	Additional Disclosure of Mutual Fund Costs Might Benefit Investors

Although mutual funds already disclose considerable information about  the fees they charge, our report recommended that SEC consider requiring  that mutual funds make additional disclosures to investors about fees in  the account statements that investors receive. Unlike many other financial products, mutual funds do not provide  investors with information about the specific dollar amounts of the fees  that have been deducted from the value of their shares. A number of alternatives have been proposed for improving the disclosure  of mutual fund fees, that could provide additional information to fund  investors. However, SEC’s proposal would not require mutual funds to disclose to  each investor the specific amount of fees in dollars that are paid on the  shares they own. Because SEC’s current proposal, while offering some advantages, does not  make mutual funds comparable to other products and provide information  in the document that is most relevant to investors—the quarterly account  statement—our report recommended that SEC consider requiring  additional disclosures relating to fees be made to investors in these  documents. In addition to specific dollar disclosures, we also noted that  investors could be provided with other disclosures about the fees they pay  on mutual funds that would have a range of implementation costs,  including some that would have even less overall cost to the industry. H.R. H.R. Mutual Fund Boards Follow Many Sound Corporate Governance Practices but Such Practices are Not Mandatory for All Funds

Mutual funds implemented many sound practices concerning their boards  of directors, but these practices are not mandatory for all funds. However, not all of these sound corporate governance practices are  currently mandatory for mutual funds. H.R. Changes in Mutual Fund Distribution Practices Raise Potential Conflicts of Interest Between Broker-Dealers and Investors

One mutual fund distribution practice—called revenue sharing—that has  become increasingly common involves mutual fund investment advisers  making additional payments beyond those made under 12b-1 plans to  broker-dealers that sell fund shares. Revenue sharing payments may also create conflicts of interest between  broker-dealers and their customers. Although revenue sharing payments can create conflicts of interest  between broker-dealers and their clients, the extent to which broker- dealers disclose to their clients that their firms receive such payments  from fund advisers is not clear. This recommendation is consistent with  the requirement in H.R. Soft Dollar Arrangements Provide Benefits, but Could Adversely Impact Investors

Soft dollar arrangements allow fund investment advisers to obtain  research and brokerage services that could potentially benefit fund  investors but could also increase investors’ costs. When investment  advisers buy or sell securities for a fund, they may have to pay the broker- dealers that execute these trades a commission using fund assets. However, this form is not provided to the shareholders of a mutual fund,  although the information about the soft dollar practices that the adviser  uses for particular funds are required to be included in the Statement of  Additional Information that funds prepare, which is available to investors  upon request. As a result, our report recommends that SEC evaluate ways to provide  additional information to fund directors and investors on their fund  advisers’ use of soft dollars. However, because SEC has not acted to more fully  address soft dollar-related concerns, investors and mutual fund directors  have less complete and transparent information with which to evaluate the  benefits and potential disadvantages of their fund adviser’s use of soft  dollars. If H.R.
Why GAO Did This Study

Concerns have been raised over whether the disclosures of mutual fund fees and other fund practices are sufficiently transparent and fair to investors. GAO's testimony discusses (1) mutual fund fee disclosures, (2) the extent to which various corporate governance reforms are in place in the mutual fund industry, (3) the potential conflicts that arise when mutual fund advisers pay broker-dealers to sell fund shares, and (4) the benefits and concerns over fund advisers' use of soft dollars.

What GAO Found

The work that GAO has conducted at the request of this Committee addresses several of the areas that are included in the recently introduced Mutual Funds Integrity and Fee Transparency Act of 2003 (H.R. 2420). Mutual funds disclose considerable information about their costs to investors, but unlike many other financial products and services, they do not disclose to each investor the specific dollar amount of fees that are paid on their fund shares. Consistent with H.R. 2420, our report recommends that SEC consider requiring mutual funds to make additional disclosures to investors, including considering requiring funds to specifically disclose fees in dollars to each investor in quarterly account statements, which we estimate may result in minimal increases in fund expenses. Our report also discusses other alternatives that could also prove beneficial to investors and spur increased competition among mutual funds on the basis of fees but be even less costly to the industry overall. U.S. mutual funds have boards of directors who are charged with overseeing the interests of fund shareholders. Various corporate governance reforms have been proposed to improve the effectiveness of mutual fund boards. As a result of SEC requirements or industry best practice recommendations, many of these practices were already in place at many funds, but not all such practices were mandatory. H.R. 2420 would ensure that all mutual funds implement these practices. Mutual fund advisers have been increasingly making additional payments out of their own profits to the broker-dealers that sell their fund shares. Although allowed under current rules, these revenue sharing payments can create conflicts between the interests of broker-dealers and their customers that could limit the choices of funds that investors are offered. Under current disclosure requirements, however, investors may not always be explicitly informed that their broker-dealer, who is obligated to recommend only suitable investments based on the investor's financial condition, is also receiving payments to sell particular funds. Consistent with H.R. 2420, our report also recommended that more disclosure be made to investors about any revenue sharing payments their broker-dealers are receiving. Under a practice known as soft dollars, a mutual fund adviser uses fund assets to pay commissions to broker-dealers for executing trades in securities for the mutual fund's portfolio but also receives research or other brokerage services as part of the transaction. Although this research and other services can benefit fund investors, these arrangements could result in increased expenses for fund shareholders if fund advisers trade excessively to obtain additional soft dollar research. SEC has addressed soft dollar practices in the past and recommended actions could provide additional information to fund directors and investors, but has not yet acted on all of its own recommendations. Consistent with H.R. 2420, our report recommended that more disclosure be made to mutual fund directors and investors.