PALM DESERT, Calif.-Interactive data, books and recordkeeping requirements and 12b-1 fees were a few of the key issues repeatedly discussed at the Investment Company Institute's "Mutual Funds and Investment Management Conference" here last week.
Interactive data, or extensible business reporting language (XBRL) data tagging, is a program that is making headway in the industry. Experts believe XBRL will help investors receive pertinent information about mutual funds.
"I really think we overload investors with information," said Andrew Donohue, director of the division of investment management at the Securities and Exchange Commission.
By data tagging SEC filings and providing abbreviated prospectus profiles online, investors would not have to pour through reams of paper data. The most pertinent information-what they would need when evaluating a fund-would be displayed in regular text. Further information could be accessed through embedded hyperlinks.
Research shows investors have a lack of clarity and understanding when reviewing mutual fund information, Donohue said. "We have a disclosure regime that discloses so much that it is difficult for investors to find the exact information they want. We now have an opportunity to simplify things," he said.
The XBRL program will also require fund companies to submit risk/return summary in interactive format. The risk/return summary is a great starting place, but the SEC plans to tag additional parts of the prospectus, as well, Donohue noted.
The power of data tagging is extraordinary, said Alan Dynner, vice president and chief legal officer at Eaton Vance Management. In the future, as the program advances, "we will look back and see how rudimentary everything was a few years ago."
Jack Murphy, a partner with Dechert, questioned what would happen if a fund tagged data, but the technology failed and the link didn't work. Currently, tagging is voluntary and funds have no liability if tags do not work, Donohue responded, adding that the issue of making sure hyperlinks work would be a key issue going forward.
Conference speakers also discussed the proposal for a prospectus profile, or a shorter, two-page fund summary, as well as its potential liabilities.
"It is important to stick to the two-page maximum, although some people have been trying to pull the line on that," said Donohue, who hopes that in the future, the two-page prospectus will be made available to 401(k) investors. Cooperation between the Department of Labor and the SEC on this point will be critical going forward, he said.
If the two-page prospectus is sent to investors, the rest of the document could be available online for investors to view. However, that raises concerns about Americans who do not have Internet access, speakers pointed out.
Dynner said the SEC should pass a standard rule that protects funds and boards that mail investors only a prospectus profile, so that they do not have to seek an SEC staff comment letter or interpretative guidance granting individual exceptions. Donohue remarked that the current thinking at the Commission is that mailing prospectus profiles in lieu of full prospectuses will eventually become a rule.
Donohue also commented that the document could be updated quarterly even though prospectuses are usually only updated annually. Panelists voiced concerns that the procedure could get very costly if that happens.
"We are all supportive of the initiative and are hoping that it will expand to other investment products," said Elizabeth Krentzman, general counsel for the ICI.
However, the liability issue will be critical, as lawyers now put in a lot of information that they think is necessary to protect them from lawsuits, she said.
Donohue reiterated throughout the conference that 12b-1 fees are a high priority for the SEC this year and that the Commission will revisit their relevancy and give guidance to fund boards in their assessment of them. "We recognize the need that something needs to be fixed, but there are a lot of views on what that fix is," he said.
It is important to reach out to directors and hear from counsel on their opinions on what can be done to make 12b-1 fees more effective, Donohue added.
Another area that the SEC will focus on this year is the books and recordkeeping rule. The requirements are clearly out of date, and there is not a lot of clear guidance on what the requirements should be, panelists agreed.
Dynner stated that a number of funds maintain an influx of documents because "we are all overwhelmed and afraid if we throw anything out it will come back to haunt us."
The SEC staff is meeting with fund executives and looking into what records should be kept and how long and where, Donohue said. Additionally, the industry's and the SEC's expectations of maintaining materials are not aligned, Donohue said. The staff is reviewing what format documents should be submitted in and if a document is electronic, whether it needs to be printed out for SEC review, he said.
"The world of e-mail and instant messaging still has not been worked out, and e-mail challenges have not been grasped," said Emily Gordy, senior vice president of regional enforcement at the NASD.
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