WEBMASTER NOTE: This is the unedited transcript of the Interactive Data Roundtable held on June 12, 2006, which we received directly from the court reporter. We are posting the transcript in this form to make it available as soon as possible. 1 THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 In the Matter of: ) 4 ) File No. 4-515 5 INTERACTIVE DATA ROUNDTABLE ) 6 7 Administrative Proceeding 8 PAGES: 1 through 188 9 PLACE: Securities and Exchange Commission 10 100 F Street, N.E., Room L-002 11 Washington, D.C. 12 DATE: Monday, June 12, 2006 13 14 The above-entitled matter came on for hearing, pursuant 15 to notice, at 9:44 a.m. 16 17 For the United States Securities and Exchange Commission: 18 Commissioner Christopher Cox, Chairman 19 Commissioner Cynthia A. Glassman 20 Commissioner Paul A. Atkins 21 Commissioner Roel C. Campos 22 Commissioner Annette Nazareth 23 24 Diversified Reporting Services, Inc. 25 (202) 467-9200 1 C O N T E N T S 2 PAGE 3 SESSION ONE: Improving the Quality of Mutual Fund Disclosure 4 Opening Remarks: Chairman Christopher Cox 5 5 Moderator: Andrew J. Donohue 13 6 Moderator: Susan Ferris Wyderko 17 7 Panel One: What types of Information are Most Useful 8 To Mutual Fund Investors? 9 Participants: 10 Barbara Roper, Consumer Federation of America 18 11 Don Phillips, Morningstar, Inc. 24 12 Henry H. Hopkins, T. Rowe Price Group, Inc. 28 13 William Dwyer, Linsco/Private Ledger Corp. 32 14 Elisse B. Walter, NASD 38 15 Panel Two: How Can the Commission Leverage the Power of 16 the Internet to Provide Mutual Fund 17 Investors with Better Information? 18 Moderator Andrew J. Donohue 61 19 Moderator Susan Nash 62 20 Dr. William D. Lutz, Rutgers University 63 21 Paul Schott Stevens, Investment Company Institute 70 22 Tim Buckley, Vanguard 74 23 Paul G. Haaga, Jr., Capital Research and Management Co. 79 24 SESSION TWO: Getting Analysts and Investors 25 Significantly Better Information 1 C O N T E N T S (Continued) 2 Opening Remarks: Chairman Cox 105 3 Opening Address: Anne M. Mulcahy, Xerox Corporation 108 4 Opening Presentations: Opportunities for Data Analysis 5 in the New World of Interactive Data 6 Moderator Corey Booth 120 7 Participants: 8 Dr. John Markese, American Association of Individual 9 Investors 121 10 Trevor Harris, Morgan Stanley 125 11 Lawrence J. Salva, Comcast Corporation 135 12 R. Christopher Whalen, Institutional Risk Analytics 140 13 Panel Discussion: Exchange and Analysis of 14 Information via Interactive Data 15 Moderator Scott Taub 148 16 Moderator James M. Daly 149 17 Participants: 18 Gregory J. Jonas, Moody's Investors Service 150 19 Thomas M. Franks, TIAA-CREF 155 20 Cathy Baron Tamraz, Business Wire 157 21 Charles Gregson, PR Newswire Association LLC 157 22 Dr. William L. Guttman, Venture Partner, TL Ventures 158 23 Mr. Stantial, Director of Financial Reporting, United 24 Technologies Corporation 159 25 Trevor Harris, Morgan Stanley 161 1 C O N T E N T S (Continued) 2 R. Christopher Whalen, Institutional Risk Analytics 162 3 Dr. Clinton E. White, Jr., University of Delaware 163 4 Mark Augustine, Augustine Consulting 165 5 Trevor Harris, Morgan Stanley 165 6 Lawrence Salva, Comcast Corporation 166 7 Dr. John Markese, American Association of individual 8 Investors 170 9 Cathy Baron Tamraz, Business Wire 171 10 Mark Augustine, Augustine Consulting 172 11 Thomas M. Franks, TIAA-CREF 174 12 Mr. Stantial, Director of Financial Reporting, United 13 Technologies Corporation 176 14 Gregory J. Jonas, Moody's Investors Service 178 15 Dr. Clinton E. White, Jr., University of Delaware 179 16 R. Christopher Whalen, Institutional Risk Analytics 180 17 Trevor Harris, Morgan Stanley 180 18 Cathy Baron Tamraz, Business Wire 181 19 Congressman Richard Baker, Chairman, House Subcommittee 20 on Capital Markets 183 21 Closing Remarks 22 Chairman Christopher Cox 184 23 24 25 1 P R O C E D I N G S 2 9:44 a.m. 3 SESSION ONE: IMPROVING THE QUALITY OF MUTUAL FUND DISCLOSURE 4 CHAIRMAN COX: Good morning and welcome. Thank you 5 all for joining us today. And welcome to our first in our 6 series of roundtables on interactive data. Our aim is to 7 make financial disclosures more user friendly to the average 8 investor. I'm Chris Cox, the Chairman of the Securities and 9 Exchange Commission. We have all of our commissioners here 10 and an outstanding panel. I'm very much looking forward to 11 this. 12 I should start by telling you that we at the 13 Securities and Exchange Commission hope to lead by example 14 here. We have recently launched on our website a beta 15 version of a full text search capability to allow investors 16 to search the entire content of SEC filings. We welcome 17 feedback as we seek to expand and enhance this new web tool 18 for investors. 19 I see a lot of surprised looks here. This is a new 20 announcement I think for most of you and we consider this to 21 be a very big deal indeed. 22 We have also launched a separate search to help 23 mutual funds investors more quickly identify information on 24 their fund and share class. Previously, details on a 25 specific fund share class were nearly impossible to dig out 1 of our electronic database. As with the full text search, we 2 encourage and welcome your suggestions on how we can improve 3 this capability. 4 It has been six years since the dotcom meltdown and 5 yet during all of that time, consumer appetite for new uses 6 of the Internet has been increasing nonstop. Nielson Media 7 Research now reports that the total number of Americans with 8 home Internet access is over 200 million. The PEW Internet 9 and American Life Project reports meanwhile that the growth 10 rate of high speed Internet to home users has doubled in the 11 past year. These same surveys show that large majorities say 12 that the Internet has improved their ability to get health 13 care information, to shop, to pursue hobbies and also to do 14 their jobs. And the Internet continues to grow as a central 15 source of news for tens of millions of Americans. 16 The time is well past when we should think of the 17 Internet as a medium that's accessible only to an economical 18 elite. According to the New York Times, the digital divide 19 is rapidly closing. 20 The Internet, this great instrument of national and 21 international communication, is also a critical engine of 22 American productivity. Wharton School Professor Jeremy 23 Siegel points out in his book, "The Future for Investors," 24 that going back to Gutenberg and even further back all the 25 way to Silon's invention of paper in China almost 2000 years 1 ago, every time we open up a new communications technology, 2 invariably it has led to expanded economic opportunity and 3 growth. 4 So the question for us today is how do we put the 5 current communications technology to the service of the 6 American investor. How do we harness the Internet which is 7 serving so many customers in so many other ways to deliver 8 the maximum benefit to those in our regulated capital 9 markets. 10 In many ways, the American investor is still 11 waiting for the Internet revolution. Yes, many people have 12 embraced online trading. Still more do research and check 13 quotes by the Internet, but most of America's more than 90 14 million investors are not enjoying anything close to the full 15 potential of the Internet to provide customized financial 16 information. 17 Some of our morning panelists have the unenviable 18 task of digging into the dense documents that we see in 19 today's status quo. Their job is to fish out the data and 20 retype it into their own more user friendly services. But 21 they and all American investors can at least imagine the 22 possibilities if all company and mutual fund financial 23 information were available to everyone for free in real time 24 directly from the source and in a format that allows the 25 investor, the analyst or the financial publisher total 1 control. They could use this information for comparison, for 2 further research or for new analytical tools, whatever they 3 chose. 4 Today most investors are still receiving stacks of 5 paper, that high tech invention of 105AD. Whether these 6 stacks are corporate proxy materials or mutual fund 7 prospectuses or other reports, investors typically find them 8 equally difficult to understand. 9 Yes, these documents have allowed countless 10 Americans to treat insomnia without resorting to 11 pharmaceuticals but they have also proven deeply flawed as 12 vehicles to inform the investor. 13 For mutual fund investors who are the focus of this 14 morning's discussions, the mailed prospectus is too often a 15 dense blob of legalese, difficult to search, time consuming 16 to read, impossible to navigate quickly. For these reasons, 17 the mutual fund prospectus seems almost designed for digital 18 distribution. It's a document that almost nobody wants to 19 read in full but from which many people want to glean key 20 facts. 21 Interactive data, the tagging of these key facts so 22 that they can easily be identified and extracted offers the 23 possibility of dramatic improvement over traditional 24 disclosure delivery for mutual fund investors. 25 Let me emphasize one important point here. I 1 believe that the Internet offers powerful new ways to put 2 investors in the driver's seat when it comes to the financial 3 disclosures they want, the way they want them. The Internet 4 offers investors more control and expanded choices. But one 5 choice that will always remain is to continue to receive 6 paper. Interactive data is not a replacement for paper. It 7 is a compelling new option and I believe a superior option 8 for investors who will be free to choose. Many investors 9 would welcome a choice. 10 Instead of a dense unsearchable morass of 11 lawyerisms, imagine disclosure documents with the flexibility 12 of your favorite website giving you access to basic 13 information and then myriad options to drill down more deeply 14 for more information on a particular topic or to make a 15 comparison. 16 Think of how that capability that we now have with 17 flash demonstrations, pop-up references and instant 18 cross-referencing that can happen on a web page. Think of 19 how that could improve life for the average investor, from 20 the novice to the professional money manager. 21 So let's imagine an investor having instant access 22 to exactly the items that she is seeking and enjoying the 23 ability to make comparisons among funds and across time. She 24 is able to immediately examine expense ratios or performance 25 and instantly compare these numbers to those of competitors. 1 Or maybe what she really cares about are the top 50 holdings 2 of a given fund. 3 Interactive data means liberating all of the 4 individual facts in large disclosure documents so you can 5 easily call up what you want without having to read the 6 60-page blob. 7 Recent evidence suggests that it isn't just average 8 investors who have difficulty navigating that blob. James 9 Choi of the Yale School of Management along with colleagues 10 at Harvard and the University of Pennsylvania recently 11 presented mutual fund prospectuses to students at Harvard and 12 MBA candidates at the University of Pennsylvania's Wharton 13 School. 14 They found that even students at these elite 15 American universities when given fund prospectuses end up 16 choosing higher fees when selecting among funds tracking the 17 exact same stock index. Of course, it's not our job to tell 18 people which funds to select or how much to pay for fund 19 management. What is our job is to provide investors with 20 easy access to the information that they want in order to 21 make an informed decision. That is why I found it 22 particularly troubling that at the outset of the study the 23 students ranked expenses as their most important investment 24 criterion. And yet they seemed unable to invest on that 25 basis when given mutual fund prospectuses to read. 1 On the other hand, when given simply summaries of 2 the expense data, the students apparently opted for 3 substantially lower fees. If true, these findings suggest 4 that even graduate students with a high level of financial 5 literacy and undergrads with SAT scores in the 99th 6 percentile have difficulty comprehending a mutual fund 7 prospectus. 