Capital markets work best when participants have the most accurate information possible.
Economic efficiency suffers when some people in a market can deliberately misinform other people. It makes us all poorer. That is why Congress should pass a strong Truth-in-Mutual Funds law similar to the Truth-in-Lending law passed in 1968.
Recent months have provided ample evidence that unclear and even deceptive reporting of fund fees and trading practices is confusing the public. Bad information results in households making less productive investments than they would if they had accurate, understandable information. It means we waste more resources on fund administration than we would if uniform fee disclosures put high-cost firms under greater competitive pressure.
The situation is analogous to one that existed in consumer lending before 1968. Lenders used a variety of dodges to make it appear that interest rates charged were lower than they really were and concealed non-interest loan fees that raised the true cost of credit.
In many cases, there was no specific intent to deceive or cheat. Some lenders merely used the practices and forms that had become common in the industry. Their customers realized they were paying a higher rate of interest than that nominally specified in the promissory note. Many also realized they were paying additional fees that increased the true cost of the credit obtained.
Many other borrowers, however, were confused by existing lending practices. Truly abusive lenders could get away with outright deception of the particularly uneducated or vulnerable. Eventually, Congress enacted Truth-in-Lending to address the problem.
Mutual funds today are riddled with even more misleading and fraudulent disclosure practices than was consumer lending a generation ago. For evidence, scan the business section of this newspaper or the Wall Street Journal over the past two months. Pioneer Press columnist Gail MarksJarvis has written an excellent series of columns detailing how mutual fund operators deliberately hide actual fees in various ways.
Independent finance experts agree that devising a uniform set of fee and performance reporting standards for mutual funds is not difficult and that such standards could be implemented at little cost to firms or their customers.
MarksJarvis recently noted, “The SEC has debated proposals for years that would require fund companies to report fees more clearly and simply for investors. The fund industry has balked.”
The lending industry similarly balked for years at uniform disclosure requirements. It argued that the costs of complying with Truth-in-Lending would be large and would drive up the cost of credit. This simply was not the case once it came into force.
Congress had the good sense to override such special interest lobbying in 1968, and it should do so again.
In an election season, members of Congress are particularly sensitive to voter complaints. Send a sharp letter to your senators and representative today. You will help yourself and U.S. society as a whole.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.