Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, November 19, 2008

SEC Adopts Rules to Improve Mutual Fund Disclosure

The SEC voted unanimously to improve mutual fund disclosure by requiring that funds provide investors with a concise summary — in plain English — of the key information they need to make informed investment decisions. The new summary prospectus will appear at the front of a fund’s prospectus.  The Commission also approved amendments to encourage funds to make greater use of the Internet so investors can receive more detailed information in a way that best suits their needs.

Mutual funds are supposed to be the best investment vehicle for retail investors to obtain diversification, yet past SEC efforts to improve the quality of mutual fund disclosure have been unsuccessful.  As Andrew J. Donohue, Director of the SEC’s Division of Investment Management, acknowledged: “Many investors often find current fund prospectuses to be lengthy, legalistic and confusing.

Specifically, the SEC adopted the following improvements to mutual fund disclosure:

Summary Information at the Front of the Prospectus
Every mutual fund must include key information at the front of its statutory prospectus about the fund’s investment objectives and strategies, risks, and costs. The summary will also include brief information regarding investment advisers and portfolio managers, purchase and sale procedures, tax consequences, and financial intermediary compensation. Funds will be required to provide the summary information in plain English and in a standardized order.

New Prospectus Delivery Option for Mutual Fund Securities
The Commission adopted a new rule that permits sending a 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 summary prospectus must have the same information in the same order as the summary at the front of the statutory prospectus.

In addition:

The online materials must be in a user-friendly 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 information.
The statutory prospectus and other information must be provided in paper or by e-mail upon request so investors can choose the format in which they receive more detailed information.

The full text of the Commission’s new disclosure requirements will be posted to the SEC Web site as soon as possible.

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