The SEC Proposes New Disclosure Standards for Mutual Funds

By Financially Fit staff

Financial disclosures, including mutual fund prospectuses, used to be written in a secret lawyer language.  In 1998, the SEC mandated “Plain English” for all agency filings, going so far as to prepare a handbook to help those who misplaced their undergraduate copies of Strunk & White. The goal was simpler sentences and plainer words to help a non-lawyer navigate documents without the aid of a lawyer, and it was a huge improvement.

A decade later, the SEC is entertaining new financial disclosure rules.  On Nov. 15, 2007, the commission announced that it was proposing a new disclosure page in a mutual fund prospectus that would list investment objectives, strategies, risks and costs; a listing of the top ten portfolio holdings; names of investment advisers and portfolio managers; information on how to buy and sell shares along with any tax consequences; and the compensation that a broker or financial planner would receive for selling the fund.  Instead of paragraphs of verbiage, people could refer to a list of bullet points covering the most important information about their investment.  The rest of the prospectus would be attached for more information and investors would have online access to it.

The second proposed rule affects all financial filers, not just mutual funds.  That’s the use of XBRL, or Extensible Business Reporting Language, which is simply a standardized way of preparing financial statements for easy Internet access.  Each line on a financial statement is tagged to identify what it is (revenue, cost of goods sold, interest paid, etc.) so that users can easily find key information and pull it into a spreadsheet for analysis.  It beats printing out badly formatted text pages and doing data entry any day.  It’s not yet mandatory and probably won’t be until late in 2008 or early 2009, but many public companies including mutual funds have begun sending their SEC filings in XBRL.  When it is widely used, mutual fund analysts will be able to do faster and deeper comparisons of performance, while mutual fund portfolio managers will be able to analyze companies more quickly and accurately.

One of the SEC’s concerns is that investors be able to get the information they need in a way that makes sense for them, and there is some number of people who do not have easy Internet access.  That number is getting much smaller; 71% of American adults regularly use the Internet, according to the Pew Internet and American Life Project (www.pewinternet.org).  The usage increases to 87% for people 29 and under using the Internet regularly.  Only 32% of folks over age 65 make the same claim.  The problem is that mutual fund investors tend to be older; the Investment Company Institute says that the average mutual fund investor is 48 years old.  Paper isn’t going away and fund companies will continue to print prospectuses for people who can’t click on a link.

From the perspective as someone who looks up fund information, both XBLR and summary statements would make it easier to find critical data. This would also make life easier for financial advisors, who may be comparing dozens of funds before making recommendations, and to investors, many of whom are more likely to read a quick summary of the facts than an entire prospectus, even one written in plain English.  The rules haven’t been approved yet, but let’s hope they will be soon.

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

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