Mutuals may have to share secrets

More frequent portfolio disclosure is one of the new requirements for mutual funds under consideration by the SEC.

By Associated Press

Published November 14, 2003

NEW YORK — Mutual fund shareholders are poised to become richer, at least when it comes to information.

Though it took some time for regulators to come around, it appears as if investors finally will get more frequent disclosure of mutual fund portfolios, one of a host of new requirements in the works.

For mutual fund activists, it’s about time. Several rule-making petitions were filed back in 2000 advocating more frequent disclosure, aimed at helping investors make more informed decisions and ensure that their funds are invested as advertised.

If the Securities and Exchange Commission approves a proposal in the coming weeks, funds will be required to disclose holdings quarterly rather than every six months, with a 60-day reporting lag time. In recent testimony before the Senate Banking Committee, SEC chairman William Donaldson said he expected consideration of the rule in the near future.

It’s definitely progress; this is a big victory, said University of Mississippi law professor Mercer Bullard, operator of the fund advocacy Web site www.funddemocracy.com

Ken Janke, chairman of the National Association of Investors Corp. an investment club organization that also petitioned the SEC on the issue, sees increased disclosure as a tool to battle end-of-quarter window-dressing. That occurs when money managers, for example, sell securities that did poorly during the quarter to make the portfolio look better.

Janke is also portfolio manager of the association’s own fund. In its six-month shareholder report, the fund makes a point to show through its disclosures of stock purchase prices and other information that window dressing isn’t tolerated. NAIC members hold roughly $40-billion in equity mutual funds, he said.

I think transparency is extremely important, Janke said. I think that’s the way we’ve run our fund and we want other funds to run the same way.

But more disclosure has its dark side, fund industry representatives argue, citing potential for market participants to front-run and piggyback on a fund’s trading habits.

In its comment letter to the SEC earlier this year, the Investment Company Institute, while questioning the benefit of more frequent disclosure, said it wouldn’t oppose the SEC’s proposal to require quarterly portfolio holdings disclosure with a 60-day lag. The mutual fund industry trade group said, however, that it remained concerned the move would facilitate abusive trading practices that will harm fund shareholders.

Fears of trading abuses have grown as fund scandal over market-timing and late trading has escalated.

The improper practices hit the spotlight when New York Attorney General Eliot Spitzer settled a civil complaint in September against Canary Capital Partners LLC. The hedge fund profited through market-timing strategies even though most fund companies assure investors they bar such trading.

To achieve this, Canary first needed to determine the exact portfolio makeup of a target mutual fund, Spitzer said in his complaint. Mutual fund managers were happy to provide this information to Canary.

Allegations and charges of market-timing — which have since spread to big fund companies, such as Putnam Investments — show that more frequent information isn’t always beneficial to all fund investors, said Ronald Feiman, partner in the New York office of the law firm Mayer Brown Rowe & Maw LLP, where he represents fund companies and independent fund directors.

More frequent portfolio disclosure could create arbitrage opportunities, he said. If the disclosure is provided with a time lag, that would dampen the opportunities, but presumably not eliminate them.

Feiman allowed that the allegations in a case like Canary illustrates an extreme example. However, there needs to be a balance between transparency as a value and the prevention of arbitrage or gaming funds based on knowledge of holdings, he said.

[Last modified November 14, 2003, 01:32:06]