Fund industry awaits simplified prospectus

CHICAGO — Industry leaders eagerly are awaiting a proposal that would allow mutual funds to provide a two-page prospectus in lieu of the lengthy one now required, a concept that could save millions of dollars in costs.
The Department of Labor is working closely with the Securities and Exchange Commission as it crafts the proposal for a shortened prospectus. That’s because the department, which has broad authority over employer-sponsored retirement plans, is pursuing its own initiative aimed at increasing disclosure, and the two regulators want to make sure their efforts are complementary.
The SEC is expected to unveil its proposal by September.
A shorter document would replace the traditional prospectus and would likely summarize a fund’s strategies, objectives, performance, risks, conflicts and costs. The entire prospectus would likely be available online or in print for investors who request copies.
The big question is, will the fund industry embrace the proposal?
The SEC first took on the issue in 1998 when it allowed fund companies to offer two-page “profile” prospectuses. Few companies did so, however, in part because they still were required to distribute the full prospectus to shareholders.
Also, many companies were worried they would be held liable for information omitted from the shortened document.
The difference now is that the SEC’s proposal is expected to allow fund companies to mail shorter prospectuses in place of longer ones. It also is expected to protect funds from incurring any liability as a result of information left out of the condensed documents, Andrew J. “Buddy” Donohue, director of the SEC’s division of investment management, said at a gathering of mutual fund executives late last month.
The SEC last week declined to comment further.
It remains to be seen whether fund executives will embrace the proposal a second time around.
Boston-based Fidelity Investments declined to comment until the proposal has been made public, and officials at Baltimore-based Legg Mason Inc. were unavailable.
Concerns about liability are likely to remain an issue, said M. Mark Perlow, a San Francisco-based partner with Kirkpatrick & Lockhart Nicholson Graham LLP of Pittsburgh.
“There’s always the fear that the courts will disagree with the SEC and find that fund companies have buried the information,” he said. “The optimistic view is, the court environment has never been so favorable to mutual fund companies.” Although fund companies have to front the costs to print and mail these documents, investors eventually will foot the bill.
“It’ll save investors hundreds of millions,” Mr. Perlow said.

Being allowed to distribute two-page prospectuses clearly would save in printing and distribution costs, said Ari Gabinet, a former district administrator in the SEC’s Philadelphia office, who now is a principal at The Vanguard Group Inc. of Malvern, Pa.
Vanguard printed 20 million prospectuses last year, he said.
There is concern in the industry that the SEC may require the shortened prospectus to be updated more frequently. Currently, prospectuses are updated annually.
“I would be a little concerned about too-frequent updating,” Mr. Gabinet said. “I know the SEC staff is thinking about the update schedule and whether [it] want[s] to make it more frequent. If you think of it as a substitute for prospectus, then it doesn’t need to be updated more frequently.”
Greater acceptance of the Internet bodes well for the future of the impending proposal, said Elizabeth Krentzman, former general counsel of the Investment Company Institute in Washington.
“I think that’s the wonderful advantage of the Internet, and you didn’t have that 10 years ago,” said Ms. Krentzman, now a partner at Deloitte & Touche USA LLP in New York and chief adviser to its investment management industry group’s regulatory consulting practice. “It really wasn’t a viable tool.”
Many advisers believe that abbreviated prospectuses will be more useful to their clients.
Very few investors read the prospectuses, said Greg Zandlo, a certified financial planner and president of North East Asset Management in Coon Rapids, Minn.
As long as the full document still is available for more sophisticated investors, shortening the prospectus is a great idea, according to Rebecca R. Preston, a CFP with Preston Financial Planning in Providence, R.I.
“I don’t think any of my clients read all of these things,” she said.