Mutual Fund Symposium Addresses Current Issues

Portfolio Disclosure, Window Dressing and Portfolio Pumping Addressed

By John M. Baker, Esq.

Fund Democracy held its Toward Truth in Mutual Fund Investing Symposium on October 12 in Washington, D.C. The symposium covered the pending rulemaking petitions for more frequent and more thorough fund portfolio disclosure; the practices of window dressing and portfolio pumping; and the pending SEC rule proposal to require investment companies to invest at least 80% of their assets in the types of investments suggested by their names.

Fund Democracy made no pretense of balancing the panel; every member, other than Paul Roye (Director of the SEC’s Division of Investment Management), supported its positions down the line. Fund Portfolio Disclosure Fund Democracy and a surprisingly long list of other organizations have submitted rulemaking petitions to the SEC, seeking to require mutual funds to disclose their portfolio holdings more frequently than the current semiannual requirement.

One panelist, Morningstar CEO Don Phillips, stated that about 70% of all funds already provide Morningstar with holdings on a quarterly basis, and he asserted that holdings information is also available to large investors – statements in which Paul Roye took great interest. Roye indicated that the SEC is generally looking at funds’ disclosure requirements; the staff apparently is considering whether shareholder reports should include more graphs and charts, and whether shareholders really want full portfolio lists in the reports.

The SEC has concluded that it does not have statutory authority to require shareholder statements more frequently than semiannually (which the petitions have not requested), but that it probably could require more frequent EDGAR disclosures. The SEC review will factor in the needs of larger funds, which cannot move in and out of positions as quickly as smaller funds, and the apparent fact that this issue is not particularly high on investors’ radar screens.

Window Dressing and Portfolio Pumping Research by panelist David Musto, Assistant Professor of Finance at The Wharton School, indicates that stocks tend to go up in price on the last trading day of each quarter, dropping the next trading day. He believes this is because of window dressing, the alleged practice of funds and others to have more desirable assets appear in their statements of portfolio holdings. Related to this is the alleged practice of portfolio pumping, the acquisition of assets that are about to rise in value at the end of the quarter (increasing advertised returns and portfolio manager bonuses), even though the gain will be lost the next business day.

According to Fund Democracy’s Mercer Bullard, the SEC has established a task force to look specifically at window dressing and portfolio pumping. Paul Roye stated that window dressing and portfolio pumping are issues that should be on the radar screens of fund directors and compliance managers.

Investment Company Names The SEC in 1997 proposed a rule that generally would require some funds to invest at least 80% of their assets as suggested by their names; present SEC staff positions require only a 65% threshold. Release No. IC-22530, 62 Fed. Reg. 10,955 (Feb. 27, 1997). Paul Roye stated that, although this rule has for some time been in a secondary position to higher-profile rules, he now anticipates that the proposal will be moving to the Commission by the end of the year. His recommendation will be to adopt the rule, not to repropose it, and to apply the proposed 80% threshold.

The 95-minute symposium has been archived and is available from Fund Democracy’s web site for a 30-day period, at

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.