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Simple Concept From SEC: Use Plain English in Fund Prospectuses

March 02, 1995|From Reuters

WASHINGTON — Regulators are working on ways to simplify mutual fund prospectuses so consumers can make investment decisions more easily, but experts caution that too much information can be as dangerous as too little.

Securities and Exchange Commission regulators are on the verge of completing a review of eight models for a proposed simpler, one-page prospectus for mutual funds.

The idea behind the so-called profile prospectus is to help consumers make investment decisions without having to wade through voluminous pages of dense, and sometimes incomprehensible, technical information.

A standardized format for an easy-to-read, plain-English document would tell investors exactly what they are buying and what to expect from a mutual fund company, proponents say.

Industry officials don't all think the standardized form is necessary.

"Not everyone reads prospectuses," said Henry Hopkins, chief legal counsel at T. Rowe Price, which says it already issues simplified offering documents. "A simplified prospectus is much more helpful than the statutory one."

What's needed is a balance between providing too little information with too much, he said.

Earlier this week SEC Chairman Arthur Levitt said the current prospectus effort "is in the nature of an experiment." Over the years, he said, the SEC and the mutual fund industry have agreed to require so much disclosure from individual fund companies that the exercise has become "self-defeating."

"It has become costly to providers and not productive to investors," he said.

Weighing in on the side of the simplified prospectus is investment guru Peter Lynch, vice chairman of Fidelity Management and Research Co., Boston-based adviser to Fidelity Funds, who called it a major step forward and an excellent idea.

The review of the models for the proposed profile prospectus with state regulators may be complete by mid-March, and industrywide comments probably will be sought in April, said Barry Barbash, director of the SEC division that oversees mutual funds.

It is the latest effort by the SEC to demystify arcane financial terms and enable investors to understand what they are buying. In October, Levitt asked mutual fund companies to use plain English in their offering documents. The SEC also had suggested a so-called off-the-page prospectus, a one-page newspaper advertisement with an application form that investors could use to buy mutual fund shares before receiving an official prospectus.

But the SEC has placed the off-the-page proposal on hold, pending results of its attempt to introduce the profile prospectus, Barbash said.

Current SEC rules require an investor to receive an official prospectus before a fund company closes a sale. But it takes days to send a prospectus, and only a few companies have produced documents that can be readily understood.

The SEC will still require that an official prospectus be sent to mutual fund buyers after they make an investment decision on the basis of a profile prospectus, Barbash said.

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