If you buy a computer, the “quick- start guide” helps you get the equipment up and running without forcing you to learn many of the fine points that may or may not someday be useful information.
The powers behind the mutual fund business want you to get the same kind of jumpstart when it comes to their products.
Paul Schott Stevens, president of the Investment Company Institute – the trade association for fund companies – called for big changes in fund disclosure last week, specifically suggesting that investors would be better served by ditching the traditional prospectus in favor of a jumpstart user’s manual, along with instructions on how to access the true prospectus on the Internet.
It’s hardly a new idea, but there’s one significant difference this time, namely that the Securities and Exchange Commission is receptive to the idea, and the fund industry powers are more eager than ever to ease their paperwork burden.
There is no question that the proposal is good for fund companies; the verdict is not quite so clear when it comes to consumers.
Technically, a mutual fund’s prospectus is the contract it has with investors, providing the rules, regulations and red tape that are a part of being a shareholder. The document that fund companies send investors tells only half of the story, literally; Part II of the prospectus – the statement of additional information, which includes data on management and the ongoing operations of the fund – is not sent to prospective shareholders or current owners. It is available only online or upon request.
That is precisely the status that the fund industry now wants for Part I of the document, the traditional prospectus that most investors file or toss without reading.
This is not the first time the industry has entertained the notion of radical change in disclosure. In the late 1990s, there was a concerted attempt to develop the “profile prospectus,” a CliffsNotes version of the traditional document. The document had two problems:
First, regulators feared that the result of a slimmed-down prospectus would be a loss of information in the marketplace, which will be an issue with the new proposal too.
Second, fund lawyers weren’t willing to take the liability risk. Securities law holds fund firms liable for putting the wrong information in a prospectus, or for omitting items that regulators or consumers (more specifically, the plaintiffs’ lawyers who might be hired by shareholders) believe should be included. By definition, a summary document drops some data by focusing on what is deemed to be most important; fund lawyers worried that their firms would be sued into oblivion.
Once it became clear that the profile prospectus could not fly on its own, fund companies gave up on the project.
Several key things have changed since the profile prospectus faded quietly into oblivion. For starters, the Internet moved from “trendy device” to “mandatory household appliance.”
That kind of widespread computer use improves the chances that regulators will do to Part I of the prospectus precisely what they now allow with Part II, making it available online or upon request. The SEC’s decision to allow the statement of additional information to be distributed that way creates a precedent that eases liability concerns. And the end of document mailing would save the industry billions (don’t count on shareholders seeing lower costs), so management is motivated.
There are still questions about whether a “quick start guide” provides sufficient information. Next week in this space, I will try to suggest just what information should be required if this proposal goes through.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
