Mutual Funds: Additional Disclosures Could Increase Transparency of Fees and Other Practices
Published: 2003-06-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Concerns have been raised over whether the disclosures of mutual fund fees and other fund practices are sufficiently transparent and fair to investors. GAO's testimony discusses (1) mutual fund fee disclosures, (2) the extent to which various corporate governance reforms are in place in the mutual fund industry, (3) the potential conflicts that arise when mutual fund advisers pay broker-dealers to sell fund shares, and (4) the benefits and concerns over fund advisers' use of soft dollars.
section_title: What GAO Found
paragraphs: The work that GAO has conducted at the request of this Committee addresses several of the areas that are included in the recently introduced Mutual Funds Integrity and Fee Transparency Act of 2003 (H.R. 2420). Mutual funds disclose considerable information about their costs to investors, but unlike many other financial products and services, they do not disclose to each investor the specific dollar amount of fees that are paid on their fund shares. Consistent with H.R. 2420, our report recommends that SEC consider requiring mutual funds to make additional disclosures to investors, including considering requiring funds to specifically disclose fees in dollars to each investor in quarterly account statements, which we estimate may result in minimal increases in fund expenses. Our report also discusses other alternatives that could also prove beneficial to investors and spur increased competition among mutual funds on the basis of fees but be even less costly to the industry overall. U.S. mutual funds have boards of directors who are charged with overseeing the interests of fund shareholders. Various corporate governance reforms have been proposed to improve the effectiveness of mutual fund boards. As a result of SEC requirements or industry best practice recommendations, many of these practices were already in place at many funds, but not all such practices were mandatory. H.R. 2420 would ensure that all mutual funds implement these practices. Mutual fund advisers have been increasingly making additional payments out of their own profits to the broker-dealers that sell their fund shares. Although allowed under current rules, these revenue sharing payments can create conflicts between the interests of broker-dealers and their customers that could limit the choices of funds that investors are offered. Under current disclosure requirements, however, investors may not always be explicitly informed that their broker-dealer, who is obligated to recommend only suitable investments based on the investor's financial condition, is also receiving payments to sell particular funds. Consistent with H.R. 2420, our report also recommended that more disclosure be made to investors about any revenue sharing payments their broker-dealers are receiving. Under a practice known as soft dollars, a mutual fund adviser uses fund assets to pay commissions to broker-dealers for executing trades in securities for the mutual fund's portfolio but also receives research or other brokerage services as part of the transaction. Although this research and other services can benefit fund investors, these arrangements could result in increased expenses for fund shareholders if fund advisers trade excessively to obtain additional soft dollar research. SEC has addressed soft dollar practices in the past and recommended actions could provide additional information to fund directors and investors, but has not yet acted on all of its own recommendations. Consistent with H.R. 2420, our report recommended that more disclosure be made to mutual fund directors and investors.

section_title: Letter
paragraphs: I am pleased to be here to discuss GAO’s work on the disclosure of mutual  fund fees and the need for other related mutual fund disclosures to  investors. The fees and other costs that mutual fund investors pay as part  of owning fund shares can significantly affect their investment returns. As  a result, it is appropriate to debate whether the disclosures of mutual fund  fees and fund marketing practices are sufficiently transparent and fair to  investors.
Today, I will summarize the results from our recently issued report  entitled Mutual Funds: Greater Transparency Needed in Disclosures to  Investors, GAO-03-763 (Washington, D.C.: June 9, 2003) and describe how  the results of this work relates to certain provisions of the proposed  Mutual Funds Integrity and Fee Transparency Act of 2003 (H.R. 2420).  Specifically, I will discuss (1) mutual fund fee disclosures and  opportunities for improving these disclosures, (2) the extent to which  various corporate governance reforms are in place in the mutual fund  industry, (3) the potential conflicts that arise when mutual fund advisers  pay broker-dealers to sell fund shares, and (4) the benefits and concerns  over fund advisers' use of soft dollars.
