There's something unusual about Dreyfus Corp.'s new Large Company Value Fund prospectus: It's clear, concise, and understandable.
Starting Dec. 1, all new fund prospectuses must resemble Dreyfus', the first to be issued under a simplified format mandated by the Securities and Exchange Commission.
Such user-friendly documents are a major departure from their predecessors-long, repetitive tracts clogged with legal jargon and baffling columns of numbers.
"I think people will actually read these things and get something out of them," said John Markese, president of the American Association of Individual Investors.
Unlike the old prospectuses, which served more as legal protection for fund companies than as investor education material, the new prospectus is "a tool to make a decision," said David Sheehan, director of marketing and product management for Dreyfus in New York.
It's a tool to which brokers at banks and elsewhere will soon be introducing their clients and a document those clients are more likely to read, said Rob Amdahl, chief operating officer at the brokerage arm of Glendale Federal Bank in Glendale, Calif.
"It's easier to look at-it's not this huge legal document," Mr. Amdahl said.
In many ways the new prospectuses are like the old, for instance, in their tendency to state the obvious. "You could lose money in this fund, but you also have the potential to make money," the Dreyfus prospectus reveals.
But the improvements are many. Among them:
A standardized summary clearly laying out a fund's investment objectives, strategies, risks, performance, and fees.
A bar graph showing the volatility of the fund's returns over the past 10 years and a table comparing its returns to those of a corresponding security market index. Funds must show their best and worst quarters in a 10-year period to show that share prices may fluctuate in the short term.
Risk disclosure describing the portfolio as a whole rather than just the risks of each type of security in the portfolio.
Another change recently adopted by the SEC is that prospectuses must use plain English and avoid legal jargon.
The prospectuses are to be shortened by shifting small-print-type information-technical, legal, and operational matters generally common to all funds-to the statement of additional information, a separate document that fund companies must make available on request.
In addition, fund companies may offer a "profile prospectus"-an even further abridged description of the fund that might be as short as three or four pages. Investors would be able to buy shares in funds using the profile alone, though fund companies would have to send a complete prospectus with the confirmation of an order.
Few if any companies appear to have produced a profile prospectus as yet-probably because of concerns about legal liability.
Some companies are making their prospectuses even more user-friendly by incorporating more white space, graphics, and icons to enliven the documents and make them easier to navigate. John Hancock Funds, Boston, did such an overhaul in 1996 when it voluntarily produced a streamlined prospectus, and Dreyfus has followed suit.
The mutual fund industry in general has embraced the changes that Matthew P. Fink, the head of their trade group, the Investment Company Institute, has called "the most significant disclosure reforms in the history of U.S. mutual funds."
But some fund companies may only go so far in revamping their prospectuses. In fact, SEC Chairman Arthur Levitt chided the industry in May at its annual conference.
"We're chagrined to hear that some of you intend to make only a few cosmetic changes and mostly leave your prospectuses as they are-the same dense, legalistic presentations that investors don't want, don't understand, and don't read," he said.
Why did prospectuses get to be so bad? Because they were seen largely as providing legal protection for fund companies through full disclosure, which was often excruciatingly full.
"They were looked on as legal disclosure documents rather than customer decision-making tools," Mr. Sheehan said.
And as new disclosure concerns piled up year after year, the SEC had fund companies add boilerplate passages addressing them-passages that accumulated and became permanent parts of the ever-lengthening documents.
The industry and the SEC have recognized the problem for years. In a 1994 speech to the National Press Club, Mr. Levitt said, "Our passion for full disclosure has created fact-bloated reports and prospectuses that are more redundant than revealing."
After working with representatives from the fund industry, the SEC adopted the plain-English rules in February and the simplified prospectus policy in March.
Jonathan Alpert, an attorney who has led several class actions against bank brokerages, said the changes appear to be for the better, though "only time will tell how consumers will react."
He said the new form, though abridged, may effectively contain more disclosure information than the old one.
"There was essentially no disclosure because there was so much disclosure in the old prospectuses," he said.
Though there is general agreement that the new prospectuses are a vast improvement, many note that the changes give the Dreyfus prospectus more of a marketing tone.
It reads in part: "Founded in 1947, Dreyfus manages one of the nation's leading mutual fund complexes, with more than $100 billion in more than 150 mutual fund portfolios."
Dreyfus' parent company, Mellon Bank Corp., is touted as well: "With more than $325 billion of assets under management and $1.6 trillion of assets under administration, Mellon provides a full range of banking, investment, and trust products and services to individuals, businesses, and institutions."
Dreyfus and John Hancock say they are confident that their new prospectuses will contain enough information to provide legal cover and also appeal to investors.
Robert M. Kurucza, a lawyer who represents the Bank Securities Association, said the simplified prospectus should be a boon to sales. But bank brokerages may have to take extra steps to protect against lawsuits, he said.
Those steps may be as simple as notifying clients that the prospectuses have changed and that more information is available through the statements of additional information.
