SEC Plans for Rule Changes Draw Protests

The Securities and Exchange Commission’s long-awaited rule proposal on mutual fund prospectuses would call for funds to provide only a simplified document to customers before they invest, an SEC official said Monday.

Customers would also be given the option of requesting the longer, more detailed prospectus under the SEC staff plan, which is due to be submitted to commissioners in the next few weeks, SEC investment management official Heidi Stam said.

In a separate development Monday, nine major stock and futures exchanges asked the SEC to delay a rule change on the way they list stock quotes over concern that regulators are trying to narrow the difference between the price at which shares are bought and sold to pennies.

The exchanges, including the New York Stock Exchange, the Nasdaq Stock Market and the Chicago Board Options Exchange, are protesting one part of a series of new rules that would force them to show when investors can get a better price than those posted on their exchanges.

The rules, scheduled to go into effect in January, would force the exchanges to display quotes from competing electronic systems. Whereas the exchanges commonly quote stocks in eighth-of-a-dollar, or 12.5-cent, increments, the electronic networks sometimes quote stocks in increments as small as a sixty-fourth, or 1.5 cents.

The rule proposal have the exchanges up in arms because they could erode profitability for those who make markets in stocks. Although profits per trade are clearly going to decline as the market moves to smaller increments and competition increases, the SEC rule may cut them too drastically, said Dale Carlson, a spokesman for the Pacific Stock Exchange in San Francisco.

The SEC declined to comment.

The upcoming SEC proposal on fund prospectuses, which has drawn widespread public interest, mirrors the mutual fund industry’s recommendation and rejects calls by consumer groups for advance delivery of both prospectuses.

“There is tremendous evidence that investors want a summary document,” Stam said. “The idea is to provide it to people who are comfortable with just that level of information, and make additional information available to those who want it. It will be very clear in the summary documents that there is more information in the prospectus.”

The proposal addresses a central issue of the SEC rule proposal, which seeks to simplify the unwieldy fund prospectus yet ensure that enough information is provided to investors.

The staff proposal, now in its final stages, must be approved by SEC commissioners before it is issued for public comment. The commission, after reviewing these comments, will then decide whether to adopt the plan.

Currently, fund companies typically send the full-length document to prospective customers who contact them directly. Brokers are not required to furnish it in advance, though all customers must receive a prospectus after they invest.

The Investment Company Institute, the mutual fund trade group, recommended in May that the SEC require funds to issue just the simplified prospectus in advance while offering an option for investors to order the more complete document.