Washington, D.C., Jan. 14, 2004 - The Commission today voted to propose three regulatory initiatives designed to better protect the 95 million investors in mutual funds. These initiatives represent the next in a series of securities law reforms pursued by the Commission to address problems identified with the management and sale of mutual funds.
1. Investment Company Governance. Mutual fund boards of directors play an important role in protecting fund investors. They have overall responsibility for the fund, oversee the activities of the fund adviser, and negotiate the terms of the advisory contract, including the amount of the advisory fees and other fund expenses.
The Commission voted to propose amendments to its rules to enhance fund boards' independence and effectiveness and to improve their ability to protect the interests of the funds and fund shareholders they serve. The rule amendments are designed to strengthen the hand of independent directors when dealing with fund management.
Comments on the proposed rule amendments should be received by the Commission within 45 days of publication in the Federal Register.
2. Codes of Ethics for Investment Advisers. The Commission voted to propose new rule 204A 1 and related rule amendments under the Investment Advisers Act of 1940. New rule 204A 1 would require registered investment advisers to adopt and enforce codes of ethics applicable to their supervised persons.
Investment advisers are fiduciaries that owe their clients a duty of undivided loyalty. The Commission's recent enforcement proceedings suggest that some advisory personnel may have forgotten or ignored this duty. The new rule is designed to prevent fraud by reinforcing the fiduciary principles that must govern the conduct of advisory firms and their personnel. An adviser's code of ethics would have to include certain minimum provisions.
Comments on the proposed rule and related amendments should be received by the Commission within 45 days of publication in the Federal Register.
The Commission voted to propose two new rules and rule amendments that are designed to enhance the information that broker-dealers provide to their customers in connection with transactions in certain types of securities. The two new rules would require broker-dealers to provide their customers with targeted information, at the point of sale and in transaction confirmations, regarding the costs and conflicts of interest that arise from the distribution of mutual fund shares, unit investment trust (UIT) interests (including insurance company separate accounts that offer variable annuity contracts and variable life insurance policies), and municipal fund securities used for education savings (commonly called 529 plans).
The rules would require disclosure at two key times - first at the point of sale, and second at the completion of a transaction in the transaction confirmation.
Because confirmation disclosure does not provide information to investors prior to transactions in securities - i.e., at the time they make investment decisions - we are proposing new rule 15c2-3 to require brokers, dealers and municipal securities dealers to provide point of sale disclosure to customers prior to effecting transactions in mutual fund shares, UIT interests, and 529 plan shares.
The rule would require the broker, dealer or municipal securities dealer to inform its customer about the distribution-related costs that the customer would be expected to incur in connection with the transaction. This would include separate disclosure (either by reference to the value of the purchase, or, if no amount was specified, by reference to a model investment of $10,000) about:
In addition, the rule would require disclosure of whether the broker, dealer or municipal securities dealer receives revenue sharing or portfolio brokerage commissions from the fund complex, as well as whether it pays differential compensation in connection with transactions in the covered security, if the covered security is either a class B share or a proprietary security.
Customers' right to terminate orders made prior to disclosure - Under the rule, an order made prior to the required point of sale disclosure would be treated as an indication of interest.
Manner of disclosure - The rule would generally require a broker, dealer or municipal securities dealer to give or send the information to the customer in writing using a new standardized form, Schedule 15D. This would be supplemented by oral disclosure if the point of sale occurs at an in-person meeting. If the point of sale occurs through means of an oral communication other than at an in-person meeting, however, then the information would only be disclosed to the customer orally.
Recordkeeping - Brokers, dealers or municipal securities dealers, at the time they disclose information required by the rule, would have to make records of communications sufficient to demonstrate compliance.
Exceptions - The rule would contain a limited exception for transactions resulting from orders that a customer placed via U.S. mail, messenger delivery or a similar third-party delivery service. It also would contain an exception for certain brokers that did not communicate with the customer, except to accept an order, if they reasonably believe another broker provided point of sale disclosure. The rule also would contain other targeted exceptions.
Proposed rule 15c2-2 would require more quantitative disclosure of the information included in the point of sale document.
Disclosures for purchases - Proposed rule 15c2-2 would require specific disclosures in purchase transactions that build on the point of sale requirements. These requirements would include:
Periodic disclosure alternative - The rule would permit brokers, dealers and municipal securities dealers to disclose the required information periodically -- rather than transaction-by-transaction -- in certain limited circumstances involving transactions in a "covered securities plan" or in no-load open-end money market funds, after an initial confirmation has been sent that meets the requirements of the rule.
Comparison range disclosure - The rule would provide a mechanism to give investors additional context for evaluating the significance of certain information. This context would come from comparison ranges for sales compensation, revenue sharing, and portfolio brokerage commissions, so that investors can see where their particular costs and payments fall in comparison to the median and ranges in the marketplace. The Commission would need to propose additional rules to determine how to obtain and disseminate comparison range information.
General disclosure requirements - For all transactions (sales as well as purchases), the rule would require disclosure of
The Commission also voted to propose conforming amendments to its general confirmation rule, as well as amendments to that rule to provide investors with additional information about call features of debt securities and preferred stock. Finally, the Commission voted to propose amendments to Form N-1A, the registration form for mutual funds, to improve disclosure of sales loads and revenue sharing.
Finally, these initiatives are intended to give investors "news they can use." In addition to including a special section in the proposal soliciting comments from investors, the Commission intends to reach out to the investor community through a variety of methods, including investor focus groups. This process is intended to design requirements - including standardized disclosure forms - that average investors will find useful and informative.
Comments on these proposals should be received by the Commission within 60 days of publication in the Federal Register.