SEC Staff Provides Guidance on Summary Section of Mutual Fund Prospectuses

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The staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2014-8 (the “Guidance Update”) to provide guidance based on comments the Division has provided on the information required to be presented in standardized order at the beginning of mutual fund statutory prospectuses (the “Summary Section”) in response to Form N-1A Items 2 through 8.  This is also the information required in a summary prospectus provided to investors pursuant to Rule 498 under the Securities Act of 1933.

Principal Investment Strategies and Risks.  The Guidance Update notes that the staff often finds that the principal investment strategies and risks provided in response to Item 4 are not, as required by the Item, a concise summary of the information provided in response to Item 9.  The Guidance Update also expresses concern over instances where the staff has observed that the disclosure in response to Item 4 substantially duplicates Item 9 disclosure, which the staff views as undermining the layered disclosure regime adopted by the SEC by increasing the length of mutual fund prospectuses.

Plain English.  The Guidance Update expresses concern over the failure by certain registrants to comply with the plain English requirements of Rule 421(d) under the Securities Act of 1933 that apply to the Summary Section, in particular, through the use of (a) technical terms that are not explained in plain English, (b) unnecessary defined terms,(c) long, compound sentences, and (d) long, dense paragraphs that the staff believes may be difficult for investors to understand.

Limitations on Information Provided in Summary Section.  The Guidance Update provides a reminder that the Summary Section may not include information other than that required by Items 2 through 8 of Form N-1A.  The Guidance Update provides examples of two areas scrutinized by the staff for compliance with this requirement: (1) footnotes to the Fee Table and (2) purchase and sale information provided in response to Item 6.

Inclusion of Non-Principal Strategies and Risks in the Prospectus.  The Guidance Update notes that while a fund is permitted to include non-principal investment strategies and risks in its prospectus that it could otherwise disclose in its statement of additional information, the staff has observed instances where these additional strategies and risks are presented in a way that does not clearly indicate which of the fund’s strategies and risks are principal and which are not. In such instances, the staff comments that the fund should distinguish between them.

Use of Cross References in the Summary Section.  The Guidance Update provides a reminder that the instructions to Form N-1A direct a fund to avoid cross-references to its statement of additional information or shareholder reports.  The staff frequently observes numerous such cross-references in the Summary Section, and when appropriate, the staff suggests that the cross-references be deleted to streamline the Summary Section.

Topics:  Compliance, Mutual Funds, Prospectus, SEC

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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