Over the last decade, the fund industry has experienced enormous growth both in total assets and in the number of funds.-[3]- Today, fund assets exceed the deposits of commercial banks.-[4]- Coincident with the explosive growth of fund investments, the
business operations of many funds have become increasingly complex as funds seek to offer investors new investment options and
a wider variety of shareholder services. These factors, combined with new and more sophisticated fund investments, have resulted
in fund prospectuses that often include long and complicated disclosure, as funds explain their operations, investments, and
ervices to investors.
Many have criticized fund prospectuses, finding them unintelligible, tedious, and legalistic.-[5]- Although
-[3]- INVESTMENT COMPANY INSTITUTE ("ICI"), MUTUAL FUND FACT BOOK 29-37 (36th ed. 1996) ("ICI FACT BOOK") (between 1987 and 1996, assets increased from $769.9 billion to $3.5 trillion and the number of funds increased from 2,317 to 6,243).
-[4]- Compare ICI, Trends in Mutual Fund Investing: November 1996 at 3 (Dec. 1996) (ICI News No. ICI-96-107) (fund net assets
exceeded $3.5 trillion as of Nov. 1996) with 82 Fed. Res. Bull. 12, table 1.21, at A13 (1996) (commercial bank deposits were
approximately $2.5 trillion as of Sept. 1996).
-[5]- See, e.g., "The SEC and the Mutual Fund Industry: An Enlightened Partnership," Remarks by Arthur Levitt, Chairman, SEC,
before the ICI's General Membership Meeting at the Washington Hilton Hotel, Washington, D.C. (May 19, 1995); Simple Concept
from SEC: Use the prospectus remains the most complete source of information about a fund, technical and unnecessarily lengthy
prospectus disclosure often obscures important information relating to a fund investment and does not
serve the information needs of the majority of fund investors.-[6]- As millions of Americans have turned to funds as an investment vehicle of choice,-[7]-
investors need to be provided with clear and comprehensible information that will help them evaluate and compare fund
investments.
Plain English in Fund Prospectuses, L.A. TIMES, Mar. 2, 1995, at D14; J. BOGLE, BOGLE ON MUTUAL FUNDS 147 (1994);
Rothchild, The War on Gobbledygook, TIME, Oct. 31, 1994, at 51;
Skrzycki, Prospectuses to be in English, Donkeys to Fly Tomorrow, WASH.
POST, Oct. 21, 1994, at B1.
-[6]- A 1995 survey conducted on behalf of the Commission and the Office of the Comptroller of the Currency ("OCC") found that,
although fund investors consulted the prospectus more than any other source of information about the fund they bought, they
considered the prospectus only the fifth-best source of information, behind employer-provided written materials, financial publications, family or friends, and brokers.
REPORT ON THE OCC/SEC SURVEY OF MUTUAL FUND INVESTORS 12-13 (June 26,
1996). See also ICI, THE PROFILE PROSPECTUS: AN ASSESSMENT BY MUTUAL FUND SHAREHOLDERS 4 (1996) ("ICI PROFILE SURVEY") (about half of fund shareholders surveyed had not consulted a prospectus before making a fund investment).
-[7]- Over 30 million U.S. households own funds. ICI FACT BOOK, supra note 3, at 92.
The Commission is committed to improving the disclosure provided to fund investors-[8]- and is proposing two major initiatives to
meet this objective. First, the Commission is proposing changes to fund disclosure requirements in an effort to focus prospectus
disclosure on essential information about a particular fund that would assist an investor in deciding whether to invest in that
fund.-[9]- Second, in a companion release, the Commission is proposing a new rule to permit investors to buy fund shares based on
a fund profile (the "profile") that would provide a summary of key information about a fund, including the fund's investment
objectives, strategies, risks, performance, and fees.-[10]- Under this
proposal.
401k Tip---
The tax deferral of 401k has a huge compounding effect: $150 per month put into a typical taxable savings account paying 8% annual interest will grow to $42,034 by the end of 20 years (assuming a combined federal and state personal income tax rate of 34%). In a 401(k), however, the same deposits earning the same rate of return during the same 20 years will yield $88,353 . Even if that amount is taxed at the 34% rate when the money is withdrawn from the plan, which is unlikely if the participant is retired, the 401(k) participant will walk away with more than $16,000 compared to the equivalent non-401(k) investment return. One small employer that has benefited greatly from a company-wide 401(k) is Target Laboratories
(www.targetlab.com). The employees are very happy to be able to save for their retirement in tax-advantaged accounts.
-[8]- See "Taking the Mystery Out of the Marketplace: The SEC's Consumer Education Campaign," Remarks by Arthur
Levitt, Chairman, SEC, at the National Press Club, Washington, D.C. (Oct. 13, 1994); "Investor Protection: Tips from an SEC Insider," Remarks by Arthur Levitt, Chairman, SEC, before the Investors' Town Meeting at the
Adam's Mark Hotel, Philadelphia, Pa. (June 11, 1996).
