Mutual fund bill gaining steam

Just days after a Senate hearing to examine the depth of the problem, Senator Daniel K. Akaka, Democrat of Hawaii, filed a bipartisan bill that is cosponsored by the chairman of the Senate Governmental Affairs subcommittee on financial management that conducted a hearing, Senator Peter G. Fitzgerald, Republican of Illinois. Akaka is the ranking Democrat on the panel.

"Public confidence in mutual funds will not recover if funds continue to employ different sets of rules for large and small investors, engage in ethical misconduct, and enrich themselves at the expense of shareholders," Akaka said, introducing the legislation. "The transgressions brought to light underscore the absence of effective oversight by the boards of mutual funds companies."

The legislation, known as the Mutual Fund Transparency Act, would require the disclosure of the financial relationships between brokers and mutual fund companies and disclosure of the way brokerage commissions are paid by mutual fund companies, according to a description of the bill.

The bill may be on a fast track, in part, due to a budding national scandal that led to the departure of longtime Putnam Investments chief executive Lawrence J. Lasser and that has several other mutual fund companies facing regulatory scrutiny from the Securities and Exchange Commission and state regulators for their handling of mutual fund activities.

The bill quickly drew popular support from a broad coalition of consumer-oriented groups, including Investor Protection, the Consumer Federation of America, Fund Democracy, Consumer Action, the US Public Interest Research Group, and Consumers Union.

Akaka also paid tribute to the work done by several state officials, including New York Attorney General Eliot Spitzer and Massachusetts Secretary of State William F. Galvin, for drawing attention to the problems. In one area in particular, Galvin had pushed for a ban on the use of soft dollars in the mutual fund industry.

According to Akaka, soft dollars "refer to the bundling of services or products into commissions. Mutual fund companies often pay higher commissions in order to obtain other products and services, typically research on stocks. Soft dollars can be used to lower their expenses by having services and products paid for by soft dollars. Purchases using soft dollars do not count as expenses and are not calculated into the expense ratio."