Normative Transparency of Mutual Fund Disclosure

Abstract

The Investment Company Act of 1940 states that the interests of shareholders are compromised when mutual funds are operated in the interest of fund managers. In this regard, one of the Act's major objectives is to ensure investors receive adequate and accurate information. For this reason, Congress, the SEC. individual funds, and the fund industry must focus on the goal of requiring and attaining normative transparency of disclosure. Normative transparency of disclosure is defined as the degree of mutual fund voluntary and proactive disclosure and also new and revised legal and regulatory disclosure required for shareholders to be able to make information efficient fund investment decisions. The attainment of normative transparency of disclosure requires major changes and prohibitions in current fund practices, laws, and regulation that are inconsistent with or contrary to this goal.

If Congress and the SEC were to enact and require, respectively, laws and regulations requiring normative transparency of disclosure, these mandates would be all that should be required. While additional laws and regulatory disclosure are likely to be forthcoming, it is most unlikely that the political process will achieve normative transparency. However, the political obstacles are much more likely to be overcome if individual mutual funds and funds collectively work vigorously and proactively in cooperation with Congress and the SEC.

Thus, the achievement of normative transparency of disclosure requires mutual fund managers and independent directors to work vigorously, proactively, and collectively to achieve this goal. However, it is also highly unlikely that these efforts will be collectively optimized as normatively transparent. Further, what is normative transparency of disclosure today will evolve over time as individual fund, fund industry, shareholder, and legal and regulatory conditions change. Thus, there is need to continually benchmark normative transparency in order to maintain normative and improve fund disclosure.

The goal of normative transparency disclosure at the fund level requires stated prohibition of inappropriate fund and fund industry practices and actions, including those permitted by regulations, such as 12b-1 fees, soft dollars, and revenue sharing. Further, it requires supplementary disclosure of those regulations that currently provide incorrect accounting, incomplete, missing, misleading and perfunctory disclosure.

To attain normative transparency of disclosure, mutual fund managers and independent directors must begin by voluntarily and collectively becoming vigorously proactive in serving and protecting shareholders. But, the initial move towards this goal, pending action by Congress, the SEC, fund managers and the fund industry, rests with proactively motivated independent directors empowered to pursue vigorously their fiduciary mandate of shareholder "watchdogs."

Keywords: mutual funds, disclosure, transparency,12b-1 fees, soft dollars, expense ratio, regulation

JEL Classification: G2, G23, G28