The staff of the SEC’s Division of Investment Management issued guidance urging mutual funds to be more succinct, avoid technical language and use plain English in the Summary Section of fund prospectuses.
In its guidance, the staff observed that, although disclosure by funds is often clear and concise, a significant number of Summary Sections remain “complex, technical, and duplicative.” Some are also quite long, reaching 10 or 20 pages instead of the intended three to four pages. The staff said that the information on principal investment strategies and risks in the Summary Section does need to be an actual summary of key information and not a mere repetition of detailed information available elsewhere.
The SEC highlighted the following disclosure items:
- Summarize the Principal Investment Strategies and Risks: Form N-1A provides that the principal investment strategies and risks, required by Item 4 in the Summary Section, should be based on the information given in response to Item 9 of the Form, and should be a summary of that information. Instead of a concise summary, however, the staff often observes in Item 4 of the Summary Section long, complex and detailed descriptions of principal investment strategies and risks that are dense, are not user-friendly, and do not appear to be summaries of the information in Item 9 later in the prospectus.
- Plain English Requirements: Form N-1A provides that the Summary Section must be provided in plain English under Rule 421(d) under the Securities Act. In addition, the prospectus, in its entirety, is subject to the requirement that the information be presented in a clear, concise, and understandable manner. Notwithstanding these requirements, the staff continues to observe the use of technical terms that are not explained in plain English. Funds also often use unnecessary defined terms, long, compound sentences, and long, dense paragraphs that the staff believes might be difficult for investors to read.
- Summary Section Must Only Include Required or Permitted Information: Form N-1A provides that the Summary Section of the prospectus “may not include disclosure other than that required or permitted by [Items 2 through 8].” A fund may, however, include information elsewhere in the prospectus or in the Statement of Additional Information (SAI) that is not otherwise required by Form N-1A. The staff closely scrutinizes the disclosure in the Summary Section, and when information is included that is not required or permitted, comments that the information should be moved out of the Summary Section.
- Inclusion of Non-Principal Strategies and Risks in the Prospectus: As noted above, Form N-1A requires a fund to disclose its principal investment strategies and risks in its prospectus. The Form provides that a fund should describe any investment strategies and risks that are not principal in the SAI. Form N-1A, however, also provides that a fund may include (except in the Summary Section) information in the prospectus that is not otherwise required. Many funds include in their prospectus additional information related to strategies and risks that are not principal. In the view of the staff, however, funds that include this additional information often do not clearly indicate which of the strategies and risks are principal and which are not principal.
- Avoid Cross-References: Form N-1A provides that, in responding to the required information in the prospectus, funds should avoid cross-references to the SAI or shareholder reports. The Form further provides that “[c]ross references within the prospectus are most useful when their use assists investors in understanding the information presented and does not add complexity to the prospectus.” The staff frequently observes funds with numerous cross-references in the Summary Section, which the staff believes can add complexity that should be avoided.
At the next annual update, Funds should review their prospectus disclosure to determine if any enhancements are advisable with regard to this guidance.