Chairman Collins Joins Senators Fitzgerald and Levin in Introducing Legislation to Reform Mutual Fund Industry

WASHINGTON, D.C.—Senate Governmental Affairs Committee Chairman Susan Collins (R-ME) today announced that she is joining Senators Peter Fitzgerald (R-IL) and Carl Levin (D-MI) in introducing legislation aimed at reforming the mutual fund industry.

“The bill that we are introducing today will not only address abusive practices, such as ‘late trading’ and ‘market timing,’ but would significantly overhaul the arcane and opaque structure of fees and expenses that has prevented meaningful price competition among the approximately 8,200 mutual funds that are offered to investors,” said Senator Collins at a press conference to unveil the legislation.

“This legislation also would help to protect the good, hardworking, middle-income families who are doing their best to plan for retirement or pay for their children’s education by investing their savings in mutual funds that are promoted as a safe haven for small investors,” said Senator Collins. “Of all the components of the financial industry, the mutual funds sector has perhaps the greatest responsibility to safeguard the interests of small investors.”

Specifically, the legislation, the Mutual Fund Reform Act of 2004, would

— Ensure that mutual fund shareholders receive clear information about the fees that they are paying for their mutual funds. Specifically, the bill would direct the Securities and Exchange Commission (SEC) to require funds to disclose fee and expense information in their account statements. Industry studies have shown that most shareholders get their information about their funds from their account statements, much as banking customers rely on their monthly checking statements.

— Strengthen the responsibilities of mutual fund directors to ensure that funds were run in the interests of their shareholders. The bill would require 75 percent of board members and board chairs to be independent. It also would strengthen the definition of independence to require that independent members not have associated with the mutual fund management for 10 years, and have no material business relationships or close familial relationships with anyone affiliated with the fund management.

— Address the abusive practices of late trading and market timing by requiring the SEC to issue new rules to prevent late trading and bans short-term trading by fund insiders. It also would require funds to disclose their market timing policies and making a fund’s violation of that policy a violation of securities law.

“At the end of the day, what it truly important is that the great engine of America’s capital markets, the individual investors, feels that they are able to save for their retirement, their home or their children’s college education safely in a market where the rules are the same for all investors and the costs and returns are clearly disclosed,” Senator Collins said.

The introduction of the legislation follows two recent Governmental Affairs Subcommittee hearings on the issue of mutual fund abuses. By December 2003, more than a dozen companies had been named in allegations of misusing millions of dollars of their investors’ money. These practices benefit a select few at the expense of the vast majority of mutual fund investors, and there is evidence that some officials at some fund companies profited personally at the expense of their customers by market timing their own funds.

Although mutual funds have been around for nearly 80 years, they have only become popular investment choices in the past 25 years. With the decline of traditional pension plans and the rise of 401(k) and similar self-directed retirement plans, roughly 50 percent of American households own a mutual fund today, and total assets are approximately $7 trillion. Approximately 445,000 Mainers have invested in mutual funds.