Earlier this year the SEC adopted final rules amending the Form N-1A registration form for mutual funds in order to enhance the disclosures that are provided to fund investors. In addition to requiring that key information be in “plain English,” the rule amendments call for a new summary section (Summary Section) to be placed at the beginning of the statutorily required full prospectus, and also permit a fund to satisfy its statutory prospectus delivery obligations under Section 5(b)(2) of the Securities Act of 1933 (the “1933 Act”) by sending or giving key information directly to investors in the form of a summary prospectus and by providing the full statutory prospectus on an Internet Website. Release No. IC-28584, 74 F.R. 4546, January 26, 2009. The purpose of these amendments is to provide investors “streamlined and user-friendly information that is key to an investment decision.”
Content of the Summary Section and Summary Prospectus
For funds that use a multiple fund prospectus, the Summary Section for each fund must be presented separately at the beginning of the prospectus, and not integrated into the prospectus with the detailed fund descriptions.1 The Summary Section at the front of each fund prospectus and a Summary Prospectus must both include the following disclosures about a fund, in the order indicated and cannot precede this information with anything other than the cover page and a table of contents:
- Investment objectives and goals, in the same manner as previously required. A fund will be permitted to identify its type or category in this section (e.g., a “money market” fund or a “balanced” fund).
- Fee table and example. This must include (i) a brief narrative alerting investors to the availability of “breakpoint discounts,” (ii) portfolio turnover rate for the most recent fiscal year as a percentage of the average value of the portfolio, (iii) a short explanation of the effect of that portfolio turnover rate on the fund’s transaction costs and performance and (iv) specific captions regarding the effect of expense reimbursements or fee waiver arrangements on disclosed gross operating expenses. The parenthetical following the “Annual Fund Operating Expenses” caption will now be required to state that these are “(expenses that you pay each year as a percentage of the value of your investment)”.
- Principal investment strategies, risks and performance. Included here will be the risk/return bar chart and table illustrating the variability of returns and past performance, as previously required. If a fund makes updated performance information available on its Website or by a toll-free telephone number, it will be required to include a statement explaining this fact and providing the Website or telephone number.
- Fund management. This will include the name of each investment adviser and subadviser followed by the name, title and length of service of each portfolio manager.
If a fund has three or more subadvisers, it will be required only to identify any subadviser that is responsible for managing a “significant portion” of net assets (generally defined to be 30% or more of the fund’s total net assets). For a fund managed by a “team” disclosure will be required only with respect to members of the team who are jointly and primarily responsible for day-to-day management of the portfolio.
- Share purchase and sale information. This should include the minimum initial investment requirements and information as to whether shares are redeemable as well as the procedures for redeeming shares.
- Tax information. A fund will be required to state that it intends to make distributions that may be taxed as ordinary income or capital gains, or that the fund intends to distribute taxexempt income, as the case may be.
- Financial intermediary compensation. This will include information about payments by the fund or a related entity to financial intermediaries, in order to “alert investors to the potential conflicts of interest.” In addition, the following statement is required, where applicable:
“Payments to Broker-Dealers and Other Financial Intermediaries — If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the brokerdealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask you salesperson or visit your financial intermediary’s Website for more information.”
Information included in the Summary Section need not be repeated elsewhere in the prospectus. The SEC has stated that it believes the Summary Section for each fund can be presented in three or four pages. The SEC had proposed that a list of the fund’s 10 largest holdings be included in the Summary Section and Summary Prospectus. Many comments submitted argued that such information could be misleading, and the SEC decided to eliminate this requirement.
In addition to the Summary Section content, the Form N-1A amendments will now require that a fund include its exchange ticker symbol on the cover page of the prospectus and the cover page of the Statement of Additional Information (“SAI”).
Prospectus Delivery Obligations—Use of Summary Prospectus
With certain minor exceptions, the content of the Summary Prospectus required by new Rule 498 should be the same information required in the Summary Section, and in the same order. If a fund files a 497 “sticker” to its statutory prospectus to change any information in the Summary Section, the Summary Prospectus also must be “stickered” to reflect the changed information.
Under the new rule, a mutual fund may satisfy its prospectus delivery obligations by delivering only the Summary Prospectus to investors as long as specific requirements are met, including:
- The Summary Prospectus, statutory prospectus, SAI, and most recent annual and semi-annual reports to shareholders are accessible, free of charge, at a Website, which Website must be disclosed on the cover or at the beginning of the Summary Prospectus.
- These disclosure documents must be accessible online for at least 90 days after the Summary Prospectus is delivered to investors.
- Investors must be able to retain an electronic version of the disclosure documents through downloading or otherwise, free of charge.
- The full statutory prospectus and the SAI on the Website include a table of contents with hyperlinks connecting a reader to the relevant sections within the document.
- A reader must be able to hyperlink between the Summary Prospectus and the related sections within the statutory prospectus and the SAI.
Funds are also required to send an investor, upon request, a paper copy or an email containing an electronic copy, or a direct link, to all the disclosure documents required to be online. In adopting the release, the SEC stated its desire to have investors choose “whether to review a fund’s information on the Internet or whether to receive that information directly, either in paper or through an email.”
Incorporation by Reference
A fund is permitted to incorporate by reference into the Summary Prospectus information contained in its full statutory prospectus, SAI and shareholder reports. The SEC acknowledged that part of the industry’s reluctance to use the “profile prospectus,” adopted in 1998, were liability concerns stemming from the abbreviated nature of the document and the inability to incorporate by reference important portions of a fund’s registration statement. The SEC explained that the Summary Prospectus is not a “self-contained” document but “one piece in a layered disclosure regime.”
The effective date of these amendments was March 31, 2009. All initial registration statements, and all post-effective amendments that are annual updates and filed on or after January 1, 2010, must comply with the amendments. Post-effective amendments filed to comply with these Form N-1A amendments should be filed under Rule 485(a), which means that they will not have immediate effectiveness and should be filed at least 60 days prior to the desired effective date (which is usually the date on which the fund’s financial statements become “stale” under Section 10(a)(3) of the 1933 Act).