Funds May Receive Permission to Communicate With Investors Via the Internet

Federal regulators are considering new rules that would allow mutual funds to communicate with shareholders using the Internet instead of the U.S. Postal Service.

The rules would permit funds to electronically transmit documents such as account statements and trade confirmations, said Jack W. Murphy, associate director of the Securities and Exchange Commission’s Division of Investment Management.

“This eliminates the flow of paper and yet the investor is protected. He knows where to look for it if he wants it,” said Murphy, speaking to a Cyberspace panel at the annual Mutual Funds and Investment Management Conference here.

The nation’s 5,970 mutual funds now mail hundreds of millions of pieces of correspondence each year to more than 40 million individual shareholders.

“We hear from fund groups all the time [that their] customers don’t want all this paper,” he said. Last October, as a first step, the agency approved distribution of fund prospectuses over the Internet.

The new rules are expected to be voted on by the SEC’s commissioners within a month, Murphy said.

A key aim of federal securities law is to provide full disclosure to purchasers of mutual fund shares. But those rules were written before there were hyperlinks or home pages.

“We’re dealing with statutes that were written in the ‘30s,” Murphy said. “Fifty-plus years of law have been developed with the concept of somebody getting a physical document handed to them. Obviously, the concept of physical delivery doesn’t work on the Internet.”

Like the post office, retail stockbrokers should also be concerned about the rise of the Internet, said Adam Schneider, a New York-based partner with Deloitte & Touche Consulting Group.

“There will be a significant decline in the number of registered representatives supporting retail investors within the next five years,” said Schneider, who also discussed the impact of the Internet at the Cyberspace panel. “It’s going to weed out the marginal brokers.”

Schneider explained that mutual fund home pages on the Internet will soon allow investors to research funds, execute trades and track their investments’ performance. Compared with stockbrokers, the Internet allows mutual funds to offer investors a high level of service at a very low cost, he said.