-[9]- As part of the improvements to prospectus disclosure, the Commission is proposing a new rule intended to address certain
broad categories of investment company names that are likely to mislead investors about an investment company's investments
and risks. The new rule would require funds and other registered investment companies with names suggesting a particular
investment emphasis to invest at least 80% of their assets in the type of investment suggested by their name.
-[10]- Profile Release, supra note 1. investors would receive the fund's prospectus upon request or no later than with delivery of
the purchase confirmation. These two initiatives are intended to improve fund disclosure by requiring prospectuses to focus on
information central to investment decisions, to provide new disclosure options for investors, and to enhance the comparability of
information about funds. Taken together, the proposals seek to promote more effective communication of information about
funds without reducing the amount of information available to investors.
As part of its commitment to give investors improved disclosure documents, the
Commission recently proposed rule amendments to require the use of plain English principles in drafting prospectuses and to provide other guidance on improving the readability of
prospectuses.-[11]- The Commission intends that the plain English initiatives serve as the standard for all disclosure documents,
and the plain English proposals are an important counterpart of the proposed
-[11]- Securities Act Release No. 7380 (Jan. 14, 1997) [62 FR 3152] ("Plain English Release"). In conjunction with these proposals,
the Commission's Office of Investor Assistance has issued a draft of A Plain English Handbook: How to Create Clear SEC Disclosure
Documents to explain the plain English principles of the proposed amendments and other techniques for preparing clear disclosure
documents. See also "Plain English: A Work in Progress," Remarks by Isaac C. Hunt, Commissioner, SEC, before the First Annual
Institute on Mergers and Acquisition: Corporate, Tax, Securities, and Related Aspects, Key Biscayne, Fla. (Feb. 6, 1997).
fund disclosure initiatives. If adopted, the plain English requirements would apply to fund prospectuses and the profile.
The Commission's efforts to improve fund disclosure are long-standing. In 1983, the Commission introduced an innovative approach
to prospectus disclosure by adopting a two-part disclosure format.-[12]- Under this format, the Commission intended that a fund
would provide investors with a simplified prospectus designed to contain essential information about the fund that assists an
investor in making an investment decision. The Commission contemplated that more extensive information and detailed discussions
of matters included in the prospectus would be available in a Statement of Additional Information ("SAI") that investors could
obtain upon request. In adopting this new format, the Commission's goal was to provide investors with
more useful information in "a prospectus that is substantially shorter and simpler, so that the prospectus clearly discloses the fundamental characteristics of the
particular investment company. . . ."-[13]-
Since 1983, the Commission has adopted a number of other initiatives to improve fund disclosure, including a uniform fee table and
a requirement for management's discussion of
-[12]- Investment Company Act Release No. 13436 (Aug. 12, 1983) [48 FR 37928] ("Form N-1A
Adopting Release").
-[13]- Investment Company Act Release No. 12927 (Dec. 27, 1982) [48 FR 813, 814] ("Form N-1A Proposing Release").
fund performance ("MDFP").-[14]- While these changes have provided investors with clear and helpful information about fund
xpenses and performance, they were not intended to address overall prospectus disclosure requirements. The Commission has
concluded that a comprehensive review and revision of fund disclosure requirements is necessary to improve the information
provided in fund prospectuses.-[15]-
The Commission's consideration of disclosure issues has included evaluating the use of the profile as a standardized, summary
disclosure document. The Commission, with the cooperation of the Investment Company Institute ("ICI") and several large fund
groups, conducted a pilot program permitting funds to use profiles ("pilot profiles") together
-[14]- Investment Company Act Release Nos. 16244 (Feb. 1, 1988) [53 FR 3192] ("Fee Table Adopting Release") and 19382 (Apr.
6, 1993) [58 FR 19050] ("MDFP Adopting Release"). See also Investment Company Act Release Nos. 21216 (July 19, 1995) [60 FR 38454] ("Money Market Fund Prospectus Release") (proposing amendments designed to make money market fund prospectuses
simpler and more informative) and 16245 (Feb. 2, 1988) [53 FR
3868] ("Performance Release") (adopting a uniform formula for
calculating fund performance).
-[15]- See, e.g., SEC, REPORT OF THE ADVISORY COMMITTEE ON THE CAPITAL FORMATION AND REGULATORY PROCESSES (July
24, 1996); SEC, REPORT OF THE TASK FORCE ON DISCLOSURE SIMPLIFICATION (1996) ("DISCLOSURE SIMPLIFICATION TASK
FORCE REPORT")
(recommending specific improvements in the disclosure provided by corporate issuers). with their prospectuses.-[16]- The pilot profiles (like the profile proposed today) contain a summary of key information about the
fund. The program's purpose was to determine whether investors found the pilot profiles helpful in making investment decisions.