The study that we have conducted at the request of this Committee  directly supports several of the key provisions of H.R. 2420. In particular, it  addresses the need to consider ways to increase the transparency of  mutual fund fees and other disclosures. Mutual funds disclose  considerable information about their costs to investors, including  presenting the operating expense fees that they charge investors as a  percentage of fund assets and providing hypothetical examples of the  amount of fees that an investor can expect to pay over various time  periods. However, unlike many other financial products and services,  mutual funds do not disclose to individual investors the specific dollar  amount of fees that are paid on their fund shares. The Securities and  Exchange Commission (SEC) has proposed that mutual funds make  additional disclosures to investors that would provide more information  that investors could use to compare fees across funds. However, SEC is  not proposing that funds disclose the specific dollar amount of fees paid  by each investor nor is it proposing to require that any fee disclosures be  made in the account statements that inform investors of the number and  value of the mutual fund shares they own. Consistent with H.R. 2420, our  report recommends that SEC consider requiring mutual funds to make  additional disclosures to investors, including considering requiring funds  to specifically disclose fees in dollars to each investor in quarterly account  statements. SEC has agreed to consider requiring such disclosures but was  unsure that the benefits of implementing specific dollar disclosures  outweighed the costs to produce such disclosures. However, we estimate  that spreading these implementation costs across all investor accounts  may result in minimal increases in fund expenses. Our report also  discusses less costly alternatives that could also prove beneficial to  investors and spur increased competition among mutual funds on the  basis of fees.
Each mutual fund in the United States is required to have a board of  directors that is charged with overseeing the interests of fund  shareholders. These boards also must include directors that are not  employed or affiliated with the fund’s adviser, and these independent  directors have specific duties to oversee the fees their fund’s charge.  However, some industry critics have questioned whether fund directors  are adequately performing their duties and various corporate governance  reforms have been proposed to improve the effectiveness of mutual fund  boards. We found that many of the corporate governance reforms are  already being practiced by many funds as a result of either recent SEC  actions or because they are recommended as best practices by the mutual  fund industry body, the Investment Company Institute. By amending the  Investment Company Act of 1940 to require these and other corporate  governance practices, H.R. 2420 would further strengthen certain  corporate governance practices and ensure that all mutual funds  implement these practices.
The work that we conducted for our report also found that mutual fund  advisers have been increasingly engaged in a practice known as revenue  sharing under which they make additional payments to the broker-dealers  that sell their fund shares. Although we found that the impact of these  payments on the expenses to fund investors was uncertain, these  payments can create conflicts between the interests of broker-dealers and  their customers that could limit the choices of funds that these broker- dealers offer investors. However, under current disclosure requirements  investors may not always be explicitly informed that their broker-dealer,  who is obligated to recommend only suitable investments based on the  investor’s financial condition, is also receiving payments to sell particular  funds. Consistent with H.R. 2420, our report also recommended that more  disclosure be made to investors about any revenue sharing payments their  broker-dealers are receiving.
Finally, we also reviewed a practice known as soft dollars, in which a  mutual fund adviser uses fund assets to pay commissions to broker- dealers for executing trades in securities for the mutual fund’s portfolio  but also receives research or other brokerage services as part of the  transaction. These soft dollar arrangements can result in mutual fund  advisers obtaining research or other services, including from third party  independent research firms, that can benefit the investors in their funds.  However, these arrangements also create a conflict of interest that could  result in increased expenses to fund shareholders if a fund adviser trades  excessively to obtain additional soft dollar research or chooses broker- dealers more on the basis of their soft dollar offerings than their ability to  execute trades efficiently. SEC has addressed soft dollar practices in the  past and recommended actions could provide additional information to  fund directors and investors, but has not yet acted on some of its own  recommendations. Consistent with H.R. 2420, our report recommended  that more disclosure be made to mutual fund directors and investors to  allow them to better evaluate the benefits and potential disadvantages of  their fund adviser’s use of soft dollars.
subsections: section_title: Additional Disclosure of Mutual Fund Costs Might Benefit Investors
paragraphs: Although mutual funds already disclose considerable information about  the fees they charge, our report recommended that SEC consider requiring  that mutual funds make additional disclosures to investors about fees in  the account statements that investors receive. Mutual funds currently  provide information about the fees they charge investors as an operating  expense ratio that shows as a percentage of fund assets all the fees and  other expenses that the fund adviser deducts from the assets of the fund.  Mutual funds also are required to present a hypothetical example that  shows in dollar terms what an investor could expect to pay if they invested  $10,000 in a fund and held it for various periods.
Unlike many other financial products, mutual funds do not provide  investors with information about the specific dollar amounts of the fees  that have been deducted from the value of their shares. Table 1 shows that  many other financial products do present their costs in specific dollar  amounts.
