The Mutual Fund Summary Prospectus: Almost – Here at Last

This summer the Securities and Exchange Commission (SEC) is expected to announce a rule for a shorter version of the standard mutual fund prospectus, or "Summary Prospectus" The proposed rule would simplify investor disclosure by providing fund investors with an easier document to read for making investment decisions, as well as providing an enhanced capability to make "fund-to-fund" comparisons. Most prospectuses today average 30 to 40 pages, and the SEC proposal calls for a shorter summary version of 3 to 4 pages.

There are two key components:
Summary Prospectus – The proposed rule would introduce a streamlined prospectus to be delivered to fund investors for mutual fund sales or confirmation in lieu of the current statutory prospectus required by the Investment Company Act of 1940. The Summary Prospectus could be delivered in print or electronically (with electronic consent), and would contain standardized information that must also appear at the front of the current statutory prospectus. Fund companies would also be required to make the Summary Prospectus available online. The Summary Prospectus would be updated annually; however, some information such as a fund’s top ten holdings would be updated quarterly.

Layered Disclosure – The proposed rule also introduces a new layered approach to conveying fund information so that investors seeking more information than what is contained in the Summary Prospectus would be able to access such information fast and efficiently online. This would include hyperlinks from the summary information to the more detailed information contained in the longer statutory prospectus. Fund companies would be responsible for providing electronic versions of the statutory prospectus, statement of additional information, shareholder reports and supplements.

So why was the rule proposed in the first place? The industry and regulators have both acknowledged that the current investor disclosure requirements enacted in 1940 have become outdated, inefficient, and ineffective in meeting their original goals of better informing and protecting investors. Three reasons include:

Too Much Information. Today, almost half of U.S. households use mutual funds to save for retirement or fund college tuition (e.g., 529 plans). But many consumers do not understand the complex prospectus documents that fund firms are required to deliver within three days of a new mutual fund purchase. In fact, a 2006 survey by the Investment Company Institute (ICI) – the trade association which represents the $12 trillion mutual fund industry – found that 66% of investors never use a prospectus. And 60% of investors said prospectuses are hard to understand.

Specific Information is Hard to Find. Not only is content hard to understand but key information – such as that proposed for the Summary Prospectus – is hard to locate. Many fund companies combine multiple fund prospectuses into a "big book" prospectus to enable a single mass mailing of required disclosure information to their customer base. An investor seeking information about the one fund he/she is interested in may have to comb through various sections of the "big book" (which can represent up to 30-40 funds). Compounding the complexity, a multi-fund prospectus may be filed under a legal name that differs from the common name the investor may know it as.

Too Much Money and Paper is Wasted. The industry spends $1 billion a year on printing and shipping fees for prospectus documents. In an electronic era where 88% of mutual fund shareholders have Internet access, and 66% of these use the Internet at least once a day, the reliance of paper-based compliance is wasteful, inconvenient and plain passé. The Summary Prospectus would be cheaper to distribute by paper or mail. As a result, fund families would save up to $300 million per year according to Forrester Research. Not to mention the environmental impact.

"One of our mutual funds, Growth of America Fund, when it prints its annual report, it fills 17 tractor-trailers …That is 600,000 pounds. Six hundred thousand pounds, three hundred tons, one fund, one report and they do two (mailings) a year to 5.6 million people. If that information could be put on the Internet, there would be direct and immediate savings to shareholders." Paul Haag, American Funds CEO, SEC XBRL Roundtable, June 2006

"The online information would be available in a progressively more detailed format so that investors could move from the summary to the particulars with the click of a mouse," SEC
Chairman Cox stated during a live webcast of the SEC’s November 2007 open meeting. "This layered; webpage layout will let every customer obtain the level of detail they want."

Put simply, key data points would be tagged using a standard global business reporting language – such as XML – enabling investors to obtain information and to easily create fund-to-fund comparisons online.

For more information, go to www.summaryprospectus.com. see
http://www.sec.gov/rules/proposed/2007/33-8861.pdf).