Fitzgerald Proposes Full Disclose of Third-Party Fund Trades

August 4, 2004 ( - Legislation has been introduced in the US Senate and House of Representatives requiring full disclosure by mutual fund groups of market timing in shareholder accounts held by third-party financial institutions.

>US Senator Peter Fitzgerald (R-Illinois) introduced the Mutual Fund Reform Act of 2004 (S. 2059) that would correct that problem by requiring full disclosure of such trades.   Specifically, Section 216 of Fitzgerald’s Mutual Fund Reform Act of 2004 would require financial intermediaries to disclose to mutual funds the identities and trading activities of shareholders in omnibus accounts who buy and sell that fund’s shares, according to a news release.  

In the House, Representative Paul Gillmor (R-OH) has introduced a companion bill (H.R. 4505).

“The Mutual Fund Reform Act of 2004 is the only mutual fund reform bill that addresses this glaring deficiency by requiring disclosure of individual shareholders in omnibus accounts,” Fitzgerald said. “Mutual funds must know their own customers to have any chance of enforcing their policies fairly and uniformly.”

Fitzgerald was spurred into action following the release of a study conducted by the Coalition of Mutual Fund Investors (CMFI).   CMFI evaluated the 50 largest mutual fund groups for the use of redemption fees and other mutual fund policies aimed at deterring excessive short-term trading. Since a significant percentage of mutual fund shares are sold by third-party financial institutions – called fund intermediaries – the CMFI study evaluated the ability of a mutual fund to enforce its market timing policies uniformly under the accounting structure used by these institutions, called “omnibus accounts.”  

Ofthe fund groups with a redemption fee policy, 88% disclosedinpublic filings that they exclude, limit, or waive the enforcement of redemption fees in third party accounts where the outside financial institution maintains the underlying shareholder account.   Additionally, of the fund groups with no policy to impose a redemption fee, half disclosed concerns about their ability to enforce their market timing policies within these third party accounts where the shareholders are unknown to the mutual fund, the CMFI study found.

The study concludes that the use of these omnibus accounts makes it impossible for mutual funds to enforce their anti-timing policies within these third-party accounts and thus, the funds cannot effectively enforce their policies.

“This study proves that greater transparency is not only helpful – but absolutely essential in restoring the integrity of America’s mutual fund industry,” Fitzgerald said.