Now that regulators have largely cleaned out the improper mutual fund trading that sparked a national scandal in 2003, the watchdogs who guard the $7 trillion industry have a new goal: making sure investors are fully informed about the fees and commissions they pay.
Most investors are at least vaguely aware of the "investment management" fee -- ranging from 0.18 percent to more than 2 percent annually of the assets in each account. But fund companies and brokers make money in myriad other ways that also reduce investor returns. Now the Securities and Exchange Commission and the brokerage industry regulator NASD are working on improving disclosure of those fees and commissions as well.
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"There is no substitute for transparency and the honesty that flows from it," said Senate Banking Committee Chairman Richard C. Shelby (R-Ala.), who has been pressing the SEC to require more disclosure.
Specifically, the SEC staff is working on a "point-of-sale" form that would require that brokers tell investors how much they are paying in commissions before they actually put their money in.
The staff is also working with the NASD on the best way to tell investors about how much their particular funds spend to buy stocks and bonds. Such "transaction costs" cut into fund returns but are not included in the management fee, and currently fund companies do not have to quantify or disclose them.
The results of these efforts could have broad implications, analysts say, because better-informed consumers could then comparison-shop, improving investors' fortunes and possibly driving down industry profits.
"You need to get this stuff out in the open, make sure that people understand what they are paying for," said Barbara Roper, director of investor protection for the Consumer Federation of America.
The debate could also affect the Bush administration's upcoming plan to partially privatize Social Security because the new rules could set standards for how workers will be told about the fees associated with private investment options, said University of Mississippi law professor Mercer Bullard.
The new focus on disclosure comes as the SEC and New York Attorney General Eliot L. Spitzer have largely wrapped up their investigations of improper late trading and high-volume, short-term trades known as market timing at numerous fund companies.
The SEC is still considering two proposals that sprang directly from the trading scandal -- a "hard close" that would eliminate the possibility of late trading by requiring all buy and sell orders to be in the hands of mutual fund firms by 4 p.m., and a mandatory 2 percent redemption fee on short-term investments that would make quick trades unprofitable.