Mutual fund companies offer their customers professional management of stocks, bonds, commodities and other investments. The funds sell shares to investors and invest their assets in diversified portfolios, according to a specific investment philosophy. Potential buyers can find information on a fund's fees and expenses, as well as historical performance, through a prospectus that is required by law.
SEC and Mutual Funds
The Securities and Exchange Commission regulates the operation of mutual funds. Since 1933, the SEC has required that funds furnish a complete "statutory" prospectus to potential investors. The prospectus contains general information about the fund's investment philosophy and past results. "Statutory" means the prospectus discloses all information as required by federal law. Over the years, however, many investors found these lengthy documents to be confusing and unhelpful in making a financial decision.
Changes to Fund Requirements
In 2009, to simplify disclosure for fund investors, the SEC amended the prospectus requirements. Instead of a full statutory prospectus, mutual funds can now provide a shorter "summary" prospectus that gives basic information about the fund in plain English. The summary must include "key information about the fund, including investment objectives and strategies, risks, costs, and performance," according to the SEC rule. Funds that choose to provide a summary prospectus must also make a copy of the statutory prospectus available online. The statutory prospectus must include the summary information at the front of the document.
Statutory Prospectus and Proxies
The rule on fund prospectuses requires all mutual funds to deliver a statutory prospectus to any customer or potential investor that requests one. In addition, the SEC requires that funds offer shareholders the option to access important proxy materials online or in hard-copy form. A proxy involves the vote of shareholders on important fund matters, such as a change in investment philosophy or the offering of a new class of shares.
The SEC also makes mutual fund prospectuses available to the public through its Internet database. Using this tool, potential investors can access fund information without disclosing personal information or subjecting themselves to a sales pitch. Many independent financial sites also make available summary information. For example, Morningstar offers subscribers a Prospectus Summary Report that lists key information for each fund that has provided the material. The format makes it easy to compare funds across different sectors and investments.
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