Friday, April 15, 2016

SEC advisory committee urges cost disclosure in fund account statements

By Amy Leisinger, J.D.

The SEC’s Investor Advisory Committee approved a recommendation regarding enhancements to mutual fund cost disclosure. The proposed change is designed to increase investor understanding of the actual costs of participation in mutual funds in the short term and over the life of the investments. According to the committee, the most effective way to accomplish this goal would be through disclosure of specific costs on account statements, and the Commission should consider additional means by which to provide context for cost information to ensure that investors understand the true impact of the costs on their investments.

Recommendation. In the recommendation, the committee noted that costs have a significant effect on the long-term success of investments and total accumulation and that they can vary widely among funds. Clear disclosure of mutual fund costs has been, and should continue to be, a priority, according to the committee, but many mutual fund investors are not aware of how much they pay in fees or how fees may impact funds’ long-term performance. While the Commission has taken measures to improve mutual fund cost disclosures, more can be done, according to the committee, as existing disclosures are in documents that many investors do not read and the complex nature of the disclosures makes it difficult for investors who do read the documents to make use of the information.

As such, the committee recommended that the Commission explore ways to improve the effectiveness of mutual fund cost disclosures, including requiring standardized disclosure of the actual dollar amount of costs on customer account statements as a supplement to existing prospectus disclosures. Investors are very likely to review their account statements, and presenting actual costs juxtaposed with total fund returns (as opposed to a percentage of assets) would provide a more accurate view and increase the likelihood that investors will appreciate the significance of the costs, they said. Even investors who do not consider disclosures could benefit indirectly from increased market competition that could follow from improved transparency, according to the committee.

In connection with this change, the committee said, the Commission should also consider other changes to improve investors’ understanding of mutual fund costs, including ways to improve current disclosures and put cost information in context.

Committee comments. While generally applauding the initiative, some committee members questioned whether the lack of data on the feasibility of the new approach and whether the change would actually provide a benefit to investors. They noted the fact that the GAO recommended this approach years ago and that the Commission rejected it as cost prohibitive. The SEC must carefully weigh the costs and benefits of proposed changes, but the data necessary to calculate the actual dollar amount of costs for inclusion on account statements is already available, other members noted. The most important consideration should be whether it would really inform investors and affect the decision-making processes, they said.

While noting the need for concrete research about how disclosures are used and for investor testing, the committee found that investors need tools to make informed decisions and determined to make the recommendation to the Commission.

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