[22290]
March 3, 2008
TO: BOARD OF GOVERNORS No. 2-08BROKER/DEALER ADVISORY COMMITTEE No. 7-08
OPERATIONS MEMBERS No. 2-08
SEC RULES MEMBERS No. 20-08
SMALL FUNDS MEMBERS No. 12-08
TECHNOLOGY COMMITTEE No. 4-08
TRANSFER AGENT ADVISORY COMMITTEE No. 11-08 RE: ICI COMMENT LETTER ON SEC DISCLOSURE REFORM PROPOSAL; JOINT ICI/SIFMA LETTER
In November 2007, the Securities and Exchange Commission proposed amendments to the rules and forms used by mutual funds to register under the Investment Company Act of 1940 and to offer their securities under the Securities Act of 1933. [1] The proposed amendments would require key information to appear in plain English, in a standardized order, at the front of every mutual fund’s statutory prospectus, in place of the current risk/return summary. Additionally, the proposed amendments would permit a fund to satisfy its prospectus delivery obligation under Section 5(b)(2) of the Securities Act by providing investors with a “Summary Prospectus” containing the same key information, and making additional information, including the statutory prospectus, available on the Internet and in paper or by email upon request. Funds choosing to use the Summary Prospectus would be required to update certain information in the Summary Prospectus after the end of each calendar quarter and to comply with technological requirements regarding the availability of materials on the Internet.
The Institute recently filed a comment letter on the proposal. The Institute’s letter included as an appendix a cost-benefit analysis of the SEC’s proposal, based on a recent Institute member survey. In addition, the Institute and the Securities Industry and Financial Markets Association (SIFMA) filed a joint comment letter on the proposal. The letters and the cost-benefit analysis are briefly summarized below and copies are attached.
ICI Letter
The Institute’s letter strongly supports the SEC’s proposed concept of a new prospectus delivery option for mutual funds. [2] Our most significant additional comments include the following:
- Quarterly Updating. The Institute strongly opposes the proposed requirement to update performance and top ten portfolio holdings information in the Summary Prospectus no later than one month after the end of each calendar quarter. We believe that this requirement is unnecessary, offers possibilities for investor confusion, and creates substantial operational burdens and costs, as well as compliance, legal, and interpretive questions. Our cost-benefit analysis suggests that up to 70 percent of funds would face substantial cost and operational burdens in complying with a quarterly updating requirement and that these burdens would likely lead funds to elect not to use the Summary Prospectus. We recommend instead that the required legend in the Summary Prospectus direct shareholders to a specified website for updated information.
- Liability and Compliance. We applaud the Commission for its efforts to ensure that proper use of the Summary Prospectus does not subject funds to the threat of new or additional legal liability. We believe that the proposed approach largely achieves this goal, but some concerns remain. These include concerns with the proposed requirement that the Summary Prospectus must be given “greater prominence” than any materials that accompany it. We offer suggestions that we believe will protect shareholders and promote the Commission’s goals while limiting the potential risks to funds from using the Summary Prospectus.
- Technology Requirements. We strongly support in concept the Commission’s proposed framework for requiring the statutory prospectus, statement of additional information, and shareholder reports to be made available on the Internet and in paper or by email upon request. We offer comments to ensure that compliance with this framework is reasonably achievable using today’s technology, without foreclosing alternative approaches or improvements based on future technology.
- Format, Order and Content. We suggest modifications to the format, order and content of the Summary Prospectus to improve the overall quality and utility of the Summary Prospectus. Our comments include the following:
- We recommend revising the proposed order of information in the Summary Prospectus so that a fund’s investment strategies, risks, and performance are described immediately following its investment objectives, as in the current risk/return summary.We strongly oppose the inclusion of top ten portfolio holdings information in the Summary Prospectus.We note that several Institute members have indicated that a Summary Prospectus that includes all of the information required under the proposal is likely to be longer than the 3-4 pages contemplated by the SEC. We offer suggestions that attempt to focus on information that is most critical to investors.
Cost-Benefit Analysis of SEC Proposal
Appendix B to the Institute’s comment letter provides an analysis of the costs, benefits, and net savings associated with the two parts of the SEC’s proposal: mandatory changes to Form N-1A and voluntary use of the Summary Prospectus. The analysis is based on survey information gathered from Institute members and other information from various industry sources.
The Institute’s estimates of the costs of complying with the proposed Form N-1A changes are relatively close to the SEC’s estimates set forth in the Proposing Release. In contrast, our assessment of the initial set-up costs in connection with opting to use the Summary Prospectus differs significantly from the SEC’s (the SEC did not factor in any such costs) and our estimate of the costs of updating the Summary Prospectus each calendar quarter also is considerably higher than the SEC’s estimate.
Based on responses to the member survey, the Institute’s analysis also estimates the percentage of funds that would choose to use the Summary Prospectus. The Institute estimates that between 30 and 45 percent of funds would opt to use the Summary Prospectus as currently proposed. This estimate takes into account whether the funds and their shareholders would realize positive net savings from opting in and whether the fund complex indicated that it would be difficult to overcome the challenges of heavy workloads at quarter ends. The Institute estimates that 80 percent of funds would find it cost-effective to use the Summary Prospectus if the quarterly updating requirement were removed.
ICI/SIFMA Letter
In a second comment letter, ICI and SIFMA jointly expressed strong support for the SEC’s summary prospectus concept, noting that it has the potential to enhance investor use and understanding of important fund information. The joint letter points out that the success of the initiative and its resulting benefits to investors depend heavily on both funds and fund distributors embracing it. It states that it is critical that the SEC avoid unintentionally creating any significant disincentives to widespread use of the summary prospectus, such as by requiring quarterly updating. The letter urges the SEC to move swiftly to adopt a summary prospectus rule that does not introduce undue operational complexities, so that investors will be able to reap the benefits of streamlined mutual fund disclosure as soon as possible.
Mara Shreck
Assistant Counsel
Frances M. Stadler
Deputy Senior Counsel
endnotes
[1] See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, SEC Release Nos. 33-8861 and IC-28064 (Nov. 21, 2007) (“Proposing Release”), available at http://www.sec.gov/rules/proposed/2007/33-8861.pdf.
[2] The letter also supports the proposed changes to Form N-1A to provide investors with summary information at the front of the statutory prospectus, subject to comments on format, order, and content.