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Materials Will Be Easier to Read--but Better? Maybe

April 19, 1998|RUSS WILES | Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work."

See the mutual fund. Watch people buy shares. Look out for risks and expenses.

OK, so you're not likely to spot sentences quite that simple in forthcoming mutual fund brochures, but, beginning later this spring, those stuffy documents will be getting easier to read.

In recent months, the Securities and Exchange Commission has approved three initiatives that should make fund prospectuses or disclosure brochures easier for investors to grasp.

Two of the initiatives involve fund prospectuses--long criticized for being wordy, obtuse and tedious. The so-called plain-English rule, which goes into effect for prospectuses written on or after Oct. 1, will require fund companies to present their prospectuses in clear, concise language.

The prospectus also will get a format make-over to include new risk-return tables and other user-friendly features.

A third initiative involves the optional "profile" prospectus, which will be a brief highlighting of key fund features.

The idea is to get people to actually pick up fund literature and read it. Regulators are concerned that with greater numbers of less-sophisticated investors buying mutual funds these days, many shareholders may not understand what they own.

But as sensible as such initiatives may seem, their approval has been a long time coming, and critics are still voicing their opposition to some of them.

One concern is that short and simple explanations will leave investors without some of the facts they need to make truly informed decisions.

"Some people feel disclosure is insufficient unless it provides all of the information that, say, a professional money manager would desire," said Craig Tyle, general counsel of the Investment Company Institute, the industry trade group in Washington.

More to the point, critics within the fund business worry that such simplification might expose the companies to lawsuits if certain relevant information is omitted or glossed over.

Robert Zack, associate general counsel at OppenheimerFunds in New York, points out that prospectuses have traditionally been written not just to inform investors but also to protect company boards of directors, money managers and marketers.

The SEC, however, argues that the primary concern should be to help shareholders better understand what they own.

"You can't just put the information out there," said Barry Barbash, director of the SEC's Division of Investment Management, which regulates mutual funds. "You also have to make sure investors use it."

The key features of the plain-English rule are:

* Short sentences.

* Concrete, everyday words.

* Sentences written in the active voice.

* Encouragement of the use of tables with bulleted points to explain complex information.

* Avoidance of legal jargon and technical financial terms.

* Avoidance of multiple negatives.

Thomas Smith, a managing partner at the New York law firm Brown & Wood, notes that some critics would have liked to see the plain-English rule go even further--limiting the length of certain sections, for example, or limiting or prioritizing the risk factors discussed.

The new "profile," or shortened prospectus, which goes into effect on an optional basis on June 1, has been even more controversial. These will summarize, probably in a few pages, a fund's objectives, investment strategies, fees, performance, risks and other key topics.

Typically, a prospective investor requesting fund information would receive this document, then receive the full prospectus shortly after his or her fund purchase has been confirmed. So, although the profile document is intended to supplement rather than supplant the lengthier version, critics fear investors will buy based only on the profile prospectus and never bother to read the full version.

The format changes in regular prospectuses will start to appear after June 1 as well. These will include:

* Simple, uncluttered cover pages.

* A standardized summary of risk and return aspects, including a performance bar chart.

* A broad discussion of a fund's principal investment strategies.

* A consolidation of discussions about sales charges, 12b-1 fees and other costs, so that these appear in one place.

The SEC's simplification effort will also affect the Statement of Additional Information, often known as Part 2 of the mutual fund prospectus, making it a more important document.

The SAI, supplied only on request, is a pamphlet in which you can find detailed explanations of a fund's investment policies and related matters, including a listing of officers, directors and even major investors. Beginning June 1, much of the information now in the regular prospectus will be moved to the SIA, including:

* Information on how and when the fund was organized.

* A discussion of director duties.

* A detailed look at certain fees and expenses, including brokerage commissions.

* Explanations of how securities are valued and the fund's daily prices established.

Taken together, says ICI President Matthew Fink, the new simplification initiatives are "the most significant disclosure reforms in the history of U.S. mutual funds."


Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work." He can be reached at

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