GAO: More Fund Disclosures Needed on Fees, Soft Dollar Payments

While noting the US Securities and Exchange Commission (SEC) has already called for additional fund fee disclosures to allow investors to better compare fund offerings (See  Mutual Funds Hit With New Disclosure Requirment ), the US General Accounting Office (GAO) said in its study of the issue that the securities regulators could also mandate that funds disclose the specific dollar figure for expenses paid or require that fund disclosures be made in quarterly account statements.

“Although some of these additional disclosures could be costly and data on their benefits to investors was not generally available, less costly alternatives exist that could increase the transparency and investor awareness of mutual fund fees that make consideration of additional fee disclosures worthwhile,” GAO researchers wrote.

The GAO said federal regulators admitted that current disclosure regulations might not always result in complete disclosure to investors of practices like revenue sharing where investment advisors make additional payments to broker-dealers who distribute their funds’ shares.

The regulators also need to pay particular attention to disclosures of soft dollar arrangements where fund advisors use part of the brokerage commissions they pay to broker-dealers for executing trades, to obtain research, and other services (See  Nomenclature – Soft Dollars) , according to the GAO. The GAO said soft-dollar programs could create an incentive to advisors to churn accounts in order to bring in more soft dollar services and that that would increase shareholders’ costs.

Even though SEC staff has already recommended soft dollar reform measures, the commission’s board has yet to take action on them.

“We believe that supplementing the existing mutual funds disclosures with additional information, particularly in the account statements that provide investors with the exact number and value of their mutual fund shares, could also prove beneficial for increasing awareness of fees and prompting additional fee-based competition among funds,” GAO researchers wrote.

The full report is at http://www.gao.gov/highlights/d03763high.pdf .