ICI Suggests Transaction Cost Disclosure Changes

February 24, 2004 (PLANSPONSOR.com) - The Investment Company Institute (ICI) has sent a letter to the US Securities and Exchange Commission (SEC) offering up a laundry list of improvements to enhance the disclosure of transaction cost information to mutual fund investors.

The Institute strongly supports improving investor awareness and understanding of fund fees and expenses and recognizes the importance of improving disclosure concerning fund transaction costs and their effect on fund performance,” said ICI Senior Counsel Amy Lancellotta in the letter.   ICI sent the letter in response to the SEC’s earlier concept release that asked for ideas about how to help fund investors by strengthening their understanding of the impact of transaction costs on fund performance, according to a news release.

To improve investor awareness, Lancellotta offered up some disclosure requirements that ICI “strongly supports.” Among those is a requirement for the disclosure ofspecific brokerage commission information in the financial highlights table in annual reports. Lancellotta said this would include disclosing brokerage commissions paid by a fund as a percent of average net assets and as a percent of the principal amount of transactions.

Other requirements include the disclosure of a fund’s gross inflows and outflows as a percent of average net assets and an expanded disclosure of a fund’s “portfolio turnover rate” in the prospectus.   Lancellotta though admitted that the turnover rate was not “a perfect proxy for fund trading costs,” but said it is “generally viewed as being highly correlated with transaction costs.”   Additionally, the turnover rate “can be easily calculated by funds, easily understood by investor and readily compared among different funds,” Lancellotta continued.

Also, the ICI suggested a requirement for fund boards to approve the fund’s policies and procedures for monitoring brokerage allocation and portfolio transaction costs, and require boards to receive reports of the fund’s transaction costs on a periodic basis.

Speaking to the aggregate of requirements, Lancellotta said that while ICI supports the overall disclosure of commission costs, at the same time, the group does not believe an “all in” measure is the best way to achieve that end, since “there is currently no single, agreed-upon way to measure of such costs that doesn’t suffer from significant shortcomings.”   Additionally, Lancellotta said the ICI does not believe that the disclosure of brokerage cost information should be included in fund fee tables or expense ratios, as doing so would diminish the ability of investors to use this information to compare the costs of different funds.

A copy of the ICI’s letter is available at http://www.ici.org/new/04_sec_port_disclose_com.html .