Although mutual funds do not disclose their costs to each individual  investor in specific dollars, the disclosures that they make do exceed those  of many products. For example, purchasers of fixed annuities are not told  of the expenses associated with investing in such products. Some industry  participants and others including SEC also cite the example of bank  savings accounts, which pay stated interest rates to their holders but do  not explain how much profit or expenses the bank incurs to offer such  products. While this is true, we do not believe this is an analogous  comparison to mutual fund fees because the operating expenses of the  bank are not paid using the funds of the savings account holder and are  therefore not explicit costs to the investor like the fees on a mutual fund.
A number of alternatives have been proposed for improving the disclosure  of mutual fund fees, that could provide additional information to fund  investors. In December 2002, SEC released proposed rule amendments,  which include a requirement that mutual funds make additional  disclosures about their expenses. This information would be presented to  investors in the annual and semiannual reports prepared by mutual funds.  Specifically, mutual funds would be required to disclose the cost in dollars  associated with an investment of $10,000 that earned the fund’s actual  return and incurred the fund’s actual expenses paid during the period. In  addition, SEC also proposed that mutual funds be required to disclose the  cost in dollars, based on the fund’s actual expenses, of a $10,000  investment that earned a standardized return of 5 percent. If these  disclosures become mandatory, investors will have additional information  that could be directly compared across funds. By placing it in funds’  annual and semiannual reports, SEC staff also indicate that it will facilitate  prospective investors comparing funds’ expenses before making a  purchase decision.
However, SEC’s proposal would not require mutual funds to disclose to  each investor the specific amount of fees in dollars that are paid on the  shares they own. As result, investors will not receive information on the  costs of mutual fund investing in the same way they see the costs of many  other financial products and services that they may use. In addition, SEC  did not propose that mutual funds provide information relating to fees in  the quarterly or even more frequent account statements that provide  investors with the number and value of their mutual fund shares. In a 1997  survey of how investors obtain information about their funds, ICI  indicated that to shareholders, the account statement is probably the most  important communication that they receive from a mutual fund company  and that nearly all shareholders use such statements to monitor their  mutual funds.
SEC and industry participants have indicated that the total cost of  providing specific dollar fee disclosures might be significant; however, we  found that the cost might not represent a large outlay on a per investor  basis. As we reported in our March 2003 statement, ICI commissioned a  large accounting firm to survey mutual fund companies about the costs of  producing such disclosures. Receiving responses from broker-dealers,  mutual fund service providers, and fund companies representing  approximately 77 percent of total industry assets as of June 30, 2000, this  study estimated that the aggregated estimated costs for the survey  respondents to implement specific dollar disclosures in shareholder  account statements would exceed $200 million, and the annual costs of  compliance would be about $66 million. Although the ICI study included  information from some broker-dealers and fund service providers, it did  not include the reportedly significant costs that all broker-dealers and  other third-party financial institutions that maintain accounts on behalf of  individual mutual fund shareholders could incur.  However, using available  information on mutual fund assets and accounts from ICI and spreading  such costs across all investor accounts indicates that the additional  expenses to any one investor are minimal. Specifically, at end of 2001, ICI  reported that mutual fund assets totaled $6.975 trillion. If mutual fund  companies charged, for example, the entire $266 million cost of  implementing the disclosures to investors in the first year, then dividing  this additional cost by the total assets outstanding at the end of 2001  would increase the average fee by .000038 percent or about one-third of a  basis point. In addition, ICI reported that the $6.975 trillion in total assets  was held in over 248 million mutual fund accounts, equating to an average  account of just over $28,000. Therefore, implementing these disclosures  would add $1.07 to the average $184 that these accounts would pay in total  operating expense fees each year—an increase of six-tenths of a percent.
In addition, other less costly alternatives are also available that could  increase investor awareness of the fees they are paying on their mutual  funds by providing them with information on the fees they pay in the  quarterly statements that provide information on an investor’s share  balance and account value. For example, one alternative that would not  likely be overly expensive would be to require these quarterly statements  to present the information—the dollar amount of a fund’s fees based on a  set investment amount—that SEC has proposed be added to mutual fund  semiannual reports. Doing so would place this additional fee disclosure in  the document generally considered to be of the most interest to investors.  An even less costly alternative could be to require quarterly statements to  also include a notice that reminds investors that they pay fees and to  check their prospectus and with their financial adviser for more  information.
