Investment Company Institute Petitions SEC Over Mutual Fund Disclosure

by Carla Johnson, Investors Offshore.com

31 July 2001

The US mutual fund industry's principal trade association has petitioned the Securities and Exchange Commission regarding the possibility of increased reporting on fund holdings and movements, it was revealed recently.

In a letter to Paul Roye, the director of the SEC, Craig Tyle, general counsel of the ICI strongly recommended that the regulator reject calls for more frequent and detailed disclosure. 'Based on the serious potential for harm to fund shareholders, the Institute is hopeful that the staff agrees that it would be a grave error for the Commission to mandate more frequent portfolio holdings disclosure by all funds,' he said, adding that the risks far outweighed the potential benefits.

As well as imposing undue burdens on funds, Mr Tyle suggested that the possibility of professional traders attempting to 'front run' a fund manager's trades by identifying the stocks that the fund is in the process of buying or selling, and gaining a 'free ride' on a mutual fund manager's proprietary research and investment strategies, would be greatly increased by more frequent disclosure.

The SEC is drafting a proposed revision of its rules as a result of calls from groups such as the Financial Planning Association, and the Consumer Federation of America, groups that the ICI feels have something to gain from the introduction of tighter legislation. It says that contrary to the findings of these groups, it has conducted studies which suggest that there is no real concern on the part of mutual fund investors in general: 'Notwithstanding the requests of certain financial intermediaries and third parties with business interests in this information, our members report virtually no demand for it from their shareholders,' Mr Tyle observed acidly.

However, the ICI did indicate that it was willing to compromise over the issue, and suggested that instead of requiring funds to provide encyclopedic lists of portfolio holdings more frequently, the SEC should consider introducing changes that will improve the quality of the information presented in shareholder reports, in an effort to make them more targeted and user-friendly for investors. Suggestions included a streamlined schedule of investments that identify the fund's 50 largest holdings (or all holdings that exceed 1% of fund assets), graphic representations of portfolio information, and complete lists of fund holdings available free on request.

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