Short Documents May Replace Prospectuses

The Securities and Exchange Commission is considering ways to eliminate the need for mutual funds to send fund prospectuses to investors every year, a change commission officials said could save fund companies millions of dollars a year.

The agency’s staff is exploring the idea of an “annual prospectus update” that would be a short document containing updated fee tables and other significant changes to the fund or its management, Paul Roye, the SEC’s investment management director, said in a speech to a mutual fund industry group in Washington.

The concise document would let investors focus on new, essential information they would be more likely to read than a complete prospectus each year, he said.

“This approach would assure that changes in essential information are not obscured and fund shareholders could focus on new information and changes in their fund’s operations,” Roye said.

Funds that send existing shareholders this annual update would be deemed to have followed securities regulations that demand fund companies provide shareholders with a current prospectus, Roye said.

Currently, he said, most funds deliver updated prospectuses to shareholders annually to avoid having to keep records of shareholders who have received updated prospectuses, and deliver prospectuses throughout the year when new investments are made by shareholders who haven’t already received a current prospectus.

Because shareholders aren’t told what information is different from the previous year’s document, they must read the whole document to find out what’s new.

“I suspect that few shareholders engage in this exercise,” Roye said.

Financial printers may not like such a proposal, which he estimated could save mutual funds printing and mailing costs, he said.

Later this month, new regulations will take effect that let fund companies reduce the number of prospectuses and annual reports delivered to investors who share the same address.