Sec Streamlines Mutual Fund Summaries New Rules Give Investors Simplified Options In Lieu Of Traditional Prospectus

Eager to make complex financial documents easier to understand, securities regulators voted last week to allow mutual funds to be sold for the first time without the traditional prospectuses.

Under the rule adopted by the Securities and Exchange Commission, instead of the usual lengthy prospectus, investors could get a shorter summary outlining a mutual fund’s risks, performance and investment style.

Investors would have the choice of buying into a fund on the basis of the summary, called a profile, or requesting a full prospectus from the fund company.

The profiles could be made available on the Internet, by mail, in newspapers or in other media. Expected to run about three to six pages, they could be provided at mutual funds’ option starting June 1.

In addition, the prospectuses themselves will have to be overhauled to provide clearer disclosure in plain English of mutual fund risks, fees charged to investors, and investment strategies and performance. Verbal clutter will have to be removed.

Traditional prospectuses, provided to millions of investors in the wildly popular mutual funds, are often so convoluted with legal jargon that they are completely ignored.

A survey by the Investment Company Institute, the mutual fund industry’s trade group, found that only half of fund shareholders consulted a prospectus before making an investment. A separate survey by the SEC and the U.S. Comptroller of the Currency found investors viewed prospectuses as only the fifth-best source of information.

“We are providing the industry with an opportunity to communicate information about mutual funds to investors in a clearer and more meaningful way than ever before,” SEC Chairman Arthur Levitt Jr. said before the 3-0 vote.

The market watchdog agency voted in January to require that key sections of prospectuses and other documents put out by companies for stock or bond offerings be written simply and clearly, without legal or business jargon.

Taken together, the SEC’s recent actions “are the most sweeping changes in our approach to disclosure in more than a generation,” Levitt said.

An estimated 62 million Americans now invest in more than 6,800 mutual funds, which had combined assets of $4.6 trillion at the end of January.

“Millions of American investors will benefit from” the SEC’s action, said Matthew Fink, president of ICI. “The SEC’s decision will make it easier for investors to understand the key elements and investment risks of a mutual fund.”