SEC study: Prospectuses go largely unread

A recently released SEC study provides further evidence that mutual fund prospectuses need fixing.
AUG 11, 2008
By  Bloomberg
A recently released SEC study provides further evidence that mutual fund prospectuses need fixing. Nearly two-thirds of investors who received mutual fund prospectuses said they rarely, very rarely or never read them, according to a telephone survey of 1,000 investors conducted between March and May by Abt SRBI Inc. of New York that was released July 30. Of those who received mutual fund prospectuses, 44% of men said they always or very frequently read them, compared with 30% of women, according to the survey. College-educated investors and investors with high levels of investment literacy also were more likely to say they read prospectuses, the survey found. The Securities and Exchange Commission on July 31 reopened the period for public comments to be filed on its proposal, issued in November, that would allow mutual funds to give investors shortened "summary" prospectuses. The comment period, which originally closed in February, was extended until Aug. 29 to allow for consideration of the telephone survey and an investor focus group survey.

PLAIN ENGLISH

The summary prospectus, a streamlined document in plain English, would contain key information needed to make investment decisions, including a mutual fund's objectives, strategies, risks, costs and performance. The information would appear in a standardized format. More detailed information could be obtained online, and mutual funds would have to send the full prospectus to investors who requested it. The summary prospectus would replace the profile prospectus adopted in the 1990s by the SEC. That effort, designed to simplify mutual fund disclosure documents, met with little success because fund companies were still obligated to send full prospectuses to investors. Investors who have commented so far generally favor moving to the summary prospectus. "Most people don't find these prospectuses to be user-friendly," said David Certner, legislative counsel and director of legislative policy, government relations and advocacy for AARP in Washington. He applauded the SEC's attempt to move to more understandable disclosures for investors. "The idea is to send out this more streamlined, more user-friendly prospectus," Mr. Certner said. "We want the information to be in a context that helps the reader understand comparative information," he said.

PAPER PREFERRED

Studies by AARP, which has about 40 million members age 50 and older, have found that older investors still want to receive a paper copy of a disclosure document, Mr. Certner said. AARP also wants investors to receive the disclosures at the point of sale. Studies by Broadridge Financial Solutions Inc. of Lake Success, N.Y., also indicate that it is necessary to give investors a document rather than relying solely on Internet delivery. Broadridge, which sends out required disclosure information by mail and by Internet for publicly traded companies, conducted studies on Internet access to proxy voting. Its officials met with SEC staff members in June after the commission adopted a rule last year that allows companies to conduct proxy voting online instead of mailing proxy votes to investors. Voting by investors dropped by 70% — from nearly 22% to less than 5% — said Chuck Callan, senior vice president of regulatory affairs in Broadridge's Englewood, Colo., office. The study was based on 164 companies that had completed proxy votes online, he said. "The research indicates that if you put information in front of people, they're more likely to view it than if they have to take steps to get the information," Mr. Callan said. Broadridge had no comment on whether the SEC should move to the summary prospectus system being proposed, he said. E-mail Sara Hansard at [email protected].

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