November 26, 2007
SEC's Proposal for Better Disclosure in Fund Prospectuses
The SEC recently released for public comment a proposed rule dealing with Enhanced Disclosure and New Prospectus Delivery Option for mutual funds. The SEC forthrightly acknowledges that mutual fund prospectuses are universally criticized for being "long and complicated" and "often prove difficult for investors to use efficiently in comparing their many choices." The SEC describes its proposal as having the "potential to revolutionize the provision of information to the millions of mutual fund investors who rely on mutual funds for their most basic financial needs." The proposed rules require funds to provide investors with a summary section in the prospectus, containing key information for seven categories of information -- investment objectives; costs; principal investment strategies, risks and performance; top ten portfolio holdings; investment advisers and portfolio managers; brief purchase and sale and tax information; and financial intermediary compensation -- in plain English, in a standard format, so that investors can make comparisons among different mutual funds. Funds have the option to give the summary information to investors and provide them with internet access to the entire prospectus, in what it refers to as a "layered approach to disclosure." In addition, the investor could request a paper copy of the prospectus.
The concept of plain English summary disclosure is a good one, but there is bound to be controversy over how to make the disclosures meaningful to investors. Let's hope that the SEC can move more speedily on this proposal than it has on the proposed rule for point of sale disclosures, originally proposed in January 2004, with the comment period reopened in February 2005.
One oddity -- in the middle of the 137 page release, the SEC contains a section entitled "Special Request for Comments from Investors," requesting them to comment on the proposal and more generally their views on mutual fund prospectuses. How many investors does the SEC think read SEC releases on proposed rules?
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