The SEC proposes rules to simplify a mutual fund’s prospectus

A prospectus is the primary selling document for a mutual fund. Federal securities laws and regulations require mutual funds to distribute a prospectus to all current and prospective investors. A fund must update its prospectus at least once a year, and the content of a prospectus is dictated by federal law. If you’ve ever read a prospectus, you know that the jargon and legalese can be quite daunting. The SEC apparently knows that as well, and has proposed new rules to help simplify a fund’s prospectus. As stated in an SEC release a few days ago

The proposed rules would require that all mutual fund investors receive a clear, concise summary of key information needed to make an informed investment decision. The rule changes would also encourage funds to harness the power of the Internet to allow investors to choose the format in which they receive more detailed information and to provide that information in a more user-friendly format than is available today. The proposed rules are intended to enable investors to use and compare mutual fund information more effectively.

Among other things, the proposed rules would require

every mutual fund to include key information in plain English in a standardized order at the front of the mutual fund statutory prospectus. Like the risk/return summary that is currently included at the front of every mutual fund prospectus, this summary would include a fund’s investment objectives and strategies, risks, and costs. It also would include brief information regarding top ten portfolio holdings, investment advisers and portfolio managers, purchase and sale procedures and tax consequences, and financial intermediary compensation. The proposed amendments would require that the summary information be presented separately for each fund covered by a multiple fund prospectus. This requirement is intended to assist investors in finding important information regarding the particular fund in which they are interested.

You can read the full text of the SEC release here.

Question: Do you carefully read a fund’s prospectus before investing, and if so, what information does it provide that you find helpful in making your investment decisions?

Published or Updated: April 9, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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