Friday, July 17, 2015

IAC Examines Fund Fee and Expense Disclosure Issues

By Amy Leisinger, J.D.

At yesterday’s meeting of the SEC’s Investor Advisory Committee (IAC), an investment management panel discussed issues surrounding the disclosure of fees and risks in fund products and potential deficiencies in the information provided to, and understood by, retail investors. The committee said it is committed to finding ways to get the right information to investors and to make sure the data and descriptions provided are both understandable and useful. Investors deserve better disclosure, according to the IAC.

Members of the committee suggested that the SEC should fundamentally rethink disclosure, both in terms of the actual information provided and the means by which it is presented. This may be especially important given the results of a financial literacy study detailed by Lori Schock, director of the Commission’s Office of Investor Education and Advocacy. She noted that investors appreciate simplified, organized information in prospectuses, particularly in the form of graphs, charts, and bullet-point lists. The problem is, she said, a large number of investors are not reading statutory prospectuses, let alone summary prospectuses. It is unclear how much information about complex subjects like fees and expenses can be truly understood, Schock explained.

Susan Nash of the Division of Investment Management talked about the existing disclosure regime and what may be done to enhance it. Performance information is extremely important to investors and is typically well-documented, she said, but discussions of fees and expenses are often unclear, and testing has shown that the use of percentages as opposed to dollar amounts can be difficult to understand. Fee tables provide a great deal of information and facilitate comparisons among share classes and multiple funds, she explained, but it is not always clear whether investors comprehend what they are reading.

According to Nash, the division has undertaken a number of initiatives to enhance both the creation and use of disclosures, particularly in the form of the recent reporting modernization rule proposal and its suggestion of new monthly portfolio reporting and the filing of certain risk metrics with the SEC. This information will be useful for not only for Commission risk monitoring but also for investors as they receive information from industry participants and analysts, Nash stated. To assist in the disclosure process, according to Nash, the division will continue to publish guidance updates like those recently issued regarding enhanced mutual fund disclosure and risk management.

Investor advocate Mercer Bullard echoed the support for the provision of clear and concise information to retail investors and the confusion that can result from fee and expense discussions in prospectuses. He also stressed the importance of specific enhancements to disclosures involving conflicts of interest. Most of the time, the interests of a financial advisor align with the interest of the investor in terms of benefiting from fund growth, he noted. However, according to Bullard, investors need information on the incentives an advisor may have to act in opposition to their goals and objections to make a truly informed decision.