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SEC Gets 2nd Petition for Stronger Mutual Fund Disclosure Rules

Investing: Consumer groups want holdings reported to shareholders more often.


Ten U.S. consumer advocacy groups have turned up the heat on the Securities and Exchange Commission to require mutual funds to improve disclosure of their portfolios' holdings to shareholders.

In a five-page petition signed Wednesday by the Consumer Federation of America, Consumer Action and others, the groups demanded that the SEC require all funds to disclose their holdings more often.

The Financial Planning Assn., whose 29,000 members generally work for firms employing one to four financial advisors, sent the SEC a similar petition June 28.

SEC rules require funds to report all their holdings--each stock or bond in the fund, the number of shares and their value--to shareholders twice a year.

The 10 consumer groups urged the SEC to require funds to disclose portfolio holdings within 30 days after the end of each month and on random days throughout the year.

Many fund companies have argued that more frequent disclosure would aid only short-term traders. They say those traders could try to "front run" the funds--and therefore their investors--by jumping into stocks in which funds appear to be increasing their stakes, or by jumping out of stocks in which funds appear to be decreasing their stakes.

But the consumer groups said more frequent disclosure of portfolio holdings would make it harder for funds to engage in questionable practices aimed at boosting a fund's short-term performance.

"Portfolio pumping," for example, is when fund managers try to boost a fund's year-end performance results by buying more of a stock it already owns to drive up the price, the groups said.

Funds are tempted to pump because managers' bonuses generally are based on year-end performance numbers, as are fund ads, the groups said.

Also, "window dressing" occurs when a fund buys popular stocks, or sells unpopular ones, just before the date its holdings are disclosed, with the goal of creating the impression that the fund has made wise investment decisions all along.

Because the typical actively managed fund turns over its entire portfolio in a single year, the current system of twice-yearly portfolio snapshots "cannot hope to provide an accurate portrait of those holdings," the groups said.

The Investment Company Institute, the trade group for the multitrillion-dollar fund industry, had no comment on the petition. Cynthia Fornelli, an SEC senior advisor, said the agency's investment management division is "considering very carefully" the petitions filed by the groups and "trying to formulate our recommendations to the commission."

SEC rules set no deadline by which commissioners must rule on such petitions, Fornelli said. She added, however, that the agency launched a review of fund communications to shareholders before the petitions were filed.

In another petition, the groups asked the SEC to require specialty funds to stick more closely to their investment niches.

Under SEC rules, a fund whose name implies it invests in a certain type of asset--such as a "value stock" fund or a "government bond" fund--must invest at least 65% of assets in that type of security.

The 10 consumer groups want the SEC to raise the threshold to 85%. The SEC in recent years proposed raising the threshold to 80%, but dropped the plan.

Between the two required yearly disclosures, some funds may be trading in and out of securities that are entirely unrelated to the fund name or its stated investment style, the groups said.

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