8 The obvious solution is to move away from a dense 9 document of legalese and toward a simple summary that allows 10 investors to drill down for more detail on whatever topics 11 they choose. And the obvious medium to deliver those 12 enhancements is the Internet. 13 I am happy to report that the spread of interactive 14 data for investors of all types has recently gained a new 15 champion. Just a few days ago I received a note from UCLA 16 computer science Professor Leonard Klinerock. As some of you 17 know, Dr. Klinerock created the basic principles of packet 18 switching back in the 1960s and his computer at UCLA was the 19 very first node of the Internet. In fact, his team at UCLA 20 sent the very first message over the Internet so normally I 21 value his opinion on matters such as this. 22 Here is what he has written to us, quote: "We are 23 likely to be surprised, even amazed at what the individual 24 investor will be able to extract and deduce from this wealth 25 of information once we transform the paper data in SEC 1 filings and annual reports into an interactive electronic 2 live format. No longer will the well endowed financial firms 3 be the only ones who can afford to compile comparative data, 4 but now even the individual investor will have the same 5 access on a level playing field. One's ingenuity will be the 6 limit to evaluation and decision making. Making accurate 7 real time interactive data available through the Internet so 8 that it can be instantly processed and compared on a personal 9 computer using one's favorite software package is an obvious 10 beneficial and urgent proposition. It's hard to believe that 11 financial reporting is only now emerging from the dark ages 12 and catching up to the 21st Century." 13 So with that to set the scene, I want you to know 14 I'm very much looking forward to hearing from our panelists 15 on ways to encourage more investor friendly communications. 16 And leading what I am sure will be a thoughtful discussion 17 this morning are my colleagues, Buddy Donohue and Susan 18 Wyderko. 19 Buddy, as you perhaps know is our new director of 20 the Division of Investment Management. Susan is most 21 recently acting director of the Division of Investment 22 Management. Unfortunately, as in sports, we at the SEC 23 sometimes lose our players to free agency and so we are sad 24 to learn that our director of the Office of Investor 25 Education and Assistance which is Susan's main job will soon 1 be leaving the Commission. But I want you to know that she 2 has been extraordinarily effective and respected leader and 3 most recently served investors in a very distinguished way as 4 the acting director of the Division of Investment Management. 5 So these two leaders of the SEC I think are extraordinarily 6 well equipped to help lead us in this panel discussion this 7 morning. 8 We have very much to learn from all of those on our 9 panel who are gracious enough to participate. I want to 10 thank each of you very much for being here. I very much 11 appreciate it. All of us on the Commission do and I look 12 forward to listening now to the rest of the day's events. 13 Thanks very much. 14 Over to you, Buddy. 15 PANEL ONE: WHAT TYPES OF INFORMATION ARE MOST USEFUL 16 TO MUTUAL FUND INVESTORS? 17 MR. DONOHUE: Thank you for the kind introduction, 18 Chairman Cox. I am very pleased to be here both as the new 19 director of the Division of Investment Management and as a 20 moderator for today's roundtable. 21 Before I begin today I need to note that the views 22 expressed today by me and all the SEC moderators throughout 23 the day are our own and do not necessarily reflect the views 24 of the Commission or of our colleagues on the staff of the 25 Commission. 1 For all the reasons the Chairman just outlined, the 2 interactive data initiative promises to improve the quality 3 of disclosure to the average investor to revolutionize how 4 investors access, use and ultimately understand information. 5 We want to empower investors to make better decisions for 6 their families, their retirement, their healthcare, their 7 education and their savings. 8 It makes sense to start our discussion with the 9 investment that ordinary Americans rely on more than any 10 other, the mutual fund. At the SEC we already require mutual 11 funds to disclose a great deal of important information in a 12 number of filings. 13 I have with me documents filed for one particular 14 fund during the past 12 months. You can see that the sheer 15 volume of this information would make it difficult for the 16 most diligent investor to unearth the nuggets that he or she 17 seeks. Much of this information is delivered directly to 18 investors typically in paper. Funds provide the prospectus 19 to each investor who purchases shares and many funds send a 20 new prospectus to every existing shareholder every year. For 21 those investors who want to go beyond the prospectus funds 22 make statements of additional information available upon 23 request. In addition, funds provide the shareholder reports 24 to each shareholder twice a year. When a mutual fund holds a 25 shareholder meeting, the fund sends its proxy statement to 1 the shareholders. 2 Other reports are available through the 3 Commission's EDGAR website. These electronic only documents 4 can provide information to investors and others who both know 5 about them and know how to find and use them. These include 6 semiannual reports on Forms NCSR and NSAR as well as 7 quarterly reports of portfolio holdings on Form NQ. In 8 addition annual proxy voting records filed on Form NPX 9 generally are available as electronic documents posted on 10 fund websites. Particularly savvy investors can also use 11 EDGAR to review the other information contained in Part C of 12 the mutual fund registration statements. 13 These SEC filings do not include the myriad of fund 14 advertisements, sales literature and other materials that 15 funds choose to use in communicating with their shareholders. 16 These two add to the total mix of information confronting 17 investors. 18 Now, I don't want to suggest that any of these 19 documents is not useful or does not contain information that 20 could be important to an investor. I believe quite the 21 opposite in fact. That buried within this paper are probably 22 all the essential data that a typical investor would need and 23 want as well as a great deal of other important information 24 that is used by financial advisors, retirement plan sponsors, 25 third party analysts and other intermediaries who help 1 investors. 2 To state the obvious, though, the average investor 3 will access to this stack of paper or even with access to the 4 online equivalence of this paper will have a difficult time 5 figuring out what the critical information much less finding 6 and digesting it in a timely manner and will have an even 7 harder time comparing it against the information in the 8 similar stacks of disclosure for other comparable funds. 9 It's a lot of information and I think it is time we 10 confront two questions head on. First, is there a better way 11 to highlight the key information that is critical to a 12 typical investor? We need to find a life raft to throw out 13 to the millions of mutual fund investors to keep them from 14 drowning in this sea of information. Perhaps a short summary 15 of the most essential information. 16 Second, how can we tame this massive data and make 17 it usable whether for a fund investor or one of the many 18 intermediaries who digest the information and repackage it 19 for the investors. It is here that interactive data holds so 20 much promise. Perhaps interactive data could help investors 21 quickly pull up and compare the after-tax return information 22 for five different funds at a glance or it might allow a 23 retirement plan fiduciary to track changes in the portfolio 24 holdings of a fund to better assess how closely the stated 25 objectives and strategies of the fund are followed. Or 1 perhaps it will give an aggressive journalist the opportunity 2 to move from a portfolio manager's name and background in a 3 prospectus to the detailed information about that manager's 4 potential conflicts in the statement of additional 5 information to the most recent Code of Ethics provisions 6 governing these conflicts filed with Form NCSR. The 7 possibilities are endless and full of great promise. 8 The purpose of the two panels this morning is to 9 discuss how we, the policy makers, investor advocates, 10 industry leaders, academics and others can start to realize 11 this promise. The task is daunting but the reward, the 12 empowerment of the individual investors, is great. 13 Before I proceed with the panel, I would like to 14 say a special thanks to my co-moderator, Susan Wyderko. As 15 acting director of the division, Susan was instrumental in 16 moving forward the division's thinking on interactive data 17 and improved mutual fund disclosure as well as in providing 18 the impetus for today's morning's roundtable session. We 19 would not be having today's discussion without Susan's 20 inspiration and efforts. 21 And with that I'd like to ask Susan to introduce 22 our panelists. 23 MS. WYDERKO: Thank you, Buddy. 24 We are very lucky this morning to have two very 25 distinguished groups of panelists coming from a wide range of 1 perspectives. I want to thank everyone this morning for your 2 time and your energy that you are devoting to us. 3 We have divided our discussions this morning into 4 two general topics. The first panel which you see before you 5 right now will focus on the types of information that are 6 most useful to mutual fund investors. The second panel will 7 focus on how the Commission can better leverage the power of 8 the Internet to provide mutual fund investors with better 9 information. 10 Now I'm going to briefly introduce the panelists. 11 I encourage you to look for more information on the 12 Commission's website. They are a very distinguished group. 13 Farthest away from me is Barbara Roper. Barb is 14 the director of Investor Protection at the Consumer 15 Federation of America. She is a leading spokesperson on 16 investor protection issues. 17 Next to Barb is Don Phillips. Don is the managing 18 director of Morningstar and he is responsible for corporation 19 strategy, research and corporation communications. 20 Next to Don is Henry Hopkins. Henry is a vice 21 president and chief legal counsel in the T. Rowe Price Fund 22 Group and a very distinguished member of the Investment 23 Company Bar. 24 Next in line is Bill Dwyer who is managing Director 25 of National Sales for Linsco/Private Ledger with 1 responsibility for retirement and management of the firm's 2 financial advisors. 3 Finally, but not least, we have Elisse Walter who 4 is senior executive vice president at the NASD. Among other 5 things, Elisse oversees the Investment Company regulation and 6 leads NASD's investor education efforts. 7 I'm going to start by inviting each of our 8 panelists to provide a brief perspective on the information 9 that is most useful for fund investors. 10 Barb, I'm going to start with you. I know the CFA 11 has done a lot of research in this area, so let's start with 12 you. 13 MS. ROPER: A wise man once said that giving 14 investors the information they need in a form they can 15 understand is what distinguishes investing from roulette. We 16 are pleased to participate in today's roundtable because we 17 believe the review that the SEC is undertaking has the 18 potential to greatly enhance the useability of the 19 information that mutual fund investors receive. 20 For the past 18 months CFA has been engaged in a 21 research project in which we have asked many of the questions 22 that we're discussing here today about the information that 23 mutual fund investors need and find useful. 