Speech by SEC Commissioner:
Statement Regarding the Adoption of the Summary Prospectus Rules
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
November 19, 2008
I am pleased to support the adoption of these rules.
The rules implementing the summary prospectus address a fundamental problem — namely, the problem of information overload. Investors today are inundated with reams of paper and volumes of information, so much so they often are unable to determine what is important to their decision making and what is not. As a result, investors too frequently do not bother opening the information they are provided or get overwhelmed and distracted, misplacing their focus on less important information. This problem is not new. Justice Marshall, writing for the Supreme Court, warned against information overload over 30 years ago in TSC Industries v. Northway, when he wrote, "… management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking."1
Research shows this to be true in the case of mutual funds. According to a 2006 survey by the Investment Company Institute, for example, less than forty percent of investors consulted a prospectus as a source of information before purchasing mutual fund shares.2 The ICI survey also found that two-thirds of investors believe that prospectuses contain too much information, while a mere three percent believe that prospectuses contain too little information.3
The rules we are adopting today go a great distance to stemming the avalanche of information, thus providing for a more effective disclosure regime that promises to improve investor decision making. These rules, however, are not the first time the SEC has attempted to streamline information to mutual fund investors. In the last attempt a decade ago, the SEC tried something similar with the "profile." While the concept was rooted in good intentions, the profile did not permit funds to incorporate information by reference. As a result, there was little incentive to use it, and so very few mutual fund companies took advantage of the option. In short, the profile failed to catch on.
The summary prospectus, however, permits incorporation by reference. Advancements in technology have made information available at the click of a mouse. Rather than mailing information through the U.S. Mail to investors, companies can post the information on their websites, where the information is literally at the fingertips of investors. In other words, technology now provides the critical component that was missing from the SEC's earlier attempts at streamlining disclosure, and I am pleased to support this rulemaking.
Information is most effective when delivered in an accessible and understandable format. I hope that the anticipated success of the summary prospectus paves the way for future initiatives by the SEC to use modern technology to provide information to investors in a manageable flow.
I would like to thank the Division of Investment Management — specifically Buddy Donohue, Susan Nash, Brent Fields, Tara Buckley, Mark Uyeda, Kieran Brown, and Sanjay Lamba — for all your hard work in developing these rules. In addition, I thank the other divisions and offices that have been involved in developing these rules — the Divisions of Corporation Finance and Trading and Markets and the Offices of General Counsel, Economic Analysis, Investor Education, and Information Technology.