The SEC unanimously voted the week of November 15, 2007, to consider a proposed rule change to further its previously announced goal of simplifying mutual fund prospectus disclosure. SEC Commissioner Paul S. Atkins noted that in a recent Investment Company Institute survey, two-thirds of investors thought that prospectuses contained too much information, and less than 40% reviewed a prospectus before purchasing a mutual fund. The proposed rule change attempts to provide prospective investors with information that is easier to read and understand, while continuing to make more information easily available for those who want it.
The SEC’s proposed rule would provide a new framework for delivering prospectus disclosure to investors as follows:
- Existing Statutory Prospectus: Funds would be required to add a standardized summary in plain English at the front of the existing statutory prospectus. The summary section would include the following information: top ten portfolio holdings, investment advisers and portfolio managers, purchase and sale procedures, tax consequences, fi nancial intermediary compensation, the fund’s investment objectives and strategies, and its risks and costs. Information for each fund in a multifund prospectus would be required to be presented separately for each fund.
- New Summary Prospectus: Instead of delivering the full statutory prospectus to investors, mutual funds could also satisfy their prospectus delivery obligations by sending prospective investors a summary prospectus. The summary prospectus would contain the same information in the same order as required at the front of the statutory prospectus, as discussed above. Each fund in a multiple fund prospectus would have its own summary. No additional information could be included in the summary, though there would be no limits on supplements that a fund could provide with the summary.
In addition, funds would be required to make the summary, full statutory prospectus and other shareholder information available on the fund’s website in a user-friendly format. The user-friendly format would enable investors to move readily back and forth between, among other things, the summary and statutory prospectuses and statement of additional information, to access information effi ciently.
The rule would also require that investors accessing the information via the Internet be able permanently to retain it electronically. However, investors would still have the choice of requesting a full prospectus by mail.
While the summary prospectus would be updated annually along with the current statutory prospectus, mutual funds would be required to update performance information and portfolio holdings quarterly. Mutual funds would also be required to have in place reasonable procedures for updating that information. If a fund has such procedures, the SEC staff suggested that funds would not be liable for an omission of a material fact due to a delay in updating information for purposes of the Securities Act of 1933 and the Investment Company Act of 1940.
The SEC will seek public comment on the proposal for 90 days following its publication in the Federal Register.
The SEC’s disclosure proposal suggests that advisers may need to start thinking about changes that might be necessary to their funds’ websites to comply with the new rule. In addition, advisers may want to consider any new procedures that will be required to comply with the proposed performance updating requirements, including changes to their compliance policies and procedures.