SEC to Fund Providers: Speak English

November 15, 2007 ( - Federal securities regulators have given preliminary approval to plan to make prospectuses easier to understand and general improve mutual fund disclosures.

Commissioners of the U.S. Securities and Exchange Commission (SEC) voted 4-0 in favor of the proposal to require funds to provide a summary prospectus with key information in plain English, in a clear and concise format, and to distribute more information online, Reuters reported.

The proposal would mandate the inclusion in a prospectus of items such as risk and return, the fund’s investment objectives, costs, and a brief summary of its top 10 portfolio holdings along with a discussion of potential tax consequences of investing in that fund, according to the news report.

Investors would be able to choose how they would like to receive the summary — on paper or online.

“This proposal is a giant step forward for investors,” SEC Chairman Christopher Cox said at a commission meeting, according to Reuters.

According to the news report, Commissioner Paul Atkins was supportive of the overall plan but expressed reservations about the cost for funds to change their prospectuses to include the summary. He also questioned whether the top 10 holdings was key information. “There is always the possibility that there is some element of window dressing by funds,” Atkins said.

The SEC already is taking steps to simplify the submission of financial information from mutual funds. Earlier this year, the agency voted to let funds join a pilot program and submit their financial data in a new, machine-readable computer language known as XBRL (See SEC Offers Quicker Report Reviews to Interactive Data Testers ).

Washington attorney Jamey Delaplane, who specializes in Employee Retirement Income Security Act (ERISA) issues, told a recent Webinar co-sponsored by the Women’s Pension Exchange and PLANSPONSOR that the U.S. Department of Labor is likely to use the SEC proposed disclosure form as a regulatory template for other required participant disclosures (See Retirement Plan Discussion Likely to Continue Past 2008 Elections ).