Focus groups conducted on the Commission's behalf ("Focus Groups") responded very positively to the profile concept. Fund
investors participating in a survey sponsored by the ICI also strongly favored the pilot
profiles.
-[17]- In another recent initiative, the Commission issued a release requesting comment on ways to improve risk disclosure
and comparability of fund risk levels ("Risk Concept Release").-[18]- The Commission received over 3,700 comment letters, mostly
from individual investors. Commenters confirmed the importance of risk disclosure to investors when evaluating and comparing funds
and highlighted the need to improve prospectus disclosure of fund risks. In particular,
-[16]- See Investment Company Institute (pub. avail. July 31, 1995) ("1995 Profile Letter"). The Division of Investment
Management (the "Division") has permitted the pilot program, with some modifications, to continue for another year. See Investment Company Institute (pub. avail. July 29, 1996) ("1996 Profile Letter"). The Division also has permitted variable annuity registrants to use "variable annuity profiles" together with their prospectuses. National Association for Variable Annuities (pub.
avail. June 4, 1996).
-[17]- See ICI PROFILE SURVEY, supra note 6, at 31-32.
-[18]- Investment Company Act Release No. 20974
(Mar. 29, 1995) [60 FR 17172].
commenters indicated that current risk disclosure is difficult to understand and does not fully convey to investors the risks
associated with an investment in a fund. The Commission remains committed to the same goals articulated in adopting Form N-1A.
The initiatives proposed today are intended to further these goals and achieve clear and concise disclosure that would assist fund
investors in making investment decisions. Based on the Commission's review of current fund prospectuses and related disclosure
requirements, the Commission has identified 5 major objectives that form the basis for today's initiatives:
- Improved prospectus disclosure: Although some funds have made significant and commendable efforts to improve their
prospectuses,-[19]- prospectus disclosure relating to a fund tends to be overly complex and difficult to follow and should be
revised to focus on essential information about the fund to help an investor make an informed investment decision.
- Fund names: Although a fund's name (like any other single piece of information about an investment) cannot tell the whole story
about a fund investment, names may communicate a great deal to an investor, and investors should have greater assurance that a
fund whose name suggests that the fund focuses on certain investments will make those investments.
- Investor choice: Different investors prefer different amounts of information before making an
investment decision, and regulatory requirements should not
-[19]- See, e.g., McTague, Simply Beautiful: Shorn of Legalese, Even Prospectuses Make Sense, BARRON'S, Oct. 7, 1996, at F10
(about the recent efforts of the John Hancock funds and other fund groups to improve their prospectuses).
foreclose options that respond to prospective investors' information needs.
- Standardized fund summaries: Investors have expressed a strong preference for summary information about funds in a standard
format; summaries should provide investors with additional tools to help them make better use of the extensive information
available about funds.
- Clearer risk disclosure: The risks of investing in a fund often are not readily apparent to investors and should be communicated
more effectively.
The proposed disclosure initiatives address these objectives.
Improved Prospectus Disclosure
The proposed amendments would change the disclosure requirements for fund prospectuses. The Commission regards the
prospectus as an investor's primary source of information about a fund. A prospectus, however, is not useful to investors if it is in
a form that discourages investors from reading it. The prospectus is intended to provide information about matters of fundamental
importance to most investors.-[20]- The Commission's proposals are intended to update and streamline prospectus disclosure
requirements to focus on essential information about a
-[20]- See Form N-1A Proposing Release, supra note 13, at 814.
particular fund and make the prospectus less technical and easier to read.-[21]- This initiative is designed to eliminate prospectus
clutter that tends to obscure information that could help an investor make an investment decision. The proposed amendments
would:
-- move certain disclosure about fund organization and legal requirements from the prospectus to the SAI to focus prospectus
disclosure on essential information about a fund, while continuing to assure that the information is available to those interested in reviewing it;
-- permit a fund that is offered as an investment alternative in a participant-directed defined contribution plan to tailor its
prospectus for use by plan participants;
-- update and incorporate certain staff disclosure requirements into the amended registration
form and include guidance about legal, interpretive, and operational matters in a new "Investment Company Registration Package," which, together, would provide more effective guidance about disclosure and legal matters;-[22]- and
-[21]- Under the authority in section 10(a) of the Securities Act [15 U.S.C. 77j(a)], the Commission is proposing amendments to
current prospectus disclosure requirements based on its determination that certain disclosure requirements result in information
that, while useful to some investors, is not necessary in the public interest or for the protection of investors to be included in the
prospectus. rrp
-[22]- Incorporating certain staff disclosure requirements into the revised form is intended to formally identify those disclosure.
