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Proposal outlaws mutual fund practices

Senators proposed to change current mutual fund and brokerage firm practices by mandating companies to provide fuller, clear information.
/ Source: The Associated Press

In a sweeping response to mutual fund scandals, senators are proposing to outlaw long-standing practices by fund companies and brokerage firms that they say create conflicts of interest and drive up costs to investors.

The proposals, which would significantly change the way mutual fund companies conduct business with investors and the brokers who sell funds, are part of a new bipartisan legislation detailed Monday that would also mandate fuller and more clear information on fees and operations.

Its backers, Sens. Peter Fitzgerald, Susan Collins and Carl Levin, called it the most sweeping legislation of its kind since enactment of the 1940 law that governs the nation’s mutual fund industry.

The three senators are in the early stages of gathering support for the legislation, and they indicated that formal drafting may not occur until early summer. But already one respected industry expert, Vanguard Group founder and former CEO John Bogle, has endorsed the measure. Bogle, who has called for a major overhaul of the fund industry in the wake of revelations of widespread abuse, described the legislation as “the gold standard in putting mutual fund shareholders back in the driver’s seat.”

New proposal covers more ground
The House in November overwhelmingly passed legislation requiring, among other things, mutual fund companies to disclose more information about fees and operations. But the measure is not as far-reaching as the new Senate proposal — which would, for example, ban fund companies from making special payments to brokerage firms for steering investors toward certain funds. That proposal is certain to ignite opposition on Wall Street, where investment houses receive billions of dollars annually from the mutual fund industry to sell its funds.

“We’re taking the brokerage community off the gravy train,” Fitzgerald said at a news conference.

The Securities and Exchange Commission, which has been making a series of changes in rules governing the fund industry, is expected to propose Wednesday the same ban on such incentive payments to brokers.

Fitzgerald said the SEC has been doing “a pretty good job ... getting more and more aggressive” but that legislation is needed to fully resolve the problems.

In another radical move, the new proposal would abolish the practice in effect since 1980 of allowing mutual funds to use shareholders’ money to pay for advertising and marketing costs, also known as 12b-1 fees.

The SEC, meanwhile, promised “relief” to investors from mutual fund abuses by early summer through its ongoing rule changes.

“The SEC is continuing to write rules aimed at protecting mutual fund investors by initiating critical reforms in the mutual fund industry,” agency spokesman Herb Perone said. “These reform initiatives launched last fall should be in place by early summer and will provide mutual fund investors with relief this year.”

SEC officials hadn’t yet reviewed the new Senate proposal, he said.

“We hope that their efforts are consistent with the initiatives already underway” at the SEC, he added.

Sen. Richard Shelby, chairman of the Senate Banking Committee — which has primary jurisdiction over mutual fund legislation — did not endorse Monday’s proposal. He has said he first wants to hear from all interested parties.

“I would expect to take into consideration all of the various legislative proposals that have been offered in the Senate when determining what action is necessary to protect American investors from abusive practices in the mutual fund industry,” Shelby said in a statement.