Normative Transparency of Disclosure for Mutual Fund Investors

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 advisers. In this regard, one of the Act's major objectives is to ensure investors receive adequate and accurate information.

This study focuses on achievement of normative transparency of disclosure. Normative transparency is the degree of mutual fund voluntary, proactive disclosure and legal and regulatory disclosure required for shareholders to be able to make normative fund investment decisions.

Normative transparency of disclosure requires changes in the current practices of individual mutual funds across the fund industry, and also in current laws and regulation. Implicit in shareholder ability to make normative investment decisions is prohibition with disclosure of those fund behaviors that impede shareholder ability to make normative investment decisions.

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 advisors, managers and independent directors to work voluntarily, proactively and collectively to achieve normative transparency. 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 fund, fund industry, shareholder, and legal and regulatory conditions change. Thus, there is need for this study to benchmark normative transparency as a stimulus to achievement of actual normative transparency of fund disclosure.

Normative transparency includes prohibition with disclosure of mutual fund actions that are inappropriate, but also changes in those laws, regulations, and practices that provide incorrect, incomplete, missing, misleading and perfunctory disclosure. The prohibitions should include 12b-1 fees, soft-dollar arrangements, revenue sharing agreements, market timing, and late trading, among others. Normative transparency also requires standardized disclosure of fair-value pricing.

To attain normative transparency in mutual fund disclosure, Congress, the SEC, and mutual fund advisers, managers and independent directors must voluntarily and collectively become more proactive in serving and protecting shareholders. Basically, achievement of fund normative transparency rests with independent directors who are proactively motivated and further empowered to vigorously pursue their fiduciary mandate of shareholder "watchdogs."