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After some two years of consideration and debate, the Securities and Exchange Commission this week approved key rule changes for mutual fund prospectuses.
The goal, said SEC chairman Arthur Levitt Jr., is to provide the industry “with an opportunity to communicate information about mutual funds to investors in a clearer and more meaningful way than ever before.”
The revisions come on the heels of another rule change, approved in January, which requires companies to use plain English in specific sections of investment documents. This plain-English campaign represents “the most sweeping changes in our approach to disclosure in more than a generation,” Mr. Levitt said.
Anyone who has read a mutual fund prospectus knows how sorely some clarity and simplicity are needed. Most mutual-fund documents give new meaning to the phrase “mind-numbing.”
The rulings, which will go into effect June 1, make two principle changes. One is creation of a short “profile” document that summarizes information prospective mutual-fund shareholders most need to know: investment strategies, risk, performance history, fees and the like. Funds are encouraged, but not required, to offer this document.
Under the second, mandatory change, mutual fund companies now must include enhanced risk disclosure in the full-length prospectuses provided when selling shares to investors.
Studies show that no more than one in four investors read mutual fund prospectuses in their current form. Not so long ago, Mr. Levitt noted, investors totaled less than 5 percent of the U.S. population.
Now, one-third of the U.S. population owns shares.
When the SEC chairman first proposed these rule changes, some critics voiced concern that investors would base decisions on insufficient information. The greater risk is that investors now are basing decisions on material that no one can read.
Even as experts warn of an overvalued market, investors continue to pour money into mutual funds. The new rules do not guarantee prudent investing, but they ensure that the risks will be plain for all to see.
–Rochester Business Journal

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