18 August 2004 Legal news, law news, law firm news & research at LAWFUEL Today the Commission is considering whether to adopt amendments to Rule 12b-1 under the Investment Company Act of 1940 that would prohibit mutual fund advisers from directing fund portfolio brokerage transactions to broker-dealers in order to compensate them for promoting the sale of fund shares. The amendments would prohibit selling considerations from entering into decisions of how best to effect transactions in fund portfolio securities. The rule is designed to eliminate a serious conflict of interest between funds and their advisers that can, among other things, compromise the best execution of portfolio transactions.
The rule amendments the Commission is considering would
• prohibit funds from compensating a broker-dealer for promoting or selling fund shares by directing brokerage transactions to that broker-dealer;
• prohibit “step-out” and similar arrangements designed to compensate selling brokers by directing to them commissions from portfolio securities transactions executed by other broker-dealers.
The rule would recognize that many funds will need to use a selling broker to effect portfolio securities transactions in order to obtain best execution of the transactions. Therefore, the rule would permit a fund to use its selling broker to execute transactions in portfolio securities if the fund or its adviser has adopted, and the fund’s board of directors (including its independent directors) has approved, policies and procedures reasonably designed to prevent:
• the persons who select executing brokers from taking into account brokers’ distribution efforts; and
• any agreement under which the fund is expected to direct brokerage commissions for distribution.
The Commission had requested comment on whether it should make additional amendments to rule 12b-1, and will consider whether to defer consideration of such amendments to a later date.
2. Disclosure Regarding Portfolio Managers of Registered Management Investment Companies
The Commission will consider whether to adopt amendments to its forms that are designed to improve the disclosure that mutual funds and other registered management investment companies provide about their portfolio managers. These amendments are intended to provide greater transparency regarding portfolio managers, their incentives in managing a fund, and the potential conflicts of interest that may arise when they also manage other investment vehicles.
The amendments that the Commission will consider include the following.
• Identification of Portfolio Management Team Members. The amendments would extend the existing requirement that a fund provide basic information in its prospectus regarding its portfolio managers to include the members of management teams. A fund would be required to state the name, title, length of service, and business experience of each member of a portfolio management team, and to provide a brief description of each member’s role on the management team.
• Disclosure Regarding Other Accounts Managed and Potential Conflicts of Interest. The amendments would require a fund to provide disclosure in its Statement of Additional Information (SAI) regarding other accounts managed by the fund’s portfolio manager (e.g., hedge funds or pension plans), including the number of such accounts and the total assets in the accounts. In addition, the amendments would require a fund to describe any material conflicts of interest that may arise in connection with the portfolio manager’s simultaneous management of the fund and other accounts.
• Disclosure of Portfolio Manager Compensation Structure. The amendments would require a fund to describe in its SAI the structure of, and the method used to determine, the compensation of its portfolio managers.
• Disclosure of Fund Securities Ownership. The amendments would require a fund to disclose in its SAI information regarding shares of the fund owned by its portfolio managers.
