Fund industry is concerned about idea of quarterly updates

InvestmentNews (March 10, 2008 11:01 pm) -- While mutual fund companies and brokers are enthusiastic about a proposal to simplify fund prospectuses, they object to the idea of filing quarterly performance and holding updates, according to comments filed late last month with the SEC. The Security and Exchange Commission's summary-prospectus proposal, issued last November, would allow fund companies and brokers to provide investors with a three- or four-page summary of a fund's investment objectives, costs, top 10 holdings, risks and performance. The shortened prospectus would also be expected to include information about the fund's investment adviser, portfolio managers and recommendations from brokers on how to compensate the funds. Fund companies would be required to make their full prospectuses available online or mail them to investors who requested them. The proposal "has the potential to enhance investor use and understanding of important fund information," according to a joint letter filed by the Investment Company Institute of Washington and the Securities Industry and Financial Markets Association, which is based in New York and Washington. "This approach will assure that investors, their financial advisers, analysts and other market participants will continue to have ready access to a large body of more detailed information should they so desire," according to the ICI-SIFMA letter, which was signed by ICI general counsel Karrie McMillan and SIFMA senior managing director and general counsel Ira Hammerman. Requiring funds to update performance and top 10 portfolio holdings in summary prospectuses on a quarterly basis would involve "substantial administrative and operational burdens and costs" for funds and fund distributors, the letter stated. "It is therefore critical that the commission avoid unintentionally creating any significant disincentives to widespread use" of the summary prospectus, the letter said. The National Association of Personal Financial Advisors in Arlington Heights, Ill., also filed a comment letter on the proposal.

A summary prospectus that includes the most relevant information affecting investors "will likely be much better than the current long statutory-prospectus document, which is not understood by most investors," according to the letter, which was signed by NAPFA chairman Tom Orecchio, chief executive Ellen Turf and industry issues committee chairwoman Diahann Lassus. Mr. Orecchio is principal of Greenbaum & Orecchio Inc. of Old Tappan, N.J., which manages $450 million. Ms. Lassus is president of Lassus Wherley & Associates PC of New Providence, N.J., which has $350 million under management. But there are "inherent limits for disclosure documents — of any size and whatever the content," the NAPFA letter stated. "Many consumers will still need an adviser that they can trust and have confidence in, such as NAPFA-registered financial advisers, who as fiduciaries to their clients are legally bound to act in the best interests of the client," it added. Consumer groups see other problems with the proposal. "Our biggest problem is the completely inadequate discussion of the effect of prospectus liability on fund managers," said Mercer Bullard, founder and president of Fund Democracy Inc. in Oxford, Miss., which advocates for fund shareholders. Fund Democracy, the Consumer Federation of America of Washington and Consumer Action of San Francisco filed a joint letter on the proposal. The last time the SEC attempted to simplify mutual fund disclosure, in the mid-1990s, mutual fund companies never used the shortened form for fear that they would incur increased liability, Mr. Bullard said. This time, the SEC has proposed giving the fund companies some protection from liability if they use the summary prospectus. The SEC should provide more discussion of what protection investors would have if the summary prospectus turned out to be fraudulent, Mr. Bullard said. "The SEC breezes through the issue as if there was never anything there," he added. While investors could still sue over fraudulent misrepresentations contained in the full prospectus, "what if somebody misrepresents investments in the summary [prospectus] and takes that back in the prospectus?" Mr. Bullard asked. SEC spokesman John Nester declined to comment on the matter. William Jacobson, an attorney who is a member of the Public Investors Arbitration Bar Association in Norman, Okla., generally agrees with the concept of the summary prospectus. "Our main concern was that there's no requirement that the summary prospectus contain asset allocation information," said Mr. Jacobson, who is a law professor with Cornell University Law School and director of its Securities Law Clinic in Ithaca, N.Y. He was also among the signers of a comment letter filed by the law clinic on the proposal. "Since asset allocation has consistently been shown to be the single greatest factor in long-term returns, we believe it would be appropriate to require that information to be contained in the summary prospectus," Mr. Jacobson said.

Another idea came from Jeff Keil, the principal of Keil Fiduciary Strategies LLC, a Littleton, Colo.-based industry consulting firm.

"On the expense side, there really is no benchmark for expenses shown in the [summary prospectus]," he said.

In Mr. Keil's comment letter, he suggested that the SEC include such a benchmark so investors will have a point of comparison for fund expenses.

"With no benchmark, how is the investor supposed to figure out whether the product is reasonably priced?" he wrote.