Q & A : SEC Cuts Out Plan to Allow Mutual Fund Buys Via ‘Off-Page’ Coupons
In a surprise reversal, a much ballyhooed proposal to allow investors to buy mutual funds directly through detailed advertisements has been indefinitely tabled, Securities and Exchange Commission Chairman Arthur Levitt Jr. revealed Thursday.
So-called off-the-page advertising, which parts of the fund industry have pushed for years, would have allowed individuals to buy no-load funds by simply clipping coupons that accompanied new detailed disclosures of fund performance, risk and fees. Now a prospectus must be mailed out first.
Levitt previously supported off-the-page proposals but now says he is convinced that the single page advertisements would not provide investors with enough information to make an informed decision.
Levitt says he changed his mind after listening to investors in focus groups, but some fund executives speculate that he backed off after the summer derivatives scare.
Instead, the SEC will launch a pilot program that would have mutual fund companies include a one-page fund summary--similar to the “off-the-page” advertisements--with the full prospectus. And the agency says it will encourage fund companies to write investor documents in plain English.
While some no-load fund companies are disappointed that Levitt was backing off the more aggressive off-the-page rules, fund experts agreed that the SEC’s actions should still make it easier to compare funds.
“This is a terrific idea,” says Diane Coffey, spokeswoman for Dreyfus Corp. in New York. “It makes the prospectus more user-friendly by putting all the pertinent information upfront. This is clearly an improvement.”
Separately, the nation’s top securities regulators said they’re also beefing up proxy disclosures for publicly-held mutual fund companies and opening up a consumer hot line where prospective investors can call for information.
Here is what these changes mean to investors.
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Q: What’s the point of the new fund summary?
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A: It is aimed at ensuring that you can read the pertinent information about a fund before you invest. It should also give investors an easy way to make apples-to-apples comparisons between funds because you could essentially line up various fund summaries side-by-side and compare them in a glance.
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Q: Exactly what will be disclosed?
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A: That’s currently being debated. But industry executives believe the summaries will include: investment performance over one-, five- and 10-year periods; the fund’s goals, objectives and strategies; sales loads, redemption fees, management fees and other expenses; investment minimums, and information on how investors can buy or redeem their shares.
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Q: Are all fund companies going to provide these summaries?
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A: That’s the eventual goal. However, right now, only seven fund companies--Capital Group, Fidelity, Vanguard, T. Rowe Price, Scudder, Dreyfus and IDS--are involved in the pilot program to produce them. And these companies say that, initially, the summaries will only be provided with some fund prospectuses. It’s likely to take a year--or more--before all funds include an easy-to-read summary with investment documents.
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Q: How does this differ from the previous proposals?
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A: The biggest difference is that the off-the-page proposals would have allowed no-load fund investors to buy a fund before they’d actually received the full 30-40 page prospectus. If you saw an off-the-page advertisement, you could clip the coupon, send a check and get back a prospectus with the confirmation that you were a fund shareholder.
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Q: What will the SEC be doing to encourage fund companies to write their lengthy prospectuses in English?
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A: The SEC has to review and approve any investment document sent to fund shareholders--or prospective shareholders--including prospectuses and annual reports. Levitt promises that fund companies will get speedy review and approval of documents that aim to simplify discussions of the fund’s risks and rewards. That could be a dramatic change from the agency’s reputation. In the past it has spent up to a year to approve a “simplified” prospectus.
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Q: What is the agency doing to beef up proxy disclosures?
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A: Publicly held mutual fund companies will be required to give their investors more information about compensation paid to directors and brokers. These rules are aimed at ferreting out possible conflicts of interest between fund managers and investors.
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Q: How can I reach the SEC to get information about the new rules or about investing in general?
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A: The agency is launching a toll-free investor hot line, which can be reached after Oct. 24 at (800) SEC-0330.
