Dr. William Lutz has decided to take a break from poring over mutual fund prospectuses. He figures he deserves one.
For six years he served as a consultant to the Securities and Exchange Commission on its Plain English Handbook. He has also advised numerous fund companies on how to comply with the commission's Plain English regulations.
Over that time, he has found the experience of trying to put prospectuses into understandable language a worthy challenge. Even so, sometimes he has found the work, "mind-numbingly boring and dull."
"I've done it probably long enough," Lutz says. "I see no new challenges in doing it. Fortunately, I have the luxury of being able to move on to something else."
Lutz, 58, an English professor at Rutgers University's Camden campus, took on the task with the right credentials. He was editor of the Quarterly Review of Doublespeak- a journal devoted to exposing faulty communication- for 14 years and has written or co-authored 14 books on language. His fifteenth book is due to be published soon.
He became familiar with mutual funds just before the SEC's Plain English project was developed in late 1994. A year earlier, a Dreyfus employee requested Lutz's help in re-writing a bond fund prospectus. Lutz revised the prospectus, but the document was never used. "Dreyfus got bought out shortly after I finished it and in that change-over the project died," Lutz said.
"Years later I met someone from Dreyfus at an ICI conference, and I told him, you have a Plain English bond fund prospectus somewhere in your files that wasn't used,'" Lutz said. "Had they made use of it, they would have been very much ahead of the times."
For the SEC, Lutz worked on the 77-page Plain English Handbook - mutual fund companies' guidebook for producing Plain English prospectuses - mostly on an unpaid basis. He has collected fees for his private work with mutual fund companies, however.
From the beginning, Lutz insisted that the handbook help companies execute the SEC's instructions. To that end, Lutz illustrated "before-and-after" examples of sentences that were used in actual prospectuses.
"One of the things I did was show companies it could be done," Lutz said, "I wanted to communicate to the SEC that they should not simply order them [mutual funds] to do something but show them how to do it."
During the period when the SEC was developing its Plain English regulations, it conducted a pilot project for which fund companies were invited to bring in prospectuses to be rewritten. Lutz worked on the project, and during that time he discovered some of the main problem areas of the prospectuses.
One area of concern was the risk section in which mutual fund companies are supposed to describe the risks of investing in their funds. But, risk is a complex concept and in the past, "the sections on risk didn't clearly communicate the nature of the risk or the extent of the risk," he said.
Another problem for companies was in defining complex financial instruments in language the average person could understand.
"Some of the instruments a fund will invest in can get very complicated," Lutz said. "For instance, collateralized mortgage obligations.' To describe those in plain English can be pretty difficult."
Lutz said he once found a sentence which dealt with a fund's investment policies that was 436 words long. Towards the end of the sentence, when a reader might justifiably be anticipating the end, came the phrase, "provided, however" which was followed by another section of material that qualified what came before.
"That meant you had to go back and read the sentence again in order to understand everything," Lutz said. "It wasn't hard to find sentences like that."
"The first question has to be: what is it you are trying to say here?'" when writing a prospectus, Lutz said. He frequently found himself saying that he did not know what phrases and sentences meant when he met with fund company personnel to review their prospectuses.
"It was not uncommon for them to answer, we're not sure what it means either,' or, we don't know why that should be there,'" Lutz said.
A major contributor to the problem of poorly-written prospectuses is that fact that historically, they have had to be re-filed each year, Lutz said. Frequently, to make the necessary revisions, committees would simply make additions to prospectuses if there were any questions raised about a previous year's document.
"They just kept adding and adding and adding," over five or ten years, said Lutz.
"In the rewriting now, we find a lot of outdated information that can be dumped," he said. "It's filtering out the chaff."
Once he sat down with a fund's portfolio manager to show him what the prospectus said the fund's investments were, Lutz said. Soon the manager was ticking off what had to go.
"He said things like, No, I don't invest in that anymore', or no, we don't invest in that -- never did,'" Lutz said. "We took about four to six pages and reduced it to two pages, in larger type. You can imagine how much we stripped out."
A key to being successful in drafting an understandable prospectus is to get "all the constituencies" of a fund involved in the process, Lutz said. That means finding out what fund managers, office staff, brokers and wholesalers think is the most essential information in the prospectus.
Even the mailroom should be consulted. Lutz said he had heard of one fund company which printed about 500,000 copies of a prospectus. Unfortunately, the document did not fit the firm's envelopes or its mailing machine.
A major problem mutual funds have with the Plain English regulation is that they have to make judgements as to whether information should be included and what wording to use, Lutz said.
"It seems to me that that's their job," he said, "but it seems that funds would rather be told a formula to follow."
"It can be done, it just takes work to do it and it takes knowledge." Lutz said.