SEC Division of Investment Management Issues Guidance on Mutual Fund Disclosure

July 03, 2014

On June 26th, the staff of the SEC’s Division of Investment Management published guidance on its 2009 mutual fund disclosure enhancements (“Guidance”). The enhancements were adopted as amendments to Form N-1A (the registration form used by mutual funds) and Rule 498 under the Securities Act of 1933, and were intended to address complex and lengthy disclosures in fund prospectuses.

The 2009 amendments to Form N-1A required certain key information to be written in a concise manner and in plain English and to appear in a specified order at the beginning of the fund’s prospectus. The SEC believed that this new “Summary Prospectus” section would not only provide clearer and more useable disclosure to investors, but would also facilitate comparisons among funds. In a complementary manner, the 2009 amendments to Rule 498 provided that funds could satisfy their prospectus delivery obligations by delivering to investors the Summary Prospectus. Through this “layered” disclosure approach, key information would thus be sent or given to investors, and investors would have access to more detailed information in the full prospectus, which would be posted publicly on the internet and provided in paper form or by email at their request.

The Guidance indicates the SEC staff has observed that, in a significant number of prospectuses filed since 2009, disclosure remains complex, technical and duplicative. The Guidance, which is based on staff comments to a number of registrants, highlights the following rule and form requirements with the aim of encouraging registrants to review their disclosures and focusing them on providing clearer and more concise disclosure to investors.

  • Principal investment strategy and risk disclosures required by Item 4 of Form N-1A in the Summary Prospectus section should be a summary of key information provided in response to Item 9 of Form N-1A, and substantially the same (or identical) information should not be provided in response to both Items 4 and 9. The Guidance notes that the Division originally intended the Summary Prospectus for a single fund to be three or four pages, but now often reviews Summary Prospectus sections that are ten or more pages long.
  • The Summary Prospectus section must be provided in plain English and the entire prospectus should be presented in a clear, concise and understandable manner for use by an average or typical investor who may not be sophisticated in legal or financial matters. The Guidance notes that the Division continues to observe the use of technical terms that are not explained, and that prospectuses often contain unnecessary defined terms, long and compound sentences, and long and dense paragraphs that are difficult for investors to read.
  • The Summary Prospectus section, including any footnotes to the Fees Table, may only include disclosures required or permitted by Items 2 through 8 of Form N-1A. For example, the Division often comments on the inclusion of purchase and sale information that is neither permitted nor required by Item 6.
  • Disclosure in the prospectus should clearly distinguish which of a fund’s strategies and risks are principal and which are not principal.
  • Funds should avoid cross-references in the prospectus to the SAI or shareholder reports, and should only include cross-references within the prospectus that are useful in assisting investors’ understanding of information presented and that do not add complexity to the prospectus.

The Guidance is a useful reminder of basic prospectus drafting requirements and the staff’s general approach to the review of fund filings.


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This article was originally published by Bingham McCutchen LLP.