Mutual fund companies have until December 1999 to create simplified prospectuses so they and the SEC's Division of Investment Management have their hands full with that task until at least then.

But the mutual fund industry should start thinking about simplified annual reports, even though they currently are at the bottom of the SEC's "To Do" list, according to Dorothy John, a consultant on shareholder communications for the mutual fund industry. John predicts that simplified annual reports could receive approval within the next two years.

Annual reports are required twice a year and the SEC's Division of Investment Management is contemplating requiring simplified versions of them.

"We will take a hard look at shareholder reports," said Paul Roye, director of the SEC division, in December 1998. "In my view, this potentially effective tool for communicating with shareholders is too often left unused or underutilized."

But, annual reports will not be high on the SEC's agenda until after simplified prospectuses are taken care of, said an SEC spokesperson. Also, issues concerning independent directors come before simplified annual reports on the SEC's priority list, the spokesperson said.

The most likely changes would include the combining of the Statement of Operations and the Statement of Changes in Net Assets sections and the reduction of how much needs to be reported in the Portfolio of Investments section. A fund company might, for instance, be required to only list a fund's top 50 holdings instead of the entire portfolio. Not only would such a change have ramifications for investors, but it could have significant implications for financial printers and the mutual funds which pay for their services. Fund companies might prefer simplified annual reports because they will mean cheaper printing costs and less time spent preparing the documents.

But it would mean a blow to financial printers.

"It's going to take a bite out of their business," John said. She could not estimate how much. The average annual report is between 12 and 60 pages, John said.

In a letter to the SEC in August of last year, the Investment Company Institute said it supported the SEC's tackling the simplified annual report.

"We encourage the Commission to undertake such an initiative as soon as possible. In doing so, the Commission should strive to achieve the same goals of making shareholder reports more comprehensible, informative and useful to the average investor that it sought to achieve in amending the requirements for fund prospectuses and permitting the use of fund profiles," the ICI wrote.

Fund profiles are the shortened versions of a fund's prospectus that the SEC approved for use last summer. Their use is optional.

Reduction of portfolio disclosure is among the recommendations the American Institute of Certified Public Accountants has made to the SEC on changes to annual reports. The ICI supports that recommendation, according to its letter to the SEC.

"The current requirement to disclose all fund investments generally is not helpful to most investors. Listing a minimum of a fund's top 50 holdings would enable an investor to focus on the fund's principal holdings in evaluating the fund's risk profile and investment strategy," the ICI said.

The ICI also recommends that money market funds be exempt from the requirement to disclose portfolio holdings. It also urges that annual reports be required to include graphics that would break down a fund's investments by category.

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