Statement by SEC Chairman:
Enhanced Disclosure for Mutual Fund Investors
Chairman Christopher Cox
U.S. Securities and Exchange Commission
November 19, 2008
Today’s meeting is focused on the adoption of major improvements to mutual fund disclosure for the benefit of all investors.
Getting investors clear and concise information about a particular mutual fund is an important investor protection objective. Mutual fund disclosure needs to serve the basic purpose of letting investors know right off the bat what the fund’s objectives and strategies are. Investors should be able to immediately see the fees. And they should be able to get a quick sense of the particular risks associated with this fund, and what its performance has been.
In today’s turbulent economy, mutual funds are playing a crucial role. Millions of Americans have their money in mutual funds, and they use them for a variety of purposes, including a liquid source of savings when they need it for emergencies, as well as longer-term goals such as education, retirement and future health care needs.
As investors consider their own personal circumstances, they may decide to invest more in mutual funds at today’s lower prices, or they may decide to redeem or sell their funds. Some investors may want to re-allocate or shift investments from one type to another, or from one fund to another. Now more than ever, they need a summary in plain English that will quickly give them basic information about each mutual fund, and permit ready comparison of one fund to all of the others that they might be considering.
Unfortunately, today’s disclosure isn’t giving mutual fund investors this kind of clear and concise description. Instead, investors have to dig through pages of legalese to obtain the key information they’re after.
It is the job of the SEC, of course, to see that material information about mutual funds is fully and fairly disclosed. It’s all well and good to say that the information is all there, if you just dig around for it. But we haven’t really achieved the goal of full disclosure if the information is not provided in a way that’s clearly understandable to the investors for whom it is intended.
Over the past year, our Office of Investor Education and Advocacy arranged a telephone survey of investors regarding the usefulness of SEC-mandated disclosure documents. In the survey, over two-thirds of investors responded that they rarely, if ever, read their mutual fund prospectuses. Their most frequent reason for not reading the prospectuses was because they were too complicated and too hard to understand.
Obviously, if the disclosure documents aren’t readable by investors — if instead, they just throw the documents out when the mail comes — then the entire purpose of the disclosure is defeated.
Today’s new disclosure approach is designed to change all of this. Less than a year ago, the Commission proposed a Summary Prospectus that, in the short space of a few pages, would summarize the key information about a mutual fund. This Summary Prospectus would be delivered to investors in place of the much longer document that most people currently throw away.
The new approach will require that a mutual fund’s full prospectus, with all of the legalese that appeals to a much smaller percentage of the investor population, be easily available on the Internet. That way, everyone who wants to drill down into the details will have the opportunity to do so. They will have more searchable information on the Internet that will be easier to analyze than the long paper documents. And of course, anyone who wants a long paper document can still get that as well.
The Summary Prospectus will be especially useful for individual investors in 401(k) plans. Over half of the several trillions of dollars that Americans have invested in retirement plans are in mutual funds. The concise mutual fund summary that 401(k) investors will now get will make it a lot easier for them to do their retirement planning.
The recommendations that we are considering for adoption will also help mutual fund investors who want to get more detailed information online. The rules will require that the most detailed information will be available to investors on the Internet, any time of the day or night.
The online information would be available in a layered format, so that investors can move from the summary to the particulars with a click of the mouse. This layered approach to web disclosure will let every investor obtain the level of detail that he or she wants.
This new format for mutual fund disclosure is a giant step forward for investors, and it’s an important complement to the Commission’s other initiatives to get mutual fund information available online in interactive data format. Today’s rulemaking will also support the transition of the SEC from an agency that requires document-format disclosure to one that requires data-format disclosure. As we will soon discuss, the Commission is also currently considering final rules to require mutual funds to publish risk/return data in tagged format and to require public companies to publish financial statements in tagged format.
The new mutual fund disclosure approach we are considering today is the product of nearly a year of comments and analysis from investors and the industry. The Commission received over 150 comment letters on our proposals. In addition, our staff arranged focus groups in several cities across America to get important feedback from investors. I am pleased to report that many commenters, including the investors in our focus groups, are excited about the new Summary Prospectus. We placed the results of these focus groups, as well as information collected in a telephone survey on disclosure documents, in the public comment file. Last summer we re-opened the comment period so that we could receive further comments on the responses we had received from investors.
So it is with a great deal of enthusiasm that we consider this morning the new Summary Prospectus disclosure framework for mutual funds that builds on the power of the Internet. Before I turn the meeting over to the staff for its recommendations, I would like to say a word of thanks to my fellow Commissioners here today. Through all the market turmoil of the past months, these Commissioners, along with the Commission staff, have dug in on the hard issues and have helped to keep the important work of the Commission moving forward at full speed.