Banks could find themselves on the front lines if investors choose to challenge the Securities and Exchange Commission's adoption of simplified mutual fund prospectuses in the courts, according to a Bank Securities Association official.
"Bankers would be naive to think that-given the nature of their marketplace and the types of retail investors that they have - they will not be among the first testing grounds," said Robert M. Kurucza, general counsel for the association.
"The particular circumstances of banks offering these products will invite that," he added.
Mr. Kurucza made the remarks after a speech at the trade group's annual conference here this week.
He referred to the SEC's recent approval of changes in the presentation of mutual fund prospectuses.
The changes will mandate more simplified disclosure in mutual fund registration form N-1A, which is used to register a new fund.
The SEC also adopted a "plain English" rule, which will mandate that various sections of prospectuses, such as the cover page and risk factors, be written in understandable English.
Rules for registering new funds become effective this summer; institutions amending existing funds must comply by fall. All registrants must be in compliance by the end of next year.
In an interview after his talk, Mr. Kurucza said that the commission "is to be applauded" for trying to make disclosure documents more understandable. However, he warned that investors are likely to eventually test the new SEC rules in the courts, possibly when some market event rattles the mutual fund market .
"Litigation comes not because there is too much disclosure, but because there wasn't enough," he said in his presentation.
More banks than ever are involved in the securities industry and the sale of mutual funds, but often deal with somewhat less experienced investors, said Mr. Kurucza.
"I wouldn't say that (bank customers) are not sophisticated, but their depth of experience with investment products is perhaps not as well developed as other segments of the financial services industry," he said.
The new rules will therefore put more onus on bank broker-dealers to provide additional hand-holding, said Mr. Kurucza. "The job and the burden of the broker is going to increase,"he said.
William A. Hawkins, the president of Griffin Financial Services in Irwindale, Calif., the brokerage unit of Home Savings of America, said he is not concerned about an additional burden on his brokers to elaborate on the slimmed-down prospectuses.
"Generally speaking, bank representatives spend more time with customers anyway," said Mr. Hawkins, who added that he welcomes the new format.
"To go from 50 pages of legalese to 20 pages of plain-talk copy that the consumer can understand makes all the sense in the world," he said.
Banks and other distribution agents cannot hide behind mutual funds prospectuses, said Richard A. Davies, a managing director with Alliance Capital and a former banker. They have to assess the customer's suitability, whether or not a fund prospectus is simplified,k he said.
Mr. Davies noted, however, that investors really don't bother to read prospectuses. "The reality is that most funds are being sold off the Morningstar one-page sheets," he said. Therefore, an SEC mandate for more simplicity will be positive, Mr. Davies said.