24 We started with the literature review where we 25 looked at the recommendations of experts from regulators, 1 industries, investor advocates, personal finance writers and 2 others. And what we found was agreement to the point of near 3 unanimity about the basic factors that investors should 4 consider when selecting a mutual fund. 5 These closely track the content of the original 6 fund profile with highest priority given to investment 7 objectives and strategies, risks, costs, and past performance 8 particularly as it relates to the volatility of past returns. 9 When you look at a more detailed level, there is 10 more variation in the recommendations on the best way to 11 evaluate risk, for example, or the relative importance of 12 costs, but our research suggests that the general question of 13 what information is essential to an informed mutual fund 14 purchase has really been answered to the general satisfaction 15 of experts from all constituencies. 16 We also found that that information is widely 17 available to investors and it comes from a lot of different 18 sources and in a lot of different formats. And while the 19 quality and usability varies, it is often quite good. 20 There are two areas where we think there is a need 21 and a possibility for improvement. One, narrative risk 22 disclosures often consist of little more than boilerplate 23 that does little to assist an investor who is seeking to 24 determine whether one fund is more or less risky than another 25 comparable fund. 1 And, second, the fee table is too cluttered and it 2 is too hard to get the key information about what you're 3 paying for the fund and what you're paying for the services 4 of a broker or adviser in recommending that fund. But, as I 5 say, we have a general agreement among the experts about how 6 investors should go about selecting a mutual fund. 7 Unfortunately we're releasing a survey today, a 8 consumer survey that shows that many/most investors' actual 9 mutual fund purchase practices don't remotely resemble the 10 expert recommendations. There is not time to go over that in 11 detail here but the gist of it here is that there are 12 significant differences in the factors they consider most 13 important, the value they place on the prospectus and other 14 written disclosures and the degree to which they research the 15 funds that are recommended to them by financial 16 professionals. 17 So what are the reasons for the gap? 18 Two leap to mind. If you look at what the experts 19 recommend you do to select a mutual fund, it's too much work. 20 The handful of people who are willing to do that much work 21 already work for Don. 22 (Laughter.) 23 Secondly, the expert recommendations treat everyone 24 as if they were a direct purchaser of mutual funds. And, as 25 you know, most people purchase their funds either through a 1 workplace-based retirement plan where they typically choose 2 from a relatively limited menu of funds or through a 3 financial professional who makes the selection for them. 4 It is unreasonable to assume that they will either 5 want or need the same information as the direct purchaser. 6 Our research suggests that even the direct purchasers don't 7 necessarily want as much information as the experts think 8 they need. 9 So what are the implications of that for how we do 10 mutual fund disclosure? 11 Well, one of the implications for us has been that 12 CFA has abandoned our former opposition to the sale of funds 13 from an abbreviated disclosure document. It seems pointless 14 to continue to insist on full prospectus delivery to all 15 investors when most investors do not appear to find the 16 prospectus of great value. 17 It also seems to us that given investors' somewhat 18 limited attention spans for these issues, we need to make it 19 as easy as possible for them to get the information they 20 really need and to understand the information they get. 21 Before you immediately conclude that the original 22 profile is the right approach, however, we would encourage 23 the Commission to study the really innovative approaches that 24 many fund companies and others take when they prepare these 25 abbreviated disclosure documents for use on their websites. 1 Many of them are able to provide somewhat more detail than 2 the original profile provided but in a user friendly format 3 that gives the investors far more control over how they 4 access that data an dhow much information they choose to 5 review. 6 I also think it is important to keep in mind the 7 different needs of different types of investors. And I would 8 just like to suggest that for those who invest through 9 financial professionals the most important information they 10 need may have nothing to do with mutual funds. Our research 11 suggests that most of these investors do little or no 12 research of the funds that are recommended to them. 13 Arguably the information they need is the 14 information that helps them make an informed selection among 15 financial professionals. And unlike information about mutual 16 funds that is not information that is typically readily 17 available. 18 So we would like to encourage the Commission to 19 seriously consider developing a plain English disclosure 20 document that brokers, financial planners and investment 21 advisors alike would be required to provide to all 22 prospective clients that covers the key issues including 23 conflicts of interest that are relevant to the selection of a 24 financial professional. 25 And before I close I would like to make a couple of 1 comments about the Internet disclosure issue. Our survey 2 offers both sort of hope and caution on that. CFA is a 3 strong supporter of making greater use of the Internet to 4 communicate with investors because we believe it has the 5 potential to both reduce the cost and improve the quality and 6 timeliness of disclosures. 7 When we asked investors about their willingness to 8 use the Internet, however, we found on the positive side vast 9 majorities of investors have access to the Internet and are 10 willing to use it for at least some purposes, but there does 11 remain resistance among certain investors, particularly older 12 investors, for certain purposes. 13 One of the things that we found that I think is 14 perhaps most relevant to our discussion today is that current 15 investors, those who identified themselves as current 16 investors who had bought most of their funds through a 17 financial professional, just under half said they would be 18 willing to use the Internet to receive periodic disclosure 19 documents. And just over a third said they would be willing 20 to use the Internet to communicate with their financial 21 professional. 22 I think we need to understand the reasons behind 23 and the intensity of that resistance if we are going to 24 develop Internet disclosure policies that benefit all 25 investors. 1 MS. WYDERKO: Thanks, Barb. 2 Don, Morningstar has a lot of experience providing 3 investors and intermediaries with information about mutual 4 funds, so let's hear from you. 5 MR. PHILLIPS: Thank you very much, Susan. Thank 6 you for the opportunity to participate in this discussion. 7 First, before I start, I would like to say that 8 clearly there is something about the system that works very 9 well. We often get hung up on ways that we can improve and 10 that is also important, but something does work. 11 At Morningstar we are now tracking funds around the 12 globe and nowhere else are costs as low and as transparency 13 is great is in the United States. So there is something very 14 right about the system. 15 And also in the aggregate, if you look at investor 16 dollars, they tend to flow to lower cost organizations and 17 the better performing funds. So there is something that is 18 working with the system, but the reason the system works so 19 well is that we are constantly asking how can it improve. 20 And that is why I think this discussion is timely. 21 Clearly, there is room for improvement on the 22 current prospectus. I would argue that there are two major 23 audiences it serves and it is not serving either as well as 24 it might. One is the individual investor who is trying to 25 make a decision. I think Chairman Cox correctly described 1 the situation. It's bombarding investors with way more 2 information than they can handle and that they can 3 intelligently assimilate. It is not helping them make 4 decisions. And that is why the move towards a simplified 5 prospectus makes all the sense in the world to get some 6 minimum level of disclosure out there to people at the point 7 or near the point of the purchase agreement. 8 But as Barbara mentioned, the vast majority of 9 investors aren't making their decisions in isolation. They 10 are putting money into a fund with the help of some sort of a 11 professional, whether it's a financial advisor or whether 12 it's an employer who is selecting funds for a 401(k) plan, 13 whether it's the press or third party research companies, 14 these are people that have a professional and sometimes even 15 a fiduciary responsibility to out and seek out all of the 16 information. 17 And the current dense prospectus in a 18 non-electronic form isn't the tool that the need. Even the 19 early tagging efforts here have been done mostly with the 20 legal mindset, not with the database management mindset. And 21 so I think there is ample opportunity to improve to get the 22 information out there. So you can have firms like 23 Morningstar spending our time and energy thinking about what 24 this information means not simply on the processing of the 25 information. I think all parties will benefit from that. 1 I think what you need are two different documents 2 because there really are two different needs. Perhaps a 3 simplified print document also available electronically for 4 individuals, the focus is on the information investors need 5 to know. And then a tagged electronic document that helps 6 the individuals who want to make further inquiries but also 7 helps this professional audience that's focused on 8 information that investors as shareholders have a right to 9 know. And this may be more detailed information than would 10 come up in any summary of 10 or 12 points that would go into 11 the summary. 12 I would give just an example. While much of the 13 focus I'm sure will be on what goes into the simplified 14 document, a tremendous amount of benefit can come from the 15 information that goes in the longer document. 16 For example, one of the SEC's recent initiatives is 17 to require disclosure on fund managers' compensation 18 structure. Not the exact dollar amount that they're paid, 19 but what is the structure, what incentives does that create. 20 Now I would argue that very few investors have actually read 21 this, but I would argue that it's making a difference in the 22 retail market and it is helping investors. 23 In the wake of this required disclosure, we have 24 had major fund companies come to us and say, "We're 25 rethinking our compensation structure." Some major fund 1 groups have come to us and said, "In the 1990s we simply gave 2 managers more money if they ran a bigger fund. It was more 3 profitable to the firm. The PMs knew that, they asked for 4 more money, we had to give it to them." 5 Now in the wake of having to disclose this, we can 6 go back and say, "That's really not a defensible practice." 7 And we're tiering their compensation more to be performance 8 relative to peers saying if they beat their peer group, we'll 9 get the assets. But under the former system, these fund 10 companies are saying, they were in fact incentivizing 11 managers to be out promoting their fund not managing it. 12 On another scale, a major no-load fund company came 13 to us and said that a marketing consultant had told them in 14 the Nineties the way to move the needle in the no-load world 15 was to get a lot of individual years where your fund was in 16 the top decile. And they structured all of their 17 compensation to get single year performances in the top 18 decile. And they said, "We got a lot of that type of 19 performance. The problem was we were in the top decile one 20 year and we were in the bottom decile the next year." And 21 they said, "The marketing consultants were right. When we're 22 in the top decile we got a lot of assets, but we were 23 attracting the most fickle types of investors, people who 24 loved us when we were at the top but hated us as soon as we 25 dropped out of the top 10 percent. And, in essence, we were 1 incentivizing our managers to scour their long-term 2 performance records just to get in these short-term fickle 3 investors." 