©2006 Investment Company Institute. All rights reserved. Information may be abridged and therefore incomplete.
Communications from the Institute do not constitute, and should not be considered a substitute for, legal advice.
[20111]
June 15, 2006
TO: ACCOUNTING/TREASURERS MEMBERS No. 13-06
BOARD OF GOVERNORS No. 19-06
CLOSED-END INVESTMENT COMPANY MEMBERS No. 24-06
INVESTMENT COMPANY DIRECTORS No. 9-06
OPERATIONS COMMITTEE No. 14-06
PRIMARY CONTACTS - MEMBER COMPLEX No. 12-06
PUBLIC COMMUNICATIONS COMMITTEE No. 5-06
SEC RULES MEMBERS No. 52-06
SMALL FUNDS MEMBERS No. 44-06
TECHNOLOGY ADVISORY COMMITTEE No. 11-06
UNIT INVESTMENT TRUST MEMBERS No. 18-06
RE: SEC INTERACTIVE DATA ROUNDTABLE, JUNE 12, 2006; INSTITUTE
SUBMISSION
On June 12, 2006, the SEC hosted an Interactive Data Roundtable. The morning session
consisted of two panels focused on mutual fund disclosure. The session brought together
representatives of consumer organizations, the mutual fund industry, academia, research organizations,
and regulators to examine the types of information most useful to mutual fund investors, and how the
power of the Internet can be leveraged to provide investors with better information. The afternoon
session focused on operating company reporting.1 The ICI submitted a written statement in advance of
the roundtable, and President Paul Stevens participated in one of the roundtable panels.2 The
Institute’s written submission and the roundtable discussions are briefly summarized below.
THE INSTITUTE’S WRITTEN SUBMISSION
The Institute’s written submission reviews ICI research demonstrating the widespread use of
the Internet among mutual fund investors, and describes the Institute’s initiative to create a framework
1 A copy of the roundtable agenda can be found at http://www.sec.gov/spotlight/xbrl/xbrlroundagenda.htm,
and statements of several panelists are available at http://www.sec.gov/spotlight/xbrl/xbrlround-parts.htm.
2 The statement can be found at http://www.ici.org/home/06_sec_rdtable_tmny.html#TopOfPage.
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for mutual funds to file the information contained in the risk/return summary in eXtensible Business
Reporting Language (XBRL). The statement then outlines the Institute’s proposal for leveraging the
Internet to improve mutual fund disclosure. Under the Institute’s proposal, a fund would provide a
clear, concise disclosure document, similar to a fund profile, to investors in paper form or, at the
investor’s election, electronically. The summary document would include a prominent statement that
additional information, including the prospectus and statement of additional information, is available
on the Internet, and that paper copies are available free of charge upon request. The Institute’s written
statement also recommends that the Commission clarify its position on the permissibility of Internet-
only mutual funds or fund share classes, and consider the Internet as a medium for point-of-sale
disclosures to brokerage customers, not just for mutual funds but for ETFs, separately managed
accounts, and annuities.
MORNING SESSION: IMPROVING THE QUALITY OF MUTUAL FUND DISCLOSURE
SEC CHAIRMAN COX’S OPENING REMARKS
Chairman Cox opened the roundtable by announcing that the SEC has launched a beta version
of a full-text searching capability for EDGAR filings, as well as a search tool to allow mutual fund
investors to find information on their fund and share class.3 He stated that the SEC hoped to “lead by
example” in working to harness the power of the Internet to deliver the maximum benefits to
participants in American capital markets. Chairman Cox suggested that mutual fund prospectuses are
well-suited to electronic delivery, because they are dense documents that few people read in full, but
they contain a wealth of information that investors and others want to know. He said that the Internet
will allow us to present a summary of important information, while allowing those who want more
information to drill down more deeply. He noted, however, that the choice to receive information in
paper form will always remain.
PANEL 1: WHAT TYPES OF INFORMATION ARE MOST USEFUL TO MUTUAL FUND
INVESTORS?
The first panel was moderated by Andrew J. (Buddy) Donohue, Director of the Division of
Investment Management, and Susan Ferris Wyderko, Director of the Office of Investor Education and
Assistance at the SEC. Director Donohue opened the panel by pointing out that while there is no
shortage of mutual fund disclosure, it is hard for investors to find the “nuggets” they are looking for
among all of the available data. He posed two questions to the panel: 1) Is there a better way to
highlight key information that is important to investors? 2) How can we tame the mass of information
and make it useful for investors and intermediaries?
