Report on Mutual Fund Fees and Expenses Released

Rise in fees noted and explained

By John M. Baker, Esq.

January 10, 2001 – The SEC‘s Division of Investment Management today released its Report on Mutual Fund Fees and Expenses (December 2000). The report finds that fund expenses ratios rose on average during the last 20 years, although the overall cost of owning fund shares may not have risen if changes in sales loads are taken into consideration.

The increase can be attributed primarily to the increased use of 12b-1 fees, which tend to decrease or replace front-end loads. Fund expense ratios generally decline as fund assets increase, and funds in large fund families (in terms of asset size) tend to have lower management expense ratios than funds in small fund families.

The report concludes that the current reliance on disclosure and procedural safeguards to determine fees and expenses is a sound approach but can be enhanced in certain areas. In particular, the report suggests that annual and semi-annual shareholder reports include a table that shows the cost in dollars associated with an investment of a standardized amount (e.g., $10,000) that earned the fund’s actual return for the period and incurred the fund’s actual expenses for the period.

Additionally, the report recommends continued focus on the role of the independent directors in monitoring fund fees and expenses, emphasizing the need for independent directors to comprise at least a majority of the board and the need for directors’ review of fees and expenses to include costs outside of the fund’s expense ratio (e.g., the cost of effecting the fund’s portfolio transactions).

The report also recommends that the SEC should consider whether to give additional or different guidance to fund directors with respect to their review of Rule 12b-1 plans and whether the procedural requirements of Rule 12b-1 need to be updated.

The SEC’s news release, with links to the report and to a related fact sheet, is available at http://www.sec.gov/news/mffees.htm

The SEC report was complied in part in response to recommendations from the General Accounting Office for additional disclosure of mutual fund fees and expenses.

My prior post on the GAO report is available at http://www.egroups.com/message/fundlaw/258

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to fundlaw-subscribe@egroups.com

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.