SEC Proposes New Rules for Funds

U.S. Securities and Exchange Commission Chairman Arthur Levitt on Tuesday proposed sweeping rules to make it easier for investors to select from the more than 6,000 available mutual funds.

The proposals include a rewriting of mutual fund prospectuses with the addition of material about funds’ risks, and the introduction of short “fund profiles,” Levitt told the mutual fund industry in Boston.

Changes to the prospectuses, which contain essential information about the investments, fees and management of mutual funds, will make them “simpler, clearer, more useful and, we hope, more used,” he said in his speech.

He also proposed allowing investment management firms to sell funds based on four-page fund profiles, which would not replace a prospectus but would summarize key facts about the fund.

“Profiles summarize key fund information . . . and they do so in a concise, standardized format,” he said.

Levitt also proposed banning misleading mutual fund names by requiring that they match the investment style and objectives of the funds.

He proposed raising to 80% from 65% the minimum amount of assets invested in securities that are described by the fund’s name. For example, a fund called Japanese Bond Fund would have to invest 80% of its assets in Japanese bonds.

Levitt also pressed fund companies to write communications in “plain English.” Investors are not as informed as they should be in part because of the baffling language that prospectuses now contain, he said.

“This is especially troubling because most of these new investors have experienced only a bull market; I fear that in a downturn, those who don’t understand risk may react precipitously and carelessly, at great cost to themselves and our markets,” he said.

Each new prospectus would highlight a fund’s historical risks and returns. The section would include a 10-year bar chart comparing a fund’s past performance with that of the Standard & Poor’s 500-stock index. The chart would show investors how volatile a fund’s performance has been.

The full commission is expected to vote Thursday to issue the proposals for public comment.

An estimated 63 million Americans now invest in more than 6,200 mutual funds, whose combined assets totaled more than $3.54 trillion in December, according to the Investment Company Institute, a mutual fund industry group.

Levitt quoted an ICI study that said that only half of mutual fund shareholders consulted a prospectus before buying into a fund.

Prospectuses should be shortened by eliminating legal and technical issues, he said. Fee and expense information should appear together in one place, and more should be included on investment risks, he added.

A new risk/return summary at the beginning of all prospectuses would include a description of the fund’s overall risks.

“The new prospectus would refocus content on what’s important to people in the real world faced with investment decisions,” he said.

The announcement capped several years of effort by the commission to make disclosure documents such as mutual fund prospectuses more readable.