Boston Citizen Seminar

S.E.C. Chief Calls For Mutual Fund Reforms

By Mark Sullivan
Staff Writer

Securities and Exchange Commission Chairman Arthur Levitt, speaking at BC's Boston Citizen Seminar on Tuesday, pitched an innovation he said is long overdue in the world of mutual fund investments - investor information in plain English.

The prospectuses that mutual funds are required to provide potential investors are so complicated they often are unreadable, said Levitt, who proposed a series of new rules aimed at ensuring the information that funds provide consumers is clear and user-friendly.

Securities and Exchange Commission Chairman Arthur Levitt details his proposal for simplifying language in mutual fund prospectuses at the Boston Citizen Seminar meeting on Tuesday at the Boston Harbor Hotel. (Photo by Gary Gilbert)
"The time has come to pierce the shroud of jargon and boilerplate surrounding the prospectus," Levitt said. "It's my aim to have prospectuses begin to speak a new language - the English language."

The event - co-sponsored by Boston College and Associated Industries of Massachusetts in association with the Carroll School of Management - at the Boston Harbor Hotel included the presentation of the series' inaugural Torch of Leadership Award to University Chancellor J. Donald Monan, SJ. The award recognizes Fr. Monan's extensive community involvement during his 24 years as University president. University Trustee Associate William Connell, chairman of the Boston Citizen Seminar, presented the award.

More than 200 invited guests heard Levitt's policy address, which the SEC chief chose to make in Boston because of the national prominence of the region's mutual-fund industry.

A mutual fund is an investment pool, an amalgam of stocks, bonds, currencies and any other kind of security that can be traded. Rather than investing in an individual company like Digital Equipment Corp., for example, an investor might want to put money in a high-tech mutual fund, representing a broad collection of securities in the high-tech industry.

Under law, a mutual fund must provide a prospectus - detailing fees, risks, a breakdown of investments and objectives, and assorted disclaimers - before allowing an investor to buy into the fund.

Because of the density of these prospectuses, and the myriad other sources of information available in the media and on the Internet, many consumers base little of their investment decisions on the jargon-packed documents the mutual funds provide, Levitt said.

The SEC chairman proposed several new rules aimed at clarifying the information mutual funds disclose to investors. Among the proposed new requirements:

.Allowing investors the option of relying on a brief "fund profile" when buying shares. The concise profile would summarize key fund information, including investment strategies, risks, performances and fees, in a standardized format. The profile would not replace the prospectus, which mutual funds would still be required to provide, but an investor would be allowed to buy shares based on the more compact profile.

.A risk-return summary at the outset of all fund prospectuses that highlights the fund's investment objectives and strategies, risks, historical returns and relative performance.

.A truth-in-labeling rule, requiring a fund with a name suggesting a focus on a particular kind of investment to invest at least 80 percent of its assets accordingly.

The rule proposals must be approved by the full Securities and Exchange Commission.

Levitt said the proposal is part of a campaign he has launched to introduce "plain English" to investments. Speaking at a seminar sponsored by a Jesuit university, he drew on religious history to make his appeal for the vernacular.

"This is no new thing under the sun," said Levitt. "In the 9th century, the Emperor Charlemagne ordered sermons to be delivered in the vernacular. In the 16th century, Martin Luther translated the Bible into the vernacular.

"Our task is far more humble - the subject we address is not faith, but finance, and the idiom we reject is not Latin, but legalese."

Levitt added, "In fairness, much of the arcane language is aimed at legitimate legal concerns. But the fact remains that disclosure is not disclosure if it doesn't communicate."

Boston College business scholars welcomed Levitt's proposal, but warned that simplification is not necessarily simple.

"Basically, I think it's a very good idea and I think he has pretty broad industry support," said CSOM Dean John Neuhauser. But he added that the task might prove "a good deal more complicated" than expected, citing an epigram on the difficulty of crafting concise prose: "I think it was Pascal who wrote, 'I'm sorry to write such a long letter, but I didn't have time to write a short one.'"

Welcoming the proposals was Assoc. Prof. John Preston (CSOM), who serves as an independent director of a financial management firm that oversees 16 mutual funds.

"What they suggest is very powerful, very good," said Preston. "I think it will be very useful to the industry."

But Preston said the push for plain language will not make the mutual-fund industry a boom market for English majors. "It will mean more jobs for lawyers who can write," he said.

The Boston Citizen Seminars were launched in 1954 to bring together leaders from academia, business, government and labor to discuss pressing issues facing Boston and the nation.

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