On June 27, 2014, the staff of the SEC’s Division of Investment Management issued a Guidance Update related to the 2009 amendments designed to enhance mutual fund disclosure. The update is intended to provide guidance related to disclosure in summary prospectuses and is based on comments the staff has provided funds and their counsel.
In 2009 the SEC adopted amendments to Form N-1A requiring that a summary section be included at the beginning of a fund’s prospectus to succinctly disclose information about a fund’s investment objective, strategies, risks, costs and performance. The SEC’s intent was not to constrain appropriate disclosure, but rather to streamline certain disclosures, giving investors better access to the information they need, want and choose to review.
The SEC also adopted amendments to Rule 498 that permit a fund to satisfy its delivery obligations to shareholders by providing the summary section, as long as the statutory prospectus is available online and upon request.
The SEC’s intent in adopting the use of the summary section was to provide investors with clear and concise disclosure about a fund’s key information. After adopting the amendments that provided for the use of a summary section, the staff has noticed that the disclosure in many summary sections is unnecessarily long, complex, technical and duplicative.
To assist funds in focusing their disclosures so they will be clear and concise to investors, the staff decided to highlight the following rule and form requirements that it felt were not being properly followed.
Summarize Principal Investment Strategies & Risks
The principal strategies and risks should be a summary of the strategies and risks found in the statutory prospectus. Often the descriptions are too long and simply restate disclosure found in the statutory prospectus. Also, the staff noted that certain disclosures made pursuant to Items 2 through 8 of Form N-1A need not to be repeated elsewhere in the prospectus.
Plain English Requirements
Despite the requirement that the summary section must be in plain English, the staff noted that many terms used in summary prospectuses are too technical and not explained so that an average or typical investor can understand them. Long, compound sentences and long, dense paragraphs should be avoided as they may be difficult for investors to read and understand.
Only Required & Permitted Information
Information that Form N-1A does not require or permit in a fund’s summary prospectus should be included in the statutory prospectus or SAI, not in the summary prospectus.
Inclusion of Non-Principal Strategies & Risks
Form N-1A provides that descriptions of non-principal strategies and risks should be included in the fund’s SAI or statutory prospectus. Including such strategies and risks in the summary prospectus may make it difficult for investors to discern a fund’s true principal strategies and risks.
Funds should avoid making cross-references in the summary prospectus to information found in the fund’s SAI or shareholder reports. Since numerous cross-references in a summary prospectus may make it difficult for investors to read, they should be used only when necessary to assist investors in understanding the information provided in the summary prospectus.
Funds should consider reviewing their summary prospectuses with respect to the requirements discussed above and making changes as necessary to give investors clear and concise disclosure that is appropriate in light of a fund’s particular strategies and risks.