4 They said, "In the wake of having to disclose this, 5 we're changing our procedures and moving from a one-year 6 period to a three or a five-year period and stretching out 7 the time periods." 8 Well, think about that. For years fund companies 9 have gone to investors and said, "Buy an equity fund with a 10 long-term horizon. Be thinking out five/ten years and, yet, 11 major fund companies were rewarding managers on the basis of 12 10 or 12 months worth of performance." 13 This disclosure which very few investors have seen 14 I think now is changing behavior in the industry and better 15 aligning the interests of individual investors with those of 16 fund managers. So I would encourage the Commission to not 17 only think in terms of print and electronic but to think in 18 terms of these two different audiences: what an individual 19 investor might need to know and what a professional or an 20 informed individual has a right to know. Both of those have 21 a part in improving the investor experience. 22 Thank you very much for the opportunity to 23 participate. 24 MS. WYDERKO: Thanks, Don. 25 Next, Henry, we would like to hear your perspective 1 as a representative of a large fund group. 2 MR. HOPKINS: Good morning. Can you hear me? 3 Okay. Good morning. 4 Since the prospectus disclosure regime was first 5 established over 73 years ago, much has changed. This new 6 environment strongly justifies some rethinking. Not of the 7 basic investor protections of the 33 and 40 Acts but of ways 8 those laws apply to mutual fund prospectuses. 9 When these acts were adopted, communications were 10 crude compared to today's digital, fiber optic, microwave and 11 satellite global networks. The age of personal computers and 12 the birth of the Internet have revolutionized the 13 transmission of and access to information. The financial 14 news media now covers the mutual fund industry to such an 15 extent that little happens without the public knowing about 16 it. The beneficiaries have been the investing public who can 17 now easily access a wide spectrum of quality information 18 instantaneously. As a result the prospectus of old has 19 become a roadblock for investors on today's information 20 highway. 21 Before outlining T. Rowe Price's recommendations, I 22 would like to set the stage by reviewing a number of the 23 findings of the ICI's 2006 study on the information needs of 24 fund investors. 25 First, shareholders prefer receiving a concise 1 summary of fund information before buying. Second, a large 2 majority of shareholders do not consult fund prospectuses 3 before purchasing. They view prospectuses as being difficult 4 to understand and too long. Third, fund shareholders use the 5 Internet regularly most particularly to gather investment 6 information. 7 The question for discussion today is how can we 8 improve the disclosure regime. Studies have shown that when 9 it comes to providing most investors with fund information 10 less is best. Out of that realization was born the current 11 profile, a document designed to give investors just the right 12 amount of information. The develop of the profile was not 13 something that just came out of the blue. It represents the 14 culmination of decades of work and, in fact, many failed 15 attempts to build a better disclosure mousetrap. 16 The profile is an excellent well organized 17 disclosure document whose content requirements were 18 substantiated by SEC-sponsored focus groups and an industry 19 pilot program. As good a disclosure document as it is, the 20 use of the profile has been disappointing at best. The cause 21 is self-evident. The profile did not replace the full 22 statutory prospectus and incorporation by reference was not 23 permitted thereby creating liability concerns. 24 In our view, wholesale changes to the profile rule 25 are not necessary to significantly improve the mutual fund 1 disclosure scheme. First, permit a fund's profile to be used 2 as its primary selling document provided investors have the 3 option of either accessing the full prospectus via the 4 Internet or requesting a hard copy. 5 Second, make the profile a statutory prospectus by 6 incorporating by reference the full prospectus just as the 7 prospectus currently is permitted to incorporate the SAI by 8 reference. 9 Third, retain the ability of funds to use different 10 versions of the profile to reflect the availability of 11 different services for different classes of investors. 12 Fourth, amend the profile rule to require 13 disclosure of a fund's top 10 and quarter-end holdings. 14 Now, skeptics argue that investors should be 15 provided a full statutory prospectus just as when they 16 purchased the securities of an operating company. My 17 rebuttal is two-fold. First, under recent amendments to SEC 18 rules, underwriters and operating companies in public 19 offerings no longer need to physically deliver a final 20 prospectus. Rather, they can rely on the availability of the 21 prospectus on the issuer's website. 22 Second, prospectuses for operating companies are 23 never required to be delivered to purchases of shares in the 24 secondary market which is where most investors purchase their 25 shares. Under the integrated disclosure system and the 1 efficient market theory, the price of an operating company's 2 shares is deemed to reflect all material information about 3 the company so there is no need to deliver a disclosure 4 document. This same principle is all the more true for 5 mutual funds whose prices are completely transparent since 6 the business of a mutual fund is solely that of acquiring the 7 securities of operating companies that meet its investment 8 objective. 9 In conclusion, we believe that our recommendations 10 should transform the profile into the much needed mutual fund 11 disclosure document for the 21st Century. Thank you. 12 MS. WYDERKO: Thanks, Henry. 13 Bill, your company works with mutual fund investors 14 across the country. Let's hear your perspective. 15 MR. DWYER: Thank you, Susan. And thank you, also, 16 Director Donohue, for inviting me here today. 17 Since LPL is not a nationally branded name I 18 thought I'd give you some background on who we are. LPL is 19 the nation's leading independent broker dealer. We have 20 7,000 financial advisors across the country that 21 independently own and operate their businesses. By industry 22 standards, they are very experienced. They typically are in 23 their mid-40s and have about 15 years of experience in the 24 business. And in most case have their name on the door 25 primarily in suburban and rural communities all across the 1 country. 2 That being said, the two things that I think are 3 really pertinent about that is that they work with investors 4 across the spectrum. When you work in a small community, 5 you're going to work with the smallest of investors, you're 6 going to work with the near mass affluent and also the 7 extremely wealthy. 8 It is important to them that disclosure should be 9 appropriate. It protects them as well in this process. 10 Advisors don't want to be misunderstood or have a client come 11 back and say that they have been misunderstood because 12 paramount to them in the business is the goodwill and their 13 name. It is the most valuable commodity they have as a 14 service organization servicing the public. 15 Don's comments about the significance of mutual 16 funds is a tool and how well they've been handled here are 17 very appropriate. With trillions of dollars invested in 18 mutual funds, they are the instrument of choice with our 19 advisors in particular, whether that's in a brokerage 20 account, whether that's in sub-accounts through an annuity 21 product or whether that is on an advisory basis, they are far 22 and away the preferred vehicle to work with the investor 23 dollar. 24 To that end, there are three unintended 25 consequences that we really don't want to see happen and some 1 of these have been expressed as well. One is -- and Henry 2 just said it in a different way -- less is more. At some 3 point, we really don't want the investor to become so 4 frustrated and so skeptical of the process that appears to go 5 on with these stacks of paperwork that Director Donohue 6 showed us here earlier that they can get through. 7 Secondly, we don't want the advisors to give up on 8 the product. One thing you have to be careful of is that you 9 don't inadvertently overburden particular vehicles so that 10 advisors move away from that valuable tool and move to other 11 products. We think that is very important that disclosure be 12 equitable across the spectrum of product. 13 We also don't want advisors to give up their 14 licenses. I can't tell you how frequently I have 15 conversations where advisors say, "Gee, I can just become an 16 RIA and give up my brokerage license, face one-time 17 disclosure -- comprehensive, albeit, to an ADV, but still we 18 don't believe that the consumer is best served at a broad 19 level if advisors are kind of moving toward giving up their 20 securities licenses. 21 There are cases where fee base is not the best 22 alternative and we would encourage that regulation not become 23 so stringent that people look to move away from those 24 securities licenses. 25 What are investors most interested in receiving? 1 Barbara's comments were interesting. Help in 2 determining and meeting investment goals is far and away what 3 clients come to an investment professional for. Education of 4 all the vehicles that are available to them to invest are 5 paramount in this process. Mutual funds today, of course, 6 are the topic of choice and there is tremendous amounts of 7 information available to the professional advisor provided 8 through industry sources like the SEC and the NASD as well as 9 mutual funds and independent organizations such as Don's. 10 When you finally get down to the specific 11 investment, performance was the number 1 thing as I polled 12 our advisors that they were interested that clients wanted to 13 know. They then wanted performance on a relative basis. How 14 is that on a market basis? So they wanted information about 15 the markets that that particular fund was concentrating on. 16 Risk and risk on a relative basis, again. What risk meant on 17 a very personal level to that client was how that fit into 18 their tolerance for risk. 19 Investment objectives of the fund were also 20 paramount. They wanted to make sure in many cases that the 21 funds culturally fit the investors -- that their holdings 22 culturally fit where the investor wanted to be. 23 And then way down the list, ironically, was the 24 cost of doing business in general. Not just the cost within 25 the fund, but the cost of doing business. Perhaps because 1 these investors have come to a professional advisor, the 2 reality is they know what they're going to pay. They want to 3 make sure that it's fair and that they get a reasonable value 4 for what they're paying. 5 Certainly, the NASD has thoroughly vetted this 6 issue and, as I prepared for this and saw the thousands and 7 thousands of pages that have been written on this, Profile 8 Plus as proposed by the NASD seems to be a strong solution to 9 the many points that consumers are looking to see. 10 That's not a segue yet, Elisse, but I just thought 11 I'd put that out there. 12 (Laughter.) 13 The information then finally also has to be cost 14 effective. The challenge in the securities business today is 15 actually providing advice and doing it profitably. Being 16 able to stay in business. This should mean that the use of 17 the Internet is an obvious choice to maximize a reduction in 18 paper and optimize the cost-effectiveness as we deliver 19 information. 