Pre-sale disclosure rules could threaten sales of mutual funds

Mutual funds would be subject to tougher disclosure rules than other financial products if legislation currently being debated in Congress is passed. The House Financial Services Committee is scheduled this week to take action on the Investor Protection Act of 2009, a bill that would amend the Investment Company Act of 1940. Specifically, the proposal would authorize the Securities and Exchange Commission to create new requirements for the type of information fund companies must divulge ahead of mutual fund sales. Not surprisingly, those in the mutual-fund business object to the singling out of their industry. They say similar pre-sale disclosures should be mandated for sellers of other products, such as annuities and separately managed accounts. Singling out mutual funds is “a matter of concern,” said Mike McNamee, spokesman for the Investment Company Institute. Mutual fund operators support “consistent comparable disclosure,” he said. Saying mutual funds are already burdened with excessive reporting and disclosure requirements, Mr. McNamee asked: “Why would you burden the most regulated product?” Even some consumer advocacy groups object to the House proposal. Barbara Roper, director of investor protection for the Consumer Federation of America, believes that saddling mutual funds with pre-sale disclosures — and not other financial products — could lead brokers to sell less-suitable products. “There’s not a reason in the world why you ought to single out mutual funds,” Ms. Roper said. “If pre-sale disclosure is a good idea, it’s a good idea for all the products and services that brokers recommend.” In a telephone press conference Oct. 23, Rep. Paul Kanjorski, D-Pa., chairman of the Financial Services Committee capital markets subcommittee, defended the proposal. “There’s no purposeful discrimination here,” Mr. Kanjorski said. “Everybody’s looking for comparative advantage, disadvantage here, and there will be some.” Mr. Kanjorski invited the mutual fund industry to suggest amendments when the legislation is marked up. “The important thing is that we keep our eye on the protection of investors as opposed to industries or as opposed to interest groups,” he said.