Washington (June 20, 2003) -- The General Accounting Office wants the Securities and Exchange Commission to consider new measures to increase investor awareness and competition among mutual funds on the basis of fees, according to a report issued this week.

The GAO recommended that the commission consider the benefits of additional disclosure relating to fund fees, including requiring more information in quarterly account statements about the fees. The GAO also recommended that the SEC evaluate ways to provide more information to investors that would allow them to evaluate possible conflicts of interest that arise from revenue-sharing arrangements, payments funds make to broker/dealers for distribution, and fund advisers’ use of soft dollars, incentives paid to broker/dealers by advisers to incentivize them to sell their funds.

Fund fees have come under increased scrutiny because of mutual funds’ growing importance to the average investor, Richard J. Hillman, GAO director of financial markets and community investments, told WebCPA. Hillman noted that 95 million investors have mutual funds in their portfolios.

“We came out in favor of additional disclosures related to fees in the quarterly account statement, because we found in an ICI study that the quarterly statement is the one that investors rely on the most,” Hillman said. “If you want to influence investors’ perception of what it’s costing them to be in a fund, you have to have disclosures in that statement.”

Regulators hope that increased disclosures will increase competition among funds and ultimately result in lower fees. Currently, mutual funds disclose information about the fees and expenses investors pay as percentages of fund assets, while most other financial services disclose costs in dollar terms. Mutual funds also incur brokerage commissions and other trading costs when they buy or sell securities, but these costs aren’t prominently disclosed to investors, GAO said.

“The idea is that fund companies will seek opportunities to reduce fees to remain competitive,” Hillman added. “Right now, without full disclosure, fees can and do vary considerably, and some investors may be unwittingly and unwillingly investing in very inefficient funds.”

-- Melissa Klein

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