In a widely anticipated move last week, the Securities and Exchange Commission unanimously approved a requirement for mutual funds to send investors a short-form, summary prospectus.
"The summary prospectus will quickly give investors a basic understanding of the fund and will permit them to compare one fund to another," said SEC Chairman Christopher Cox. "Investors will also have access to more searchable information about mutual funds on the Internet-an important improvement in their ability to comparison shop."
The new rule, which applies to funds' fiscal years beginning Feb. 28 and becomes final at the end of 2010, requires funds to send investors a concise document containing key information in plain English, while referring them to a full statutory prospectus available online or by mail upon request.
In a few brief pages, the summary prospectus will contain key information about a fund's investment objectives, strategies, risks and costs, all located at the front of the statutory prospectus. The summary will also include information regarding investment advisers, portfolio managers, purchase and sale procedures, tax consequences and compensation for financial intermediaries.
"Many investors often find current fund prospectuses to be lengthy, legalistic and confusing," said Andrew J. Donohue, director of the SEC's Division of Investment Management. "This mutual fund disclosure framework will provide information that is easier to use and more readily accessible, while retaining the comprehensive quality of the mutual fund information available today." Cox said the majority of investors find the current prospectuses to be too complicated and difficult to understand, and typically toss them into the trash without reading them.
"It's all well and good to say that the information is all there, if you just dig around for it," he said, "but we haven't really achieved the goal of full disclosure if the information is not provided in a way that's clearly understandable to the investors for whom it is intended.
"The entire purpose of disclosure is defeated" if investors can't understand the information, he added.
Under the new requirement, the summary prospectus will provide the basic information and include a web address where investors can find the complete prospectus available for free online or by mail upon request. The online version must be able to be printed and/or saved.
"Everyone who wants to drill down into the details will have the opportunity to do so" on the Internet, Cox said, and online information should be available in a layered format, allowing "every investor to obtain the level of detail he or she wants."
In 1995, a similar proposal was rejected by the industry because not enough people had access to the Internet, and legal experts worried about disclosure laws.
Computers and Internet access weren't nearly as common 13 years ago as they are today, and it was thought that making information available online wouldn't necessarily reach every investor.
"Technology now provides the critical component that was missing from the SEC's earlier effort," said Commissioner Troy Paredes. Secondly, there was little incentive to use the shortened profiles in the past. The previous version of the short-form rule required funds to continue to mail the full version, which most funds regarded as doubling their workload.
Earlier efforts at a short form were also stymied by a fear that funds could be sued for withholding information if they sentinvestors anything other than the full, statutory prospectus.
Under the new rule, funds can continue to mail investors a full prospectus, but a clear referral to the complete information online should satisfy legal concerns, according to the SEC's Associate Director Susan Nash.
In addition to several public comment periods that garnered more than 155 comments, the SEC's Office of Investor Education and Advocacy did a telephone survey of average investors and held several focus groups in various cities to see how the proposal would appeal to people who aren't financial experts.
Some key changes came out of the survey and public comments, such as the elimination of the requirement to list the top 10 holdings in the summary, which the SEC found wouldn't be useful for funds that have their assets spread over a large number of stocks. Fund companies also resisted that requirement, saying the data would be stale by the time it was published.
The rule has been met with widespread support from the mutual fund industry for its practical approach and potential savings in postage and printing costs.
"The Investment Company Institute welcomes the summary prospectus-a clear, concise document that investors are more likely to use and, therefore, benefit from than the long-form statutory prospectus," said ICI President and CEO Paul Schott Stevens. "Funds can take advantage of this option to provide investors with the information they want and need most, while giving them more detailed disclosure on the Internet or on paper by request."
"This is a watershed event for the country," said Len Driscoll, vice president of product marketing at NewRiver. "This vote is the largest change to investor disclosure since the SEC was formed."
Driscoll said NewRiver is "uniquely positioned in the industry," and has been offering a summary prospectus product for 10 years. "We've done essentially what the SEC adopted today."
A recent study by Forrester Research found that a shortened prospectus rule will save the mutual fund industry more than $300 million a year in delivery costs alone. In addition, the industry will see tremendous savings in printing costs, and Driscoll predicts there will be a dramatic shift to print-on-demand and electronic delivery methods.
The Department of Labor is considering adopting a similar summary prospectus requirement for 401(k) plans.
"The Department of Labor has a longstanding relationship with SEC to share information on retirement and investment issues," said Bradford P. Campbell, assistant secretary of labor for the Employee Benefits Security Administration. "The SEC's action is consistent with the pending regulations from the Department of Labor to provide 401(k) participants with concise, user-friendly information that allows them to easily compare a wide range of investments available through their 401(k) plans."
"This new format for mutual fund disclosure is a giant step forward for investors, and it's an important complement to the Commission's other initiatives to get mutual fund information available online in interactive data format," Cox said. "Today's rulemaking will also support the transition of the SEC from an agency that requires document-format disclosure to one that requires data-format disclosure."
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