Mutual-fund prospectuses, traditionally so full of legal gobbledygook that they've been lampooned in cartoons, will no longer be the only source that investors in the wildly popular funds can go to for information.
Securities regulators, eager to make complex financial documents easier to understand, voted Tuesday to allow mutual funds to be sold for the first time without the prospectus documents.Under the rule adopted by the Securities and Exchange Commission, instead of the usual lengthy prospectus, investors could get a shorter summary outlining a mutual fund's risks, performance and investment style.
Investors will have the choice of buying into a fund on the basis of the summary, called a profile, or requesting a full prospectus from the fund company before making a decision.
The profiles could be made available on the Internet, by mail, in newspapers or in other media. Expected to run about three to six pages, they can be provided at fund companies' option starting June 1.
In addition, the prospectuses themselves will have to be revamped to provide clearer disclosure in plain English of mutual-fund risks, fees charged to investors and investment strategies and performance.
A survey by the Investment Company Institute, the mutual fund industry's trade group, found that only half of fund shareholders consulted a prospectus before making an investment. A separate survey by the SEC and the U.S. comptroller of the currency found investors viewed prospectuses as only the fifth-best source of information.
"We are providing the industry with an opportunity to communicate information about mutual funds to investors in a clearer and more meaningful way than ever before," SEC Chairman Arthur Levitt Jr. said before the 3-0 vote.
The market watchdog agency voted in January to require that key sections of prospectuses and other documents put out by companies for stock or bond offerings be written simply and clearly, without legal or business jargon.
Taken together, the SEC's recent actions "are the most sweeping changes in our approach to disclosure in more than a generation," Levitt said.
An estimated 62 million Americans now invest in more than 6,800 mutual funds, which had combined assets of $4.6 trillion at the end of January.
"Millions of American investors will benefit from" the SEC's action, said Matthew Fink, president of the Investment Company Institute. "The SEC's decision will make it easier for investors to understand the key elements and investment risks of a mutual fund."
SEC aides said the public comments received in the past few months on the proposal adopted Tuesday had been overwhelmingly favorable.
According to the securities industry, Wall Street has made significant progress in voluntarily using plain English in documents.
In a related action Tuesday, the SEC voted to require plain-English prospectuses, and to allow the use of summary profiles, for mutual funds sold through variable life insurance contracts.