange Commission | To promote greater investor awareness and competition among mutual funds on the basis of their fees, the Chairman, SEC should increase the transparency of the fees and practices that relate to mutual funds by evaluating ways to provide more information that fund investors and directors could use to better evaluate the benefits and potential disadvantages of their fund adviser's use of soft dollars, including considering and implementing the recommendations from its 1998 soft dollar examinations report. |
Closed – Implemented
On July 18, 2006, SEC issued an interpretative release, Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934 (34-54165), which was intended to provide greater clarity to what services and products that money managers could receive as part of soft dollar arrangements. According to the release, this interpretation addresses the current environment and the issues raised by its 1998 soft dollar examinations report.
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Topics
InvestmentsMutual fundsFeesInvestment advisersShareholdersSecuritiesFinancial servicesRevenue sharingCorporate governanceBid proposals