20 Timely execution is also important. If there are 21 going to be signatures, they should be electronic signatures 22 wherever possible. Certainly, paper will not go away, but 23 the Internet provides a valuable, valuable tool that 24 investors can work with and get pertinent information on a 25 timely basis. 1 Cost effective and efficient to implement. You 2 know, if you look at excessive and unnecessary disclosure, 3 you find out that the manufacturers of product are burdened. 4 You find out that the distributors of product, whether that 5 be a broker dealer or other channels, are burdened. You find 6 out that the advisors are burdened with excessive disclosure. 7 And, in the end, the consumer ends up paying for all of that. 8 That's a condition that just cannot exist. 9 The consumer ends up paying either by people moving 10 away from providing advice to small investors or by cost 11 precluding them from participating in valuable vehicles. 12 Again, we would be strong proponents of the Profile 13 Plus as an alternative and we finally see it as an evolving 14 work. The goal here is not to continue to heap on more and 15 more data but, in fact, to replace other vehicles that are in 16 place and as the Profile Plus would evolve, it would become 17 more robust and remove pages and pages. 18 One advisor said to me, in closing, he said, "You 19 know, it amazes me that I can go get some really, really 20 powerful medicine and all the pertinent disclosures I need to 21 know are wrapped around that little bottle. But, yet, in 22 this business, we have to put out reams and reams of 23 paperwork to try and disclose the risk." 24 Thanks for allowing me to participate. 25 MS. WYDERKO: Thanks, Bill. You're absolutely 1 right that the NASD has done a lot of thinking about the 2 kinds of information that mutual fund investors want to see. 3 So, Elisse, why don't you wrap up our summary 4 remarks? 5 MS. WALTER: Thank you, Susan, and thank you very 6 much for inviting NASD to participate in this critically 7 important event. At the risk of completely destroying a 8 sports analogy, I feel like the clean-up batter. I think 9 that's right. Hopefully, I will add some remarks from the 10 regulatory, including Investor Education, point of view. 11 What has struck me sitting here this morning is the 12 general consensus among the members of this panel. Perhaps 13 surprising given the diversity of our backgrounds and the 14 different points of view that we represent. 15 There is a vast array of information as we have all 16 said in the public domain about mutual funds. But as the 17 Commission is recognizing by holding this forum, we need to 18 take action to make the federally mandated disclosure more 19 useful to the millions of Americans who purchase funds. 20 Disclosure simply should not be just a vehicle to protect 21 issuers and intermediaries from liability. It should inform 22 investors and help them to make better decisions. 23 We all recognize that the overwhelming majority of 24 investors won't read long complicated documents like the 25 traditional prospectus. As Barb highlighted, we need to 1 create mandated disclosures that investors can manage easily. 2 And we need to avoid disclosure creep. As Henry said, less 3 is best. Investors must be able to digest, comprehend and 4 retain the information. 5 And we should also note and act on the fact that, 6 as Bill stated, if a disclosure is unduly complex or the 7 manner in which it is provided is unduly cumbersome, 8 investment professionals will be wary of selling these 9 products and may well turn to others which may not be as good 10 for the investors they serve. 11 The Fund Profile already adopted by the Commission 12 was a giant step in the right direction. I believe that we 13 can improve on that concept and address the issues that seem 14 to have prevented its widespread use. 15 As Bill noted, last year the Mutual Fund Task 16 Force, a group principally industry which NASD organized, 17 recommended that the Commission adopt a new mandated point of 18 sale disclosure document which it called the Profile Plus. 19 NASD, itself, has endorsed that proposal. 20 The Profile Plus builds on both the profile 21 prospectus and the Commission's proposed new point of sale 22 disclosure about fees, expenses and conflicts of interest. 23 We believe it would provide meaningful disclosure both 24 because of what it does include -- key information about a 25 fund, objectives, risks, fees, performance and also 1 information about dealer fees and conflicts of interest. 2 It also is important for what it does not include. 3 It deviates from the profile because it doesn't include 4 information such as redemption information that is not 5 important at the time of sale. It avoids lengthy narrative 6 and uses graphics where possible and it omits information or 7 less interest to investors such as the breakdown of the 8 expense ratio. It is simple. It provides performance 9 numbers, for example, without the hypothetical illustration 10 from the prospectus. And the Profile Plus also works because 11 by linking the short form disclosure to the full prospectus 12 using hyperlinks, as Chairman Cox said, the Profile Plus 13 harnesses the power of the Internet in this particular 14 respect which is very important. Whatever happens should use 15 that power. It doesn't force disclosure into one size fits 16 all. 17 Investors can choose for themselves the level of 18 detail they want. And, as Don said, institutions and 19 professionals will continue to have the benefit of the longer 20 disclosures. But it offers investors this tailoring ability 21 without sacrificing comparability. And we believe it also 22 addresses the liability concerns that have plagued the 23 Profile prospectus. 24 Some have suggested that oral disclosure is 25 preferable. We agree with Chairman Cox that investors should 1 be offered a choice. Detailed oral disclosure is confusing 2 and difficult to retain and while some investors are not 3 ready to use the Internet for this purpose, many are. As the 4 CFA survey reported, even among those 65 and over, the most 5 Internet resistant group, a significant number are willing to 6 use the Internet for some purposes. And all the investor 7 research today shows that a majority of investors are 8 Internet savvy. The resistance of some should not be a 9 reason to preclude those who want to use the Internet from 10 opting for Internet delivery. 11 Others have suggested that even with Internet 12 delivery the investment should be held up until the broker 13 can obtain assurances that the investor has read the 14 disclosure. We believe strongly that imposing such a 15 requirement would not be investor friendly. The ability of 16 investors to invest as they choose to do should not be 17 impeded. 18 Two more brief thoughts before I close. As the 19 Commission moves forward, it should be sure to address the 20 needs of retirement plan investors. Of course, working 21 closely with the Department of Labor. 22 And, finally, this is a beginning. This effort 23 should not stop with mutual funds but should extend to other 24 investment vehicles as well. Thank you. 25 MR. DONOHUE: I want to thank the panelists for 1 their prepared remarks. We have about 15 minutes now within 2 which to have some questions asked and I would encourage the 3 Commissioners, although I'm sure no encouragement is 4 necessary, if there are questions to certainly jump in. 5 I will first defer to the Commissioners if there 6 are any questions that they might want to ask the panelists. 7 COMMISSIONER ATKINS: Well, just one. I guess as 8 we talk about the liability issues that have come up with 9 respect to the Profile prospectus and perhaps also of the 10 Profile Plus, I was just curious if you all have any, you 11 know, particulars as to what we need to do, whether it's a 12 Safe Harbor in that respect. We were talking about -- Mr. 13 Hopkins mentioned that making it a statutory prospectus might 14 help solve that problem, whether there are other ways as well 15 of addressing that? 16 MS. WALTER: Commissioner Atkins, I think there are 17 a number of different ways to do it. When the Mutual Fund 18 Task Force came up with the Profile Plus what it in effect 19 was advocating was a step less that access equals delivery. 20 Because what the task force said and we at NASD agree is that 21 if you deliver a short form document and it hyperlinks to the 22 larger document, that that really is delivery of the larger 23 document and that simply could be done as an interpretive 24 matter. 25 So, if the Commission didn't feel comfortable going 1 all the way to access equals delivery as it has in the 2 corporation context, that might be one solution. 3 MR. HOPKINS: I would agree wholeheartedly. I 4 think incorporation by reference, the prospectus into the 5 Profile is the simple solution. And it avoids having to 6 reach the conclusion that Internet access equals delivery. 7 MS. ROPER: Obviously, it is an issue that is much 8 easier when you're talking about Internet delivery because it 9 really does -- if you link it, you have delivered it. The 10 investor has the choice whether they read it or not just as 11 they have a choice whether they read the print document that 12 they receive in the mail. 13 For those who choose not to use the Internet, it is 14 a more difficult issue and I don't know that I have a 15 specific solution there. 16 COMMISSIONER NAZARETH: As you know, one of the 17 features of the point of sale disclosure was this really, you 18 know, two-page hard-copy document. And perhaps Elisse can 19 address this. I know one of the controversial elements of 20 that was whether or not that was in fact a step backward or 21 whether we should encourage people to look at such a document 22 online and have the online document supplement oral 23 disclosure. Can you sort of address again where your group 24 came out on that? 25 MS. WALTER: Where the task force came out was that 1 for those people who were comfortable with Internet 2 disclosure that it really was a more effective way to deliver 3 the information. There was great concern among the members 4 of the task force and we share that that the oral disclosure 5 would confuse and be difficult to deal with. 6 So for those who were willing to deal with the 7 Internet and we think there will be many, it is a more 8 powerful form of disclosure. It leaves the oral conversation 9 that may be taking place when the fund is being recommended 10 or the investor calls to place an order on the questions that 11 the investor has. 12 Now, for those who are not comfortable with 13 Internet delivery, it would be worth having an abbreviated 14 form of oral delivery that would be more capable of being 15 retained than the lengthy delivery of repeating the whole 16 document and to have that serve as a substitute and then 17 provide the prospectus or perhaps just the two-page document 18 later on with the confirmation. 19 We are quite concerned that investors will not want 20 to delay the consummation of their transaction until the 21 document arrives in the mail and we don't think that we 22 should interfere with their investment choices including the 23 time in which they want to place their order. 24 COMMISSIONER CAMPOS: I wholeheartedly agree. 25 COMMISSIONER GLASSMAN: I thought that one of the 1 issues regarding Internet delivery, at least in some of the 2 research that we had done, was that although the investors 3 are interested in using Internet delivery, it was difficult 4 for them to be on the phone with their investment provider 5 and use the Internet at the same time. That was a challenge. 6 MS. WALTER: It was for some and it wasn't for 7 others. There were a significant number who said, when we 8 went back -- and if you'll recall, Commissioner Glassman, at 9 your request we did some further investor research 10 specifically about that issue and we determined that I 11 believe it was a little bit less -- it was hovering around 12 half felt comfortable accessing the Internet while they were 13 on the phone. Others felt that they would continue in a 14 later phone call. Others felt that they would access the 15 information later but wanted to proceed. And we really think 16 that that ought to be at the investor's option and it ought 17 to be presented to them quite neutrally so that they can 18 decide the way they feel most comfortable. 