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Retirement Planning: Fund Firms Get Ahead of Summary Prospectus Deadline

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While mutual funds are busy getting up to speed with the Securities and Exchange Commission’s 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, by January 1, 2010–some firms like Los Angeles-based Guinness Atkinson Asset Management already put out its first summary prospectus on May 1. “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.

However, 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 regulator hasn’t issued any directives as yet, and is likely waiting to see how things pan out on the mutual fund side, 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 the Washington, D.C., office of Jorden Burt LLP.

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 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.

Choi 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 savings afforded 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 NewRiver, Inc., Andover, Massachusetts, a leading 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.

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.

Savita Iyer-Ahrestani is a freelance business journalist based in Arnhem, The Netherlands.She can be reached at [email protected].