More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Securities and Exchange Commission recently released mutual fund guidance that advises registrants to reduce the length of the summary disclosure to three to four pages, and to use “plain English” to explain disclosures.
Meanwhile, the long-awaited release of a formal SEC proposal regarding a variable annuity summary prospectus has been pushed off once again. The agency’s regulatory agenda said the scheduled September release date of such a proposal has been pushed to March.
Lee Covington, senior vice president and general counsel for the Insured Retirement Institute, told ThinkAdvisor in an email message that IRI “believes all the work necessary to move this proposal forward has been completed,” and that IRI urges the SEC “to move forward at the earliest possible time.”
Former SEC Chairwoman Mary Schapiro publicly supported developing a VA summary prospectus seven years ago, Covington notes.
IRI’s research shows that “very few consumers are reading any of the full prospectus and that 95% of consumers would prefer a VA summary prospectus,” he says.
While the staff of the SEC’s Division of Investment Management declined in its guidance to offer a specific page limit on a summary prospectus, the staff expects that the summary should not exceed three to four pages. The staff noted in the guidance that it was not “unusual’ for them to review filings with summaries “longer than 10 pages for a single mutual fund and sometimes almost 20 pages in length.”
The SEC staff also says in the guidance that the summary section should be a summary and not a restatement of the investment strategies and risks stated elsewhere in the prospectus, and that the summary should also omit any information not required, such as purchase and sale information.
“There are a significant number of prospectuses … in which disclosure remains complex, technical and duplicative,” the SEC writes in the guidance.
The SEC’s June guidance provides further clarification of the enhanced mutual fund disclosure amendments adopted in 2009 to Form N-1A, the registration form used by mutual funds. The June guidance is based on comments the Investment Management staff says it has provided to a number of funds and their counsel related to the Form N-1A amendments.
The agency notes that while use of the summary prospectus is optional, it has been “widely adopted,” with 80% of mutual funds offering investors a summary prospectus as of March 3.
Cipperman Compliance Services noted in reaction to the guidance that “mutual fund prospectus drafting has become as much art as science,” and recommended that funds “retain a law firm that has extensive experience with drafting registration statements and interacting with the SEC’s disclosure staff.”
Check out The Disclosure Paradox: How Much Information Is Too Much? by Michael Finke on ThinkAdvisor.