On January 13, 2009, the U.S. Securities and Exchange Commission (the “Commission”) adopted a number of new rules and rule amendments (collectively, the “Summary Prospectus Rules”)[1] designed to simplify mutual fund prospectus disclosure and to provide funds with the option to sell shares by means of a short (3-4 page) summary document (“Summary Prospectus”)[2]. In June 2014, the Commission’s Division of Investment Management issued a Guidance Update[3] in light of comments the Commission’s staff has provided to a number of funds and their counsel related to the Summary Prospectus Rules.

The Guidance Update reports that the staff has observed a trend in which a significant number of prospectuses include complex, technical, and duplicative disclosure that is inconsistent with the objective of the Summary Prospectus Rules. The Guidance Update is intended to further the Commission’s goal of clear and concise, user-friendly disclosure by focusing funds on the following requirements set forth in Form N-1A[4] and the Summary Prospectus Rules:

  • Summarize the Principal Investment Strategies and Risks

Form N-1A provides that the principal investment strategies and risks, which are required to be set forth in the Summary Section, should be a summary of the information provided later on in the body of the prospectus.[5] The Guidance Update reminds issuers that information included in the Summary Section need not be repeated elsewhere in the prospectus. The Guidance Update also notes that the staff often observes that the Summary Section sometimes contains 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 that appears later in the prospectus. In fact, the staff often sees prospectuses that substantially, and often times identically, repeat the same principal investment strategies and risks disclosure in the Summary Section and in the body of the prospectus. The Guidance Update notes that this undermines the Commission’s layered disclosure regime, in which investors are sent or given key information contained in the Summary Prospectus, coupled with more detailed information that is provided online and, upon request, is sent in paper or by e-mail. The layered format is intended to aid investors in comparing funds and to provide investors with more useable information in a format that investors are more likely to use. Furthermore, the unnecessary duplication of information increases the length of the prospectus.

According to the Guidance Update, when the staff observes a Summary Section that is long, dense, and complex and does not, in fact, appear to summarize a fund’s principal investment strategies and risks, the staff will remind the fund that the Summary Section is intended to summarize the key information that is important to an investment decision, with more detailed information presented elsewhere. Further, when a fund substantially duplicates its disclosure, the staff will remind the fund that information need not be duplicated.

  • Plain English Requirements

The prospectus disclosure requirements are intended to elicit information for “an average or typical investor who may not be sophisticated in legal or financial matters.” As such, the Summary Section must be written in plain English[6] and the information must be presented in a clear, concise, and understandable manner.[7]

Notwithstanding these requirements, the Guidance Update reports that the staff continues to observe the use of technical terms that are not explained in plain English and the use of unnecessary defined terms, long, compound sentences, and long, dense paragraphs that the staff believes may be difficult for investors to read. Failure to follow the plain English requirements undermines the usefulness of the Summary Section, and, thus, the Summary Prospectus. The Guidance Update reminds funds to revisit their disclosures in light of these requirements.

  • Summary Section Must Only Include Required or Permitted Information

Form N-1A provides that the Summary Section may not include disclosure other than that required or permitted by the Form.[8] The Guidance Update reports that the staff closely scrutinizes the disclosure in the Summary Section and will comment that information included, but not required or permitted, should be moved out of the Summary Section. As an example, to streamline the disclosure and foster comparison between funds, the staff assesses whether information in the footnotes to the Fee Table is permitted or required. As another example, the staff often comments about the inclusion of purchase and sale information that is neither permitted nor required to appear in the Summary Section, which generally requires a fund to disclose its minimum initial or subsequent investment requirements, that the fund’s shares are redeemable, and briefly identify the procedures for redeeming shares. The Guidance Update reminds funds to include only information in the Summary Section that is either permitted or required by Form N-1A.

  • Inclusion of Non-Principal Investment Strategies and Risks in the Prospectus

Form N-1A requires a fund to disclose its principal investment strategies and risks in its prospectus. Any non-principal investment strategies and risks should be disclosed 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. The Guidance Update reports that many funds include in their prospectus additional information related to non-principal investment strategies and risks; however, they often do not clearly indicate which of the strategies and risks are principal and which are non-principal. The staff believes that this can result in prospectus disclosure that does not clearly and concisely inform investors about how the fund principally intends to invest and the related risks. In such cases, the staff will comment that funds should distinguish which of the investment strategies and risks are principal and which are non-principal.

  • Avoid Cross-References

Form N-1A provides that in providing the required information in the prospectus funds should avoid cross-references to the SAI or shareholder reports. The Guidance Update reports that the staff frequently observes funds with numerous cross-references in the Summary Section, which the staff believes can add unnecessary complexity. When appropriate, the staff suggests that the cross-references be deleted to streamline the Summary Section.