Junk mail may soon contain all that an investor needs to structure a financial portfolio. And if the information doesn’t arrive by mail, it may appear as an ad in your local newspaper.
The Securities and Exchange Commission Thursday proposed a rule change that will let mutual fund investors buy shares simply by clipping a newspaper coupon or responding to a mailed solicitation.
If the rule becomes final, investors no longer will be required to first receive a formal prospectus on a fund before buying shares.
Instead, a new “summary prospectus”-which can be included in an advertisement or direct-mailpiece-will be sufficient under SEC rules as a full legal disclosure of the risks and costs of investing.
Vicki Beci, vice president for marketing at Stein Roe & Farnham, a Chicago-based mutual fund group, hailed the proposed change because the new advertising format will highlight important information about funds-such as investment risk, past performance and fees-and allow investors quicker access to buying shares.
“A prospectus is a very lengthy, boring, dull legal document,” she said. “Shareholders have a hard time trying to pour through a prospectus to find these things.”
Current rules forbid no-load and low-load funds that deal directly with investors to sell shares in a fund without first mailing the customer a full prospectus, which can delay a sale two days or more.
Beci estimates that the rule change, if approved, will save her firm about 20 percent of its marketing costs because of reduced mailing needs. Full prospectuses will only be sent to those who request them and to investors who actually buy shares, she said.
The rule change is being hailed by many no-load mutual funds as a way of leveling the playing field with load funds, which charge a sales fee, usually sharing it with a broker. Brokers, as financial advisers, aren’t required to provide a prospectus to an investor before accepting a purchase of shares, according to the SEC.
While the new advertising format will summarize key information about each fund, it will be strictly regulated, said Matt Chambers, associate director of the division of investment management at the SEC.
Newspaper ads and direct-mail pieces will be required, for instance, to disclose the fees and expenses of the fund, its historical performance for the last year, last five years and last 10 years (if available), as well as information on investment philosophy and investment risk, Chambers said.
No fund in operation less than two years will be allowed to run such ads, and all ads will be pre-screened by the National Association of Securities Dealers or the SEC.
Many fund groups estimate that to successfully include all the required and desired information, a magazine ad will have to be a full page and a newspaper ad half a page.
Not all no-load funds are happy with the proposal.
“We don’t think there is any need to rush into what should be a long-term investment,” said Brian Mattes, a spokesman for Vanguard Group, a Valley Forge, Pa.-based mutual fund company. “It relegates the purchase of a mutual fund to that of an impulse purchase, like bubble gum.”
The proposal is open for public comment for 90 days, after which the SEC will consider changes and vote on adopting the new rule as a final regulation.
