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SEC Endorses Part of Mutual Fund Bill : Congress: Simpler prospectuses and relaxed ad rules get official's support. He voices concern about shareholder rights.

November 01, 1995|From Times Wire Services

WASHINGTON — The Securities and Exchange Commission on Tuesday endorsed provisions in a bipartisan House mutual fund bill that would simplify investor prospectuses and relax advertising rules, but it voiced reservations about other aspects that would lower shareholder-vote thresholds.

Barry P. Barbash, SEC investment management chief, testified at a congressional hearing on the Investment Company Act Amendments of 1995. These were introduced in February by subcommittee Chairman Jack Fields (R-Tex.) and Edward J. Markey (D-Mass.). The legislation seeks to reform mutual fund regulations for the first time since 1970.

Barbash told the House Commerce subcommittee on telecommunications and finance that the legislation would "further the commission's efforts to develop shorter, more investor-friendly disclosure documents, since advertisements would no longer be tied to the contents of a fund's prospectus."

The panel's hearing began as the General Accounting Office, the investigative arm of Congress, issued a report concluding that many banks and thrifts do not inform customers adequately of the risks of investing in mutual funds.

The GAO found that salespeople at only 32% of the institutions it surveyed disclosed all the risks they are required to under law.

In a separate development, Florida regulators are investigating whether at least four banking chains--NationsBank Corp., First Union Corp., Barnett Banks Inc. and Great Western Financial Corp.--may have misled bank customers about the risks of mutual fund investing.

Barbash told the hearing that current law limits funds' advertising to information already contained in their prospectuses. Some funds heap their prospectuses with unnecessary data so that that information can be included in their advertising, he said.

Barbash voiced concern about a section of the bill that would reduce the number of shares required to obtain investor approval on matters such as advisory fee increases and investment policy changes. "The new definition could in many cases result in a dilution of shareholder voting rights," he said.

The mutual fund legislation is separate from a controversial bill Fields introduced earlier this year that would pare securities regulation and reduce states' enforcement authority.

Barbash also expressed support for mutual fund bill provisions that would strengthen the independence of fund boards and lift restrictions on a fund's investments in other funds. And he endorsed sections to give the SEC rule-making authority to address misleading fund names and improve the agency's ability to examine questionable transactions.

The proposal would also give the SEC greater power to get financial information quickly about mutual funds during a market drop or a financial emergency such as last year's bankruptcy filing by Orange County.

Current law "is riddled with regulatory burdens that should be eliminated," Fields said.

Matthew Fink, head of the Investment Company Institute, a mutual fund trade group, endorsed the bill in his testimony.

As for the GAO's report: Federal banking regulators require mutual fund sellers to tell customers of four risks: that mutual funds are not insured by the Federal Deposit Insurance Corp., that they are not deposits, that they are not guaranteed by the institution and that owners could lose their principal.

GAO investigators found that sales personnel at 19% of the facilities failed to mention any of the risks. The investigators also estimated that 34% of the banks did not clearly separate the mutual fund sales area from the deposit-taking area, as federal banking guidelines require.

The Consumer Bankers Assn. disputed the report's conclusions.

"Our surveys show that the vast majority of banks not only disclose that funds aren't insured, but require written acknowledgment of this from the customer," CBA President Joe Belew said.

Consumers Union, a national consumer group, said the GAO report confirms other evidence of problems with mutual fund sales through banks and thrifts. "It gives us great concern," said Michelle Meier, a lobbyist for the group.

The GAO recommends that the SEC and federal banking regulators work together to develop a common approach for conducting examinations of banks' mutual fund sales.

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