ICI to regulators: Focus on quality of disclosure

Feb 13, 2006 @ 12:01 am

By Frederick P. Gabriel Jr.

BOSTON - The $8.9 trillion mutual fund industry, seizing on the SEC's willingness to consider allowing investors to receive annual reports and proxy-voting materials online, will redouble efforts to relieve funds of the responsibility of mailing prospectuses to all shareholders.

The Investment Company Institute, the industry's powerful lobbying group, will begin laying the groundwork for the electronic delivery of prospectuses tomorrow when it releases the results of a survey showing that 88% of all fund shareholders now have access to the Internet, up from 68% in 2000.

In a speech to the National Press Club in Washington on the same day, ICI president Paul Schott Stevens will urge regulators to focus on the quality of mutual fund disclosure, not just the quantity.

The Internet, he plans to say, should play a prominent role in

getting important fund documents into the hands of investors.

Change of heart?

"The Internet needs to be looked much more centrally at as a tool to inform investors and provide information to other market participants," Mr. Stevens said last week in an interview with InvestmentNews. "I think this is something [Securities and Exchange Commission Chairman] Christopher Cox seems to be very attracted by."

The Washington-based ICI, which long has pushed for an overhaul of disclosure requirements, clearly is betting that the SEC has had a change of heart when it comes to the electronic disclosure of certain corporate documents.

Although the SEC allows fund companies to post prospectuses on their websites, it has refused to apply the concept of "access equals delivery" to fund prospectuses.

In other words, the SEC maintains that online access to prospectuses doesn't abdicate companies from their legal responsibility to make sure investors receive a prospectus by the time they receive their purchase confirmation. Fearing liability, most fund companies elect to mail prospectuses - which often total more than 100 pages and which are filled with legalese - to investors along with confirmations.

Under Mr. Cox and his predecessor, William H. Donaldson, the commission has shown more interest in the electronic delivery of corporate documents.

In fact, the SEC is considering a proposal that would allow public companies to provide annual reports and proxy-voting materials online. The 60-day public comment period for that proposal ends today, and if approved, the rule change would take effect by 2007.

Last year, the SEC also embraced an "access equals delivery" standard for final prospectuses of companies undergoing initial public offerings.

"The SEC has been acting more and more as if it is in the pocket of industry on these kinds of issues," said Mercer Bullard, a University of Mississippi law professor and founder of Fund Democracy Inc., an Oxford, Miss., mutual fund shareholder advocacy group. "Maybe Mr. Cox will completely roll over on this."

Any effort to allow fund companies to meet their full prospectus delivery requirements through the use of a shortened version of

a prospectus - even if that version contained explicit directions on how to obtain a full prospectus -would likely meet stiff opposition from consumer groups, said Mr. Bullard, who is a former SEC attorney.

"That would be a completely self-serving approach to take," he added.

The SEC, for its part, declined to comment on whether it would be open to the electronic delivery of mutual fund prospectuses.

"We're committed to the increasing use of technology to enhance disclosure to investors," SEC spokesman John Nester said.

Despite the ICI's contention that nearly 90% of fund investors have access to the Internet, any effort to let fund companies completely off the hook for mailing prospectuses would likely face some opposition.

For example, AARP, the Washington-based lobbying group for Americans age 50 and over, would be opposed to any rule change that would make the electronic delivery of fund prospectuses as the "default" delivery option for investors, said Roy Green, AARP's senior lobbyist for financial services issues.

"Our research generally shows that quite a significant part of the older population is still not comfortable with the Internet with things that are substantially important," he said.

About 71% of people between the ages 50 and 64 used the Internet, according to research from The Pew Research Center in Washington. That figure dropped to 30% among those 65 and older, according to Pew.

The ICI's soon-to-be-released study paints a different picture. It concludes that 91% of mutual fund shareholders between the ages of 50 and 64 had access to the Internet, up from 60% in 2000. Meanwhile 63% of people 65 and older had access to the Internet, up from 30%, according to the study.

Less of a digital divide

"There isn't the kind of digital divide by age as there has been in the past," said Mr. Stevens, who acknowledged that any changes in investor disclosure requirements would have to make "specific accommodations for certain portions of the investor population."

The ICI isn't alone in its push to release fund companies from having to mail prospectuses to all investors.

Last spring, Washington-based NASD, the securities industry's self-regulatory body, also urged the SEC to reconsider its stance on mailed prospectuses.


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