Yesterday the SEC turned down a request from the Investment Company Institute (ICI) to regulate folio products as mutual funds. Sponsors of folios--which are ready-made baskets of stocks individually owned by investors--operate as broker/dealers. For now, the SEC says that status quo will remain.
That’s the correct move. Folios aren’t even close to being funds, and folio platforms will likely become more popular among advisers. We don’t need regulatory turf battles impeding on an innovative new service.
The mutual fund trade group, of course, sees folios as competition to the less efficient and more expensive pooled fund. (If you can’t beat ’em, sic the regulators on ’em?)
One problem with folios, according to the ICI, is that folios don’t have the disclosure requirements funds do. ICI President Matt Fink harped on this very point last March at an industry conference. “All investors should receive full and fair disclosure,” he said.
That hypothetical disclosure problem is not a real concern. Call it for what it is--a mutual fund hypo-crisy.
Because while the fund industry snipes at folios for potentially weak disclosure requirements, the ICI is at the same time urging the SEC not to make funds disclose the payola they fork over to brokerages firms for shelf space (http://industryclick.com/magazinearticle.asp?magazineid=156&releaseid=6196&magazinearticleid=99652&siteid=16). In fact, the ICI wants to kill a current NASD rule requiring detailed disclosure. (That NASD rule is not now being followed anyway.)
This is the payola you never see and you never share in. Your clients pay for it indirectly. These payments, if you could see them, would help explain why some wholesalers get in the door and others don’t, why certain products might be subtly pushed over others.
Meanwhile, the SEC has been reviewing its policy on how these so-called revenue-sharing deals should be disclosed (http://industryclick.com/magazinearticle.asp?magazineid=156&releaseid=4408&magazinearticleid=49273&siteid=16.)
There may be nothing wrong with firms “renting their distribution systems” (yeah, they really talk that way). But the payola has to see the light of day. Yes, of course, firms don’t want their individually negotiated deals disclosed. Too bad. The laws and rules say otherwise.
Before it attacks a new competitor over a potential lack of disclosure, the fund industry should first address its own very real failings in that regard.
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