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. 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.