May 21, 1996
TO: BROKER/DEALER ASSOCIATE MEMBERS No. 9-96
DIRECT MARKETING COMMITTEE No. 11-96
INDUSTRY STATISTICS COMMITTEE No. 14-96
INTERNATIONAL COMMITTEE No. 16-96
INVESTMENT ADVISERS COMMITTEE No. 10-96
MARKETING POLICY COMMITTEE No. 15-96
MEMBERS - ONE PER COMPLEX No. 36-96
PENSION COMMITTEE No. 17-96
RESEARCH COMMITTEE No. 20-96
SALES FORCE MARKETING COMMITTEE No. 13-96
SEC RULES COMMITTEE No. 45-96
SHAREHOLDER COMMUNICATIONS COMMITTEE No. 9-96
STATE LIAISON COMMITTEE No. 15-96
SUBCOMMITTEE ON ADVERTISING No. 8-96
RE: PROFILE PROSPECTUS SUBMISSION TO SECURITIES AND EXCHANGE
COMMISSION
______________________________________________________________________________
As you may know, on August 1, 1995, the Securities and Exchange Commission
approved a "profile" prospectus for use during a one-year trial period. During the trial period,
the profile prospectus was to be provided to investors together with the existing mutual fund
prospectus, and the Institute and participating members agreed to undertake research to
determine how investors assess the profile and their preferences concerning the format and
contents of mutual fund disclosure. The Institute recently submitted to the Commission the
results of this research and our suggestions for future Commission action. A copy of the
Institutes submission and our press release announcing the submission are attached.
The research of the Institute and the fund complexes that participated in the profile
project provides strong evidence that the profile prospectus provides effective disclosure to
investors. For example, according to the Institutes research, 70% of recent fund investors
stated that the profile prospectus provides the right amount of information. Only 53% gave the
same rating to the long-form prospectus; 41% stated that the long-form prospectus contains too
much information. Indeed, according to the Institutes survey, 50% of all recent fund investors
did not consult a long-form prospectus for any purpose before making their most recent
purchase.
According to the Institutes research, shareholders find the profile prospectus easier to
use than the long-form prospectus. For example, 56% of recent purchasers surveyed by the
Institute found it very easy to understand information in the profile prospectus on investment
risks. (Only 21% found it very easy to understand this information in the long-form
prospectus.) Most shareholders -- including those who consult the long-form prospectus --
indicated they would like to receive the profile prospectus either alone or with the option to
receive the long-form prospectus. Sixty-six percent of recent purchasers surveyed by the
Institute stated that they would like to receive the profile prospectus alone or with the option to
order the long-form prospectus.
All of these results are consistent with the findings of prospective investors and other
surveys conducted by participating Institute members. Two members participating in the
project also surveyed broker-dealers and other financial professionals concerning the profile
prospectus, and found that most of these professionals would use the profile prospectus to help
inform their clients concerning the characteristics of various mutual funds.
Based on the results of this research and our experience with the profile prospectus to
date, the Institute has recommended that the Commission propose, for public comment, rules
that would permit funds to distribute the profile prospectus for use by investors, at their
option, to purchase shares or request the long-from prospectus. (All investors would receive
the long-form prospectus, in any event, not later than the confirmation of purchase.) We also
have recommended a number of enhancements be made to the profile prospectus including the
following:
a comparison of the funds 1, 5 and 10-year total returns to the returns of either a
broad-based securities market index or an appropriate fund index and, at the funds
option, the Treasury bill rate;
disclosure concerning the funds portfolio manager;
a clear statement that loss of money is a risk of investing in the fund;
risk disclosure specific to the type of fund, focusing on overall portfolio risks rather
than risks of particular portfolio securities;
for equity funds, specifically required disclosure of the criteria used for making
investments and, for fixed income funds, disclosure of any general policies
concerning average maturity or duration and credit quality;
a prominent legend stating that the profile "contains key information about the
fund" and that if the reader would like more information before investing, the
reader should consult the mutual funds long-form prospectus;
in the same legend, a statement that, for details about a mutual funds holdings or
recent investment strategies, investors should review the mutual funds most recent
annual or semiannual report; and
disclosure concerning the tax consequences of distributions.
Finally, the Institute also has urged that the Commission persist in its effort to simplify
the long-form prospectus. Even if the Commission were to authorize use of the profile
prospectus at an investors option, the traditional prospectus will remain a helpful tool for
existing shareholders, including those many investors who are able to use it effectively in
making their investment decision.
We will keep you informed of further developments. In the meantime, please contact
me, or Craig Tyle (at 202-326-5815), or Tom Selman at (202-326-5819) of the Institute staff, if you
have any questions regarding the profile prospectus project.
Paul Schott Stevens
Senior Vice President and General Counsel
Attachments
Transmittal letter from Matthew P. Fink to Arthur J. Levitt, Jr.,
Chairman, U.S. Securities and Exchange Commission
Letter from Paul Schott Stevens to Barry P. Barbash, Director, Division of
Investment Management
The Profile Prospectus: An Assessment by Mutual Fund Shareholders
- Summary of Research Findings
- Volume I
- Volume II
Generic Form of Profile Prospectus
Press Release Announcing Institute Submission