Each panelist was then invited to offer short introductory remarks.
3 An SEC press release on this announcement is available at http://www.sec.gov/news/press/2006/2006-93.htm.
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Barbara Roper, Director of Investor Protection at the Consumer Federation of America,
described recent research by the CFA that found near unanimity on the question of what information
is most useful to investors. That information closely tracks the information found in the fund profile,
including objectives/strategies, risks, costs, and past performance of a fund. She noted that this
information is already widely available to investors in a variety of formats. Ms. Roper offered two areas
for improvement. First, the narrative risk disclosures are boilerplate, making it difficult for investors to
distinguish one fund from another. Second, the fee table is too cluttered; investors cannot easily
ascertain and distinguish the costs to them of buying or holding a fund.
CFA’s research also showed that there is a gap between the information considerations
recommended by experts and investors’ actual purchase practices. Ms. Roper suggested that expert
recommendations are too time-consuming for investors, most of whom purchase funds either through
intermediaries or defined contribution plans with limited fund choices. These investors do not need as
much information as experts suggest. Based on this research, CFA no longer opposes mutual fund sales
based on a summary document. The industry and its regulators need to make it easy for investors to get
the information they really want and need. For investors who work with financial professionals, many
of whom do not review information on funds recommended to them, the most important information
might be information about their advisers. Ms. Roper suggested that the SEC consider requiring a
disclosure document from financial advisers, which would include, for example, fees and conflicts of
interest.
Finally, Ms. Roper noted that there is some resistance among investors to using the Internet for
certain types information, and also general resistance to the Internet from older investors. The industry
needs to understand the reasons for this resistance.
Don Phillips, Managing Director of Morningstar, Inc., began by emphasizing that something in
the system must be working well: fees in US mutual funds are lower than anywhere else in the world,
and the assets appear to flow, on the whole, toward lower-cost, higher-performing funds.
Mr. Phillips then stated that fund prospectuses currently serve two audiences with different
needs, and therefore serve neither very well. The first audience is individual investors, for whom a
prospectus provides too much information, and is not helpful in making investment decisions. A
simplified disclosure document would serve investors better. The second audience is professional
investment advisers. Mr. Phillips suggested that the entire market benefits from providing professionals
with more in-depth disclosure. He cited as an example the fact that after funds were required to
disclose portfolio manager compensation, compensation structures began to create incentives for
managers to create long-term value rather than short-term results. Although in-depth disclosure
benefits the market, the current prospectus is not an ideal tool. Mr. Phillips stated that providing the
information electronically and in tagged format would help advisers spend more time analyzing data
and less time looking for and entering it.
Henry Hopkins, Chief Legal Counsel at T. Rowe Price Associates, Inc., began by outlining ICI
research showing that most shareholders prefer receiving a concise summary of fund information, that
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very few consult fund prospectuses before making purchases, and that fund investors use the Internet
regularly. Based on these findings, Mr. Hopkins summarized that “less is best.” He noted that the fund
profile initiative was based on similar research, and it resulted in an excellent disclosure document. The
disappointing use of the profile is directly attributable to the fact that it did not replace the full
statutory prospectus and incorporation by reference was not permitted, thereby creating liability
concerns.
Mr. Hopkins proposed that the Commission permit the fund profile to be used as a fund’s
primary selling document, provided that investors have the option to access the full prospectus via the
Internet or request a hard copy. The profile should be permitted to incorporate by reference the full
prospectus. Mr. Hopkins also suggested that the profile be amended to require disclosure of a fund’s
top ten, quarter-end holdings, and that funds be permitted to use different versions of the profile to
reflect the availability of different services for different investors.
Bill Dwyer, Managing Director of National Sales at Linsco/Private Ledger Corp., began by
explaining that LPL is an independent brokerage firm, with over 6,000 financial advisers throughout
the country, many of whom work in small communities and whose clients represent a cross-section of
the investing public, from the working class to the wealthy. Mutual funds are the preferred investment
vehicle for most of these investors.
