On January 13, 2009, the Securities and Exchange Commission (SEC) issued a release adopting rule changes to allow mutual funds to use summary prospectuses. The release also makes substantial revisions to Form N-1A, which prescribes the content of mutual fund prospectuses.1 Mutual funds will have to provide a revised summary section at the beginning of each statutory prospectus and can use the information in this summary section as a summary prospectus to satisfy their delivery obligations under Section 5(b)(2) of the Securities Act of 1933.
Compliance Dates
The changes become effective March 31, 2009, at which time funds can make use of the new summary prospectus, but the SEC delayed the time for required compliance. Funds must comply with the amendments to Form N-1A with respect to initial registration statements and post-effective amendments that are annual updates and for all post-effective amendments that add a new series, in each case that is filed on or after January 1, 2010. Funds must comply with the amendments to Form N-1A as to all other amendments to registration statements by January 1, 2011.
The SEC, as it did when it last comprehensively amended Form N-1A, has stated that, in almost all cases, filings using the new format must be made using Rule 485(a), which requires 60 days before a filing is effective.
The Summary Section of the Statutory Prospectus
The new summary section of the statutory prospectus must be succinct, generally three to four pages long. It must be in plain English, as defined by the SEC (including, among other things, active voice, short sentences, and an avoidance of jargon and multiple negatives), but it should be noted that this was already a requirement for the risk/return summary of current prospectuses.
The summary must provide information on a fund's investment objective; costs; principal investment strategies, risks, and performance; investment advisers and portfolio managers; purchase and sale and tax information; and financial intermediary compensation, in that order. Thus, the new summary places more emphasis on mutual fund costs than does the current summary used in Form N-1A. Wisely, the SEC dropped the proposed requirement that a fund must list its top ten portfolio holdings, to be updated quarterly in the summary prospectus, agreeing with commentators who pointed out that such information is of limited usefulness and potentially misleading, and that full holdings reports are widely available elsewhere. Likewise, the SEC decided to require updating performance data in the summary prospectus annually, rather than quarterly as proposed.
A fund may include in the summary section only that information that is specifically required by Form N-1A. In addition, the information for each fund must be presented in a separate, self-contained summary section. Integrating information regarding multiple funds will not be allowed (though multiple share classes of a single fund may be presented together).
The Summary Prospectus
Under revised Rule 498, a fund may use the summary prospectus as an offering document in lieu of the statutory prospectus if it meets certain requirements. In particular, the fund must post on its website, and make available via a toll-free number on request, its summary prospectus, statutory prospectus, SAI, and most recent annual and semiannual shareholder reports. Under a safe harbor under the Rule, if a fund has reasonable procedures in place to ensure that fund materials are available in the required manner, it will be considered to be in compliance notwithstanding unavailability of fund materials due to events beyond the fund's control, including system outages and natural disasters.
The summary prospectus must include the same information as the summary section of the statutory prospectus, and text identifying the relevant website and toll-free number for obtaining fund materials. The summary prospectus may not be bound together with any materials (with certain exceptions for variable insurance products).
The summary prospectus may incorporate by reference information contained in the statutory prospectus and SAI, as well as information in shareholder reports already incorporated by reference into the statutory prospectus.
In response to concerns raised by commentators about private liability for noncompliance with certain aspects of Rule 498, the SEC amended Rule 498 to provide that noncompliance with those aspects of the rule would violate the rule, but not result in a violation of Section 5(b)(2) of the Securities Act that would give rise to private liability. In particular, the requirements that the summary prospectus be given greater prominence than any accompanying materials (with the exception of other summary prospectuses), that the relevant statutory prospectus, SAI, and most recent shareholder reports be available to all persons on request, and that Internet information be presented in a format that is convenient for both reading online and printing on paper, are no longer conditions of the safe harbor. The SEC reasoned that this approach was necessary to encourage funds to provide concise disclosure documents to investors.
The ultimate success of the summary prospectus will depend on whether sellers of mutual funds are convinced that the SEC has addressed concerns about private liability and on whether investors prefer the summary prospectus over longer documents.
1 Investment Company Act Release No. 28584 (Jan. 13, 2009).