When the Securities and Exchange Commission voted a few days ago to adopt a shorter, simplified form for closed-end fund prospectuses, it included a new requirement: disclosure of who is "primarily responsible for the day-to-day management of the fund's portfolio."
Addressing Marianne K. Smythe, director of the SEC's Division of Investment Management, during the discussion of the proposed change, Chairman Richard C. Breeden asked why the division wasn't proposing a similar requirement for open-end funds, too.
"If you wish, we'll bring it up to you," Ms. Smythe replied, as two of the three other commissioners, Richard Roberts and Mary L. Schapiro, expressed agreement with Mr. Breeden. (Commissioner J. Carter Beese Jr. had reservations; the fifth seat is vacant.)
K? The notion that mutual fund investors should know something
about the people who manage the mutual funds -- and when the managers are replaced -- has been around for some time. It was part of a proposal for amending mutual fund prospectuses that the division released for public comment in January 1990, a half year after it released the closed-end-fund proposal.
Of 617 individual investors who wrote the SEC about what they thought, 612 urged the adoption of the item requiring the disclosure of mutual fund portfolio managers.
Industry comments ranged from opposition to support. (Quite a few funds have been identifying their managers in reports to shareholders, if not prospectuses.)
Some said they regarded disclosure as appropriate under some circumstances but not under others.
Because it may not take Ms. Smythe and the division staff long to develop the prospectus item for commissioners to consider, their recommendation could presumably be made early in the new year. (Whether it will be paired with a requirement for management discussion of fund performance remains to be seen.)
It would be one of several proposed changes in legislation and regulations involving funds that may be advanced in 1993. Most were recommended in the Division of Investment Management's page report on its study of fund regulation, issued in May.
Recommendations of greatest interest to investors include:
* Fund governance. Raising the minimum number of independent directors, who represent public investors, from 40 percent of a fund board to a majority. (Many funds already follow this practice.) And giving independent directors authority to cancel a fund's advisory contract, usually signed with the fund's sponsor or an affiliate. Only a full board or shareholders can do so now.
* Shareholders' policy role. Requiring shareholder approval for changes in a fund's investment objectives.
* Sales charges. Repealing the requirement that dealers who sell shares of a load fund charge the sales loads stipulated in the prospectus. That would permit lower commissions and, thus, prices.
* Fund choices. Permitting new fund types, including unified fee investment companies (UFICs) and interval funds. A UFIC would have a single fixed fee and no sales charges or redemption fees. Unlike mutual funds, which must pay redemption proceeds within seven days of receiving a request, and closed-end funds, which may not repurchase their shares directly from shareholders (with limited exceptions), interval funds would permit redemptions at regular intervals. Thus, they could invest in less-liquid securities.
* Facilitating purchases. Permitting mutual funds to sell shares "off-the-page" directly from advertisements without requiring that investors first receive a prospectus. It still would have to be sent.
Because all would require congressional amendment of the Investment Company Act of 1940 or other laws, two questions are in order:
1. How and when would they be sent from the SEC to Capitol Hill?
2. How would the proposals be received?
Normally, the commissioners would decide what should be in a legislative package and then dispatch it with their endorsement.
This, however, is not a normal time. Mr. Breeden presumably will be leaving the commission soon -- his term expires in mid-1993 -- and will be replaced by a Clinton appointee. Thus, it is conceivable that decisions would have to await a new chairman.
The situation has given rise to speculation that, without action by the commissioners, Ms. Smythe and her staff could put together a package and send it to Congress instead.
While the lack of the commission's endorsement would be noted, congressional staffers say, it would not make a great difference. Nor would it matter, a staffer points out, if an SEC package omits division recommendations that interest members of Congress. "We have copies of the study and can find them," he said.
Regardless of how a legislative proposal leaves the SEC, action is unlikely in Congress until the second half of 1993 because of old business still pending. Hearings, however, could start earlier.
Congress is also expected to consider tax proposals affecting mutual fund investors.
One would liberalize terms for deducting contributions to individual retirement accounts. Another would repeal a 1936 rule that limits the income a fund can earn from sales of securities held less than three months, thereby reducing the manager's flexibility and possibly hurting fund performance.
1992 By Werner Renberg