The Absurd Fight Over Fund Documents You Probably Don’t Read
(Bloomberg) -- Like many Americans, Ken Winterhalter wants the financial industry to pay for its past recklessness. His favored punishment, however, isn’t jail time for CEOs or bigger corporate fines.
Instead, the president of Twin Rivers Paper Co. has zeroed in on something a bit closer to home: stopping a U.S. Securities and Exchange Commission plan that would spur more investors to get mutual fund reports online.
“After the nightmare of the meltdown in 2007 where millions of shareholders watched their holdings evaporate, Wall Street must remain accountable with paper statements and printed information,” Winterhalter wrote to the agency after it made the proposal last year.
Winterhalter’s Madawaska, Maine, company, which manufactures McDonald’s french fry bags, prescription drug inserts and, yes, a thin paper used for mutual fund documents, doesn’t typically wade into financial regulation. Yet, its campaign has won support from lawmakers and has been embraced by an unusual collection of allies, including postal workers’ unions, AARP and consumer groups.
The effort has put mutual funds on the defensive, forcing them to plead their case for the change to SEC commissioners and buy advertisements touting the plan’s environmental benefits. Costs for printing and mailing are borne by investors. Going digital would save them some $200 million annually and preserve millions of trees, the fund companies say.
Few thought the SEC’s electronic delivery push, part of a broader proposal to modernize fund regulations, would be controversial. The battle has been both bizarre and bruising, with the two sides trading accusations of hidden agendas and creative use of statistics while squabbling over issues such as whether elderly people can input a lengthy web address. SEC Chair Mary Jo White has yet to schedule a vote on a final rule.
Most of the SEC’s disclosure requirements were issued long before people started using smartphones, or even e-mail. While investors and businesses generally agree that the agency should move faster into the digital age, the dust-up over the mutual fund documents is a cautionary tale of how difficult that can be.
“Why are we having a debate about whether we should be sending reports out on paper?” said Tom Quaadman, senior vice president at the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, which supports the digital proposal. “If you sit down and think about this for a few minutes, there are radical changes coming in the next five years.”
The SEC’s move is more like a tiny first step, covering one type of document known as a shareholder report. Currently, investors get them in paper form unless they opt for digital-only. The reports, which are sent twice a year, contain information on the fund’s holdings, performance and expenses, but they are also filled with fine-print legalese and marketing pitches. The proposed rule would simply allow a fund company to change the default delivery option to electronic.
The measure doesn’t cover other fund mailings, such as prospectuses or customers’ statements, and it still requires fund companies to mail a notice giving the web address where information can be found online. The note would also have a toll-free phone number that investors could call and elect to permanently get paper delivery.
The dispute has caused both sides to make some uncustomary arguments. While the paper industry is touting the value of dense financial information, fund companies are downplaying the importance of their own reports.
According to an American Forest & Paper Association letter last year to the SEC, the reports “are critical information upon which millions of Americans depend to make sound investment decisions.”
The Investment Company Institute, the funds’ trade group, countered that the documents can be as long as 651 pages. “While they contain important information, many shareholders likely find the contents and length of these reports quite daunting,” the ICI told the agency in March.
The SEC should keep in mind “the business opportunity they represent for paper purveyors,” the association said.
Paper companies and their supporters say they are mobilizing against the measure because it could set a government-wide precedent, marking the first time a regulator would allow people to be switched out of a paper option without their express consent.
“This development raised a red flag to us,” said Mark Pitts, executive director of printing-writing and pulp at the American Forest & Paper Association.
The group has contacted members of Congress and is also lobbying through a coalition called Consumers for Paper Options, Pitts said. It includes interested parties like the Envelope Manufacturers Association and the National Association of Letter Carriers, as well as Consumer Action, a non-profit that advocates for low- and moderate-income people on financial issues.
While the industry doesn’t hide its commercial interests, it tends to highlight the pro-consumer message.
“It is a business issue, yes, but it is a humanistic issue, too,” Twin Rivers’s Winterhalter said in an interview, noting that manufacturing the paper used for mutual fund reports is a small part of the company’s business. “It is key to us to protect the elderly” and others who may have trouble accessing information online.
The lobbying has been successful. More than a dozen lawmakers from both parties have weighed in with SEC Chair White against the provision. Among the most vocal have been Maine’s two senators, Republican Susan Collins and Angus King, an independent, and Republican Representative Bruce Poliquin, whose district includes Twin Rivers.
Usually a reliable friend of the fund industry, Poliquin has come out strongly against the rule proposal. He noted at a House Financial Services Committee hearing in May that Twin Rivers is a “thriving employer” in northern Maine, and he arranged for the chief financial officer of Blue Wolf Capital Partners, a private equity firm that owns the paper company, to testify.
Poliquin didn’t stop there. He tried to attach an amendment to a spending bill that would have de-funded the SEC’s rule. Collins got a similar measure approved by the appropriations committee in the Senate.
The effort sent mutual fund lobbyists into overdrive.
The ICI, in a memo to members, said it conducted “numerous meetings and calls” and sent e-mails to all House members and key staff urging them to oppose Poliquin’s legislation. The association took out an advertisement in Roll Call, a Capitol Hill newspaper, displaying several tall stacks of paper, noting that the SEC rule would save shareholders about $2 billion over a decade while preserving 2 million trees each year.
In early July, Poliquin backed down and didn’t introduce the amendment. His spokesman said he would continue to closely monitor the rulemaking process.
Agency disclosures show that fund companies also have been making their case in person at the SEC offices of Chair White and Commissioners Michael Piwowar and Kara Stein, who will vote on the final plan.
The visitors included officials from the ICI, BlackRock Inc., Vanguard Group Inc., T. Rowe Price Group Inc., MFS Investment Management and Capital Group Companies Inc., which owns American Funds, according to the disclosures.
Tensions between the two sides were on display at a July 14 meeting of an SEC investor advisory committee in Washington, where arguments emerged over issues like the length of web addresses and whether investors’ home printing costs would rise if the reports were delivered online.
At one point, David Blass, ICI’s general counsel, told the panel that the association had Googled a number of people who sent the SEC comments panning the rule and found they failed to disclose that they worked in the paper industry.
The advisory committee, which helps the SEC set regulatory priorities, was also split on the issue.
“I don’t see any reason why the SEC should have spent penny one of federal money thinking about this,” said Damon Silvers, director of policy for the AFL-CIO, adding that the mutual fund lobby’s estimated $200 million annual savings was insignificant when spread out across all investors.
By his calculation, Silvers said a person with $30,000 in a 401(k) would only save 45 cents per year. That’s not enough money, he said, to risk depriving investors of information they might want.
Fellow committee member Susan Wyderko, who runs an association for independent mutual fund directors, backed the electronic delivery proposal.
“The money for this comes from the shareholders’ pockets and a lot of shareholders just don’t read this stuff,” she said. “They put it in the trash.”
As the debate rages on, some who have studied financial disclosure say the electronic delivery fight is overshadowing a more important problem -- few people understand what they are reading anyway. All sides may be missing the forest for the trees, so to speak.
“The paper costs are second order to the bigger issue,” said Michael Barr, a former Treasury Department official who is a professor at University of Michigan Law School. “How do we make these disclosures easier for human beings?”