Mr. Dwyer outlined three unintended consequences of providing too much disclosure. First,
investors could become frustrated with the process or feel overloaded. Second, advisers may decide that
the disclosure requirements make selling mutual funds too burdensome compared to other investment
products. Third, advisers may give up their securities brokerage licenses and move to fee-based services.
Mr. Dwyer summarized that to avoid these consequences, the Commission should focus on getting
disclosure right, and should also require similar disclosures for other investment products. Finally, Mr.
Dwyer described the information investors want – performance, risk, investment objectives, and cost of
doing business – and noted that the profile seems to be exactly what investors are looking for.
Elisse Walter, Senior Executive Vice President of NASD, observed that the consensus among
the panel regarding disclosure was striking. Disclosure should not be just a liability protection; it
should inform investors and help them to make investment decisions. The fund profile is a step in the
right direction, but it can be improved upon. The Profile Plus, a point-of-sale disclosure document
developed by NASD’s Mutual Fund Task Force and subsequently endorsed by NASD, builds on the
profile and the SEC’s point-of-sale disclosure proposal. It is important as much for what it includes as
what it doesn’t include – redemption information and a breakdown of the expense ratio – information
that investors do not need when they purchase funds. In addition, it links to the full prospectus, which
should resolve liability concerns.
Ms. Walter closed with several additional suggestions: the SEC should not let resistance to the
Internet by a few preclude others from benefiting from its capabilities; oral disclosure should not be the
primary mode of providing point-of-sale disclosure, because it could be confusing and is difficult to
document; the Commission should work with the Department of Labor to address investor
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information needs in the context of retirement plans; and finally, disclosure requirements should be
established for other investment vehicles so that investors are not steered away from mutual funds
simply because they bear additional burdens.
Questions
The Commissioners and moderators were then invited to ask questions. Noting Mr. Hopkins’
proposal to make the profile a statutory prospectus, Commissioner Atkins requested additional
suggestions to address liability concerns. Ms. Walter suggested the Commission resolve, as an
interpretive matter, that if a short-form document is delivered to an investor, and that document links
to a long-form document, the investor can be deemed to have received the long-form document. Ms.
Roper agreed with this suggestion, noting that just like with a paper copy, if a link is provided the
investor has a choice whether to read the document or not. Mr. Hopkins reiterated his suggestion that
incorporation by reference be allowed.
Commissioners Nazareth, Glassman, and Campos next solicited recommendations for point-
of-sale disclosure. Ms. Walter restated her position that disclosure via the Internet, at least for those
who are comfortable with the Internet, is preferable to oral disclosure, both because an investor has
something to look at while talking to the adviser, and because it will be easier for brokers to document
that the disclosure was provided. For investors who are not comfortable with the Internet, however, an
abbreviated oral disclosure, followed by a written disclosure after sale, is preferable to requiring paper
delivery of a disclosure document prior to purchase because of the inconvenience to investors in having
to delay purchase. Responding to a question to Commissioner Glassman, Ms. Walter observed that
with the higher reported use of high-speed Internet connections there are fewer investors now who
cannot be on the Internet and telephone at the same time. She also noted other solutions to this
problem, such as downloading a disclosure and calling the adviser back. Finally, she noted that sending
a written disclosure with a trade confirmation adds an expense that would be borne by the investor, and
therefore should not be the default policy.
Referring to Mr. Phillips’ comment that many professionals study prospectus information that
investors ignore, Chairman Cox inquired as to the benefits of data tagging. Mr. Phillips reiterated that
tagging would allow his company to spend much less time developing and maintaining a clean database,
and more time on the value-added services they provide, such as analyzing data, developing new
interpretive devices, and offering judgment. Ms. Walter observed that real benefits would also accrue to
retail investors, who would be able to more easily seek the information that interests them and compare
funds. Ms. Roper disagreed that individual investors would compare information themselves, but
agreed that tools enabling investors to find funds matching the characteristics they sought would be
useful.
Responding to a request by Mr. Hopkins for more guidance on disclosure in the retirement
sector, Commissioner Campos asked whether some disclosure should be required. Ms. Roper
emphatically agreed that retirement investors should receive some disclosure, noting that for many
individuals, this is their first experience with investing. Mr. Hopkins agreed that some information
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should be offered, but noted that in the 401(k) context an employer has already conducted some
research and limited the options an investor can choose, so the investor may need less information.
