CONFERENCE CALL: STATE REGULATORS MULL BENCHMARK FEE

State regulators would like to examine the feasibility of a single mutual fund fee that investors could use to evaluate the expenses of their funds, the head of the association representing state and Canadian provincial securities regulators said at a recent Washington forum on the subject.

“An idea that many of the state regulators would like to see is whether we can create a structure where there could be a single fee that people can look at, and juxtapose that fee against their anticipated performance,” said Neal E. Sullivan, executive director of the North American Securities Administrators Association in Washington.

But he rejected the idea of directly regulating mutual fund fees. “It would not be appropriate for these sorts of issues to fall into the realm of governmental rate-setting, capping of fees,” he said at the forum, which was sponsored by the National Press Club.

prodding can help

“We really cannot be in the business of making decisions for them. We really cannot be in the business of stratifying competitive niches for market participants. That is not a role for government. However, the industry needs to be prodded a bit to do more.”

He called for creating “a competitive environment where the fund players who are the most competitive in terms of the delivery of services and goods in the most cost-effective manner at the lowest possible cost to the individual, that becomes the industry norm.” He suggested that funds should consider discussing costs and risks in their TV ads.

While it is not clear if a single-fee structure would be practical, Mr. Sullivan added, “I think it would be a very healthy debate to see if we could have a single fee that investors could look at.”

Participants in the discussion agreed that few mutual fund investors now know how much they are paying in fund fees, and that it could well become a crucial issue when the market slumps.

The problem is that consumers “don’t really know how to evaluate costs,” said Laura Polacheck, an analyst with the American Association of Retired Persons. Financial products are complex, and it is difficult to evaluate their true costs, she said. For example, she said, the 12b-1 fee, used in the mutual fund industry to cover marketing expenses, “doesn’t have an obvious meaning for most people who are very, very educated.”

A recent AARP survey of people over the age of 50 who work with brokers found that 37% did not know what the term “load” meant, Ms. Polacheck said. More than a third did not realize that commissions are deducted from initial investments. “So the problem is you can talk about disclosing fees and disclosing costs, but how does that really translate to the consumer as far as what they’re paying and what they’re getting for that product.”

Barry Barbash, director of the Securities and Exchange Commission’s Division of Investment Management, cited a 1996 SEC survey finding that fund investors do not see expenses as a key factor in making investment decisions. Less than a fifth could give an estimate of the expenses of their largest mutual fund.

close look from sec

While he did not indicate that his agency planned new regulatory action, he said it will “look closely” to ensure that standards requiring reasonable fees are met. He noted that the SEC has recently issued regulations requiring clearer disclosure of fees and has tried to educate investors to show the effect of fees and expenses.

Since many investors expect the unusually high fund returns of recent years to continue indefinitely, Mr. Barbash said: “One can only come to the conclusion that when the market comes down, there will be a lot of disappointed people out there and there will be a lot of people focusing on fees and expenses. A lot of people will feel cheated.”

Ms. Polacheck questioned the extent of voluntary compliance in the industry, noting that compensation practices identified two years ago by the SEC as involving conflicts of interest — such as sales contests for selling particular products or paying different commissions for selling in-house or high-risk products — are still around.

“The chairman of the Securities and Exchange Commission is still talking about these practices as being problems,” she said. “It’s very unlikely that the person (customers are) working with is going to tell them, ‘By the way, I’m recommending this product because I might win a trip to Hawaii.’ “