Guest Article

(From the December 10, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

SEC Proposes New Summary Prospectus for Mutual Funds to Help 401(k) Participants and Other Investors Compare Funds

Seeking to provide 401(k) plan participants and other mutual fund investors with information that is easier to use, SEC voted unanimously to propose amendments to Form N-1A that will require inclusion, at the front of the fund's prospectus, of a new "summary section" that will report key information about the fund including investment objectives, risks, costs and performance. The new summary section, designed to enable an apples-to-apples comparison between mutual funds, is envisioned to be no longer than 3-4 pages and may also be utilized separately as the fund's Summary Prospectus. If a Summary Prospectus is used, the obligation under the Securities Act to deliver a statutory prospectus can be satisfied by giving the Summary Prospectus and making the statutory prospectus available online. 72 Fed. Reg. 67790 (November 30, 2007).

The SEC's proposed rules are designed to help all mutual fund investors. However, they also are part of a coordinated effort with the Department of Labor (DOL) to make sure 401(k) plan participants have the information needed to make informed choices among their plans' investment options. The DOL has just issued revisions to Form 5500 Schedule C to "more specifically define the information that must be reported concerning the 'indirect' compensation service providers received from parties other than the plan or plan sponsor, including revenue sharing arrangements among service providers to plans." The DOL also is planning to issue proposed regulations that would enhance required disclosures to 401(k) plan participants.

Concerns about the effect of investment fees on 401(k) plan participants' overall investment returns have prompted numerous Congressional hearings and several legislative proposals, including one by Chairman George Miller (D-CA) of the House Committee on Education and the Workforce. It remains to be seen if the DOL's and SEC's regulatory efforts will be sufficient to stave off legislative action.

New "Summary Section" for Mutual Fund Prospectuses

The proposed amendments will require the statutory prospectus to include at the beginning a summary, in plain English, of key information drawn largely from the current risk/return and fund profile information found otherwise in the document. Multiple-fund prospectuses must provide a separate summary section for each fund covered by the prospectus. Briefly, the summary section must disclose:

New Summary Prospectus Option

As proposed, the Summary Prospectus will contain the same information as the "summary section" of the prospectus. However, the Summary Prospectus must be updated quarterly to reflect changes in the fund's average annual total returns and yield, and its top 10 holdings. SEC anticipates the quarterly updating to be done by any reasonable means (e.g., affixing a label or sticker) and to not require reprinting of the Summary Prospectus. No obligation is imposed to provide current investors who previously received a Summary Prospectus with an updated Summary Prospectus reflecting only the quarterly updates. Rather, the previously provided Summary Prospectus will continue to be deemed current until the fund is required to update the Summary Prospectus for some other reason or is required to file an annual updating amendment to its registration statement.

Option to Deliver Statutory Prospectus by Internet

If a Summary Prospectus is delivered, the duty to deliver a statutory prospectus can be satisfied by making the prospectus available on an internet Website, provided certain requirements are met. The key requirements include:

Comments Sought and Anticipated Effective Date

SEC identified numerous specific areas in proposed amendments where it seeks comments from the public and, in particular, from investors. If the proposed amendments are adopted, all initial registration statements on Form N-1A and all post-effective amendments that are annual updates to effective registration statements on Form N-1A which are filed 6 or more months after the effective date will be expected to comply.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.