Director Wyderko asked panelists how the SEC should ascertain which information is most
important to investors. Ms. Walter responded that ample research has already been done. Mr.
Hopkins concurred, stating that the profile is an excellent document, and that the SEC should just
confirm that the findings of research conducted while developing the profile in the late 1990s are still
valid. Ms. Roper, while agreeing that the profile contains the right categories of information, suggested
that research be conducted to determine how that information can best be presented so that investors
understand it.
PANEL 2: HOW CAN THE COMMISSION LEVERAGE THE POWER OF THE
INTERNET TO PROVIDE MUTUAL FUND INVESTORS WITH BETTER
INFORMATION?
The second panel was moderated by Buddy Donohue and Susan Nash, an Associate Director of
the Division of Investment Management. Ms. Nash introduced the panelists and invited them to offer
short introductory remarks.
Paul Stevens, President of the Institute, began by announcing the launch of the Institute’s
XBRL initiative. Mr. Stevens expressed support for the Commission’s efforts to encourage companies
to submit the financial data components of EDGAR filings in XBRL. He noted, however, that
financial statement information is of secondary importance to mutual fund investors, who rely much
more heavily on the information found in the fund profile, including the risk/return summary. The
Institute has engaged PricewaterhouseCoopers to help develop an XBRL taxonomy to cover the
risk/return summary. The Institute expects to complete this project by the first quarter of 2007, at
which time it will launch an educational program to encourage mutual funds to use this tagging in their
EDGAR filings.
Mr. Stevens then briefly summarized three Institute recommendations for the Commission to
take advantage of the benefits of the Internet, all of which are described in the written submission and
summarized above.
Tim Buckley, Chief Information Officer at Vanguard, described the substantial increase in
Internet usage among Vanguard investors over the past several years, noting that 80 percent of
Vanguard’s contacts now come in through the Internet. In this respect, he observed, the Internet
revolution has already come to the mutual fund industry. Mr. Buckley expressed support for data
tagging, but cautioned that the industry should not rush to tag the entire universe of mutual fund data.
Rather, it is critical to prioritize for tagging those types of information that people would and should
use – he estimated 10 to 12 pieces of information – and assess the resulting benefits before going
further.
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Paul Haaga, Jr., Executive Vice President of Capital Research and Management Co., noted that
many points in his prepared statement had already been made, and referred the audience to his written
submission. He then addressed several additional points. First, the analysts at Capital Research
appreciate the ability of data tagging to help them conduct their jobs. Second, Mr. Haaga suggested
that, while it is important to consider what information investors need at point of sale, this is only the
third most important point at which they need information; information is more critical to investors
when they sell funds and while they own them. Finally, Mr. Haaga observed that, while the goals of
disclosure reform should not stop at migrating paper documents to the Internet, there are very
immediate gains to be had by doing so. Mr. Haaga explained that a single shareholder report for his
company’s largest fund fills 17 tractor-trailers, and the financial statements alone weigh 600,000
pounds. He urged the Commission to consider these cost and resource savings in the near term while
contemplating longer-term reforms.
Bill Lutz, a professor of English at Rutgers University, stressed the power of the Internet to
revolutionize how individuals obtain information. He stated that “information is that which reduces
uncertainty,” explaining that while the current statutory prospectus has plenty of data, it has no
information because investors do not know how to use the data to answer their questions. If the
Internet is properly utilized, an individual will be able to take data and create the information he or she
seeks.
Questions
The Commissioners and moderators were then invited to ask questions. Commissioner
Glassman began by asking how difficult the taxonomy development process is expected to be. Mr.
Stevens described the project, which consists of developing a “straw man” set of tags for approximately
157 data elements, and then inviting a large and diverse working group to review and refine it. He
explained that even after the tag set is developed, individual funds will have further work to ensure that
they apply the tags accurately; additionally, someone will need to maintain the taxonomy over time.
Mr. Buckley added that while tagging common information should not be particularly difficult for
funds, tagging exotic data could be much more complicated.
