After the market timing and late trading investigations of certain mutual fund complexes by Federal and state regulators, the SEC initiated a series of rulemakings to address several outstanding issues.
In January 2004, the SEC proposed a new rule to create a code of ethics for registered investment advisers. The code of ethics for each investment adviser would set forth standards of conduct expected of advisory personnel, safeguard material nonpublic information about client transactions, and address conflicts that arise from personal trading by advisory personnel. This proposed rule was finalized by the SEC in July 2004.
In February 2004, the SEC issued a proposed rule to prohibit mutual funds from paying for the distribution of their shares with portfolio brokerage commissions. Mutual funds buy and sell large amounts of securities for their portfolios and, for many years, it was a common practice for fund advisers to use commissions to reward broker-dealers for promoting and selling shares of the funds they manage. Using brokerage commissions in this manner creates a significant conflict of interest and the rule would end this practice. This rule was finalized by the SEC in September 2004.
In February 2004, the SEC issued a proposed rule to improve the disclosure provided by mutual funds about how their boards of directors evaluate and approve--and recommend shareholder approval of--investment advisory contracts. This SEC proposal would require a mutual fund to provide disclosure in its reports to shareholders regarding the material factors and the conclusions with respect to those factors that formed the basis for the board's approval of advisory contracts. The SEC rule on this issue was finalized in June 2004.
In March 2004, the SEC issued a proposed rule to improve the disclosure provided by mutual funds regarding their portfolio managers. The proposed rule would extend the existing requirement that a mutual fund provide basic information in its prospectus about its portfolio managers to include the members of management teams. The proposed rule also would require a mutual fund to disclose additional information about its portfolio managers, including other accounts they manage, compensation structure, and ownership of securities in accounts they manage. This SEC rule was finalized in August 2004.