Because SEC’s current proposal, while offering some advantages, does not  make mutual funds comparable to other products and provide information  in the document that is most relevant to investors—the quarterly account  statement—our report recommended that SEC consider requiring  additional disclosures relating to fees be made to investors in these  documents. In addition to specific dollar disclosures, we also noted that  investors could be provided with other disclosures about the fees they pay  on mutual funds that would have a range of implementation costs,  including some that would have even less overall cost to the industry. H.R.  2420 also mandates that SEC require additional information about fees be  disclosed to investors. Seeing the specific dollar amount paid on their  shares could be the incentive that some investors need to take action to  compare their fund’s expenses to those of other funds and make more  informed investment decisions on this basis. Such disclosures may also  increasingly motivate fund companies to respond competitively by  lowering fees. Because the disclosures that SEC is currently proposing be  included in mutual fund annual and semiannual reports could also prove  beneficial, it could choose to require disclosures in both these documents  and account statements, which would provide both prospective and  existing investors in mutual funds access to valuable information about  the costs of investing in funds.
H.R. 2420 also mandates that SEC require mutual funds to disclose more  information about portfolio transactions costs, including commissions  paid with respect to the trading of portfolio securities. Although additional  information about such costs could be beneficial to investors, we found  that determining these costs in a way that allows them to be accurately  and fairly compared across funds could prove difficult.
section_title: Mutual Fund Boards Follow Many Sound Corporate Governance Practices but Such Practices are Not Mandatory for All Funds
paragraphs: Mutual funds implemented many sound practices concerning their boards  of directors, but these practices are not mandatory for all funds. The law  governing U.S. mutual funds promotes investor protection by requiring  funds to have a board of directors to protect fund shareholder interests. As  a group, the directors of a mutual fund have various statutory  responsibilities to oversee fund operations. In particular, the directors  independent of the fund’s investment adviser have additional duties  including approval of the contracts with the investment adviser.  As a  matter of practice, independent directors also review other arrangements  such as transfer agency, custodial, or bookkeeping services.
As a result of recent scandals such as Enron and Worldcom, new  legislative and regulatory reforms have been adopted or proposed to  increase the effectiveness and accountability of public companies’ boards  of directors. In July 2002, the Sarbanes-Oxley Act (Sarbanes-Oxley) was  enacted to address concerns related to corporate responsibility and  governance. In addition to enhancing the financial reporting regulatory  structure, Sarbanes-Oxley sought to increase corporate accountability by  reforming the structure of corporate boards audit committees. Section 301  of Sarbanes-Oxley requires that directors who serve on a public company’s  audit committee be “independent” and select and oversee outside auditors.  The New York Stock Exchange (NYSE) and NASDAQ have also proposed  changes to the corporate governance listing standards for public  companies. However, many of the proposed reforms for public companies  are either already required or have been recommended as best practices  for mutual fund boards. Table 2 shows how the current or recommended  corporate governance practices for mutual fund boards compare to  current and proposed NYSE and NASDAQ listing standards applicable to  public company boards.
According to regulators and data from industry participants that we  obtained, many mutual funds have implemented many of the practices that  are being recommended for public companies. As shown in table 2 above,  many of these practices are already required for many funds by SEC  regulation or are recommended by ICI as a best practice. Officials of the  fund companies and the independent directors that we interviewed told us  that the majority of their boards consisted of independent directors, and,  in many cases, had only one interested director. For public companies,  some commenters have called for boards of directors to have  supermajorities of independent directors as a means of ensuring that the  voices of the independent directors are heard. ICI already advocates this  practice in its best practice recommendations and one fund governance  consulting official said that a 2002 survey conducted by his firm found  that, in 75 percent of the mutual fund complexes they surveyed, over 70  percent of the directors were independent. An academic study we  reviewed also found that funds’ independent directors already comprised  funds’ nominating committees and most funds have self-nominating  independent directors.
However, not all of these sound corporate governance practices are  currently mandatory for mutual funds. For example, if a fund does not  take advantage of any of the exemptive rules that SEC cited in requiring  certain corporate governance practices, such a fund may not already be  following these practices. In addition, some of the reforms advocated by  ICI’s best practices and by those advocating change for public companies  are not currently required for mutual funds. H.R. 2420 would make these  and other practices mandatory for all funds, which would ensure  consistent implementation of the practices across the industry.
