Investors would get more information on their mutual funds under a series of changes the Securities and Exchange Commission proposed this week.
The stock market agency voted to seek public comment on the proposals that would be subject to revision, based on review of the comments the SEC gets, before they can be adopted.The proposals under consideration would:
- Improve the information given investors about funds with multiple classes of securities that target specific kinds of investors.
- Update the proxy rules governing information provided investors by a fund's board of directors before voting on issues like fee increases.
- Extend to tax-exempt money market funds the same risk investment limitations imposed three years ago upon taxable funds.
Mutual funds, the professionally managed, pooled investments of many shareholders, have been the fastest growing segment of the retail financial markets with $1.976 trillion invested as of October 31.
The SEC has been upgrading its regulation of the industry since releasing a massive study last year of the 1940 law that governs mutual funds.
The first proposal would allow mutual funds to issue multiple classes of shares without obtaining an exemption from the SEC.
But new sales documents and advertising requirements "would help investors decide which investment suits them better by clearly setting out sales and service charge options," said SEC Chairman Arthur Levitt Jr.
The proposal seeks to make proxy statements easier to understand by providing investors with tables allowing them to assess the magnitude of increased fees or expenses. The proposal also would require directors to disclose all fees and pension benefits paid by all funds in the same fund complex - not just the fees paid by a particular fund.
The nation's nearly 1,000 money market funds, with $590 billion in assets, invest only in the so-called money market of very short term, debt-based securities like commercial paper and Treasury bills
In 1991, the SEC limited taxable money funds to investing no more than 5 percent of their holdings in one company's commercial paper, usually short-term debt, and no more than 5 percent in securities with less than a top ranking from rating services.
The agency is proposing doing the same for national tax-exempt funds - those exempt from federal income taxes.
But for single state funds that are also exempt from state and local taxes as well, it would be hard to diversify their holdings without going out of state and jeopardizing their local tax-exempt status.
So the SEC is proposing limiting their investment to only the highest rated securities and disclosing in sales documents the increased risks associated with investing in a concentrated geographic area.