Avid coupon-clippers may one day be able to snip newspaper ads to invest directly in the mutual fund of their choice, if a Securities and Exchange Commission staff proposal becomes law.
The mutual fund industry`s possible use of this mass-marketing technique, more often associated with cents-off discounts at grocery stores, signifies the growing appeal of such funds and the more aggressive attempts by some to market their wares directly to investors.
The SEC proposal would let a mutual fund design an advertisement as a mini-prospectus. The ad would include certain required information about fees and risk, as well as an application form that an investor could clip and send with a check to buy shares in the fund.
The proposal would eliminate the requirement that mutual funds first send investors a full prospectus before they are allowed to buy shares, which can delay an investor`s entry into a fund by several days.
Mutual funds would be required, under the SEC proposal, to send a full prospectus-which details a fund`s investment objectives, performance, fee structure and risks-with the confirmation letter noting an investor`s purchase of shares.
”It lowers the barriers to entry in the selling process,” said Tim Armour, president of Chicago-based Stein Roe Mutual Funds, part of Stein Roe & Farnham. Current rules, he said, are ”like telling someone that you can never buy an automobile on your first visit to a showroom.”
”For customers, it`s very important, as to the timing for getting into a fund,” said Robert Pozen, general counsel for Fidelity Investments, which favors the proposal. ”(The timing) determines their price, and if they have to wait a week and the market goes against them, they get very upset.”
The requirement that a prospectus be sent before an investor buys shares does not apply to mutual funds whose shares are sold through brokerage houses, nor does it apply to the sale of stocks.
Armour said his firm favors the proposed change because it ”levels the playing field” for mutual funds.
Funds benefiting most from the proposal appear to be no-load or low-load funds. These funds eliminate or sharply reduce the fees charged to investors to buy shares in a mutual fund and mostly use direct marketing to sell their shares, circumventing brokerage firms or other sales agents.
Of the about $176.6 billion in mutual fund shares sold in the last year, $65.3 billion, or more than a third, were sold through direct-marketing efforts, according to the Investment Company Institute, a trade association for the mutual fund industry. That represents a slightly higher proportion of sales than a year ago.
Critics of the SEC proposal, including at least one major no-load mutual fund company, question the wisdom of speeding up an investor`s entry into an investment vehicle generally considered to be long-term.
”We don`t see what purpose would be served by someone rushing into an investment,” said Brian Mattes, vice president of the Vanguard Group, which maintains 66 no-load mutual funds. ”Why can`t they wait for a day or two to get a prospectus? The selection of funds is not something that is ordinarily an in-and-out type decision.
”There are people who can make their own selection, but the risk is you wind up with an inappropriate investment, faster than you would otherwise, and maybe without the full discussions of the risks,” Mattes said.
”Frankly, I don`t think it`s a good idea,” said Gary Bowyer, a Chicago- based financial planner. ”When people are investing, they ought to have a very good idea of why they`re doing it and what their overall plan of action is. If people have a plan, they don`t need to change their thoughts from one week to the next.”
Those who support the measure question whether many investors actually read the full prospectus, and they note that the proposed rule change speeds up the process only for those who wish to act quickly.
”If you have an ad that tells you the investment objective, the main risk, all the loads, redemption fees, the performance record in the last few years, what else do you want to know that I`m not telling you?” asked Fidelity`s Pozen.
An investor who wishes to read a full prospectus before sending money need only ask a mutual fund company to send one, he said.
”My own sense is that this will be used by more sophisticated investors, who already know some of the choices,” said Erick Kanter, spokesman for the Investment Company Institute, which favors the rule change.
The proposal is intended, among other things, to cut costs by reducing the number of prospectuses sent to investors who then choose not to invest. That ultimately would benefit all fund shareholders, Kanter noted.
”It would make your outreach marketing dollars much more effective,”
added Armour, of Stein Roe & Farnham.
The SEC has yet to release a formal rule spelling out exactly what mutual fund companies would be required to include in the coupon ad.
Kanter said it likely will require funds to disclose information about the fund`s investment objectives and policies, significant risk factors and all fees and expenses. The rule will include current requirements that mutual funds use standard SEC formulas for computing performance figures, he added.
Final adoption of the regulations may take up to a year.
