Mutual Fund Industry Details Simplified Q & A Prospectus

Investors, take heart: The jargon-bloated language of mutual funds is going on a crash diet.

Stepping up its drive to pare confusing language, the mutual fund industry on Monday proposed an easier-to-read version of the sales materials that detail investment risks, fees and other important facts about mutual funds.

Federal regulators say investors should welcome the supplements to existing lengthy prospectuses.

About 40 million Americans now own shares in mutual funds, which essentially are portfolios of securities bought by investors pooling their money. Yet many prospective investors aren’t fully aware that buying stocks or bonds can be far riskier than, say, opening a bank certificate of deposit.

Arthur Levitt, chairman of the Securities and Exchange Commission, said he doesn’t think the “vast influx of millions of unsophisticated investors” has “an adequate understanding of the risks involved.”

The new material summarizes 11 key points of the prospectus in question-and-answer format.

The third question in a sample stock-fund profile asks, “What are the significant risks?” The paragraph-length answer doesn’t dawdle. “Stock values fluctuate in response to the activities of individual companies, and general market and economic conditions,” it says. “In the short term, stock prices can fluctuate dramatically . . . . “

No. 6 asks, “How has the fund performed?” The answer is a bar chart depicting the fund’s annual total return during each of the last 10 years, or fewer years depending on how long the fund has existed.

In contrast, one typically wordy prospectus explained its “average annual total return” as showing the “average percentage change in value of an investment in the fund from the beginning date of an investment in the fund to the end of the measuring period.”

“If the profiles are well-received by investors, they will serve as a model for effective fund disclosure,” Levitt said in announcing the new “profile prospectus.”

Mutual fund companies in the pilot program, developed jointly with federal securities regulators, plan to test the format with investors to see how helpful and handy they find it. The new format would then become required for all mutual fund companies.

Levitt said that one possible outcome is the proposed question-and-answer format replacing the longer prospectuses in mailings to investors. The longer prospectus would then be sent only to investors who request it.

Industry observers agreed that the simpler version may get more investors to read important information on mutual funds. But some wondered whether the abbreviated format provided an oversimplification of crucial facts.

Michael Lipper, president of Lipper Analytical Securities Inc., said he would like to see the easy-to-read version also include details such as types of specific securities held in the mutual fund portfolio.

“I think it helps. It is clearer, less legalese,” Lipper said. “Now I would like to see them go further.”

The suggested supplement follows an earlier simplification of sales materials in which mutual fund companies extracted some of the most technical information from prospectuses and moved it into an additional statement.

Despite the trend, some doubt whether investor confusion is as widespread as suggested Monday by the prospectus changes touted by industry and regulators.

“Are 20 million investors befuddled? No. Could you have some small number of millions that don’t understand? Yes. But that’s true for Americans with their owner’s manuals with their cars,” Lipper said.