Every decade or so, the Securities and Exchange Commission revisits mutual fund reporting requirements, usually with the objective of simplifying and clarifying disclosure to investors.
And while past rule changes made frustratingly modest improvements, the commission’s recent proposal to revamp shareholder communications may be a game-changer.
Here’s why this “Tailored Shareholder Reporting” proposal is different:
1. Fewer Prospectuses to Recycle
Mutual funds are professionally managed portfolios designed to be held by investors over several years, usually a full market cycle or more. Yet, securities laws have traditionally had the effect of treating every fund share purchase as though it is part of an initial public offering.
This has meant that a current prospectus must be delivered to each investor not only at the time of initial purchase, but each year thereafter even if, as is often the case, there were no material changes in the fund’s risks, objectives or expenses.
The duplication was needed to assure compliance with the prospectus delivery requirements of Securities Act section 5. Without it, shareholders who make subsequent purchases or reinvest dividends would have a right of rescission: a money-back guarantee if the fund shares happened to decline in value. Because shares always fluctuate — which is the point of investing — the rescission risk has been unacceptable to fund sponsors.
The SEC already had allowed for delivery to take place electronically for most investors, which eased the burden on our forests but not on investors’ attention spans. As the agency recognized, attention spans are important, too: When investors receive too much duplicative information in the mail or email, they may learn to ignore all communications.
Under the SEC proposal, section 5 would be satisfied for existing shareholders by summarizing material prospectus changes in a different document, the annual report to shareholders.
The full prospectus will still have to be prepared, filed with the SEC, delivered to new investors and made available online, so there is no reduction in the information available to the public. But the largely unread annual deliveries may soon become a thing of the past.
2. Streamlined Shareholder Reports
Twice-a-year shareholder reports — which include full sets of financial statements and accounting footnotes — also may get a more consumer-friendly update.
Based on surveys suggesting that few investors read the financial statements, the proposal would instead allow expanded, graph-focused summary information, including fund performance and expense information, holdings summaries and (as noted) any changes to key prospectus information.