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May 15, 2008 at 08:00 PM
In an effort to minimize increasing fulfillment costs, fund companies have been combining multiple fund prospectuses into a phone-book-sized “one-size-fits-all” document distributed in a single mass mailing. What began as a noble effort to inform investors and protect them has resulted in disclosure that is costly, wasteful and confusing. As the industry moves toward greater transparency in mutual fund sales transactions and standardization of information, a central need has been simplicity.
After more than a decade of effort by the fund industry and the U.S. Securities Exchange Commission, the answer is on the horizon. In November 2007, the SEC announced a proposed rule for a shorter, simpler, standardized prospectus that would tell investors what they need to know within three to four pages. The stated goal is to provide the average investor with clear, succinct information and to standardize information to facilitate fund-to-fund comparisons.
The proposed rule is designed to simplify investor disclosure by providing fund investors with an easier to read document and better enable “fund-to-fund” comparisons. It includes two key components:
- The summary prospectus, which introduces a streamlined prospectus for fund investors, in lieu of the current statutory prospectus. The summary prospectus could be delivered in print or electronically. Fund companies would also be required to make it available online.
- Layered disclosure on the web introduces a layered approach to conveying fund information. Investors seeking more information than what is contained in the summary prospectus would be able to access it online. Fund companies would be responsible for providing electronic versions of the statutory prospectus, statement of additional information, shareholder reports and supplements.
If financial intermediaries wish to deliver a summary prospectus to investors, it would behoove the fund companies to make the standalone document available. In this case, the fund companies would submit two separate filings on the SEC’s mutual fund database “EDGAR” (Electronic Data Gathering, Analysis, and Retrieval system) – the summary prospectus included at the front of the statutory prospectus and a separate, standalone summary prospectus, as well as a URL for investors to electronically access the statutory prospectus and other related fund disclosure information.
Forrester Consulting estimates the summary prospectus could save fund companies $300 million annually. Even greater cost savings could be achieved by combining the summary prospectus and the trade confirm in a single mailing or by moving to cost-efficient e-delivery. In fact, many believe the summary prospectus and its layered disclosure via the Web will be a huge impetus to migrate the industry from paper-based to electronic disclosure. Gone will be the days of “pick and pack” warehouse fulfillment as digital print-on-demand and e-delivery gain a new stronghold. The industry spends roughly $1 billion each year producing and delivering paper prospectuses yet studies show 67 percent of investors don’t even read it. When you factor in other forms of disclosure – such as semi-annual and annual reports, supplements, and statements of additional information – the total annual bill for paper-based investor disclosure is $5 billion.
