Deciphering Road Map to Mutual Funds : Investing: The prospectus remains a jumble of legal jargon, often 60 pages long, despite attempts to simplify it.
While the $1.7-billion mutual fund industry has hit the big time in the 1990s, its basic compact with investors has proved difficult to modernize.
That compact is the prospectus, a document published by each fund that--for all recent attempts at streamlining--can still easily run to 50 or 60 pages of dense boilerplate.
“You’ve heard it a dozen times: Read the prospectus before you invest,” says the Investment Company Institute, the funds’ largest trade association, in a pamphlet it offers as a guide to prospectus-deciphering.
“It’s not as if you haven’t tried. But it’s almost like reading the fine print on a legal document. You’re not sure what some of it means or why it’s there.”
The industry and its regulators have been trying too, seeking to develop a format that serves all the legal requirements imposed on the prospectus but that is reader-friendly at the same time.
Since 1983 the Securities and Exchange Commission has permitted some of the material that funds are required to disclose to be published in a separate “statement of additional information” distributed to investors only at their request.
By law the prospectus itself must be supplied to investors before they buy shares or along with the confirmation of their initial purchase.
Marketing executives and staffers at the fund organizations, meanwhile, vie to write prospectuses that might reach a welcoming eye. Such fund sponsors as Gateway, Liberty and Putnam now publish prospectuses as centerfolds in broader explanatory sales literature.
But few people inside or outside the business are ready to proclaim the campaign a success. Over the last 10 years, “the simplified prospectus has grown lengthier, more complex and less comprehensible to investors,” says Matthew Fink, the investment institute’s president.
In current fund prospectuses, investors still routinely encounter sentences like: “The Fund intends to qualify and elect to be treated each taxable year as a ‘regulated investment company’ under subchapter M of the Internal Revenue Code of 1986, as amended.”
A proposal now awaiting SEC approval would let funds offer their shares for sale through so-called summary prospectuses-- short-form descriptions and account applications that fit readily into newspaper and direct-mail ads.
These would not be “short, sexy ads with purchase coupons,” Fink declares, but “would be a summary prospectus, containing key information specified in SEC rules.” A full prospectus would be forwarded to investors later.
Proponents of this idea, sometimes called off-the-page advertising, say it might actually encourage increased disclosure to investors such as participants in employer-sponsored 401(k) plans.
