February 11, 2004
BB 04—16

In this issue:

  • New Mutual Fund Reform Bill Introduced

New Mutual Fund Reform Bill Introduced

On February 9, Senator Peter Fitzgerald (R-IL) — along with Senators Carl Levin (D-MI) and Susan Collins (R-MA) — introduced the Mutual Fund Reform Act (S. 2059). This comprehensive mutual fund reform legislation would give the Securities and Exchange Commission (SEC) the authority to determine under what circumstances to permit an exception to the hard 4:00 close for intermediaries such as pension plan administrators. The bill also requires redemption fees for short-term trading and authorizes redemption fees in excess of 2 percent.

S. 2059 is one of several mutual fund reform bills that have been introduced in the U.S. Senate (S. 1958, S. 1971) and the U.S. House overwhelmingly passed its own version of mutual fund reform Mutual Funds Integrity and Fee Transparency Act (H.R. 2420) in November. S. 2059 may garner more attention and support than other Senate bills because Fitzgerald is chairman of the Governmental Affairs subcommittee on Financial Management, the Budget and International Security, which has held several hearings on mutual fund issues. Vanguard founder John Bogle, who testified at several of the Senate hearings, called the new bill the "gold standard" of mutual fund reform.

Fitzgerald's bill directs the SEC to issue rules to prevent late trading and specifies the SEC "shall determine the circumstances under which to permit, subject to rules of the [SEC] and an annual independent audit of such trades, the execution of after-hours trades that are provided to a registered investment company by a broker, dealer, retirement plan administrator, insurance company, or other intermediary, after the time as of which the net asset value was determined."

The bill also requires any mutual fund that does not allow market timing practices to charge a short-term redemption fee. The statutory language does not provide any guidance on what constitutes "short-term" but does specify that the fee will be imposed on a LIFO or last in, first out basis. It also does not provide an exception for common retirement plan transactions such as employee deferrals and loans.

The new bill contains very extensive new disclosure requirements and fee and compensation regulation in addition to the attention to compliance procedures and late trading/market timing we have seen in prior bills. For example, the bill prohibits 12b-1 fees and revenue sharing arrangements (which are commonly used to pay fees to recordkeepers and third party administrators (TPAs)). The bill would permit use of the adviser's fee for distribution expenses.

The bill would also require intermediaries (such as recordkeepers and TPAs) to provide basic customer identification and trading activity information to the mutual funds to enable the funds to enforce fund policies fairly and uniformly. This could include matching up trading information inside and outside retirement plans in order to impose mandatory redemption fees. The information that is provided can only be used to enforce fund policies, and all proprietary rights to customer information under state and federal law are preserved.

The Council supports an exception to the hard 4:00 close for TPAs such as plan administrators, as proposed in H.R. 2420, and supports exceptions to mandatory redemption fees for common plan transactions. The Council would welcome member feedback on the potential retirement plan effects of the new proposals to eliminate 12b-1 fees and revenue sharing arrangements.

For more information, contact Jan Jacobson, Council director, retirement policy, at 202-289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.