In a unanimous vote, the Securities and Exchange Commission agreed to adopt rule amendments to improve mutual fund disclosures. This includes letting investors receive a summary prospectus written in simple English. The SEC also adopted revisions to the mutual funds’ registration form known as form N-1A, including amendments that let exchange-traded funds use summary prospectuses.
The summary prospectuses, which are voluntary, may include important information about investment strategies and goals, past fund performance, risks, and fees. As long as the statutory prospectus, summary prospectus, and other essential data can be accessed online, mutual funds that send investors a summary prospectus will be fulfilling their prospectus delivery requirements. Key data, such as selling and buying procedures, financial intermediary compensation, and tax consequences must also be included. The SEC expects approximately 75% of all mutual funds to use summary prospectuses.
SEC Chairman Christopher Cox is calling the mutual fund amendments a huge step forward for investors. The amendments will go into effect on February 28, 2009. Form N-1A changes won’t go into effect until January 2010.
On the same day these amendments were passed, however, the SEC announced that it was delaying making any final rule changes about credit rating firms and the credit ratings they issue. SEC Chairman Cox said the rating rule proposals package will be discussed on December 3. The Commission continues to maintain that credit rating agency rules remain a top priority for 2008.
However, the future of one proposed ratings provision may already be uncertain. The provision involves mandating that nationally recognized statistical ratings organizations reveal the data that they are using to come up with their ratings. The SEC planned to exclude this provision from the November meeting and it may not be included in the December talks.
Commenting on these recent developments, Stockbroker Fraud Attorney William Shepherd had this to say:
The SEC’s handling of mutual fund disclosure amendments and the proposed credit rating provisions demonstrate that despite the incredible damage to investors over the past eight years, the SEC remains the proverbial “fox in charge of the henhouse.” Led by Chairman Christopher Cox, a former Republican Congressman who is a champion of deregulation, the SEC has continued to provide a free reign to Wall Street, while acting in the worst interest of investors.
Making mutual fund information easier to read is not for the public’s benefit. Instead, it is designed to put the onus of sales fraud on the investor-yet another example of “blame the victim.” Rather than maintain the requirement that mutual funds send a full prospectus to investors, these companies must now only provide a “summary,” with the full disclaimer document available online.
Thus, when an investor complains that he or she was not given an accurate description of what was being purchased, or worse, was lied to about the risks, all the salesperson and firm needs to do is say: “Well, the prospectus was available to you, all you had to do was go online to read it.”
Of course, 99 our 100 investors will likely not do this. Furthermore, it has been a recent common practice for those who sell mutual funds to omit mailing the required prospectus but later say that they did.
As for the decision to delay making a decision on final rules for credit ratings-why take action now, Mr. Cox, when you have stood by as the credit rating agencies have fraudulently sold their ratings to borrowers for years, while you, the SEC, and Wall Street have known that the credit ratings were completely bogus?
Shame on you, Mr. Cox, shame on the Bush Administration for putting you in office, and shame on the greedy folks on Wall Street for using the SEC as a tool to defraud investors. For all Americans, I ask: “Where is the outrage?”
Mr. Shepherd is the cofounder of Shepherd Smith Edwards & Kantas LTD LLP , a securities fraud law firm that is nationally recognized for its ability to successfully help investors recoup their losses.
Related Web Resources:
SEC Adopts Fund Disclosure, Money Market Rules, CCH Wallstreet.com
US SEC delays action on credit rating agency rules, Reuters.com, November 19, 2008
Securities and Exchange Commission
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