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| Visions & Revisions |
Mutual Antipathy
Debra Ryono
07/01/2004
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Mercer Bullard is a former assistant chief counsel at the U.S. Securities and
Exchange Commission, where he was responsible for a wide range of matters
relating to the regulation of mutual funds and investment advisors. He left in
2000 to found Fund Democracy, a nonprofit organization that serves as an
advocate and information source for mutual fund shareholders and their advisors.
An assistant professor at the University of Mississippi School of Law, Bullard
is adamant in his criticism of the SEC for failing to tackle the issue of mutual
fund regulation. Those of us with significant investments in mutual funds or
managed accounts may want to heed his warnings about the fund industry’s
regulatory shortfalls and conflicts of interest, and what can be done about
them.
Oversight of mutual funds is strong; the problem lies with
individual managers.
The regulation of mutual funds has many serious deficiencies that have
gone unaddressed by the SEC for years and, in some cases, for decades. For
example, the mutual fund expense ratio continues to omit what can be a fund’s
single largest expense: portfolio transaction costs. The SEC has also refused to
require funds to tell shareholders their actual costs in dollars. The SEC
opposes needed legislation regarding fund governance reforms.
The SEC permits
funds to make hidden payments to brokers to help sell fund shares and fund
managers to use Rule 12b-1 fees for purposes that the commission itself concedes
are beyond the scope of Rule 12b-1 as it was originally intended. (Rule 12b-1
was adopted in 1980 to allow fund assets, rather than the fund manager’s assets,
to pay for marketing and distribution costs.) The SEC permits fund executives to
keep their compensation secret, while executives for all other types of public
companies must disclose this information.
The SEC has broadened the safe
harbor for soft dollars to such an extent that soft dollars have become a
multibillion-dollar business that increases costs, reduces performance and
encourages self-dealing.
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