Cox, Schapiro tackle disclosure at ICI meeting

WASHINGTON — The Securities and Exchange Commission is examining disclosures for 401(k) plans and is looking at ways to provide 401(k) information using interactive software, SEC Chairman Christopher Cox said last week. “We’re interested in both the disclosures of the constituent investments in the 401(k) and the aggregate disclosures by the plan,” including overall expenses and performance of investments in the accounts, he said. Mr. Cox made his comments in a speech before the 1,200 members of the fund industry gathered here for the Washington-based Investment Company Institute’s 49th general membership meeting. It was disclosure of a different kind, however, that Mary L. Schapiro, chairman and chief executive of Washington-based NASD, highlighted.
The regulator’s proposed mutual fund point-of-sale-disclosure, known as Profile Plus, would bring much-needed transparency to the process of buying mutual funds, she told the audience in a speech. First proposed in 2005, Profile Plus would be a two-page document delivered to potential mutual fund purchasers before they decided whether to buy a fund. It would summarize a mutual fund’s strategies, objectives, performance, risks, conflicts and costs. The SEC is weighing different options with regard to point-of-sale disclosure, but Ms. Schapiro said that it is her hope that the commission will move forward on the issue very soon. “This is a real opportunity for better disclosure,” she said. Running the gamut Mr. Cox said that disclosure concerning 401(k) plans ranges widely from full prospectuses and shareholder reports to “one-page charts that contain extremely limited information.” The SEC is working with the Department of Labor on the project. The SEC wants to make it easier for 401(k) participants to understand expenses, as well as the after-tax, after-inflation returns that they are getting, compared with the appropriate benchmark, Mr. Cox said. “We’re confident that we can achieve a great deal in the coming months,” he said in his speech, in which he encouraged the mutual fund industry to file fund information voluntarily using interactive extensible business reporting language software that allows for easy comparisons for fund data. In addition to using XBRL software for mutual fund disclosures, “there will be a significant future role for interactive data” for 401(k) information, Mr. Cox said. Mutual fund executives applauded him for his efforts to streamline mutual fund disclosure. “I can’t be more supportive of that,” Gene Needles, president and chief executive of AIM Distributors Inc., the Houston-based sales and marketing division of Amvescap PLC of London, said in an interview. Meanwhile, in a question-and-answer session with reporters after his speech, Mr. Cox indicated that the SEC could consider ways for advisers to recoup expenses for servicing their customers’ accounts if 12(b)-1 fees are abolished. “To the extent that administrative expenses, for example, are being paid with these fees, those are administrative chores that fund shareholders need to have performed,” he said. “The money needs to come from someplace.” Many brokers now use 12(b)-1 fees to pay for servicing their clients. About $11 billion in 12(b)-1 fees is collected annually. “Undoubtedly, they are put to a variety of important purposes,” Mr. Cox added. The SEC is considering “whether or not the morphing of 12(b)-1 fees from the original purpose, marketing expenses, to today’s applications has outstripped the confines of the original rule,” he said. At the session with reporters, Mr. Cox also reiterated the intention of the commission to “reform or repeal” the fees. “We are doing a top-to-bottom review of 12(b)-1 fees — their usefulness today in light of their original purposes, the dramatic changes that have taken in the market in the last 27 years since the rule [allowing the mutual fund fees] was first put into effect,” he said. “I expect that we will, as a result of that, actually propose reform or repeal” this year, said Mr. Cox. Fund executives, however, aren’t happy with the idea of repeal. It seems logical that Mr. Cox and the SEC will look at making 12(b)-1 fees easier to understand, Thomas E. Faust Jr., president and chief investment officer of Eaton Vance Corp. of Boston, said in an interview. Doing so would be a natural extension of the SEC’s drive to make disclosure better, he said. But Mr. Faust said he isn’t sure that repeal is the way to go. Getting rid of 12(b)-1 fees would “play havoc with the industry,” Mr. Needles said. But at least one mutual fund executive said that he disagrees. Although Neil Hennessy, president of Hennessy Advisors Inc. of Novato, Calif., wouldn’t want to see 12(b)-1 fees abolished, it wouldn’t cripple his business if they went away, he said in an interview. For the most part, however, he and other fund executives in attendance said they liked what they heard from the regulators. In addition to point-of-sale disclosure, Ms. Schapiro talked about the need for different regulators to work more closely together, eliminating duplicative rules and regulations. She called the scheduled merger between the regulatory operations of the New York Stock Exchange and NASD — which she said should conclude sometime this summer — one example of what should be happening in the industry. That is something that the SEC and the Commodities Futures Trading Commission in Washington should consider, rather than fight over such issues as who has jurisdiction over investment vehicles such as credit default swaps. Ms. Schapiro said. “It’s a waste of energy,” she said about such tussles. Sara Hansard can be reached at shansard@crain.com, and David Hoffman can be reached at dhoffman @crain.com.