CoreStates Financial Corp. has joined a group of trailblazing companies that are trying to make mutual fund prospectuses easy to read.
After more than three months of work, the Philadelphia banking company last week sent out a new CoreFund prospectus, said Debby Kuhn, vice president and product manager for the fund family.
"It is an unusual exercise when you look at it sentence by sentence," she said. "You wonder how (shareholders) dealt with this for so long."
The new prospectus sports a colorful painting on the cover and an inviting introductory section that uses plain English and graphics to lay out the basics of investment. Throughout the document, sentences are simpler and page design more appealing than in the previous prospectus.
The Securities and Exchange Commission has proposed that prospectuses be simplified to better inform investors. But the SEC has not adopted a final rule, so many fund companies are waiting for definitive guidelines before digging in.
John Hancock Funds was among the first to go through the process, making a streamlined document available in July 1996. KeyCorp's funds also have a simplified prospectus, and many other mutual fund companies are considering doing one.
CoreFund executives decided to revise the document when it came time for the annual updating, rather than waiting for the SEC to adopt its rule, Ms. Kuhn said.
George Martinez, senior vice president and director of administration at Bisys Investment Services Group, said it makes sense for fund companies to get a jump on the process.
Since the work can take 60 to 90 days, Mr. Martinez is recommending that clients put a plan together and be ready to start the process by the time the SEC issues a final rule.
While industry experts agree that simpler language goes a long way toward explaining the potential risks of investing in mutual funds, many warn that it will not eliminate investor confusion.
"I'm concerned they're confusing the Band-Aid with the cure," said Jonathan Alpert, a Tampa-based plaintiff's lawyer. Mr. Alpert has sued investment programs at large banks for not properly disclosing the risk of investments.
Today, it is particularly important that investors understand investment risk since many have not experienced a stock market downturn, said Avi Nachmany, a consultant at Strategic Insight, New York. Risk disclosure cannot replace the lessons learned from going through a down market, he warned.
"We all try to have linguistic purity, but investors might not get it unless they experience it," he said.
All the same, many applaud the move toward simpler prospectuses.
Lawyers often work under the premise that the bigger a prospectus is, the better protected a mutual fund will be from investor lawsuits, said John Pelletier, senior vice president and general counsel at Funds Distributor Inc., Boston.
"That's great for lawyers and for liability, but that's not great for investors," he said. If an investor can understand the prospectus and the investment, that should prevent lawsuits, he said. "This is not only a step in the right direction, it is long overdue."
