Q&A; : SEC Plan to Ease Fund Investing
The Securities and Exchange Commission will announce today a proposal to dramatically change the way mutual funds are sold to the public.
The proposal, first revealed last May as part of a sweeping overhaul of the fund industry, would allow no-load funds--those sold without up-front fees--to sell shares through newspaper advertisements.
The advertisements will be standardized to include vital information, including fund fees, performance and risks. They will also differ from today’s ads in that they will bear the full weight of SEC disclosure laws. These laws say that investors are entitled to a full refund of their investment if they can prove the fund company misrepresented the investment.
“If this is successful, it will not only lower the cost of delivering funds, it will also significantly improve the ability of investors to shop for funds,” SEC Chairman Richard Breeden said Wednesday.
The change is needed to put no-load funds on the same playing field as “load” funds--those sold through brokers that charge up-front fees, Breeden said.
If you want to buy a load fund, all you have to do is call your broker. But no-load funds can be purchased only after the fund company sends you a prospectus and you send back a signed statement confirming your intention to buy the fund, along with your check. That requirement means that it takes more time--usually a week or two more--to invest in a no-load fund than a load fund.
Here are some answers to questions about how the SEC’s proposal would work:
Q. What kind of advertisements is the SEC proposing to allow?
A. Mutual funds will be able to sell shares through “prospectus advertisements” that can run in newspapers, magazines, newsletters--anywhere the fund company chooses to advertise. However, unlike advertisements that fund companies now run, the content of these new advertisements will be regulated. Certain information must be included. And the advertisements will be considered legal documents, subject to securities penalties for misrepresentation.
Q. What will be included in the advertisements?
A. In addition to discretionary advertising copy, the prospectus ads must include:
* Past performance over one-, five- and 10-year periods, if the fund has been in business that long.
* Fees, including management charges, so-called 12(b)1 marketing fees, loads and other expenses.
* Risks, both generic and specific. In other words, if it is a stock fund, the advertisement would note that the stock market is volatile, and consequently the value of your shares could decline, depending on the market. However, it would also say whether the fund is more or less aggressive--and thus, more or less risky--than similar funds.
* Investment objectives and goals--what the fund is attempting to do with your money.
* Dividend payment options, such as whether the fund allows automatic reinvestment of dividends.
* Redemption procedures--how you get your money back.
* A coupon to send in with your check. Once the mutual fund company receives this coupon and your check, it will put your money in the fund of your choice. You don’t have to wait for the more detailed prospectus to invest. But the prospectus will be forwarded to you.
Q. What happens if the fund has only been operating for a year and doesn’t have a track record?
A. It can’t advertise. Only funds that have been operating for two years or more can use the prospectus ads. Funds that have been in business less than five years, but more than two, will report 12-month performance and a second performance figure, which will be based on how long they’ve been operating.
Q. What safeguards are there to protect investors from misleading ads?
A. The first year a fund runs these ads, they’ll be reviewed prior to publication by either the SEC or the National Assn. of Securities Dealers. The advertisements will also be considered legal documents, subject to SEC disclosure rules. Those rules say that if an investor can prove the fund misrepresented the investment, the fund company must refund your money. In some cases, civil and criminal fraud penalties could also apply.
Q. How would these rules help individual investors?
A. Aside from speeding purchases, they could allow investors to compare funds on an apples-to-apples basis more easily. If you want to compare funds now, you must get prospectuses and read through dozens of pages of charts and prose to get all the vital details.
While all funds must provide certain information, with a few exceptions the information doesn’t have to be on any specific page. And, in addition to the required information, funds often provide additional performance and investment information that may be calculated slightly differently than the required performance information. As a result, comparisons now require hours of detailed reading.
The prospectus advertisements would get all the pertinent information on one page. Presumably, several funds could advertise in the same newspaper, which would give investors the ability to compare a variety of options relatively quickly and painlessly, Breeden notes.
Q. When would these rules go into affect?
A. The soonest would be this summer, Breeden says. They are still proposals and must go through a 90-day comment period. If there are significant objections, the SEC may revise the rules, he adds. The SEC’s main concern is that the prospectus advertisement rules will provide sufficient consumer protections.
