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Regulators vote for greater fund disclosure

Mutual-fund shareholders may receive a late holiday gift from Uncle Sam: increased disclosure about their funds.

On Dec. 11, the US Securities and Exchange Commission voted unanimously in favor of revising rules to require fund companies to provide more timely information about their funds' holdings and expenses.

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The proposal has a good shot at being implemented, at least in some form. But there are hurdles.

For starters, it will have to clear the desk of the likely new SEC chairman, William H. Donaldson. He must be confirmed by the Senate to replace outgoing chairman Harvey Pitt. And it is not clear if Mr. Donaldson fully supports the revised rules. In addition, a number of major fund companies are expected to oppose the proposal vigorously, claiming it will be costly to implement.

Under the proposed rules, fund companies would be required to show what assets they hold in their portfolios on a quarterly basis. Currently, funds must do this twice a year. Also, funds would have to show the total dollar amount an investor paid in fees over the previous six months. The amount would be based on a model $10,000 account that earns 5 percent a year. Currently, funds are only required to list fees as a percentage of a shareholder's assets in the fund.

The proposal will give shareholders "a much clearer picture" of their funds, says Russ Kinnel, who heads equity analysis for information firm Morningstar Inc., in Chicago. Investors would be able to better monitor the types of assets (stocks, bonds, or cash), in their fund portfolios, as well as actual sector weightings, he says.

"Fund investors will be treated more like investors in individual stocks," who have far more timely information on their investments, Mr. Kinnel says. "Mutual-fund investors have been treated like consumers, whereas stock investors have been treated like owners."

More detailed information about fees should also help to hold down fund expenses, Kinnel believes.

One caveat about the disclosure proposal: Fund groups would have to mail shareholders only quarterly summaries about their funds and cite its largest holdings. Details would be available to shareholders only through the SEC website (www.sec.gov/edgar/searchedgar/mutualfundsrpt.htm), or if requested from the fund company.

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Kinnel would like to see more disclosure about manager compensation as well as the actual holdings of the manager. If bonuses are based on annual performance, he says, that suggests "a focus on short-term results," which may be a disadvantage for long-term shareholders.

Also, where the manager puts his or her own investments is telling, he says. Kinnel cites a case where top fund managers have personal assets in low-cost Vanguard funds, not the fund group where they work. Wouldn't shareholders love to know about that, he says with a laugh.

The SEC is also weighing another disclosure proposal stemming largely from the socially responsible (SRI) segment of the fund industry and labor unions. It would require fund companies to identify how they vote on corporate proxy statements. SRI proponents note that as of early December, the SEC had received some 7,000 responses on the proposal, less than 10 against and more than 6,000 in favor.

"We remain very optimistic" that the SEC will approve the proposal, says Anita Green, an official with Pax World Funds. Still, a final decision from regulators is not expected until next year, SEC watchers say.


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