If you buy a computer, the "quick-start guide" helps you get the equipment up and running without forcing you to learn many of the fine points that may or may not someday be useful information.
The powers behind the mutual fund business want you to get the same kind of jump-start when it comes to their products.
Paul Schott Stevens, president of the Investment Company Institute - the trade association for fund companies - called for big changes in fund disclosure last week, suggesting that investors would be better served by ditching the traditional prospectus in favor of a jump-start user's manual, along with instructions on how to access the true prospectus on the Internet.
It's hardly a new idea, but there's one significant difference this time, namely that the Securities and Exchange Commission is receptive to the idea.
There is no question that the proposal is good for fund companies; the verdict is not quite so clear when it comes to consumers.
Technically, a mutual fund's prospectus is the contract it has with investors. The document that fund companies send investors tells only half of the story, literally; Part II of the prospectus - the statement of additional information, which includes data on management and the operations of the fund - is not sent to prospective shareholders or current owners. It is only available online or upon request.
That is precisely the status that the fund industry now wants for Part I of the document, the traditional prospectus that most investors file or toss without reading.
This is not the first time the industry has entertained the notion of radical change in disclosure. In the late 1990s, there was a mild effort to create "off-the-page advertising" - where consumers would have been able to buy funds directly from a coupon on ad copy, rather than requiring the traditional documentation - and a concerted attempt to develop the "profile prospectus," a Cliff Notes version of the traditional document. The profile prospectus had the support of the ICI and it gained necessary approval, but not widespread acceptance.
The document - which succinctly addressed 11 points that regulators considered essential to know before buying - had two problems:
First, regulators feared that the result of a slimmed-down prospectus would be a loss of information in the marketplace, which will be an issue with the new proposal, too.
Second, fund lawyers weren't willing to take the liability risk. Securities law holds fund firms liable for putting the wrong information in a prospectus, or for omitting items that regulators or consumers (more specifically, the plaintiffs' lawyers who might be hired by shareholders) believe should be included. By definition, a summary document drops some data by focusing on what is deemed to be most important; fund lawyers worried their firms would be sued into oblivion.
Once it became clear that the profile prospectus could not fly on its own - but rather needed to be attached to the traditional document - fund companies gave up on the project. Most firms simply added a summary at the start of their regular prospectus, trying to keep that portion of the document in "plain English."
Several key things have changed since the profile prospectus faded quietly into oblivion. For starters, the Internet moved from "trendy device" to "mandatory household appliance." An ICI study from 2006 showed that 92 percent of fund shareholders have Internet access, and that 70 percent were online every day.
That kind of widespread computer use improves the chances that regulators will do to Part I of the prospectus precisely what they now allow with Part II, making it available online or upon request. The SEC's decision to allow the statement of additional information to be distributed that way creates a precedent that eases liability concerns. And the end of document mailing would save the industry billions (don't count on shareholders seeing lower costs) so management is motivated.
There are still questions about whether a quick-start guide provides sufficient information. Next week in this space, I will try to suggest just what information should be required if this proposal goes through.
"Everyone seems to be on board, from the consumer groups to the SEC," says Stevens. "I'd like to think we'll see a formal proposal sometime this year, and that a final rule might be adopted not terribly long thereafter. ... Basically, it's time. Most investors haven't been reading the prospectus for a long time, so giving them a document that gets them up to speed and making the rest of the information [available elsewhere] makes sense."
Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.