NEW YORK - The plain English prospectuses that the SEC will require fund companies to use beginning Dec. 1 under the new Form N-1A regulations will be educational and helpful for investors but may expose mutual fund companies to disclosure liabilities.

This was the consensus of attorneys who spoke here last week at a conference on investment management regulation organized by Glasser LegalWorks of New York, a sponsor of legal conferences.

Rewriting a prospectus in plain English carries with it the danger of changing the original meaning, said David Sturms, a partner in the law firm of Vedder, Price & Kammholz of Chicago.

In addition, many fund companies are removing important risk and investment information from the main text of prospectuses and moving it into statements of additional information, said Jay Baris, a partner with Kramer, Levin, Naftalis & Frankel of New York.

"Statements of additional information are becoming a dumping ground of nuclear waste," Baris said. "Disclosing that the information is available in the SAI should give us some protection," but lawsuits could still arise over disclosure questions.

Transferring information from a prospectus's main body into the statement of additional information goes against the "bespeaks caution" doctrine that courts have upheld, Sturms said. That doctrine holds that "the more detailed your description of risk, the less likely a lawsuit will actually go to court," Sturms said. "The bespeaks caution doctrine" enables defendants to get suits dismissed early on and so avoid an expensive judgement or settlement, he said.

Fund companies can protect themselves against lawsuits in this new age of plain English prospectuses by arguing that the practice of "incorporation by reference" should extend to the statement of additional information, Sturms said. If the courts allow this extension, then the bespeaks caution doctrine should also apply to the statement of additional information, he said.

However, there has not been a case making the incorporation by reference argument and, thus, there is a danger that the courts will not accept it, Sturms said.

"A court could conceivably decide to ignore risk disclosure in an SAI. . . under the buried facts doctrine that the risk disclosure in an SAI cannot be read in the overall context of the prospectus because it is obscured or buried in a separate document," Sturms said.

However, a counter-argument a mutual fund company can make to protect itself against risk disclosure litigation is to argue that they are protected by rule 19(a) of the 1933 Act and rule 38(c) of the 1940 Act, said Richard Phillips, a senior partner and head of the securities group at Kirkpatrick & Lockhart of Washington, D.C. These rules protect companies conforming in good faith to SEC regulations from litigation, he said.

For example, an investor could conceivably claim that he was not properly informed about a fund's risk or investment style because that information was not disclosed in the main text of a plain English prospectus but buried in the statement of additional information, Phillips said. A fund company could counter that its prospectus was so designed because it was adhering to the SEC's new plain English rule, and thus, should be protected by rules 19(a) and 38(c) for obeying the SEC, Phillips said.

Fund companies should also note that the new plain English rule only applies to the cover page, general summary and risk return summary, Sturms said. Although some fund companies are re-writing entire prospectuses in plain English, the SEC only requires firms to change these three sections, Sturms said. A fund company may unnecessarily expose itself to disclosure lawsuits by rewriting other prospectus sections in plain English, he said.

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