SEC Rebukes Bond Funds for Disclosures

October 21, 2003 ( - US mutual fund companies got a stern reminder from federal securities regulators about the requirement that the fund houses properly disclose that their "US government" bond offerings often have assets in mortgage-related bonds.

>In a letter to the Investment Company Institute, a mutual-fund industry trade group, and quoted by the Wall Street Journal, the US Securities and Exchange Commission (SEC) complained that some sizable government-bond funds “have reduced the prominence of these important disclosures by relegating them” to footnotes of funds’ registration papers or by glossing over them “to such an extent that they may be easily missed by investors.”

>At issue is how government-bond funds describe their investments when most of their assets are tied up in mortgage debt backed or packaged by government-sponsored agencies such as Fannie Mae and Freddie Mac.   Many mutual funds that hold the companies’ top-rated debt are called US Government funds, or Federal Securities funds – labels that some critics say implies the funds hold US Treasuries backed by the full faith and credit of the federal government. In reality, both Fannie and Freddie are neither issued nor guaranteed by the US Treasury.

With its letter, the SEC is weighing in on a contentious issue in the mutual fund industry. The SEC is also stepping back from its approach in recent years of calling for “layered” disclosure, in which fund companies lay out the basics in registration papers they are required to send investors, while providing nitty-gritty details in additional statements that investors must request from the fund company or find in SEC filings.