In an effort to minimize increasing fulfillment costs, fund companies have been combining multiple fund prospectuses into a phone-book-sized "one-size-fits-all" document distributed in a single mass mailing. What began as a noble effort to inform investors and protect them has resulted in "investor disclosure" that is costly, wasteful and confusing. As the industry moves toward greater transparency in mutual fund sales transactions and standardization of information, a central need has been simplicity.

After more than a decade of effort by the fund industry and the U.S. Securities Exchange Commission (SEC), the answer is on the horizon. On November 21, 2007, the SEC announced a proposed rule for a shorter, simpler, standardized prospectus that would tell investors what they need to know within 3-4 pages and provide Web access to more detailed information if desired. The stated goal is to provide the average investor with clear, succinct information and also to standardize information to facilitate fund-to-fund comparisons. In the subsequent months, the rule has received over 90% favorable commentary and has been endorsed by the Investment Company Institute (ICI).

A study by Forrester Consulting -- commissioned by NewRiver, Inc. -- also revealed strong industry support of a streamlined "short-form" prospectus. Forrester conducted an online survey of 150 companies that sell mutual funds and annuities and determined 95% would consider using the summary prospectus in lieu of the current statutory ("long-form") prospectus. According to the study, respondents recognized that the summary prospectus could provide significant savings and better ways to fulfill investor communications. Ninety-percent of respondents would consider combining the trade confirm with the summary prospectus into a single mailing to reduce postage costs and 86% would likely explore electronic delivery – the most cost-efficient and "greenest" form of disclosure document delivery available.

The Proposed Rule

The SEC’s Proposed Release 33-8861 ("Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies") is designed to simplify investor disclosure by providing fund investors with an easier to read document and better enable "fund-to-fund" comparisons. The proposed rule includes two key components:

• Summary Prospectus – Introduces a streamlined prospectus to be delivered to fund investors for mutual fund sales or confirmation in lieu of the current statutory prospectus. The Summary Prospectus could be delivered in print or electronically (with electronic consent), and would contain standardized information that must also appear at the front of the current statutory prospectus. Fund companies would also be required to make it available online.

• Layered Disclosure on the Web – Introduces a layered approach to conveying fund information. Investors seeking more information than what is contained in the Summary Prospectus would be able to access it fast and efficiently online. Fund companies would be responsible for providing electronic versions of the statutory prospectus, statement of additional information, shareholder reports and supplements. All of this information would be required to be organized by individual fund (although separate share classes may be combined under a single fund).

If the Summary Prospectus rule is passed, the 600+ fund companies would be required to file the Summary Prospectus and include this 3-4 page document at the front of the current 8,000+ U.S. mutual fund prospectuses available (and any future funds as well). Summary plan information must be presented separately for each fund in a multiple-fund prospectus. A single fund offering more than one fund class via a prospectus could integrate summary information for all fund share classes.

If financial intermediaries wish to deliver a Summary Prospectus to investors, it would behoove the fund companies to make the standalone document available. In this case, the fund companies would submit two separate filings on the SEC’s mutual fund database named "EDGAR" (Electronic Data Gathering, Analysis, and Retrieval system) – the Summary Prospectus included at the front of the statutory prospectus and a separate, standalone Summary Prospectus. Fund companies would also be required to provide a URL inside the Summary Prospectus for investors to electronically access the statutory prospectus and other related fund disclosure information.

Investors and the Environment

Forrester estimates the Summary Prospectus could save fund companies $300 million annually. Even greater cost savings could be achieved by combining the Summary Prospectus and the trade confirm in a single mailing or by moving to cost-efficient e-delivery. In fact, many believe the Summary Prospectus and its layered disclosure via the Web will be a huge impetus to migrate the industry from paper-based to electronic disclosure. Gone will be the days of "pick and pack" warehouse fulfillment as digital print-on-demand and e-delivery with electronic consent gain a new stronghold. The industry spends roughly $1 billion each year producing and delivering paper prospectuses yet studies show 67% of investors don’t even read it! When you factor in other forms of disclosure – such as semi-annual and annual reports, supplements, and statements of additional information – the total annual bill for paper-based investor disclosure is $5 billion.

It’s not just the length of the fund prospectuses; it’s also the content that’s hard to decipher. According to a 2006 ICI survey, 60% of investors say prospectuses are hard to understand. Locating information pertaining to a single fund can also be a challenge in a multi-fund prospectus combining sections with 30-40 funds. Adopted properly, the Summary Prospectus would provide investors with a simple form that is easy to read and understand, and that provides access to more detailed information within two mouse clicks.

What About Retirement Plans?

The Department of Labor (DoL) has been working in conjunction with the SEC as they prepared the Summary Prospectus proposed rule. Why is this important? The DoL is responsible for the 55 million Americans who participate in 401(k) plans. The regulations around prospectus delivery to plan participants have not been as strict as those relating to retail investors. In fact, unless an individual’s retirement plan qualifies under Section 404(c) "safe harbor" provisions, he or she may never see a prospectus. (Section 404(c) compliance provides plan fiduciaries wider protection against liability for the results of participant investment decisions.)

If the Summary Prospectus is enacted, the DoL is expected to mandate a similar provision for all 401(k) plans requiring that all plan participants be provided a Summary Prospectus and a website where they can electronically access the statutory prospectus and other related disclosure information.

Individuals and Institutions Rally

The SEC received comments from 124 different individuals and investors during the period from November 21, 2007 through February 28, 2008. As was foreshadowed by the results of the Forrester study, the proposed Summary Prospectus rule received an overwhelming amount of favorable reviews for the spirit of the rule. Sixty-six individuals and industry giants including American Funds, Fidelity and Vanguard voiced strong support.

Time for Change

As individuals now bear more of the responsibility for paying for their retirement, the investments they make through brokerage accounts and retirement plans are critical to securing their financial future. For too long the industry has spent too much money and wasted resources to over-communicate to investors. Investors need clear, concise information about their investments and ready access to additional information.

The Summary Prospectus offers a significant opportunity to reduce costs and investor confusion with a better, simpler model of investor disclosure. And it offers a promising bridge toward greater transparency and clarity in investor communications and mutual fund transactions. It’s time to deliver a simplified prospectus that investors will read and understand.

Footnotes

1 K&L Gates LLC, Investment Management Alert: SEC Proposes to Enhance Mutual Fund Disclosure and Provide for New Prospectus Delivery Option (December 5, 2007)

2 Forrester Consulting, The Short-Form Prospectus: Industry Poised for Savings, Transparency, and Innovative Ways to Communicate with Investors (October 2007)

3 2007 Investment Company Fact Book (1.5 trillion mutual fund assets in 401(k) plans as of end of 2006)