Arnold Kling  

SEC Taxes Mutual Funds?

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The latest SEC regulation of mutual funds draws fire from Stephen Bainbridge. He quote Cindy Glassman, an SEC Commissioner who dissented, as pointing out that no cost-benefit analysis was done of the proposal to require mutual funds to have an outside board chairperson. Bainbridge continues,

But it becomes even more outrageous when one considers Glassman's further complaints:

It is a fact that many of the top-rated funds today based on high performance and low fees have inside chairs. Why should we tell shareholders they can no longer have the form of governance that produced this high level of performance? And further, why should we require them to pay for it? There can be no doubt that this requirement will add to fund expenses. An independent chair cannot be expected to have — and in most cases, will not have — hands-on knowledge about fund operations. Therefore, to be effective, the chair would have to hire a staff. Shareholders will bear that expense as well as the likely additional cost of the independent chairman. In sum, the benefits are illusory, but the costs are real.

In effect, the SEC just imposed a new tax on all mutual fund investors and for no good reason. And people wonder why I complain about over-regulation.

For Discussion. What was broken that the new SEC regulation is supposed to fix?

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COMMENTS (3 to date)
Lawrance George Lux writes:

The overall access to Fund policy, missed even by the Government. Simply an attempt to get answers, which most Mutual funds still do not provide. lgl

Jervis Ninehammer writes:

The SEC chairman was on CNBC recently to present the rationale for this regulation. His claim is that it was necessary to handle conflicts of interest. I'm not entirely persuaded by his reasoning, but I understand his motivation. The fundamental problem that I see in the mutual fund market is that consumers are unwilling to spend the time necessary to inform themselves about financial products. I'm not what policies the SEC could promulgate to address this.

Bernard Yomtov writes:

I admit to being surprised that no one has studied this issue in a methodical way. Doesn't seem like it would be too tough, given the data, to see if there is any significant difference in fees between funds with independent chairmen and those without. I'd leave performance out of the analysis, because that's extremely difficult to measure.

Glassman seems to be arguing that funds with outside chairmen have higher fees than those with insiders. It seems to me that she might direct some criticism toward herself. I suspect she herself could have had a study done to investigate this without too much trouble.

I will say that, if there is no effect, I think outside chairmen are to be preferred, but that's probably far from the biggest problem in the industry. I'm not sure what the boards actually do to earn those big fees. (Anyone out there want to explain how the fees are set by free competitive markets?) Maybe there just is no need for them at all, in their present form.

I agree with Jervis that investors should look more carefully at things like reported expenses. One thing I'd like to see is funds reporting the actual expense incurred by the investor on the statements. If you had $10,000 invested at the start of the quarter, the fund earned 3% for the quarter, and has an annual expense ratio of 1% your statement would read something like:

Starting value: $10,000
Gross Return 300
Fees (25)
Ending value $10,275

That would get attention, and do a lot to hold fees down. Dollars have a bigger impact than percentages.

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