	Additional Disclosure of Mutual Fund Costs Might Benefit Investors

Although mutual funds already disclose considerable information about  the fees they charge, our report recommends that SEC consider requiring  that mutual funds make additional disclosures to investors about fees in  the account statements that investors receive. Although mutual funds do not disclose their costs to each individual  investor in specific dollars, the disclosures that they make do exceed those  of many products. 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. In addition, other less costly alternatives are also available that could  increase investor awareness of the fees they are paying on their mutual  funds by providing them with information on the fees they pay in the  quarterly statements that provide information on an investor’s share  balance and account value. Disclosures of Trading Costs Could Benefit Investors

Academics and other industry observers have also called for increased  disclosure of mutual fund brokerage commissions and other trading costs  that are not currently included in fund expense ratios. Changes in Some Fund Distribution Practices Likely Beneficial But Others Raise Potential Conflicts of Interest

The way that investors pay for the advice of financial professionals about  their mutual funds has evolved over time. These fees are called 12b-1 fees after the rule that allows fund assets to be  used to pay for fund marketing and distribution expenses. Rule 12b-1 provides investors  an alternative way of paying for investment advice and purchases of fund  shares. Questions involving funds with 12b-1 fees have also been  raised over whether some investors are paying too much for their funds  depending on which share class they purchase. 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. 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. Although the research and brokerage services that fund advisers obtain  through the use of soft dollars could benefit a mutual fund investor, this  practice also could increase investors’ costs and create potential conflicts  of interest that could harm fund investors. As a result, our June 2003 report recommends that SEC evaluate ways to  provide additional information to fund directors and investors on their  fund advisers’ use of soft dollars. 2420 would  require SEC to issue rules mandating disclosure of information about  soft dollar arrangements; require fund advisers to submit to the fund’s board of directors an  annual report on these arrangements, and require the fund to provide  shareholders with a summary of that report in its annual report to  shareholders; impose a fiduciary duty on the fund’s board of directors to review soft  dollar arrangements;   direct SEC to issue rules to require enhanced recordkeeping of soft  require SEC to conduct a study of soft-dollar arrangements, including  the trends in the average amounts of soft dollar commissions, the types  of services provided through these arrangements, the benefits and  disadvantages of the use of soft dollar arrangements, the impact of soft  dollar arrangements on investors’ ability to compare the expenses of  mutual funds, the conflicts of interest created by these arrangements  and the effectiveness of the board of directors in managing such  conflicts, and the transparency of soft dollar arrangements. In conclusion, GAO believes that various changes to current disclosures  and other practices would benefit fund investors.
Why GAO Did This Study

Concerns have been raised over whether the disclosures of mutual fund fees and other fund practices are sufficiently fair and transparent to investors. Our June 2003 report, Mutual Funds: Greater Transparency Needed in Disclosures to Investors, GAO-03- 763, reviewed (1) how mutual funds disclose their fees and related trading costs and options for improving these disclosures, (2) changes in how mutual funds pay for the sale of fund shares and how the changes in these practices are affecting investors, and (3) the benefits of and the concerns over mutual funds' use of soft dollars. This testimony summarizes the results of our report and discusses certain events that have occurred since it was issued.

What GAO Found

Although mutual funds disclose considerable information about their costs to investors, the amount of fees and expenses that each investor specifically pays on their mutual fund shares are currently disclosed as percentages of fund assets, whereas most other financial services disclose the actual costs to the purchaser in dollar terms. SEC staff has proposed requiring funds to disclose additional information that could be used to compare fees across funds. However, SEC is not proposing that funds disclose the specific dollar amount of fees paid by each investor nor is it proposing to require that any fee disclosures be made in the account statements that investors receive. Although some of these additional disclosures could be costly and data on their benefits to investors was not generally available, less costly alternatives exist that could increase the transparency and investor awareness of mutual funds fees, making consideration of additional fee disclosures worthwhile. Changes in how mutual funds pay intermediaries to sell fund shares have benefited investors but have also raised concerns. Since 1980, mutual funds, under SEC Rule 12b-1, have been allowed to use fund assets to pay for certain marketing expenses. Over time the use of these fees has evolved to provide investors greater flexibility in choosing how to pay for the services of individual financial professionals that advise them on fund purchases. Another increasingly common marketing practice called revenue sharing involves fund investment advisers making additional payments to the broker-dealers that distribute their funds' shares. However, these payments may cause the broker-dealers receiving them to limit the fund choices they offer to investors and conflict with their obligation to recommend the most suitable funds. Regulators acknowledged that the current disclosure regulations might not always result in complete information about these payments being disclosed to investors. Under soft dollar arrangements, mutual fund investment advisers use part of the brokerage commissions they pay to broker-dealers for executing trades to obtain research and other services. Although industry participants said that soft dollars allow fund advisers access to a wider range of research than may otherwise be available and provide other benefits, these arrangements also can create incentives for investment advisers to trade excessively to obtain more soft dollar services, thereby increasing fund shareholders' costs. SEC staff has recommended various changes that would increase transparency by expanding advisers' disclosure of their use of soft dollars. By acting on the staff's recommendations SEC would provide fund investors and directors with needed information about how their funds' advisers are using soft dollars.