Fund Disclosure: Too Much or Not Enough?

Perhaps the only thing that people can agree on is that mutual fund disclosures need to change, and that's just what the Securities and Exchange Commission is hoping to accomplish. During this crucial time, many within the industry argue that investors are being bombarded with too much information, while others say that it is too risky to pare down the documents, Dow Jones Newswires reports.

Mercer Bullard, founder and president of Fund Democracy, said that much of the information currently included in prospectuses is irrelevant to helping investors select a mutual fund for investing.

"There is broad agreement even at the [SEC] that prospectuses have too much information1/4to be useful," Bullard said. Investors should assume that the fund is priced correctly and don't need to know the company's trading policy, he added. "We're not communicating to investors1/4we're really dumping data in their laps."

The Investment Company Institute advocates moving much of the current disclosure information to the Internet. During its general membership meeting, ICI officials stated that this would save investors from the data-filled, 45-page prospectuses that are unlikely to be read.

Furthermore, a glut of regulation could scare off investment managers who will gravitate to the path of least regulatory resistance, ICI President Paul Schott Stevens said.

"If [increased regulatory requirements] discourage portfolio managers from managing mutual funds versus other investment products, if they cause intermediaries to favor less-regulated financial products over mutual funds, then the SEC's regulatory regime is not effectively serving the interests of investors," Stevens said.

Critics, however, argue that the industry's focus on confusion is an obfuscation that could truly harm investors.

"It's one of those things where I don't know whether to laugh or cry," said Roy Weitz, publisher of FundAlarm.com and industry skeptic. "In this environment, it's dangerous to start picking and choosing information."

It's more important for the information to be available than rely on the industry to decide what to print, Weitz said. The media and analysts are able to sort through the information and draw their own conclusions. Furthermore, the industry should not rely on the Internet when fund investors do not universally have access.

The industry should only consider streamlining after it is able to provide adequate information for a few years, Weitz added.

The lack of an organized advocacy group for fund investors means that it is too risky to leave investors uninformed, said Larry Barton, president and CEO of The American College. "The reality is when companies are selective about disclosure, investors pay the price."

Bullard suggested that a middle ground would be to more heavily rely on profile documents, which provide a synopsis of a fund. While this abbreviated form of communication may be appealing to investors, it does raise questions with the legal staff at funds over liability risks.

Although this type of information can be valuable for investors, providing this type of document without the companion prospectus represents another way to circumvent disclosure, Barton said.