April 8, 1991
TO: STATE SECURITIES MEMBERS NO. 14-91
SEC RULES COMMITTEE NO. 21-91
RE: INSTITUTE RECEIVES RESPONSE FROM NEW JERSEY REGARDING
DISCLOSURE CONCERNS
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As we previously informed you, the Institute responded to
the New Jersey Securities Bureau's concerns that the disclosure
contained in a mutual fund prospectus was inadequate unless
accompanied by the statement of additional information ("SAI").
(See Memoranda to State Securities Members Nos. 7-91 and 10-91;
SEC Rules Committee Nos. 9-91 and 15-91, dated January 31, 1991
and February 28, 1991.)
The Bureau recently acknowledged receipt of the Institute's
letter and stated that it "is concerned that, as a result of the
widespread use of Form N-1A, practices have developed in the
mutual fund industry that are not consistent with full disclosure
and protection of investors." The Bureau's letter goes on to
recommend certain actions that could be taken by mutual funds to
eliminate the "abuses" perceived by the Bureau to be practiced by
mutual funds. The Bureau's recommendations are as follows:
increasing the availability of the SAI and annual reports to
investors and making such documents available to broker-dealers;
disclosing the availability of the SAI in bold face type;
including a table of contents of the SAI in the prospectus;
including disclosure of the existence and availability of the SAI
in the "Additional Information" section; and disclosing the risk
factors of a fund in the prospectus. However, it is unclear
whether such actions must be implemented in order to be deemed in
compliance with the New Jersey Securities Act or whether such are
merely recommendations to be considered by fund sponsors.
The Institute suggested that the Bureau raise its concerns
and recommendations at the 1991 Conference on Federal-State
Regulation of Securities Conference to be held on April 19. The
Institute felt this would be appropriate since the two-part
disclosure format is specifically included as an agenda item for
the conference and each of the suggestions could be fully
explored by the SEC, NASAA and the participating states. The
Institute concluded by reiterating its belief that a mutual fund
prospectus containing the disclosure required by Form N-1A
includes all the necessary and material information required for
an investor to make an informed investment decision and
reaffirmed its commitment to the two-part disclosure format.
* * *
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