On November 19, 2008, the Securities and Exchange Commission (the “Commission”) unanimously voted to adopt amendments to Form N-1A (the registration form for mutual funds) that will require mutual funds to provide, at the front of the fund’s prospectus, a standardized, concise and plain English summary of the key information typically considered by investors when making informed investment decisions. The Commission also adopted a new rule that permits sending a summary prospectus to satisfy prospectus delivery requirements, provided that all other required disclosure documents are available online and that certain other conditions are met.
The new rules are intended to allow investors to quickly gain a basic understanding of mutual funds and, as a result of the standardized format, facilitate comparison between mutual funds, as well as make mutual fund information available online in a searchable electronic format.
The rule changes are effective on February 28, 2009, and mutual funds must begin complying with Form N-1A changes on January 1, 2010. The text of the adopted rules and interpretive guidance are not yet available. Accordingly, the descriptions provided in this special alert are based upon the proposing release and statements made by the commissioners and Commission staff at the open meeting. We will provide a client advisory as soon as such materials are made available.
Summarized Prospectus Information
The amendments to Form N-1A adopted by the Commission require that the front of every statutory prospectus include a summary (a “Summary”) of key information, including information about the mutual fund’s investment objectives; strategies; risks; and costs.
The Summary must also include brief information regarding investment advisers and portfolio managers, purchase and sale procedures, tax consequences, and financial intermediary compensation. The amendments require the Summary to be written in plain English and present the information in a standardized order and format.
As noted by Andrew “Buddy” Donohue, Director of the SEC’s Division of Investment Management, the information included in the Summary is not intended to replace any information currently required to be included in a statutory prospectus, but rather to “provide information that is easier to use and more readily accessible, while retaining the comprehensive quality of the mutual fund information available today.”1
New Prospectus Delivery Option
The Commission also adopted a new rule under the Securities Act of 1933, as amended, that permits sending a summary prospectus (“Summary Prospectus”) to satisfy prospectus delivery requirements, provided that the mutual fund’s Summary Prospectus, statutory prospectus and other specified information are available online (the “Online Materials”) or in hard copy upon the request of the investor. This rule will replace the former rule that permitted funds to satisfy their prospectus delivery requirements through the use of a profile prospectus. The Summary Prospectus must have the same information in the same order as the Summary.
- The Online Materials must be in a user-friendly, “layered” format that permits investors and other users to move back and forth between the Summary Prospectus and the statutory prospectus. This will allow investors and others to efficiently access particular information that is of interest to them;
- Investors have to be able to download and retain an electronic version of the Online Materials. This will allow investors and others to more easily search and analyze information provided by the mutual fund; and
- The statutory prospectus and other information must be provided in paper or by e-mail upon request, allowing investors to choose the format in which they receive more detailed information.