SEC Issues Guidance on Mutual Fund Enhanced Disclosure Suggesting Further Improvements

The SEC Division of Investment Management issued guidance relating to the enhanced mutual fund disclosure amendments that were adopted in 2009.

After finding that mutual fund prospectuses were too long and contained too much complex language, in 2009, the SEC amended Form N-1A, the registration form used by mutual funds, and Securities Act Rule 498 ("Summary Prospectuses for Open-End Management Investment Companies"). The amended Rule 498 provided a new option for satisfying prospectus delivery obligations with respect to mutual fund securities. According to the guidance, the amendments created a "layered" approach to disclosure, in which key information is sent or given to the investor and access to more detailed information is provided.

After finalizing the amendments, the SEC observed that, in a significant number of prospectuses, disclosure remains "complex, technical, and duplicative." The guidance highlights certain rule and form requirements that are intended to provide investors with clearer and more concise disclosure, including:

• summarizing the principal investment strategies and risk in Form N-1A with language that is not lengthy, dense or complex;
• presenting Form N-1A in plain English that can be read easily by investors;
• including only required or permitted information in the summary section;
• clearly defining information related to strategies and risks that are principal versus those that are non-principal; and
• avoiding cross-references.

The SEC encouraged funds to revisit their disclosure in light of the guidance.

See: SEC Guidance; Form N-1A.