Mutual Funds Singled Out in Proposal

Funds could face more stringent disclosure requirements.

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In a move that has raised eyebrows in the financial community, Congress is considering a proposal that could alter the way mutual funds do business with new investors. Specifically, funds could face more stringent requirements regarding the information they must provide to prospective customers.

[See Kanjorski Discusses Hedge Fund Regulation.]

While the proposal, part of the Investor Protection Act of 2009, is designed to increase transparency, mutual fund lobbyists have called foul because the measure doesn't apply to any other type of security. This imbalance, they fear, could give a slight edge to similar vehicles such as annuities and separately managed accounts, which could become more attractive to brokers looking to avoid extra paperwork.

If approved, the act would give the Securities and Exchange Commission the authority to require mutual funds to send investors certain documents, such as a summary prospectus, before selling them shares. While funds are currently required to provide full prospectuses, this disclosure occurs after sales take place.

Mike McNamee, a spokesperson for the mutual fund trade group the Investment Company Institute, argues that any additional disclosure regulations should apply more broadly.

"[This] singles out mutual funds and says the SEC has the authority for mutual funds but not for other financial products," he says. "We are very strong supporters of disclosure . . . but it has to be comparable and it has to be consistent."