Taking up the banner of the small investor, the government's top securities regulator Friday chided the booming mutual fund industry for what he sees as inadequate disclosure of fees and risks.
But a consumer advocate contended such jawboning isn't sufficient and the regulators should require fuller disclosure.
"I'm going to ask whether you're adequately communicating" with investors so they understand what fees they're paying and what risks they run, Arthur Levitt Jr., chairman of the Securities and Exchange Commission, said in a speech to a mutual fund-industry group.
Noting the millions of dollars continuing to pour into mutual funds, Levitt said, "The time to take stock is now. . . . The industry must speak with a new voice that reaches the millions of fund investors whose retirement nest eggs depend on them making sensible choices today."
An estimated 65-million Americans now invest in more than 6,800 mutual funds, which had combined assets of $4.9-trillion at the end of March.
"The fees have continued to go up while the assets have continued to climb," said Neal Sullivan, executive director of the North American Securities Administrators Association. He suggested Levitt should keep up "a consistent and steady drumbeat" on the theme because the mutual fund industry responds well to that sort of pressure.
Without saying whether fees are too high _ or too low _ Levitt challenged mutual fund companies to more clearly explain fees and how brokers selling the funds are compensated.
He warned that the industry was setting itself up for trouble when the raging bull market ends, leaving "millions of disappointed investors" who had been wooed by mutual funds that concentrated their sales efforts only on a rising market.
A spokeswoman for the Investment Company Institute, the mutual fund trade group that Levitt addressed, said the industry "agrees very strongly" with his remarks. "Investor awareness has been an industry priority for a very long time," Elizabeth Powell said.
But Barbara Roper, director of investor protection for the Consumer Federation of America, said Levitt and his agency should take action rather than relying on the mutual fund industry's ability to police itself.
"We clearly need mandatory" disclosure of fees, Roper said in a telephone interview after Levitt's speech. "The current system is clearly inadequate."
She said it was "somewhat ironic" that Levitt was upbraiding the industry about disclosure a few months after the SEC, under his leadership, adopted a rule allowing mutual funds to be sold for the first time without the traditional prospectus documents. Now investors can get a shorter summary outlining a fund's risks, performance and investment style.
The use of summaries tends to reduce the amount of key information disclosed, Roper said.
In his speech, Levitt told the mutual fund companies they should "look beyond" their prospectuses when they think about how they communicate with small investors.
"I worry that the fund industry is building unrealistic expectations through performance hype," he said. "I read the ads. I see nothing but performance, performance, performance. Why not outline clearly the impact of (fees) or the nature of risks?"
Levitt, who has campaigned during his tenure for improved investor education, said he was "disturbed" by the number of small investors who don't understand the impact of mutual fund fees. A fee of 1 percent, he noted, will reduce an investor's final account balance by 17 percent on an investment held for 20 years.
For the securities industry in general, Levitt recently threatened to clamp down on broker pay practices _ such as higher commissions for higher-risk investments _ that can create conflicts of interest.
He had urged Wall Street in 1995 to voluntarily change such practices, but his frustration with the industry's response led him to threaten to impose new regulations on brokers' compensation.