section_title: Changes in Mutual Fund Distribution Practices Raise Potential Conflicts of Interest Between Broker-Dealers and Investors
paragraphs: One mutual fund distribution practice—called revenue sharing—that has  become increasingly common involves mutual fund investment advisers  making additional payments beyond those made under 12b-1 plans to  broker-dealers that sell fund shares. Approximately 80 percent of mutual  fund purchases are made through broker-dealers or other financial  professionals, such as financial planners and pension plan administrators.  To be compensated for providing advice and ongoing assistance to  investors, many of these financial professionals receive payments from the  mutual fund either through the sales charges paid up front by the investor  (called loads) or from ongoing fees that are deducted from the fund’s  assets. These fees are called 12b-1 fees after the rule that allows fund  assets to be used to pay for fund marketing and distribution expenses.  NASD, whose rules govern the distribution of fund shares by broker  dealers, limits the annual rate at which 12b-1 fees may be paid to broker- dealers to no more than 0.75 percent of a fund’s average net assets per  year. Funds are allowed to include an additional service fee of up to 0.25  percent of average net assets each year to compensate sales professionals  for providing ongoing services to investors or for maintaining their  accounts. Therefore, 12b-1 fees included in a fund’s total expense ratio are  limited to a maximum of 1 percent per year.
However, broker-dealers, whose extensive distribution networks and large  staffs of financial professionals who work directly with and make  investment recommendations to investors, have increasingly required  mutual funds to make additional payments to their firms beyond the sales  loads and 12b-1 fees. These payments, called revenue sharing payments,  come from the adviser’s profits and may supplement distribution-related  payments from fund assets. According to an article in one trade journal,  revenue sharing payments made by major fund companies to broker- dealers may total as much as $2 billion per year. According to the officials  of a mutual fund research organization, about 80 percent of fund  companies that partner with major broker-dealers make cash revenue  sharing payments. For example, some broker-dealers have narrowed their  offerings of funds or created preferred lists that include the funds of just  six or seven fund companies that then become the funds that receive the  most marketing by these broker-dealers. In order to be selected as one of  the preferred fund families on these lists, the mutual fund adviser often is  required to compensate the broker-dealer firms with revenue sharing  payments.
One of the concerns raised about revenue sharing payments is the effect  on overall fund expenses. A 2001 research organization report on fund  distribution practices noted that the extent to which revenue sharing  might affect other fees that funds charge, such as 12b-1 fees or  management fees, was uncertain. For example, the report noted that it was  not clear whether the increase in revenue sharing payments increased any  fund’s fees, but also noted that by reducing fund adviser profits, revenue  sharing would likely prevent advisers from lowering their fees. In addition,  fund directors normally would not question revenue sharing arrangements  paid from the adviser’s profits. In the course of reviewing advisory  contracts, fund directors consider the adviser’s profits not taking into  account marketing and distribution expenses, which also could prevent  advisers from shifting these costs to the fund.
Revenue sharing payments may also create conflicts of interest between  broker-dealers and their customers. By receiving compensation to  emphasize the marketing of particular funds, broker-dealers and their  sales representatives may have incentives to offer funds for reasons other  than the needs of the investor. For example, revenue sharing arrangements  might unduly focus the attention of broker-dealers on particular mutual  funds, reducing the number of funds considered as part of an investment  decision−potentially leading to inferior investment choices and potentially  reducing fee competition among funds. Finally, concerns have been raised  that revenue sharing arrangements might conflict with securities self- regulatory organization rules requiring that brokers recommend  purchasing a security only after ensuring that the investment is suitable  given the investor’s financial situation and risk profile.
Although revenue sharing payments can create conflicts of interest  between broker-dealers and their clients, the extent to which broker- dealers disclose to their clients that their firms receive such payments  from fund advisers is not clear. Rule 10b-10 under the Securities Exchange  Act of 1934 requires, among other things, that broker-dealers provide  customers with information about third-party compensation that broker- dealers receive in connection with securities transactions. While broker- dealers generally satisfy the 10b-10 requirements by providing customers  with written “confirmations,” the rule does not specifically require broker- dealers to provide the required information about third-party  compensation related to mutual fund purchases in any particular  document. SEC staff told us that they interpret rule 10b-10 to permit  broker-dealers to disclose third-party compensation related to mutual fund  purchases through delivery of a fund prospectus that discusses the  compensation. However, investors would not receive a confirmation and  might not view a prospectus until after purchasing mutual fund shares.
