Money Management Executive
After more than a decade of fits and starts for prospectus profiles, it appears both the mutual fund industry and the Securities and Exchange Commission are finally comfortable with the idea.
More than 90% of mutual fund providers said they would consider a switch from mailing full-length paper prospectuses to a shorter, condensed form supplemented by Internet access to the full prospectus, according to a survey of 150 firms conducted by Forrester Research Inc. and commissioned by NewRiver Inc.
Mutual fund providers are required by law to disclose their objectives, strategies, past performance, top holdings, risks, and fees in prospectuses at the point of sale and then twice a year by mailing the bulky reports, which often reach 100 pages. But the SEC is looking at ways to reform the mutual fund disclosure framework, including drafting a new rule that would allow firms to send the short version instead.
Andrew J. Donohue, the director of the its division of investment management, testified before the House Ways and Means Committee last month about how the SEC has worked with a mutual fund task force organized by the Financial Industry Regulatory Authority to create a two-page "profile plus" document.
"This should help investors who are overwhelmed by the choices among funds, which are too often described in lengthy and legalistic prospectuses," Mr. Donohue said. "A concise mutual fund summary could enable investors to readily access key information that is important to an informed investment decision, including information about fund fees."
Certainly, investors would prefer not to be inundated with information they cannot understand.
Four out of five investors surveyed said they would prefer a concise, to-the-point version of an investment prospectus with graphics and charts, instead of a long and detailed description, according to an August 2006 study by the Investment Company Institute.
"Two thirds of investors do not read prospectuses. They just throw it in the trash," said Len Driscoll, vice president of product marketing at NewRiver.
According to the Forrester report, "the current prospectus delivery method provides information in an arcane format that's hard for investors to digest."
The SEC first proposed a "prospectus profile" in 1995 and gave it a trial year in which fund providers were allowed to send investors the shorter form of the prospectus but were still required to provide the long version.
But most fund companies were reluctant to take on the cost and burden of sending two versions of the same report, and many have concerns that they could be accused of omitting facts from the shorter version.
The new rule would require providers to continue filing the full prospectus form with the SEC, make it available on their Web sites, and send a short-form version to investors, unless they specifically request the long one.
It would be preferable for an investor to get a two-page document at the point of sale confirming their purchase, summarizing their investment, and listing any conflicts of interest, Mr. Driscoll said. Investors could access more detailed information on the Internet or request for it to be mailed in hard-copy form, he said.
"The SEC is realizing that the vast majority of people are comfortable with using computers and the Internet," Mr. Driscoll said. "Most mutual fund investors use the Internet to do financial activities."
According to the ICI, a majority of fund investors use the Internet and say it saves them time and provides them with up-to-date investment information. In 2005, 88% of mutual fund shareholders had access to the Web, compared with 79% of all Americans, the institute's study said. In 2000, 68% of mutual fund shareholders had access to the Web, versus 57% of all Americans.
Investors who are 35 or younger are more likely than others to use the Internet to view financial information, while those who are 60 or older are more likely to prefer receiving financial information through the mail or from a professional financial adviser, the ICI found.
"Regardless of their age or current use of the Internet, the majority of all recent fund investors believe obtaining investment information online is the wave of the future," the study said.
Mr. Driscoll said the new rule will help foster the industry's migration away from warehouse "pick and pack" fulfillment and toward providing the information on demand digitally.
Forrester estimates that widespread adoption of the short-form prospectus could save the mutual fund industry $300 million a year on the $1 billion it currently spends on printing and postage costs.
"Not only does the investment industry spend exorbitant amounts of money printing and sending these often unread prospectuses, [but] the environmental impact of producing and shipping all that wasted paper is irresponsible in today's climate of sustainability and energy efficiency," according to the Forrester study.
Mr. Driscoll said eliminating the production of billions of pages of unread financial material is an environmentally sound business practice.
If approved, the SEC's rule would take effect sometime next year, he said.