Commissioner Campos asked the panel whether the Commission should think about an
analytical component to make the tagged data more useful. Professor Lutz observed that with the
Internet, investors will be able to create their own useful information based upon the data made
available; he stressed that the Internet should not be viewed as a pipeline, but rather as a medium for
creating information. He expressed confidence that third parties will develop tools to enable investors
to obtain answers to their questions. Mr. Stevens added that a great deal of thought had already been
given to presenting the risk/return summary in a useful and usable manner when it was developed in
the late 1990s.
Director Donohue next asked how the Commission can facilitate disclosure reform efforts.
Mr. Haaga suggested that the Commission specify some minimal amounts of information that are
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required to be disclosed, along with some standardized placement and organization of that information,
and relax certain other requirements such as those regarding delivery of advertising materials.
Continuing this discussion, Ms. Nash inquired whether the Commission should be more or less
prescriptive regarding how information is presented. Mr. Buckley pointed out that while information
architecture is important, different constituencies have different needs. He recommended that the
Commission focus its attention on which information to require, but not on how it is presented. Mr.
Stevens agreed that some flexibility is appropriate, but that some standardization is also possible because
some types of information serve all constituencies. Mr. Stevens added that once the Commission
identifies the required information, it should be wary of adding new disclosure requirements. Professor
Lutz recommended that the Commission encourage creativity in expressing information, so long as it is
not misleading. He noted that corporations demonstrate extreme conservatism in displaying
information based on fears of liability, and the public suffers.
Chairman Cox next asked the panel how the Commission should address the liability issue.
Professor Lutz advised that if a company provides disclosure that is accessible, informative and easily
understandable, it should have no liability concerns. Mr. Stevens encouraged the Commission to focus
on interpreting the securities laws in a way that make sense in the modern environment. He pointed
out that today, putting a prospectus on the Internet makes it as available to most investors as mailing
them a copy, and that this should be construed as a “delivery.”
Director Donohue asked what steps the SEC can take as the taxonomy development progresses.
Mr. Stevens invited the Commission to take part in the working group that will review the taxonomy,
and also recommended that the Commission offer incentives to funds to use the tags once they are
available. Asked for specific suggestions, Mr. Stevens proposed allowing funds that file in XBRL to use
a fund profile as their primary disclosure document. Mr. Haaga and Professor Lutz agreed, and Mr.
Buckley added that the fund profile confers not only a financial benefit on funds, but also the benefit of
knowing that shareholders are receiving useful information.
Ms. Nash asked the panel whether using the Internet for disclosure offers an opportunity to
integrate investor education. Mr. Haaga advised against conflating disclosure and education. Mr.
Buckley added that Vanguard’s investor education tools are rarely used, and that making disclosure easy
to understand may render separate educational tools unnecessary. Mr. Stevens agreed, noting that
investor education will be advanced by focusing on providing the information that is important to
investors. In conclusion, Professor Lutz observed that the Internet can serve these basic needs while at
the same time providing more complex information to analysts and others who seek it.
AFTERNOON SESSION: GETTING ANALYSTS AND INVESTORS SIGNIFICANTLY
BETTER INFORMATION
The afternoon session addressed the benefits and opportunities interactive data can provide to
analysts and investors, focusing primarily on XBRL reporting by operating companies. Participants
included representatives of public companies who have made XBRL filings, business newswires, and
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financial analysts, among others. After a series of opening remarks, Scott Taub, Acting Chief
Accountant, and James Daly, Associate Director of Corporation Finance at the SEC, moderated a
panel discussion.
Several themes emerged from the afternoon session. First, XBRL filings will directly benefit
financial analysts of all types, and indirectly benefit the clients they serve. They will do so both by
improving data quality and by rendering data re-entry and normalization unnecessary, thereby allowing
more time for value-added analytical services. Second, smaller and mid-size companies that do not
currently receive sell-side coverage will likely get more attention from analysts, because XBRL-tagged
data will enable analysts to automatically screen hundreds of additional companies. Third, XBRL will
level the playing field between institutional and individual investors. To date, institutional investors
have had an advantage because they maintain capacity to enter and verify data or to purchase it from a
third party. With XBRL, any investor who wants to conduct his or her own analysis will be able to do
so without collecting or purchasing data. Finally, many panelists agreed that while non-proprietary
tools for analyzing XBRL data have not yet been built, once more data becomes available such tools will
be developed.
Mara Shreck
Assistant Counsel