SEC is evaluating a shortened prospectus

The Securities and Exchange Commission might adopt a shortened prospectus that could save the industry $300 million a year in printing and mailing costs — and help preserve the environment. The SEC opened the proposal to a 90-day public comment period that began Nov. 21. "We think the short form is a good idea," said Laura Lutton, a mutual fund analyst who heads the stewardship grade effort at Morningstar Inc. in Chicago. "There is a real opportunity here for fund companies to do a nice job in plain English in describing their strategy," she said. "Most investors do not read the current prospectus." But, short should not mean vague, said Ms. Lutton. The document should include how a manager picks stocks, how frequently they turn over their holdings and whether quantitative strategies are relied upon. If the shorter version is approved, a summary section would be required in the front of every prospectus. Mutual fund companies could then meet their prospectus- delivery obligations with a document that consists of as little as two pages. Firms would still be required to provide the longer prospectus for inclusion on the SEC's website and the short form would include an online link to it, so investors could find the longer prospectus. The longer form would be delivered upon the investor's request. And, if a recent survey is any indication, market participants are proponents of the shorter prospectus. The majority of 150 firms surveyed by Forrester Consulting in Cambridge, Mass., in August support the short-form prospectus. NewRiver, a financial services technology company based in Andover, Mass., sponsored the survey. The study reflected the views of brokerage firms, banks, insurance companies, mutual fund groups and money management and financial advisory firms. Fully 95% of those surveyed said they would be somewhat or very likely to consider delivering the short-form prospectus if the commission decides to allow it. Eighty-six percent of respondents wanted to explore electronic delivery if the short-form ruling is passed. And 90% indicated they would consider a printed combination of the short-form prospectus with a trade confirmation. The major concern raised in the study was liability: About 66% cited legal issues as the primary barrier to the short form. "They want to make sure the legal liability issue is addressed if they use the short form," said Len Driscoll, vice president of product marketing at NewRiver. Forty-one percent cited investor or shareholder preference for the current long-form prospectus as another possible barrier. The reduction in paper and mailing costs alone would save the industry an estimated $300 million per year, according to Forrester. If you apply that logic to annual and semi-annual reports, which are not included in the proposal, another $1 billion to $2 billion in savings per year could be realized, Mr. Driscoll said. In a study conducted last year by the Investment Company Institute, just 33% of shareholders surveyed said they obtained information from the prospectus before purchasing their fund shares. Only 30% said they consult the prospectus at all. Most investors reported that they do not use these documents to monitor their investments. Not only could the measure save mailing costs; it could also save trees. There is also a growing concern about wasting paper and the effect on the environment, said Craig LeClair, senior analyst at Forrester Consulting. "This is a major opportunity for the SEC to do something better for the investor and the environment," he said. With an abbreviated prospectus, investors will find it easier to compare funds, and they won't have to sift through pages of long documents, Ms. Lutton said. More than 8,000 mutual funds are available to investors. The SEC requires that the fund prospectuses include information about investment objectives, risks and expenses. Sue Asci can be reached at sasci@crain.com.