19 MS. ROPER: You also don't have to be on the 20 Internet at the same time you're on the phone. If you have 21 downloaded a link and you've pulled up the document, you can 22 go off line. If you have received it out and printed it out, 23 I mean, virtually instantaneous delivery, you're talking 24 about a delay of perhaps, you know, five minutes that I think 25 most people are willing to tolerate. 1 So it does not require that you have the 2 technological ability to be online and on the phone at the 3 same time. And I actually think the model that Chairman 4 Glauber has talked about recently of having the broker talk 5 to the client about the document while they have the either 6 Internet document in front of them is the most useful one if 7 we want the investor to actually understand it. 8 COMMISSIONER CAMPOS: In this kind of a 9 conversation context what should the broker dealer maintain 10 as evidencing the conversation with the investor? 11 MS. WALTER: Well, clearly, it's one of the 12 concerns that people have about oral disclosure. It's not 13 very easy to police. And unfortunately for those who are on 14 the edge and unscrupulous, it's probably fairly easy to gain 15 on because you're going to end up with a notation in a file 16 that an oral conversation took place. 17 Whereas, if in fact the broker is e-mailing the 18 investor a hyperlink to the document, then you will at least 19 have a record that that e-mail has been sent and received. 20 But one way or the other, however the scenario is set up, 21 however the requirements are set up, it will be clear that 22 the brokers will have to maintain a record which will be 23 auditable by examiners when they go in to make sure that they 24 have fulfilled their obligation. 25 COMMISSIONER GLASSMAN: To follow up on that, how 1 difficult is it to follow up the oral disclosure with 2 something that's sent later with a confirm if the security is 3 purchased? 4 MS. WALTER: You know, I really should defer in 5 part to Bill and Henry on this. I think it is really more a 6 question of the expense of the system. And to the extent 7 that you have to not only do the Internet disclosure which is 8 quite inexpensive and really does conserve costs and you have 9 to do another mailing, that obviously just adds another cost 10 to the system. Is it a great cost? If you're just sending 11 the two-page document, it obviously isn't terribly bulky, but 12 it is an added cost. 13 COMMISSIONER GLASSMAN: It wouldn't be an 14 additional mailing because the confirm is mailed, correct? 15 So it could be something in the confirm mailing. 16 CHAIRMAN COX: Don, I wonder if I could put a 17 question directly to you. You mentioned this army of people 18 that look at information whether or not the customer ever 19 sees it. And I'm quite interested in what your forecast is 20 of what use might be made not only by Morningstar but other 21 people that are in the business of intermediating some of 22 this disclosure if a whole lot of information in mutual fund 23 prospectuses were tagged. Help us imagine some of what might 24 come of that. 25 MR. PHILLIPS: Well, right now, a tremendous amount 1 of our time and energy goes into just establishing and 2 maintaining a clean database. And, yet, the real value that 3 we bring to the equation is the exercise of judgment about 4 that information. 5 And I think the same is true for these 6 intermediaries. And right now the time and energy, the 7 daunting part of the task is just how do you get this 8 information into a position where you can start extracting 9 value from it. 10 And that's why I think the move to make it easier 11 to do that and have more people thinking about what the 12 information means is a healthy one. 13 If I'm going to go buy a car or a big screen TV or 14 some other expensive consumer item, I can do a whole lot of 15 research on the Internet. And the comparative information 16 might be provided not by the person who makes or sells it but 17 by some third party in many cases lending it some objectivity 18 and in other cases you've got to be careful what you run into 19 on the Internet. But the ability to use the Internet as a 20 tool for comparative shopping is one of the things that makes 21 it a great tool. 22 What might I be able to see crop up in the form of 23 web-provided information as a customer if I want to do a 24 little bit of research before I call my broker or my 25 financial advisor. 1 Well, today you can already get a tremendous amount 2 of information because there are parties like Morningstar and 3 a number of newspapers and other organizations do have a lot 4 of information out there. 5 MR. PHILLIPS: Yes, of course. I understand that. 6 I guess I'm thinking what would be the increment, what 7 additional information might we get? 8 MR. PHILLIPS: Well, I think what you would do is 9 you would free up more parties to think about this 10 information, how you present it, how you interpret it. The 11 classic mistake that Wall Street makes is we throw lots and 12 lots of information at people and pretend that we've educated 13 them. And people don't relate to big tables of numbers. 14 And, at the end of the day, that's still what this will be. 15 What they relate to are pictures. They relate to 16 advice and counsel. And that's what you need is to empower 17 people to be focusing on the interpretation of this, the 18 counsel that goes along with this. 19 You could argue that making this information more 20 accessible to the public would be a disadvantage to a group 21 like Morningstar since we have assembled big databases. But 22 we think that our real value added again is not just you 23 having the data but how we think about it. And what you 24 would be doing by this is inviting more competition for our 25 firm and for others but it would be a healthy process because 1 you would get us all focused on the value added part. How do 2 you interpret this? 3 And there are major advantages that third party 4 firms will continue to have in that a legal document or the 5 discrimination documents can't offer the opinion as to 6 whether this is the right fund. 7 And the real art of investing is taking all that 8 investment information and matching it to the investor. And 9 I think that by making the investment information more 10 accessible, you can allow more people to focus on the real 11 art of investing, matching the right investment to the right 12 investor. 13 And that's where, that's where the process often 14 breaks down because many people can't participate because 15 they don't have the data to begin with or they have been 16 freed up to focus on the matching up of the data which really 17 is the key to creating a good investor experience. 18 MR. HOPKINS: If I could just interject? I don't 19 think by providing this data in an easily accessible form 20 we're going to have a million little Morningstars making the 21 same analysis that Don's company does. That's number 1. 22 Number 2, what we provide retail shareholders which 23 is the Profile versus what we provide our 401(k) retirement 24 participants is quite different. Actually, we do not use the 25 Profile with our 401(k)7 business. We use the Morningstar 1 profiles for each of our funds. 2 And I think if there is one area that the 3 Commission should examine and that is what should 4 participants in these plans be given. 5 Right now there really is very little guidance and 6 everyone is sort of doing their own thing. Whereas, in the 7 retail side, we have a very distinct prospectus and profile. 8 So that's an area I think where we need some discussion. And 9 I would propose that in the area of the retirement business 10 that it could be something other than the profile. It could 11 be something like, you know, the Morningstar investment 12 profile as an example, which is a very simple way to provide 13 information to a certain segment of investors that don't even 14 need as much as in the profile. But a lot of discussion and 15 thought has to go into deciding how are we going to best 16 provide this very large segment of the mutual fund investing 17 public with appropriate information to make decisions. 18 MS. WALTER: I think, Chairman Cox, the real 19 increment will come with respect to the retail investor. If 20 you have all of this data tagged and, therefore, there can be 21 an easy way for investors to be able to choose what 22 information, beyond the short form disclosure document, they 23 want, they will be able to get to it more easily. And I 24 would like to think they would be more likely to look at the 25 things that particularly interest them. 1 And it also comes about because of the short form 2 disclosure document, if that is done in a standardized format 3 so that it's readily comparable, there can be a library, an 4 electronic library of those established. And, in act, NASD 5 has offered to put some of its resources behind establishing 6 such a library so that investors can easily when they're 7 considering what fund or what fund share class to invest in, 8 they can bring up the documents, very short form, comparable 9 format and make a very easy simple comparison. And that is 10 something that is very difficult for people to do today. 11 MS. ROPER: I guess I look at it a little 12 differently. I don't see investors as being interested in 13 setting up lots of pieces of information side-by-side and 14 making the analysis themselves about which is going to be the 15 best funds based on those factors. 16 But I do see the potential of the Internet to allow 17 a kind of comparative shopping that does that comparison for 18 them. You know, if I buy a car, I can say I want a car that 19 gets this many miles per gallon and I want it to have these 20 kinds of crash test results. And, you know, whatever the 21 factors I want. There is no reason you couldn't do -- that 22 someone couldn't develop the same kind of thing for mutual 23 funds on the Internet. 24 I want a fund, you know, a large cap stock fund 25 with expense ratio of some whatever percentage. And whatever 1 factors that I want to put into that. And I don't have to 2 sit down and look side-by-side at all the different funds 3 that have those characteristics. It can spit it out for me. 4 There is some of that available in sometimes 5 somewhat crude form on the Internet now. And I think if we 6 make it easier to tag that data we're going to see more of 7 that kind of thing. 8 MR. DWYER: You know, I might just add to that, 9 that typically when you refer to buying things over the 10 Internet and doing background information -- maybe you're 11 going to go buy a microwave, for example, and you want to do 12 a Consumer Report study, you're generally not going to buy a 13 portfolio of microwaves. You're not going to buy a suite of 14 them unless it's an institutional buy. So what Don alludes 15 to is the art of investing is really where it goes. 16 Your conversation tends to separate a little bit 17 the Internet and the advisor. The reality is professional 18 advisors today use the Internet every day in working with 19 their clients to go over their portfolios, to go over the 20 account status at any given point, and to go over investment 21 recommendations that they're making going forward. So it is 22 a very viable vehicle that advisors are using already today. 23 And I think it really needs to be looked -- you can get so 24 wrapped up in disclosure on a given entity that it's really 25 relevant to "I can fully understand it, but if it doesn't fit 1 my need, then it's still a bad investment." 2 One advisor said that everyone seems to be focused 3 on the sticker on the window of the car as opposed to what's 4 under the hood. And when you have that car that can't get 5 you up the hill, then that's a problem at any price. 