Your Funds: Summary prospectus rule step in right direction

When it comes to mutual-fund paperwork, less seems to be more.

That's why the fund industry is rushing headlong into the "summary prospectus," getting positioned for new rules governing documents long before it must adopt such changes, and rushing quickly to the furthest edge of the new rules.

It's actually a win-win kind of move -- good for shareholders and money managers -- but it should leave investors and watchdogs a bit nervous and unfulfilled. It's a good first step, where no one knows how the next move plays out.

The summary prospectus rule adopted by the U.S. Securities and Exchange Commission about a year ago requires mutual funds to create CHARLES
A. JAFFE
a short-form document of three or four pages, which is the primary way investors will get their details about the fund.

This short form needs to be at the front of the full prospectus, but the rule also allows the new document to stand on its own, so long as the "statutory prospectus" -- the traditional long-form document -- is available online and on demand.

That's the step funds are quickly moving to, and it puts the full-blown prospectus in the same boat as the fund's "statement of additional information," technically the second part of the traditional prospectus that investors currently get only by request or online.

The idea here is simple: With no one reading the traditional paperwork, a brief piece written in plain English and unburdened by pages of legal mumbo-jumbo might give consumers a fighting chance to get the data they need to make a smart buy or hold decision. (There's very little in any fund's documentation that would lead to a sell decision.)

Specifically, the summary prospectus must cover the fund's investment objectives and goals, costs, past performance, primary strategies and risks, management, tax information, compensation paid to financial advisers or brokers, and purchase and sale procedures.

It is four pages that, effectively, make 100 pages -- the average prospectus and statement of additional information combined -- redundant or unnecessary for most investors.

NewRiver Inc., which maintains an index on summary prospectus activity, estimates that some 300 funds have already got summary documents on the market today.

And it counts 1,400 additional funds that have filed the paperwork to get their new documents approved.

"The rule hasn't even started its official time yet, and already there are 1,700 out of about 8,000 funds either using or in process to use the summary prospectus," said Russ Planitzer, CEO for NewRiver. "By the end of calendar year 2010, when the rule allowing this has been in effect for a full year, we think that 90 percent of funds will have adopted [the summary prospectus]."

That said, the whole thing remains an experiment where no one can be quite sure of how it will work out.

The summary will save trees and cut fund expenses, clearly a positive for all, but there is no guarantee that anyone will actually read it just because it is more concise and on point than the statutory document.

In the end, the summary will help the average investor most of the time, but if the SEC is serious about improving documentation, it will follow up this change by making the online documents -- the detailed paperwork -- easier to slog through and decipher.

Charles A. Jaffe is senior columnist at MarketWatch. He can be reached at or at Box 70, Cohasset, MA 02025-0070.