Chapter 17: Normative Transparency of Mutual Fund Disclosure

John A. Haslem,ed., Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship, pp. 319-335. Hoboken, NJ: John Wiley & Sons, 2010.

Robert H. Smith School Research Paper No. RHS 2545093

26 Pages Posted: 6 Jan 2015 Last revised: 9 Dec 2018

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business; University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 17, 2015

Abstract

The 40Act states that the interests of shareholders are compromised when mutual funds are operated in the interest of fund advisers. In this regard, one of the Act’s major objectives is to ensure investors receive adequate and accurate information. They do not. For this reason, Congress, the SEC, fund advisers and independent directors, and the fund industry must focus on the goal of requiring across the board normative transparency of disclosure. This disclosure includes adoption of “best practices” over the current focus on “rule-making,” which allows incorrect accounting and incomplete, missing, misleading and perfunctory disclosure.

Adoption of the Total Expense Ratio construct and its components would provide a major portion of what is needed in the way of normative transparency of disclosure by placing upfront its four major categories of fees and their sub-categories. In so doing, current indirect fund shareholder payments by advisers/distributors would no longer be “behind the mutual fund curtain.” There would also be continual need to benchmark.

By making these payments “behind the mutual fund curtain” upfront and transparent, there will be increased pressure on fund advisers and independent directors, the fund industry, Congress, and the SEC to prohibit inappropriate fund practices and actions, most importantly, selling group payments of dealer concessions and customer servicing fees, the several types of revenue sharing payments, and costly soft-dollar trades. If successful, there would also be continual need to benchmark normative transparency if it is to be maintained with future changing conditions.

But, while improvements in regulatory disclosure are likely to occur over time, it is most unlikely the political process will achieve complete normative transparency of disclosure. However, industry and political obstacles for reform are more likely to be overcome if major “shareholder friendly“ fund advisers and dedicated independent directors work collectively, vigorously, and proactively for Congressional and SEC legal and regulatory action. However, such success will be difficult to attain because of the powerful influence of many major mutual fund advisers who benefit greatly from the regulatory status quo, and at the great expense of fund shareholders.

Keywords: mutual funds, 40Act, normative transparency of disclosure, total expense ratio. Congress, SEC, regulatory disclosure

JEL Classification: G2, G23, G28

Suggested Citation

Haslem, John A. and Haslem, John A., Chapter 17: Normative Transparency of Mutual Fund Disclosure (May 17, 2015). John A. Haslem,ed., Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship, pp. 319-335. Hoboken, NJ: John Wiley & Sons, 2010., Robert H. Smith School Research Paper No. RHS 2545093, Available at SSRN: https://ssrn.com/abstract=2545093

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University of Maryland - Robert H. Smith School of Business ( email )

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