6 So I think the Internet is a valuable tool in the 7 education process that the advisor uses with the client and, 8 again, streamlined disclosure for them to work with is very 9 valuable. 10 COMMISSIONER CAMPOS: If we're done with that 11 question, I have another one if I could. 12 Henry brought up the retirement sector and I wrote 13 a short article a few months ago about the terribly different 14 requirements on the retail side of mutual funds versus the 15 retirement side where if you have insurance products or bank 16 products other than ERISA rules which only 17 encourage -- don't require -- disclosure, there is not much 18 available to retirement investors. And, in particular, given 19 the fact that defined benefit plans are on their way out, 20 defined contribution plans are pretty much the norm, we have 21 essentially in my view retirees and the boomers essentially 22 driving blind to sort of emphasize the problem. Because 23 they're getting very erratic and not very much disclosure 24 because they're not required to essentially especially with 25 some of these products. 1 Do any of you feel that this is a problem? Some 2 have said maybe I'm an alarmist and we shouldn't worry about 3 this. But it seems to me that at a minimum some type of 4 profile, a summary disclosure should be required to 401(k) 5 and other self-management retirees. 6 MS. ROPER: I couldn't agree more. This is for 7 many people, not only the major way they invest, but the 8 first way they invest. And they enter that arena with the 9 least amount of information that we provide in any context. 10 And I don't see any reason why different types of 11 investments should come with different types of disclosure. 12 Just as I think all financial professionals should have 13 comparable up front disclosures that they have to provide to 14 aid an informed decision among professionals, it shouldn't 15 matter whether it happens to by tradition have been regulated 16 under the Insurance Division or some other division, you 17 ought to be able to get some basic information about every 18 investment you've considered that allows you to determine is 19 this appropriate for my needs. And among the types of 20 products that is appropriate for my needs, is it a good 21 choice for me? 22 MR. HOPKINS: You know, it's a little different 23 situation when you face making an investment in your 24 company's 401(k) program because the company has already 25 selected certain options that you choose from. So it's not 1 like the retail investor that has the whole universe of 2 mutual funds they must select from. The company has already 3 done the research and has a reasonable component of funds 4 that you must select. So that the information generally that 5 is provided to participants within a program is less. 6 The surprising thing to me is that there has not 7 been any agreement between the Department of Labor and the 8 SEC in coming together with what should be the minimum amount 9 of information to provide this segment of the investing 10 public which, as Barbara said, in many times it's the first 11 time the person has invested and many times they are the 12 least trained and able to make investment decisions. 13 COMMISSIONER CAMPOS: My research showed that even 14 in the menu situation where you're getting a basic equity 15 index and maybe a fixed income product, very little 16 information as to making the choice is among the select menu 17 we're being provided. 18 MR. HOPKINS: A lot of the companies, you know, 19 want to streamline what goes to their employees and so it's 20 sort of a consolidation to have, you know, a one-page concise 21 summary of each fund as opposed to either prospectuses or 22 even profiles. 23 MR. DONOHUE: One of my more important functions is 24 to see if we can maintain a schedule. I think Susan has one 25 last question and I think, Susan, I'll turn it to you. 1 MS. WYDERKO: Thanks, Buddy. The topic of this 2 panel is what types of information do mutual fund investors 3 find most helpful. And I think what we've said is that the 4 answer can depend on the investor and the answer often 5 depends on the channel in which they're getting the 6 information, the time at which they're getting the 7 information. 8 Now, we in the government, pass regulations. And 9 the cost of getting those regulations is very high. If we 10 get the answer wrong, the cost is very high. We can't adjust 11 easily. So give us some practical advice. 12 How do we, the SEC, go about figuring out which of 13 the different kinds of information are the most important to 14 put on a streamlined document? 15 MS. WALTER: I think the answer is many fold. 16 There's been a lot of consumer research done. The CFA, the 17 ICI, NASD, the Commission, we have all done a lot of consumer 18 research. 19 I know that our Mutual Fund Task Force brought to 20 bear on many of what I consider to be people at the NASD 21 excepted some of the great minds in the industry. And they 22 took a look at the information including the information that 23 was required in the original profile and added to it to a 24 certain extent to focus on dealer conflicts as the Commission 25 had and subtracted from it and came out with a rather 1 streamlined list of items that we felt were the items that 2 were critical to give at the point of sale. Not to continue 3 to emphasize that one proposal, an awful lot of thought went 4 into that and it is that body of information or something 5 very similar to that that I think gives you what you need. 6 MR. HOPKINS: Yes, I would say that the research 7 and effort that went into the profile produced an excellent 8 document, a disclosure document, and I think all we need to 9 do is simply build upon that and confirm those findings, that 10 they're just as true today as they were when that document 11 was created. 12 MS. ROPER: I would say that I think the profile 13 effort did a very good job of defining the categories of 14 information that we need to give investors. Where I think we 15 would benefit from additional research is on how best to 16 present that information to investors to ensure that they 17 understand it. 18 And when I say to ensure that they understand it, I 19 don't necessarily mean to ensure that they like it. People 20 like the profile. What we don't know is whether they can 21 then make an informed decision based on the information that 22 they got in the profile. 23 And I think the kind of testing you have done in 24 other contexts to determine the usability of information 25 could help us to refine the basic profile concept to make 1 sure that it conveys information in a way that investors can 2 use and understand. 3 MR. PHILLIPS: And I think the key thing would be 4 to have two different mindsets. When you're thinking of the 5 profile, it really does get down to what information do 6 investors need. And that's very difficult to figure out 7 exactly what the key things are going to be. 8 We used to have analysts who were starting off at 9 Morningstar and they would say, "Well, tell me which order to 10 look at the numbers and the information on the page." 11 And we'd say, "Well, it's always something 12 different. It's the exercise of judgment." 13 And we had one page that we used to use in training 14 and it was a fund where I maintained the most important thing 15 you could know about the fund was the address. And it was a 16 convertible bond fund that had an expense ratio close to 3 17 percent a year which was causing it to significantly 18 underperform its category year in and year out. And the 19 address was Penthouse Suite, something or other Wilshire 20 Boulevard, Beverly Hills, California. 21 So, you're never going to come up with the perfect 22 document that has all the information that people need to 23 know. But I do think that the efforts for the profile have 24 been very good and, if not exactly perfect, maybe that one 25 outlying fact that you would want on a certain fund, it is 1 awfully close to the information people need. 2 But it needs to be backed up and supplemented by 3 the larger prospectus which is guided not by this 4 paternalistic idea of what investors need to know or what we 5 think they need to know, but what as investors, as 6 shareholders, have a right to know and what the third parties 7 that are helping investors make decisions have a 8 responsibility to know about a fund. 9 And I think if you have got that safety net of that 10 broader document with a right to know mindset, then even if 11 we are a little off on what the need-to-know information is, 12 investors will be well protected. 13 MR. DONOHUE: Don, I think that's a good point to 14 end our first session. 15 Thank you all. 16 (Brief Recess.) 17 PANEL TWO: HOW CAN THE COMMISSION LEVERAGE THE POWER OF THE 18 INTERNET TO PROVIDE MUTUAL FUND INVESTORS WITH 19 BETTER INFORMATION? 20 MR. DONOHUE: I'd like to start our second panel 21 now. Today we are standing at an information crossroads. As 22 Chairman Cox outlined in his opening remarks, we are moving 23 from a world where paper was the norm for information 24 delivery to a world where the Internet increasingly is the 25 medium of choice. 1 Over 200 million Americans have home Internet 2 access. Their Internet experience is improving rapidly as 3 broadband connections proliferate and the demographics of 4 those with Internet access increasingly mirror the general 5 population. 6 The Internet has done far more than simply move 7 paper documents online. It has caused a see change in our 8 expectations of how quickly and easily information should be 9 available. Recent book by Internet design expert, J. Cobb 10 Nielson, explains that Internet users typically are looking 11 for answers to questions. In Nielson's words, "It's almost 12 like the web is swamp. People are fishing in that big swamp 13 and dragging out something that hopefully will be a nugget of 14 gold but could be an alligator." 15 Our second panel this morning will explore how we 16 can use the Internet and interactive data to help mutual fund 17 investors find the nuggets of gold they seek among the swamp 18 of available information. 19 Now I'll turn the mike over to Susan Nash, an 20 associate director in the Division of Investment Management 21 whose office is spearheading our reexamination of mutual fund 22 disclosure and the role that interactive data can play. 23 Susan will introduce our four distinguished panelists. 24 Susan? 25 MS. NASH: Thanks, Buddy. 1 Farthest from me is Bill Lutz. Bill is a professor 2 of English at Rutgers University and an expert on plain 3 language. I know that Bill has been instrumental in helping 4 a number of funds to rewrite their prospectuses to make them 5 easier for investors to understand. 6 Next to Bill is Paul Stevens. Paul is the 7 president and chief executive officer of the Investment 8 Company Institute, the National Association of US investment 9 companies. 10 Next to Paul is Tim Buckley. Tim heads up 11 Vanguard's Information Technology Division and in that job he 12 is responsible for Vanguard's utilization of technology to 13 provide services to Vanguard's millions of shareholder 14 accounts. 15 And, finally, Paul Haaga is executive vice 16 president and a director of Capital Research and Management 17 Company as well as chairman of the executive committee. 18 As with the first panel, we will open the 19 discussion by inviting each of our panelists to provide some 20 perspective on how the Internet could be used more 21 effectively to provide better information to mutual fund 22 investors. 23 Bill, can you give us your vantage point as an 24 expert in the area of communications with investors? 25 DR. LUTZ: I'm the outsider here, I'm the academic 1 which means I'm allowed to be very abstract and 2 non-practical. Although I have written 58 mutual fund 3 prospectuses into plain English, today I work on Item 7 of 4 the 10-K. That is the MD&A in plain English. I don't know 5 which of the two I would rather choose. I think the third 6 option is having my fingernails slowly extracted one by one 7 in which case, I would go with the latter. 