The Internet could allow mutual funds to disclose to investors all the information that they have the right to, only, but on a need-to-know basis - and that might just be what investors want most, a panel of experts told Federal regulators during a roundtable discussion hosted last week at the Securities and Exchange Commission's Washington headquarters.
Putting abbreviated disclosure forms online, with links to deeper levels of data for those who seek it, could be good news for fund companies and analysts, too.
"The prospectus of old has become a roadblock for investors on today's superhighway," said Henry H. Hopkins, vice president and chief counsel for Baltimore-based T. Rowe Price.
That's because investors who dive into these mandated disclosure documents hoping to become better educated, too often instead end up drowning in data.
"There is a vast array of information in the public domain about mutual funds, but we need to take action to make Federally mandated disclosures more useful," said Elisse Walter, senior executive vice president of regulatory policy and programs at NASD. Currently, disclosure documents are designed, "not to protect the investors but to protect the issuers and intermediaries from liability," she said.
What investors need are shorter, one-page summary documents modeled after the profile prospectuses debuted a few years ago, without the long, jargon-filled passages, panelists agreed.
"Investors must be able to digest, comprehend and retain this information," Walter said.
The fact that many of America's 90 million mutual fund investors pay for one-page summaries from companies like Chicago-based fund tracker Morningstar demonstrates investor demand for concise guidance, with a uniform format, said Paul Haaga, Jr., executive vice president of Los Angeles-based Capital Research and Management Co.
Today's disclosures, often written in dense legalese, are too daunting to decipher, said Barbara Roper, director of investor protection at the Consumer Federation of America in Washington. In fact, the organization released a study last week on what investors claim is important to them when selecting a fund. Based on the information available to them, the funds they actually choose to invest in are very much at odds with what they believe is essential in making that choice.
"We must make it as easy as possible to get the information they really need and to understand the information they get," Roper said.
That's where the power of the Internet and eXtensible Business Reporting Language (XBRL) can help.
SEC Chairman Christopher Cox has pegged mutual fund disclosure as the next frontier for this electronic tagging program. For the past year, the SEC has conducted a voluntary XBRL pilot program, through which more than a dozen companies have volunteered to record their filings electronically using a computer language that "tags," or marks, certain sections for easy searching.
"Don't think of the Internet as a pipeline. It's a medium- an interactive medium - and that creates information," said William D. Lutz, a professor of English at Rutgers University in New Jersey who has helped many operating and fund companies alike transform investor documents into more accessible plain-speak.
"If we look at the Internet as a means for transforming the data into information the industry wants, then we will completely re-think the system," Lutz said.
Using the XBRL program, funds would be able to put an embedded version of a short fund profile online. The document would display the information most investors would need to evaluate whether a fund was worth buying, with the embedded hyperlinks leading to the underlying financial information contained in the prospectus for those who actually want it, such as analysts.
Rather than forcing them to dive headlong into data, this model allows investors to wade into a deep pool of information, at their own pace, while experts, such as the institutional investors or analysts, can still plunge into details at the deepest levels.
"We have to get away from the idea we're going to tell people information," Lutz said. "What our job is, is that we have to get them data."
Because the so-called tags belong to a uniform taxonomy, retail investors can easily search for funds and compare them side-by-side, based on the points they consider most important - whether expense ratios, or the fund's top 10 holdings or historic performance - much like they comparison shop for a car online.
Paul Schott Stevens president of the Investment Company Institute of Washington, noted that the industry organization has hired PricewaterhouseCoopers to help design tags for risks and returns, a project that is scheduled for completion this autumn.
If the profile and prospectus are linked, it is imperative that the SEC consider delivery of the profile to be adequate delivery of the prospectus, said Hopkins of T. Rowe Price.
For those without computers, the concise fund profile could be mailed, with the prospectus available on demand, Roper suggested.
Shorter disclosure documents and electronic delivery will save fund companies hundreds of thousands of dollars in printing and postage costs alone. These advancements could also provide value to certain funds, especially smaller ones.
First, electronic tagging programs could save analysts the time spent typically combing though long prospectuses to find information, and allow them to begin the actual analysis more quickly, said Don Phillips, managing director of Morningstar.
Because the tags are standardized, and applied by the fund companies themselves, analysts will know that they are more accurate than databases created by third-party providers presently used. "It creates greater transparency and accuracy," said Trevor Harris, a managing director with Morgan Stanley in New York.
With more time to focus on comparing funds, and better data with which to do it, institutional investors also may be more likely to notice investment opportunities they would have otherwise overlooked, said Thomas M. Franks, head of global equity research for TIAA-CREF.
Finally, moving to such an information architecture would help financial advisers, said William Dwyer, managing director for sales at Linsco/Private Ledger, a Boston-based broker/dealer that represents 7,000 advisers nationwide.
"We don't want the investor to become so frustrated and skeptical of the process with stacks of paper they can't get through," Dwyer said. "We don't want advisers to give up on the product."
Dwyer said that many advisers have difficulty persuading investors to examine certain funds because the existing disclosures are off-putting. As a result, frustrated investment advisers are giving up licenses, and investors are missing out on the products that might best serve them, Dwyer said.
"It changes the market and makes it much more efficient for everyone," said Morgan Stanley's Harris.
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