Federal regulators on Thursday took steps to provide investors with more information about corporate news and potential conflicts of interest for mutual fund portfolio managers.
The Securities and Exchange Commission voted to adopt a rule that adds to the list of events that firms must promptly tell investors about, and accelerates the timetable for the disclosure.
Commissioners also proposed a plan for requiring mutual funds to offer more information about who portfolio managers are, how they are compensated, what holdings they have in their funds and potential conflicts of interest.
The disclosure rule, which takes effect in August, adds eight items that must be disclosed in 8-K regulatory filings, plus expands or accelerates disclosure of four others.
Among the new items are restatements; entry into or termination of a material agreement outside the normal course of business; creation of important off-balance-sheet arrangements; and material costs of exiting a business.
Previously, 8-Ks were required for nine events, including bankruptcy, acquisition or sale of significant assets, and a change in independent auditor.
Under the new rule, reports must be filed to the SEC within four business days. The old rule allowed up to 15 calendar days.
“There should be no mistake made that this is … a very important day for corporate governance and for our financial markets,” said Republican Commissioner Paul Atkins.
The original proposal, made in June 2002 but delayed by the SEC’s efforts to respond to corporate and mutual fund scandals, called for a deadline of two business days.
“Speed is good, but we want accuracy even more,” said Democratic Commissioner Harvey Goldschmid.
On the mutual fund side, commissioners voted to propose new rules for information that funds would have to provide about portfolio managers. Included are disclosing names, tenure and experience of all members of a management team; whether they manage other accounts, such as hedge funds; how compensation is determined; and dollar ranges of their own fund holdings.
SEC Chairman William Donaldson noted concerns that if a manager runs both mutual funds and hedge funds, it may present an inherent conflict–particularly if hedge fund results dominate the manager’s compensation–because the funds’ interests may diverge.
In addition, he said, if managers are rewarded for tax-free performance, they may not be sufficiently sensitive to tax considerations of fund trading.
Although some experts have sought disclosure of the actual amounts of portfolio managers’ compensation, as is required of corporate executives, commissioners said it’s not necessarily relevant or appropriate.
Some commissioners expressed reservations about the plan to require disclosure about managers’ holdings in funds. Donaldson said information could be misleading–a lack of an investment, for example, could indicate the fund is inappropriate for the manager’s finances, not that he lacks confidence in the fund, he noted.
Atkins said he feared such disclosures could provide a “disincentive” for quality people to want to manage funds.
“I don’t think it’s really anyone’s business how much a portfolio manager has in that fund, and, at the end of the day, what’s important to investors … is performance of the fund and fees,” Atkins said.
Democrat Roel Campos, however, said managers chose to invest the public’s money, and they can leave the profession if they don’t want such scrutiny.
“No one is telling them they have to be there,” he said.
The proposal now goes to a 60-day public comment period before any final vote.
