Consumer Groups Sound off on SEC Disclosure Proposal Going Against Some CU Groups

WASHINGTON – Joining a number of entities within the credit union industry on their disapproval of an SEC investor point of sale disclosure proposal are several prominent consumer groups, but they’re not all on the same side. The Consumer Federation of America, Consumers Union, Consumer Action and the Fund Democracy, Inc. have all raised concerns about the SEC’s proposal, initially introduced in January 2004. At issue is the regulator requiring broker-dealers to provide their customers with information regarding the costs and conflicts of interest that arise from the distribution of mutual fund shares, 529 college savings plan interests, and variable insurance products at the point of sale. Ironically, some in the credit union industry think the SEC’s proposal will backfire and most have overwhelmingly expressed their frustration with providing more disclosures questioning whether investors really read them and worry that compliance costs will be passed on to clients. At least 20 representatives from Linsco Private/Ledger, a third party provider of networking arrangements to more than 400 credit unions and banks, are against more disclosures. Meanwhile, in an April 5 letter, all four groups praised the SEC for the strides it has made so far in improving price transparency and preventing abusive sales practices in the fund industry. But more work needs to be done, the groups contend. “While we believe the Commission’s re-proposal makes strides toward meaningful price transparency for mutual funds, we continue to have significant concerns in several areas. In particular, we are concerned that a number of the steps the Commission has proposed to simplify the disclosures have undermined their ability to serve their intended purpose,” the groups said. The authors of the letter are Barbara Roper, director of investor protection, Consumer Federation of America; Kenneth McEldowney, executive director, Consumer Action; Sally Greenberg, senior counsel, Consumers Union; and Mercer Bullard, founder/president, Fund Democracy, Inc. One area that needs more clarity involves what is included in disclosure information to investors. As the proposal stands, the SEC wants the inclusion of sales charges and 12b-1 fees, for example, but with regard to the broker’s receipt of these payments, the document states “we receive all or almost all of the distribution fees.” “The disclosures do little to apprise investors of the broker’s incentive to favor a particular fund or class of shares that pays the highest compensation rather than the fund or class that is the best investment for the customer,” the groups offered. Instead, investors should have a breakdown of information on what he or she pays for the services of the broker and what they pay for the operation of the fund, the consumer groups suggested. In disclosing what the investor pays for the broker’s services, the document should note, if this is the case, that these payments include both a one-time payment of a sales load and an ongoing payment of distribution fees, they added. Another area of concern has to do with revenue sharing information, which the SEC’s proposal does not include on payment amounts received by the broker, the groups noted. As a result, investors will be left with no information to use in assessing the extent to which these payments may influence the broker’s recommendations, they said. While they are “sympathetic” to brokers who’ve said the fees are “difficult to disclose clearly” the groups did not mince words on its claims of a hidden agenda. “Revenue sharing payments are often little more than a form of legalized payola – the price brokers exact from fund companies to ensure access to their customers,” they wrote. “Investors receive no benefit. Fund companies that can’t or won’t make the payments are discriminated against. Only brokers benefit by using their position as gatekeeper to exact additional pay.” The consumers groups have suggested that all types of compensation disclosures should be created in an environment free of conflicts of interest. As for the best way for investors to receive disclosures, the groups feel that “there is no substitute for contemporaneous, written disclosure.” The SEC has proposed that such information can be sent to investors through the Internet, via a toll-free number or orally. The sale of multi-class funds, specifically “B shares,” has also raised red flags with the consumer groups. “We are dismayed that, despite widespread, documented abuses in this area, the Commission apparently does not believe it is necessary to better apprise investors of conflicts of interest created by the sale of different classes of shares.” The groups suggested the SEC consider requiring disclosure of a line graph showing the relative distribution expenses paid by the investor over time for each class of shares the investor is eligible to purchase. -