Mutual Funds Upset About Regulations
The House Financial Services Committee is scheduled to take action this week on new financial regulations that single out mutual fund products, a step that could impact mutual fund companies like Fidelity, Federated(FII) and Vanguard.
The Investor Protection Act of 2009 would allow the Securities and Exchange Commission to create new requirements for the type of information that fund companies have to divulge before selling mutual funds to investors. The new legislation would amend the Investment Company Act of 1940.
While additional disclosures could be beneficial, and even necessary, for investors, the burden to supply them would fall squarely on mutual funds. The risk is that brokers and investors will choose less regulated products with fewer requirements.
Both mutual fund managers and investor protection groups are questioning the additional regulation. “I don’t know why mutual funds are continually picked out for higher levels of disclosure,” noted Paul Frank, manager of the ETF Market Opportunity Fund(ETFOX), a mutual fund that utilizes ETFs.
“The hoops that we have to jump through already are nearly too burdensome, and now to move the bar higher just doesn’t make sense,” Frank added. “I guess the Congress doesn’t owe their seats to anyone running a mutual fund, so they are throwing more regulations at us to make the public think they are being protected.”
In an interview with Investment News, Barbara Roper, director of investor protection for the Consumer Federation of America, noted that, “there’s not a reason in the world why you ought to single out mutual funds.” She also said that “if pre-sale disclosure is a good idea, it’s a good idea for all the products and services that brokers recommend.”
Other financial products, such as annuities and separately managed accounts, would not be subject to the “pre-sale disclosure rules” currently being debated. The new legislation would require mutual fund companies to provide prospective purchasers of mutual funds with specific information or documents before the purchase of such funds.
Currently, fund prospectuses are provided to customers upon the completion of a transaction. New legislation suggests that it could be necessary for investors to be provided with a summary prospectus and disclosure showing the costs of a fund in a comparative context could be necessary before purchase.
While additional disclosure and increased education is good for investors, the new process could be onerous for mutual fund companies. Pre-sale disclosure requirements could slow down the investment process and encourage brokers and investors to utilize other, less regulated, investment alternatives.
Take, for example, an investor choosing between an open end S&P 500 mutual fund like the Vanguard 500 Fund(VFINX) and the SPDR S&P 500 ETF(SPY). Both funds share many of the same top holdings, like Exxon Mobil(XOM), Microsoft(MSFT), General Electric(GE) and JPMorgan Chase(JPM). VFINX has a low expense ratio of 0.18% while SPY has a gross expense ratio of 0.10%.
If new regulation makes it more complicated to purchase shares of mutual funds like VFINX, more investors may seek out alternatives like SPY.
While it is important for regulators to keep finding ways to increase investor education and protection, the standard should be applied across the board. Currently, financial products are managed by an alphabet soup of regulators and a wide range of rules.
If the current “pre-sale disclosure” regulation before the House Services Committee passes, mutual funds may be singled out unfairly and suffer as a result.
