More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
While mutual funds are busy getting up to speed with the Securities and Exchange Commission (SEC) summary prospectus rule--the Commission only requires mutual fund companies to file summary prospectuses, either as standalone documents or as part of their statutory prospectuses--on January 1, 2010--some firms like Los Angeles-based Guinness Atkinson Asset Management already put out its first summary prospectus on May 1st.
"The motivation in doing this early on was simply that we thought it was the right thing to do," says Jim Atkinson, CEO of Guinness Atkinson.
Experts believe the SEC will soon extend the summary prospectus requirement to variable annuities (VAs), an asset class that has been growing significantly over the past couple of years.
The Obama Administration's white paper on financial services reform, released June 17, would allow the SEC to require that a summary prospectus be provided to investors at or before the point of sale, if it finds that this would improve investor understanding of the particular financial products, their costs, and risks. Currently, the summary prospectus is delivered after the sale has taken place.
The Commission hasn't issued any directives as yet, and is likely waiting to see how things pan out on the mutual fund side, but the advent of a summary prospectus along the same lines as what's required for mutual funds would be a very positive development for the variable annuity industry, says Richard Choi, a partner at in the Washington, D.C., office of Jorden Burt LLP, and participants would be as enthusiastic about it as their mutual fund counterparts.
Atkinson says that although at present only a handful of companies have put together summary prospectuses, there is little doubt that all players are now working on this project.
The simple document that the SEC has mandated would allow investors to quickly learn all the important facts about a mutual fund. Of course, the statutory prospectuses that funds have to put out contain all the information that investors need to know, but these lengthy tomes are no easy read, Atkinson says, and often intimidate more than they inform.
"I am a believer in complete disclosure and we always give people whatever information they want, but making that information easy to digest is really the right thing to do," he says.
Choi of Jorden Burt believes that because a variable annuity has "fewer moving parts" than a mutual fund, it would actually be even easier to put together a summary prospectus for it. However, one possible challenge to the summary prospectus could be the difficulty of disclosing in a concise format some of the more complex enhanced guarantee features that VAs offer, he says. Still, with VA products becoming increasingly simpler, this is not such a big issue, and being able to offer investors a simple and easy-to-understand document would help the industry overall, not least because of the tremendous savings it would generate for insurance companies and other manufacturers of annuities.
Indeed, the cash that fund management companies can save by issuing a three- to four-page summary prospectus is one of the most important parts of the exercise, says Len Driscoll, chief client officer at Andover, Massachusetts-based NewRiver, Inc., a provider of mutual fund data and documents.
"This requirement completely changes the way in which [prospectuses] are printed, produced, and get to investors," he says. "In the old world, with that big book investors got, it made sense to pre-print and ship, but with a streamlined document, it makes sense to digitally print them on demand."
According to Atkinson, some fund companies might find the "layering" of information that the SEC requires for the summary prospectus to be a bit of a challenge. The summary prospectus needs to be linked to relevant parts of the statutory prospectus, he says--a tedious and rather complex technological process, albeit a necessary one.
"Some of our competitors looked at the Internet linking of documents as a rather onerous task," he says. "It was tough for us and we only have six funds, so imagine a company with 100 funds."
This is where a firm like NewRiver can come in, Driscoll says. NewRiver has been a repository of electronic information for over a decade, mining from the Edgar database (where all documents need to be filed prior to first use), organizing the information down to the CUSIP level, and providing the kind of layered information that the SEC has mandated for the summary prospectuses.
"We're very comfortable with being compliant with all the requirements of the SEC, but individual fund complexes may find these issues tough and they shouldn't have to think of them, because it makes more sense for them to turn to a service provider like us, who can easily implement the necessary technology," Driscoll says.
NewRiver has been seeing a greater demand for its services as a result of the summary prospectus requirement.
Even if the technology was a bit of a challenge for Guinness Asset Management, Atkinson believes that it was worth sweating it out a bit. The firm even went a bit further by adding some colorful artwork to its summary prospectus, he says, "because I believe that if the point is to make people read more, the document should be inviting."