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Rules will unmask mutual fund movers

Published Oct. 9, 2005

In the Age of Peter Lynch, when investment managers are as popular as movie stars, it is hard to believe there are some mutual funds that are reluctant to tell shareholders the names of the people who manage their money.

It's true. But those days are coming to an end.

Starting July 1, the nation's mutual funds will have to comply with a new set of disclosure rules adopted recently by the Securities and Exchange Commission. The SEC's goal was to make mutual funds give shareholders more information about how the funds are run, what it costs to run them and what kind of performance investors are getting.

The new SEC guidelines will reinforce the agency's earlier insistence that funds include a "fee table" in each prospectus _ so investors can see what they are paying in sales charges, management and other fees. Together, the SEC actions significantly increase investor protection.

The new rules have these requirements:

Mutual funds will have to reveal the names and backgrounds of individuals who are primarily responsible for the day-to-day management of a fund's investment portfolio. The information must be listed in the fund's prospectus. When managers change, the fund will have to put a sticker on the prospectus with that information until a new prospectus is printed.

The SEC will make an exception for a fund that contends its investment decisions are made entirely by a committee. In that case, the fund will be allowed to simply state it uses a committee system. The SEC rule does not cover money market or index funds.

Fund executives or managers will have to write a report that discusses the market factors, investment strategies or techniques that affected a fund's performance. The management's analysis can be included in the fund's annual or semiannual reports, or in the fund's prospectus.

As part of that analysis, a fund will be required to include a line graph that compares its performance with that of a broad-based securities market index, such as the Standard & Poor's 500 or the Lehman Brothers Bond Index. A fund also will be allowed to compare itself to a third, more narrowly based sector index, but it won't be allowed to compare itself to funds in its peer group.

Funds will have to use a new SEC-organized "financial highlights" table in shareholder reports. The table is intended to make it easier for investors to understand a fund's gains and losses. It also will show the portfolio's turnover rate, which indicates how much trading is being done by the fund manager.

As July 1 approaches, many fund executives are worried about finding the right broad market index to use for comparison purposes.

The S&P 500 index would work well for a broad-based mutual fund, they say, but not necessarily for a contrarian fund, for which there may be no broad index. As a result, comparing a contrarian fund with the S&P 500 could make the fund look bad a good part of the time.

The SEC rules were adopted after several years of acrimonious industry debate. While scores of mutual funds trumpet the names of their portfolio managers and encourage them to write regular reports to shareholders, many other funds have shown a distinct dislike for the "star" system.

Different funds will face different challenges implementing the rules.

At the Franklin Group of Funds in San Mateo, Calif., which manages $69-billion in 77 funds, the reports to shareholders are usually authored by President Charles B. Johnson or other executives. Although Franklin's portfolio managers are identified in investment publications and give interviews, they generally have been anonymous as far as Franklin's shareholders are concerned.

In the future, Franklin's 29 portfolio managers will be identified in the company's prospectuses, but with some reluctance.

"We are not wildly enthusiastic," said Deborah R. Gatzek, senior vice president for legal affairs at Franklin. "We don't have a star system. We do it more on a team basis. We think it isn't a real meaningful bit of information."

A different view came from Henry L.P. Schmelzer, president of the TNE Funds in Boston, which manage $5-billion in 19 funds. "It's pretty doable," said Schmelzer of the changes the funds have to make. "People grind their teeth when they have to do it. But it gets to be old hat after a while."

Despite the problems the funds may encounter, Schmelzer said, "it's hard to argue with the intent of the requirements."