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Congress finds hidden fees for mutual funds

©Associated Press
March 16, 2003

WASHINGTON -- Fees paid by investors in mutual funds are rising despite intense competition in the $6-trillion industry, and some fees are hidden so that it's difficult to compare funds, a key House lawmaker said Wednesday.

"Fees and expenses, in fact, are going up," Rep. Michael Oxley, R-Ohio, chairman of the House Financial Services Committee, said as a panel subcommittee examined the mutual fund industry at a hearing.

The latest evidence: a new report by congressional investigators finding that mutual fund fees appear to be increasing. The analysis by the General Accounting Office showed that average fees for large stock funds have increased recently, while fees charged by major bond funds have declined.

While investors have become aware of some fund fees such as sales loads, other fees "are either hidden or opaque, escaping the attention of even savvy fund investors," Oxley said.

A recent inspection by securities regulators, meanwhile, found that brokers did not give large-scale investors in mutual funds the discounts they were owed in nearly a third of transactions.

The Securities and Exchange Commission said Tuesday that as a result of the examination, about 2,000 brokerages are being required to review their transactions in mutual funds with upfront sales charges.

An inspection "sweep" of 43 brokerage companies from November through January by the SEC, the New York Stock Exchange and the National Association of Securities Dealers, the industry's self-policing body, found that most companies -- apparently inadvertently -- failed to provide the required discounts in at least some instances.

With investor confidence shaken by last year's wave of corporate accounting scandals, lawmakers and the SEC are focusing on mutual funds -- with 93-million Americans invested in U.S. stock funds -- as a field for possible stricter regulation.

The SEC last month proposed new rules that would tighten internal controls within mutual fund companies and opened to public review the idea of creating a self-policing organization for the fund industry.

The vote by the five SEC commissioners followed closely their move in January, over industry objections, to force mutual funds to tell investors how they voted on decisions at the companies whose shares they hold.

Investors who were improperly deprived of the mutual fund discounts will be compensated, and brokerages may be disciplined in cases where they fail to remedy problems or brokers' conduct was seriously harmful, Mary Schapiro, NASD's vice chairwoman and president of regulatory policy operations, said Tuesday.

The so-called "breakpoint" discounts are required by NASD rules to go to investors in funds with upfront sales charges when they invest at high levels, typically $50,000, $100,000, $250,000, $500,000 and $1-million.

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