November 30, 2007
SEC Proposes New Mutual Fund Prospectus
Format and Delivery Options
The Securities and Exchange Commission (SEC) proposed two rule amendments that (1) could
significantly change the look and feel of mutual fund prospectuses by requiring a Summary Section for
each Fund as the first three or four pages of every prospectus and (2) would permit a Fund to satisfy its
prospectus delivery requirements by using a Summary Prospectus that incorporates the Summary
Section, instead of the full prospectus. A Fund would still be required to create and maintain a full
prospectus, and that full prospectus would have to be available at a website and delivered in paper or
via e-mail upon request. Note that, as proposed, the use of the Summary Prospectus to meet a Fund’s
delivery obligations is optional, but every Fund would be required to include a Summary Section as the
first pages of its full prospectus.
Comments on the proposed rule amendments must be submitted by February 28, 2008. The proposed
changes will not be final until the SEC considers the comments provided and adopts final rule
amendments. The SEC expects that filings made more than six months after the adoption of final rules
will be required to include the new Summary Section. Use of the alternative delivery option relying on
the Summary Prospectus would be dependent on compliance with the new prospectus format
requirements.
Discussion
A.
The New Summary Section of the Prospectus
The SEC proposals would change Form N-1A to require every Fund prospectus to begin with a new
Summary Section, no more than three or four pages long, that provides information on the following
topics, in the order listed, without any additional disclosures:
1.
Investment objectives and goals, including the identity of the Fund “type” or “category”
(e.g., money market fund, balanced fund, etc.).
2.
Fee table, which includes suggested edits to note the availability of sales load discounts
(breakpoints) and the Fund’s portfolio turnover rate, and also recognizes current staff
positions concerning disclosure of expense waivers.
3.
Principal investment strategies, risks, and performance bar charts, which is
unchanged from current requirements.
4.
Top 10 portfolio holdings, as of the end of the most recent quarter, subject to certain
protective exclusions.
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5.
Investment advisers and portfolio managers, including disclosure of the adviser, any
sub-adviser managing over 30% of the Fund’s assets, and portfolio manager
biographical data.
6.
Brief purchase and sale, and tax information, including minimum investment
amounts, redemption procedures and the possible tax status of Fund distributions (e.g.,
ordinary income, capital gains or tax-exempt).
7.
Financial intermediary compensation, including SEC mandated disclosure or
comparable data that the Fund and “related companies” may make payments that may
influence the intermediary to recommend the Fund over other investments.
In discussing these requirements, the proposals mandate that each Fund have a separate, complete
Summary Section, even if the Fund is included in the same prospectus with other Funds in a complex.
Flexibility is provided for disclosure related to Fund classes with different cost structures.
B.
New Delivery Option Using the Summary Prospectus
The SEC also is proposing to replace current Rule 498 to permit a Fund to satisfy its obligation to
deliver a full prospectus (the “statutory prospectus”) to purchasers by providing a Summary Prospectus
and making the full prospectus available on-line. The full prospectus also would have to be sent in
paper or via e-mail upon request. As discussed below, the Summary Prospectus would reflect the same
information included in the Summary Section, as well as additional disclosures.
This proposal essentially permits the delivery of the Summary Prospectus to replace the need for a
Fund to deliver the full prospectus, provided that (1) if other materials accompany the Summary
Prospectus, the Summary Prospectus is given greater prominence and is not bound with those
materials; and (2) the Fund’s website provides the additional information required by the rule, including
the full prospectus and SAI, and the most recent annual and semi-annual shareholder reports. In that
regard, the SEC release notes that failure to send a full prospectus upon request would be a violation of
the new rule, but would not subject a Fund to liability for failing to deliver a statutory prospectus. As
proposed, each Summary Prospectus would have to be filed with the SEC via EDGAR no later than the
fifth business day after the date it is first used.
The delivery of a Summary Prospectus could also replace the need to deliver a full Fund prospectus
before or at the time of delivery of additional materials or communications that, under current
regulations, must be accompanied or proceeded by a full Fund prospectus.
The proposals establish the format for the Summary Prospectus, and also include a sample Summary
Prospectus. The Summary Prospectus must include all of the information from the new Summary
Section, and the additional information required under the rule, but may not include any additional
information. A Summary Prospectus may only describe one Fund, but can describe multiple classes of
that Fund. In essence, the Summary Prospectus will consist of (1) a cover page or first page that
provides basic information (Fund name, classes included, date of use) and a mandated legend noting
where to obtain a full prospectus; and (2) the information required by the Summary Section. Total return
and yield information, and top 10 holdings information would be required to be updated as of the end of
each succeeding calendar quarter not later than one month after completion of the quarter, although
some greater flexibility is provided with respect to disclosure of top 10 holdings data. A “sticker” could
be used to provide updating information to avoid the need to reprint the Summary Prospectuses
quarterly. Also, a Fund would not be required to send an investor another Summary Prospectus solely
to provide the updating information, unless the Fund is required to update the Summary Prospectus for
2
some other reason or for the annual update. This means that for current investors, the Summary
Prospectus need only be sent once a year.
Finally, the rule imposes certain requirements to make sure that all documents made available on-line
are “user friendly,” including the ability to move directly back and forth between various sections of the
documents. The documents must also be available to be downloaded electronically, free of charge.
For further information, please contact Cameron Avery 312-807-4302, Kevin Bettsteller 312-807-4442,
Paul Dykstra 312-781-6029, Jennifer Esquibel 312-807-4262, Alan Goldberg 312-807-4227, Elizabeth Hudson 312-807-4376,
Anna Paglia 312-781-7163, Alicia Perla 312-807-4318, Andrew Pfau 312-807-4386, Paulita Pike 312-781-6027,
Eric Purple 202-955-7081, Bruce Rosenblum 202-955-7087, Donald Weiss 312-807-4303, Gwendolyn
Williamson 202-955-7059, or Stacy Winick 202-955-7040 of Bell, Boyd & Lloyd’s Investment Management and Financial
Markets Group or visit our Web site at www.bellboyd.com.
This publication has been prepared by the Investment Management and Financial Markets Group of Bell, Boyd & Lloyd for
clients and friends of the firm and is for information only. It is not a substitute for legal advice or individual analysis of a
particular legal matter. Readers should not act without seeking professional legal counsel. Transmission and receipt of this
publication does not create an attorney-client relationship.
© 2007 Bell, Boyd & Lloyd LLP All Rights Reserved
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