February 28, 1991
TO: STATE SECURITIES MEMBERS NO. 10-91
SEC RULES COMMITTEE NO. 15-91
RE: INSTITUTE RESPONDS TO NEW JERSEY DISCLOSURE CONCERNS
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As we previously informed you, the Institute was advised
that the New Jersey Securities Bureau had taken the position that
the disclosure in a mutual fund prospectus was inadequate without
the statement of additional information ("SAI"); therefore, the
information in the SAI had to be included in the prospectus or
the SAI had to be delivered with the prospectus to New Jersey
investors. The Institute wrote to the Bureau stating that this
position was contrary to the requirements of the SEC and
undermined the purpose and intent of Form N-1A. (See Memorandum
to State Securities Members No. 7-91 and SEC Rules Committee No.
9-91, dated January 31, 1991.)
The Bureau subsequently wrote to the Institute stating that
the "quality of disclosure in mutual funds has decreased to the
point where it appears to be adversely affecting the interests of
investors." According to the Bureau, investors are not receiving
the disclosure necessary to make informed investment decisions
because material information is included in the SAI rather than
the prospectus. The Bureau lists several items in its letter
which it states are not included in the prospectus.
The Institute responded to the Bureau’s concerns by meeting
with the staff and submitting a detailed follow-up letter that
outlines the purpose and goal of prospectus simplification and
the disclosure currently required by Form N-1A. The letter
addresses the specific disclosure inadequacies expressed by the
Bureau with respect to a fund’s investment objective, risk
factors and fees and notes that disclosure with respect to each
of those items is required to be included in a fund’s prospectus.
The Institute objected to the inclusion of additional
information not currently required by Form N-1A in that such
would unnecessarily lengthen a fund’s prospectus without
providing any additional meaningful or material information to
investors. Specifically, the letter states that information with
respect to a fund’s officers and directors is not material to
investors in making an investment decision and should not be
included in a fund’s prospectus. We also objected to the
inclusion of disclosure with respect to all investment
restrictions since Item 4 of Form N-1A specifically eliminates
the need for "negative disclosure" in a fund prospectus. The
letter emphasized that investors need to know what a fund can and
will do rather than a list of everything a fund cannot do. We
further disagreed with the Bureau’s position that investors need
to be provided with all available information at one time and
reaffirmed our commitment to the two-part disclosure format.
The letter concludes by stating that based upon the
discussion at our meeting, it is our understanding that if a
mutual fund prospectus contains full disclosure of all material
information, then the fund sponsor need not expand the disclosure
currently contained in the prospectus or deliver the SAI with the
prospectus. If this is not the Bureau’s understanding, we
requested that they contact us as soon as possible.
* * *
A copy of the Institute’s letter to the Bureau and the
Bureau’s letter to the Institute is attached. We will keep you
advised of further developments.
Patricia Louie
Assistant General Counsel
Attachments