SIA Urges Voluntary Prospectus Changes
A rewrite of mutual fund prospectuses to put them in plain English should be voluntary and not mandatory, as federal regulators are proposing, the securities industry says.
The Securities Industry Assn. submitted comments Thursday on the sweeping initiative being pushed by the Securities and Exchange Commission to make prospectus documents simpler for investors to understand by using plain English and clearing away technical jargon and clutter.
“We agree with the SEC that the language and readability of [mutual fund] disclosure documents can and should be improved,” the industry group said in its 20-page comment letter. “We believe, however, that this goal can be achieved--at much less cost and risk to investors, [companies] and the capital-raising process--by the SEC recommending plain English usage and voluntary efforts” by companies.
But Kenneth Morris, the president of a firm that developed a plain-English handbook that the SEC has distributed to prospectus writers, maintained that most companies don’t participate in such voluntary programs.
“Voluntary compliance just isn’t enough,” Morris, president of New York-based Siegel & Gale, said in a telephone interview Friday.
An estimated 63 million Americans now invest in more than 6,400 mutual funds, which had combined assets of $3.73 trillion in February, the latest month for which statistics are available. A survey by the Investment Company Institute last year found that only half of fund shareholders consulted a prospectus before making an investment.
In its comment letter, the Securities Industry Assn. agreed with the SEC that prospectuses can be bogged down by legal and technical minutiae and be unreadable. But the group asserted that deciding whether a prospectus meets plain-English requirements is a subjective process.
“What is plain to one reader might not be plain to another,” the letter said. “The examiner reviewing a prospectus to determine if it is sufficiently plain will need to make countless subjective judgment calls. The SEC is not designed or equipped to regulate the use of the English language in this way.”
The SEC’s proposal, unveiled by Chairman Arthur Levitt Jr. in late February, also would require information to make it easier for investors to understand the risks when choosing a mutual fund.
The rules would also allow mutual funds to be sold for the first time without first giving investors the traditional prospectuses. Investors would get a shorter summary profile outlining a fund’s risks, performance and investment style.
The new profile rule was developed by the SEC and a handful of major mutual fund companies.
While most of the Securities Industry Assn.’s comments would appear to meet the plain-English test, there were some rough spots.
For example, this sentence from the letter: “Our experiences with securities litigation and related negotiations with plaintiffs attorneys leaves little doubt that any requirement to prioritize risk factors will result in increased exposure to liability, absent some sort of safe harbor protection.”