8 (Laughter.) 9 We were asked when we were invited to this panel to 10 prepare five points so I will give you the five points. One, 11 the effects of the Internet will be as great as if not 12 greater than the introduction of moveable type in the 13 mid-15th Century. 14 Two, the Internet is moving us back to the oral 15 tradition replacing important elements of the print 16 tradition. 17 Three, the Internet is a medium that doesn't simply 18 transmit data, it creates information. 19 Four, the Internet as it develops will become a 20 dynamic blending of the visual and the verbal allowing users 21 to interact with the data to create the information they 22 want. 23 Five, information is that which reduces 24 uncertainty. That definition comes from the now classic 25 monograph, "The Mathematical Theory of Information," 1 published in 1949 by Claude Shannon and Warren Weaver. 2 Let me repeat that. Information is that which 3 reduces uncertainty. 4 It is important that we distinguish our terms. 5 Much of what we are talking about is not information, it is 6 data. Those piles of folders were data, they were not 7 information. And we are drowning in data and we have too 8 little information. And we need to sort the two and decide 9 which it is we are doing. 10 I am the only person and I am the English professor 11 who is going to use PowerPoint right now. Only a little bit 12 because I am going to show, not tell. 13 We start with the Shannon and Weaver definition. 14 But what does this mean? Like all definitions, this one is 15 simple but profound in its implications. And this is what I 16 want you to start thinking about, the implications of this. 17 What does this mean? For those of you who have 18 traveled to London and have ridden the Underground or the 19 Metro in Paris or even the Metro in Washington, D.C., this is 20 the London underground map of 1913. When you take a subway, 21 what do you want to know? How do I get from A to B and how 22 much is it going to cost me. 23 Look at this underground map. We have the Thames 24 River on it, but look at all the roads that are on there, 25 there are parks that are marked. I don't need to know this 1 on a subway map. 2 Well, they simplified it. Notice how a lot of 3 those features were removed by 1932. Now it's focusing just 4 on the lines. But do I really need to know the directions 5 that they go in relationship to each other? No. 6 This is the map today. It tells me how I get to 7 from point A to point B and because of the zone structure in 8 London, I know how much the fare is going to be or how to 9 look up my fare. That's all I need to know. Any additional 10 information I can look for it someplace else. This is called 11 information architecture in which we have a hierarchy of 12 information here. 13 Now, by the way, if you are one who rides this a 14 lot, you quickly learn the limitations of this map. For 15 example, you learn that you will never ever transfer stations 16 at Bank because although on the map they intersect, they 17 intersect only because you walk about a mile underground. 18 The same thing in Paris at the Chatelet stop. Never change 19 trains at Chatelet. You'll spend your life walking 20 underground in Paris. So there are limitations to this, but 21 it gives me the information that I'm looking for. 22 By the way, there's another map you can buy in 23 London that will tell you that information if you really want 24 it. So this is that which reduces uncertainty. Now which 25 map would you rather use? This one or this one? This is the 1 new New York City Subway Map. This is data overload. I 2 really don't need to know the route that the path train takes 3 to New Jersey if I'm riding the New York City Subway. I 4 don't need to know all those highways and streets that are 5 mapped on there. And notice also that the map is trying to 6 following the geographical layout and just for good measure 7 bus routes are thrown in. No one in New York City uses this 8 map. You can't. It is data overload. It's not information, 9 it is data overload. 10 How do I get from Point A to Point B? I bought a 11 different subway map. Everybody else does because it's 12 simplified and it gets rid of all this extraneous data. 13 So, if we think of the prospectus as a document 14 loaded with data but no information, because people look at a 15 prospectus to reduce uncertainty to make certain decisions. 16 As a simple example, I'm surprised no one has mentioned when 17 we go online to look for an airplane ticket, we want to know 18 when does the plane leave, when does it arrive and how much 19 will it cost me. Those are the first three questions we have 20 answered. After that, we may want to know my seat assignment 21 and then, you know, do they serve meals, what type of 22 aircraft. But notice that the first screens that you 23 interact with give you that essential information. That is 24 what data hierarch is. That's why it is so important that we 25 try to determine what it is that investors need to know. 1 But, if we look at the Internet as a means for 2 creating information, for transforming data into information 3 that the individual wants, then we will completely rethink. 4 We don't have to worry about using the information as a pipe 5 to deliver. It is not a delivery system, it is a medium for 6 creating through interaction. And it is not a replacement 7 for the Post Office. It is an entirely new medium for the 8 creation of information just as the development of moveable 9 type was when we moved from the oral tradition to the print 10 tradition. So now we need to think of it that way. 11 If we create a truly interactive means of 12 delivering this information, we don't have to worry what we 13 put up there. You can throw everything in there because 14 people will have the power to do it. 15 As one who has just purchased recently three 16 electronics on the Internet doing exactly what we're talking 17 about, I went on line, I said this is what I want to get. It 18 popped up, gave me three choices. I looked up each of the 19 choices for the features I wanted and made my decision. Then 20 I looked for the cheapest place to buy it. This is the way 21 we need to think about the delivery of data to anybody who is 22 going to invest in a mutual fund. 23 There is no reason why you cannot do exactly what 24 Barbara said earlier, why can't I ask for, "I want a mutual 25 fund with these features," and it will pop up or the three or 1 five or four. That's what I did when I was looking for my 2 DVD recorder. I said I want something that will do this. 3 And it popped up with five examples for me. This is how we 4 need to think about it. 5 I am very much a print person. I'm in English 6 literature -- and I also worked on the Profile Prospectus by 7 the way. If you go back into the files, you will find that 8 one of the three sample profile prospectuses was called "The 9 Grendell Fund." 10 (Laughter.) 11 I had to slip that one in and originally named it 12 the Rothguard, but nobody could pronounce that one. 13 So what we need to do is break from the print 14 tradition. And there is no reason why we can't use natural 15 language questioning to give the information and think we 16 solve a lot of problems that we're all worried about here. 17 The conflict between disclosure, liability and the 18 information that the investor seeks. Those are three 19 different purposes. And we have been trying to come up with 20 a mutual fund prospectus that does all three things for all 21 three functions and it doesn't work. It ends up being 22 unreadable. So we need to change the way we think about it 23 and use the Internet the way it can be used, to create 24 information for each individual. 25 MS. NASH: Thanks, Bill, those were informative 1 insights. 2 Paul, I know that the ICI has recently done some 3 research in the area of mutual fund investors' information 4 needs as well as fund investors' use of the Internet. Could 5 you share your perspective with us? 6 MR. STEVENS: Yes, Susan, thank you very much. 7 Thank you, as well, Buddy, and Chairman Cox and members of 8 the Commission for this opportunity to present the ICI's 9 views. 10 We believe the Commission deserves great credit for 11 recognizing that the time is right to seize upon the 12 potential of the worldwide web as a means to better inform 13 investors. In 2005, a survey that we conducted found that 90 14 percent of US fund investors have access to the Internet. 15 Most of them use it regularly. In fact, 90 percent of that 16 90 with access use it at least once or two times a week. The 17 vast majority of them are on line everyday. And that typical 18 among their uses of the Internet are for financial purposes. 19 But just as important and I think this is part of 20 the calculus here, the Internet can serve us far more than a 21 stand-in for paper documents, the current method that we use 22 to provide data or hopefully information. It can, in fact, 23 as you have observed, Chairman Cox, put investors in control 24 when it comes to information about their investments. 25 It is with this in mind that I'm particularly 1 pleased to be able to report that the ICI has launched what 2 we think of as a ground-breaking project to help realize that 3 vision. We are working to extend the XBRL taxonomy to cover 4 the risk-return summary that's included in all fund 5 prospectuses. 6 ICI has engaged Pricewaterhouse Coopers, the 7 experts in XBRL international there to help develop this new 8 taxonomy. We have also formed a very broad working group 9 enlisting our members along with other stakeholders who will 10 be involved in XBRL reporting for mutual funds. 11 We expect to complete the project by the first 12 quarter of 2007 and then we will launch an education program 13 to encourage mutual funds to use this tagging in their EDGAR 14 filings. 15 Now what, may you ask, is the significance of this 16 effort? The current XBRL tagging system for mutual funds as 17 you probably know principally focuses on financial 18 statements. For operating companies, the financials contain 19 most of the information that shareholders want. But for 20 mutual funds and for fund investors, financial statements 21 frankly are of secondary importance. By contrast for almost 22 a decade under the SEC's disclosure rules, the risk-return 23 summary has highlighted the crucial information that 24 investors use in deciding which funds to buy. 25 Now, ICI research about the use and preferences for 1 information among fund shareholders and investors confirms 2 that recent fund buyers look primarily for information that 3 is included in this risk-return summary. It's information 4 such as the fund's fees and expenses, its historical 5 performance and its risk characteristics. XBRL tagging can 6 help turn the risk-return summary into an even more powerful 7 tool than the Commission envisioned when it first adopted it 8 in 1998 as a way to help investors compare one fund with 9 another through the standardization of the information and 10 the format in which it's presented. 11 Now, to our knowledge, ICI is the only US financial 12 services industry organization actively working to extend 13 XBRL beyond financial data. Widespread use of this new 14 taxonomy will introduce millions of investors and their 15 advisors to the benefits of XBRL and we are proud to be 16 leading this new effort. 17 Beyond XBRL, we would urge the Commission to 18 consider other reforms that will help bring fund disclosure 19 into the 21st Century. In the new system we would encourage 20 you to consider, funds and their intermediaries could deliver 21 a clear concise disclosure document at least to those 22 investors who have not affirmatively opted to receive 23 information online. The document could be much like the 24 profile prospectus. It would include a prominent statement 25 that additional disclosures, detailed disclosures that is to 1 say the prospectus and statement of additional information as 2 they exist today would be available on the funds website or 3 upon request in a paper form. 4 That sets up sort of a win-win system it seems to