As a result of these concerns, our report recommends that SEC evaluate  ways to provide more information to investors about the revenue sharing  payments that funds make to broker-dealers. Having additional disclosures  made at the time that fund shares are recommended about the  compensation that a broker-dealer receives from fund companies could  provide investors with more complete information to consider when  making their investment decision. This recommendation is consistent with  the requirement in H.R. 2420 that mandates that SEC require mutual funds  to further disclose revenue sharing payments and make annual or more  frequent reports of such payments to fund boards of directors.
section_title: Soft Dollar Arrangements Provide Benefits, but Could Adversely Impact Investors
paragraphs: Soft dollar arrangements allow fund investment advisers to obtain  research and brokerage services that could potentially benefit fund  investors but could also increase investors’ costs. When investment  advisers buy or sell securities for a fund, they may have to pay the broker- dealers that execute these trades a commission using fund assets. In  return for these brokerage commissions, many broker-dealers provide  advisers with a bundle of services, including trade execution, access to  analysts and traders, and research products.
Some industry participants argue that the use of soft dollars benefits  investors in various ways. The research that the fund adviser obtains can  directly benefit a fund’s investors if the adviser uses it to select securities  for purchase or sale by the fund. The prevalence of soft dollar  arrangements also allows specialized, independent research to flourish,  thereby providing money managers a wider choice of investment ideas. As  a result, this research could contribute to better fund performance. The  proliferation of research available as a result of soft dollars might also  have other benefits. For example, an investment adviser official told us  that the research on smaller companies helps create a more efficient  market for such companies’ securities, resulting in greater market liquidity  and lower spreads, which would benefit all investors including those in  mutual funds.
Although the research and brokerage services that fund advisers obtain  through the use of soft dollars could benefit a mutual fund investor, this  practice also could increase investors’ costs and create potential conflicts  of interest that could harm fund investors. For example, soft dollars could  cause investors to pay higher brokerage commissions than they otherwise  would, because advisers might choose broker-dealers on the basis of soft  dollar products and services, not trade execution quality. One academic  study shows that trades executed by broker-dealers that specialize in  providing soft dollar products and services tend to be more expensive than  those executed through other broker-dealers, including full-service broker- dealers. Soft dollar arrangements could also encourage advisers to trade  more in order to pay for more soft dollar products and services.  Overtrading would cause investors to pay more in brokerage commissions  than they otherwise would. These arrangements might also tempt advisers  to “over-consume” research because they are not paying for it directly. In  turn, advisers might have less incentive to negotiate lower commissions,  resulting in investors paying more for trades.
Under the Investment Advisers Act of 1940, advisers must disclose details  of their soft dollar arrangements in Part II of Form ADV, which investment  advisers use to register with SEC and must send to their advisory clients.  However, this form is not provided to the shareholders of a mutual fund,  although the information about the soft dollar practices that the adviser  uses for particular funds are required to be included in the Statement of  Additional Information that funds prepare, which is available to investors  upon request. Specifically, Form ADV requires advisers to describe the  factors considered in selecting brokers and determining the  reasonableness of their commissions. If the value of the products,  research, and services given to the adviser affects the choice of brokers or  the brokerage commission paid, the adviser must also describe the  products, research and services and whether clients might pay  commissions higher than those obtainable from other brokers in return for  those products.
In a series of regulatory examinations performed in 1998, SEC staff found  examples of problems relating to investment advisers’ use of soft dollars,  although far fewer problems were attributable to mutual fund advisers. In  response, SEC staff issued a report that included proposals to address the  potential conflicts created by these arrangements, including  recommending that investment advisers keep better records and disclose  more information about their use of soft dollars. Although the  recommendations could increase the transparency of these arrangements  and help fund directors and investors better evaluate advisers’ use of soft  dollars, SEC has yet to take action on some of these proposed  recommendations.
As a result, our report recommends that SEC evaluate ways to provide  additional information to fund directors and investors on their fund  advisers’ use of soft dollars. SEC relies on disclosure of information as a  primary means of addressing potential conflicts between investors and  financial professionals. However, because SEC has not acted to more fully  address soft dollar-related concerns, investors and mutual fund directors  have less complete and transparent information with which to evaluate the  benefits and potential disadvantages of their fund adviser’s use of soft  dollars. If H.R. 2420 is enacted, investors and fund directors would get  more information to allow them to make these evaluations. Also, the study  that H.R. 2420 would require SEC to conduct of soft dollars would likely  provide SEC with valuable information to allow it to best decide the form  of these disclosures and whether any other changes to soft dollar practices  are warranted.
This concludes my prepared statement and I would be happy to respond to  questions.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.