Buying fund shares, monitoring their performance may get easier this year


Do you find the marketing claims of mutual fund companies hard to decipher? Be patient.

By the end of the year, the companies are likely to start offering easier-to-understand ads. And before long, you'll get additional information about the funds you own, improving your ability to monitor their performance.

Both enhancements result from recent actions by the Securities and Exchange Commission, following months of study by its Division of Investment Management. They are, in a sense, farewell gifts to investors by outgoing SEC Chairman Richard C. Breeden and outgoing division director Marianne K. Smythe.

The first change, a proposed amendment to an SEC rule, would permit funds to sell shares via newspaper and magazine ads and direct-mail pieces that take the form of "simplified printed prospectuses," as Breeden calls them. To ensure accuracy, sponsors would be subject to "prospectus liability."

Today, if you see an ad or leaflet for a directly marketed fund, you must request -- and wait for -- the long prospectus that tells you, often in incomprehensible prose, what you should know before investing.

If, however, you buy from a broker or other sales person, you need not wait to invest. The SEC assumes that the broker will have told you what you need to know and that it's sufficient for you to get the prospectus after the purchase.

Although the proposal could reduce a competitive disadvantage for direct marketers, the idea apparently didn't originate with them. It was suggested by Kathryn B. McGrath, Smythe's predecessor, during a staff brainstorming session in 1990, after Breeden had asked the division to recommend changes in fund regulation.

Given that broad mandate, she thought it would be appropriate to study the British practice of offering fund shares via ads. The staff study, completed last May, recommended that such sales be permitted.

Industry reaction has varied. The Investment Company Institute has endorsed the proposal. So have some individual direct marketers. Others have reserved public comment. Some executives of broker-sold funds, meanwhile, say privately that they don't expect to lose sales.

One prominent direct marketer has been critical. John C. Bogle, Vanguard's chairman, asserts that, because mutual fund shares are long-term investments -- not consumer goods to be bought JTC impulsively -- investors shouldn't mind waiting a few days for a prospectus.

After revising the proposal to reflect reaction and further study, the staff submitted it to the commissioners who, in turn, have released it for public comment. One revision -- a proposal to extend the simplified prospectus to direct mail -- could enable fund marketers to adapt the concept to brochures aimed at participants in 401(k) retirement plans.

The focus of attention, of course, is the text -- the essence of the longer prospectus, boiled down to about one-fourth of the size of a newspaper page and written in "plain English." Its scope: fees and expenses, performance data, investment objectives and policies, investment risks, tax consequences and redemption procedures.

Accompanying the text would be an application form, which you would send to a fund with your check. Of course, you could use the coupon to ask for the regular prospectus first.

What the simplified prospectus eventually will contain will depend, in large measure, on comments by investors, the fund industry and others. They are due by the end of June. After they're analyzed, the SEC staff will develop a final version for commission approval, probably by year's end.

If you want to tell the SEC what you think of the idea, you may submit your comments (in triplicate) to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, Stop 6-9, Washington, DC 20549. In your letter, refer to File No. S7-11-93.

In a related action, the SEC adopted a rule requiring a fund prospectus or annual report to provide: (1) a graph comparing the fund's performance over the last 10 years to an investment in a relevant index of securities, and (2) management's discussion of factors, strategies and techniques that affected performance.

The commission also asked funds to expand a prospectus' per-share data tables to include total returns for each of the last 10 years, and to identify the people principally responsible for making investment decisions. Funds must advise shareholders promptly -- by prospectus sticker or other means -- when a portfolio manager leaves, is reassigned or dies.

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