Morningstar Editors Differ on Fund Disclosures Morningstar Editors Differ on Fund Disclosures
Among the proposed revisions to mutual fund disclosure rules, the
one relating to "soft-dollar" arrangements between fund companies and
brokerages is touching off particularly spirited debate.
At this year's Morningstar Investment Conference in Chicago,
executives from the fund rating company differed on just how far
disclosure should go and on whether soft money was as important an
issue as many make it out to be.
Speaking during the opening evening of the conference last Wednesday,
Morningstar executive director Don Phillips downplayed the importance
of the arrangements, in which mutual fund companies pay broker/dealers
fees in order to get "shelf space" at that broker/dealer. Soft-dollar
deals are a "basis point issue, not a percentage point issue," Phillips
says, meaning that other issues facing the mutual fund
industry--including the misallocation of funds, style drift and manager
investment discipline--had far more serious financial implications for
investors.
But others disagreed, including former Morningstar editor Russell
Kinnel, who said in an interview with Registered Rep. that advisors
acting in the interests of a client could end up "having an incentive
to favor one investment over another."
Legislation proposed by Rep. James Baker (R-La.) would require that
fund companies detail what arrangements they enter to get shelf space,
including payments made to broker/dealers.
Industry groups have generally been supportive of the enhanced
disclosure. Investment Company Institute Chair Paul Haaga said in a
statement that the SEC should take action on this and not necessarily
wait for legislation.
Meanwhile, exhibitors at the conference generally admitted that
soft-dollar arrangements are a necessity for them because it gives them
access to the distribution franchises like Merrill Lynch, Smith Barney
and other broker/dealers. Fund execs interviewed said that competition
among product offerings creates a need for this. "Critical distribution
is more limited than the supply of product," said John Carey, director
of portfolio management at Pioneer Investments in Boston, who supports
greater disclosure.
Not all are as sanguine, however. The Securities Industry Association,
in a recent statement, said that soft-dollar arrangements "have
increased competition in execution services and enhanced the quality of
investment advice provided." The SIA did not take a stand on whether
more disclosures are necessary, saying only that they "appreciate"
Baker's concerns about "the need to improve current disclosures."
But Kinnel is less equivocal. He believes the process is dirty and that
"Sunlight is the best disinfectant."
"The resistance to this is not terribly convincing," he adds.
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