Beginning March 31, 2009, all investment companies eligible to use the Form N-1A registration statement, such as mutual funds and exchange traded funds (“ETFs”), may optionally begin providing investor disclosure in a layered format and satisfy prospectus delivery requirements through the use of a three- to four-page summary prospectus. This new disclosure regime will apply to all new fund or new series registrations on January 1, 2010, and to annual amendments filed by existing funds on and after January 1, 2010. By January 1, 2011, all mutual fund and ETF registration statements will have been converted to the new prospectus format.
The Securities and Exchange Commission (“SEC”) believes that access to the Internet has become so widespread and connection speed and quality have advanced enough to permit a major revision of fund disclosure presentation utilizing an interactive electronic format. The Form N-1A prospectus modifications and revisions of Securities Act of 1933 Rule 4981 will:
- require a summary section in the prospectus consisting of key fund information
- enhance disclosure relating to ETFs; and
- permit delivery of a “summary prospectus” identical to the new summary section in lieu of the full prospectus so long as the full prospectus, statement of additional information (“SAI”) and other fund reports are provided online in certain formats.
New Standardized Summary Section
Under the new form requirements, every fund prospectus must include a summary section at the front containing key information.2 The summary section is intended to provide investors with a standardized presentation of information to aid investors in evaluating and comparing funds. To a certain extent, this summary resembles the “product description” ETFs have been permitted to use to satisfy prospectus delivery requirements to retail investors. In all events, the summary is supposed to be short, concise and informative to investors.
The summary section may not be preceded by any information other than the cover page or table of contents and must contain the following eight points of information3 in the following order:
- Investment objectives
- Principal investment strategies
- Risks and performance
- Investment advisers and portfolio managers
- Purchase and sale information
- Tax information
- Financial intermediary compensation
A fund may not include additional information in the summary section, although it may do so in the full prospectus. For a multi-fund prospectus, a summary section must be presented for each fund. However, a multi-fund prospectus may integrate into a single presentation certain information on share purchases and sales, taxes and financial intermediary compensation if it is identical for all funds covered. Multiple class funds may alternately present summary information separately for each class, integrate the information for multiple classes, or use another presentation consistent with disclosing summary information in a standard order at the beginning of the prospectus. All funds are also required to put their exchange ticker symbols on their prospectus and SAI covers.
Summary Section Disclosure Requirements
The following highlights are among the many new summary requirements:
- Mutual funds that offer volume or breakpoint discounts on sales charges must inform investors of the availability of such discounts.
- A fund, other than a money market fund, must include a brief narrative regarding portfolio turnover after the fee table example. The annual portfolio turnover rate and an explanation of the effect portfolio turnover has on costs, fund performance and tax obligations must be provided.
- Expense reimbursement or fee waiver arrangements for a period of at least one year allow fee table line items for the amounts reimbursed and waived and net operating expenses below the “Total Annual Fund Operating Expenses” line.
Investments, Risks and Performance
- A fund that makes updated performance information available online or via a toll-free telephone number must explaining the availability of such information.
- Funds must name their investment advisers and sub-advisers as well as provide the name, title, and length of service of each portfolio manager. A fund with three or more sub-advisers need only disclose those sub-advisers expected to be individually responsible for managing 30% or more of the fund’s net assets.
Purchase and Sale Information
- A mutual fund must disclose minimum initial investment or subsequent investment requirements, the redeemable nature of fund shares and redemption procedures.
- Every fund must declare either an intention to make distributions that are taxed as ordinary income/capital gains or an intention to distribute tax-exempt income.
- Funds that disclose investment in securities generating tax-exempt income must disclose, if applicable, that portions of fund distributions may be subject to federal income tax.
Financial Intermediary Compensation
- A fund that pays a financial intermediary for selling fund shares must disclose such arrangement and identify related potential conflicts of interest.
ETF prospectus requirements have been revised for retail investors purchasing on the market rather than for financial institutions dealing directly in creation units with the ETF. The new ETF prospectus requirements apply to ETFs with creation units of 25,000 or more shares and:
- eliminate disclosure about buying and redeeming directly from the ETF; and
- require disclosure about historical market price premiums/discounts relative to the ETF’s net asset value (“NAV”). Specifically, ETFs must disclose the number of trading days during the most recent calendar year and subsequent quarters on which the market price of the ETF shares traded at a discount or premium to NAV. Such premium/discount may be omitted if provided on the ETF’s website.
Additional ETF prospectus revisions focus on providing standardized disclosures concerning creation unit size, individual share market trading, potential deviation of NAV from market prices and the potential obligation to pay brokerage commissions.
New Delivery Option for Fund Prospectuses
The SEC re-wrote Rule 498 to permit mutual funds and ETFs to deliver a “summary prospectus” in lieu of the full statutory prospectus so long as the full prospectus, SAI and other fund reports are made available online with internet links between the summary prospectus, full prospectus and SAI. In this manner, the SEC is encouraging funds with a simple revised prospectus delivery option to adopt layered and interactive disclosures to serve the needs of a variety of investors. Under the new delivery option, the summary prospectus must be filed with the SEC by first use and the full statutory prospectus must be delivered upon request.
The summary prospectus is required to contain the same information in the same order as the summary section previously discussed. If information in the summary section changes, the summary prospectus must be updated. The summary prospectus may describe only one fund but may describe multiple classes of that fund.
The cover page or beginning of the summary prospectus must include:
- the fund’s name and share classes;
- the exchange ticker symbol(s) of each of its classes;
- a statement identifying it as a summary prospectus;
- the approximate date of first use; and
- a legend informing the investor of the availability of a statutory prospectus and other materials via a website, a tollfree number, and/or an email request.
Additionally, the website address and/or telephone number must appear in the summary prospectus if the fund provides updated performance information online and/or toll free. As a condition of Rule 498, the summary prospectus, statutory prospectus, SAI and most recent annual and semiannual reports must appear on the website specified on the cover page, and such materials must be available for at least 90 days after the date of delivery of a security or communication in reliance on Rule 498. Information required to be made available online must be presented in a format that is “human-readable” online, printed or downloaded, free of charge. The new Rule 498 further prescribes linking requirements (a) within the statutory prospectus and SAI and (b) between corresponding sections of the online summary prospectus, statutory prospectus and SAI.
A summary prospectus may be distributed with other materials (e.g., sales literature or other marketing items) but must be given greater prominence (or better placement) than the accompanying material.