Mr. AKAKA. Thank you, Mr. President. I rise today to introduce the Mutual Fund Transparency Act of 2005. Mutual funds are vital investment vehicles for middle-income Americans that offer diversification and professional money management. Mutual funds are what average investors rely on for retirement, savings for children's college education, or other financial goals and dreams.
I was outraged by the widespread abuses in the industry. Ordinary investors were being harmed due to the greed of brokers, mutual fund companies, and institutional and large investors. That is why I introduced the Mutual Fund Transparency Act in November 2003 with my colleagues Senator Fitzgerald and Senator Lieberman.
I want to thank the Chairman of the Securities and Exchange Commission (SEC), William Donaldson, for his courageous leadership. Chairman Donaldson has demonstrated a commitment to bring about reforms that better protect investors. I applaud the SEC's enforcement and regulatory efforts in addressing weaknesses and abuses in the mutual fund industry.
The SEC has adopted several reforms that mirror provisions found in my original Mutual Fund Transparency Act. In July 2004, the SEC adopted reforms requiring mutual funds, with certain exemptive rules, to have an independent chairman and ensure that 75 percent of their board members are independent.
Although the SEC has undertaken a number of impressive reforms, I have chosen to reintroduce a modified version of my original bill to further strengthen the independence of boards, make investors more aware of the true costs of their mutual funds, and prevent several key reforms from being rolled back. It is also important to legislatively address areas where the SEC needs additional statutory authority. Legislation is needed to ensure that the increased independence rules are applied universally among mutual funds.
Mr. President, my bill includes a number of provisions intended to strengthen mutual fund boards. It will require that mutual fund boards have independent chairmen and that 75 percent of their directors be independent. My bill strengthens the definition of who is considered an independent director and requires independent directors to be approved by shareholders. These steps are necessary to strengthen the ability of mutual fund boards to detect and prevent abuses of investor trust.
My bill will also increase the transparency of the complex financial relationships between brokers and mutual funds in ways that are both meaningful and easy to understand for investors. Shelf-space payments and revenue-sharing agreements between mutual fund companies and brokers present conflicts of interest that must be addressed. Brokers have conflicts of interest, some of which are unavoidable, but these need to be disclosed to investors. Without such disclosure, investors cannot make informed financial decisions. Investors may believe that brokers are recommending funds based on the expectation for solid returns or low volatility, when the broker's recommendation may be influenced by hidden payments. This legislation will require brokers to disclose in writing the amount of compensation the broker will receive due to the transaction, instead of simply providing a prospectus. Currently, the prospectus fails to include the detailed relevant information that investors need to make informed decisions.
The SEC has requested comments on a proposal to require a confirmation notice, as well as increased point-of-sale disclosures, to provide investors with more information about broker conflicts in mutual fund transactions. The SEC is reviewing comments on its proposal, and studying other possibilities. I have included a point-of-sale disclosure requirement in my legislation that was absent in the prior bill. In my bill, investors would have to be provided with the amount of differential payments and average fees for comparable transactions. My legislation also requires that confirmation notices be provided for mutual fund transactions, which will include how their broker was compensated.
To further increase the transparency of the actual costs of the fund, brokerage commissions must be counted as an expense in filings with the SEC and included in the calculation of the expense ratio. Consumers often compare the expense ratios of funds when making investment decisions. However, the expense ratios fail to take into account the cost of commissions in the purchase and sale of securities. Therefore, investors are not provided with a complete and accurate idea of the expenses involved with owning that fund. Currently, brokerage commissions are disclosed to the SEC, but not to individual investors. Right now, brokerage commissions are only disclosed to the investor upon request. My bill puts teeth into brokerage commission disclosure provisions and ensures that commissions will be included in a document that investors have access to and can utilize.
The inclusion of brokerage commissions in the expense ratio creates a powerful incentive to reduce the use of soft dollars. Soft dollars can be used to lower expenses, since most purchases using soft dollars do not count as expenses and are not calculated into the expense ratio. There have been calls for the prohibition of soft dollars. This is a recommendation that needs to be further examined. My bill provides an alternative, which is an incentive for funds to limit the use of soft dollars by identifying them as expenses. If commissions are disclosed in this manner, the use of soft dollars will be reflected in the higher commission fees and overall expenses. This makes it easier for investors to see the true cost of the fund and compare the expense ratios of funds.
Some may argue that this approach gives an incomplete picture and fails to account for spreads, market impact, and opportunity costs. However, the SEC has the authority to address the issue further if it can determine an effective way to quantify these additional factors. My bill does not impose additional reporting requirements that would be burdensome to brokers. It merely uses what is already reported and presents this information in a manner meaningful to investors.
Another important provision in my bill requires the SEC to conduct a study to assess financial literacy among mutual fund investors. This study is necessary because any additional disclosure requirements for mutual funds will not truly work unless investors are given the tools they need to make smart investment decisions.
Mr. President, my legislation will ensure that mutual fund boards are independent and that investors are provided with more relevant and meaningful disclosures from which they can make better informed choices. I look forward to continue working with my colleagues and the SEC to better protect investors.
Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.
Mr. President, I ask unanimous consent that a letter of support of my legislation from Fund Democracy, the Consumer Federation of America, Consumer Action, and Consumer Union be included in the Record. I also ask unanimous consent that a letter of support from AARP be included in the Record. Thank you, Mr. President.
