SEC Plans Would Make Buying Products Easier

Securities: One proposal would allow investors to purchase funds immediately after reading about them in an advertisement.

If certain federal regulators and fund-industry executives get their way, buying shares in a mutual fund will be as easy as clipping coupons.

The Securities and Exchange Commission staff late last month unveiled a series of proposals to modernize the mutual fund business. One would make it quicker and easier for investors to purchase funds by sending in their money directly upon reading a newspaper or magazine ad.

Specifically, fund companies could place ads that included both a streamlined prospectus and a coupon-like application. Investors would fill out the application and mail it in with their checks. They would still get a full prospectus--the legal disclosure document required of all funds. But they would have to wait several days for it to arrive in the mail with their transaction confirmation.

Under the proposal--formulated by the SEC’s investment-management division and subject to approval from the agency’s commissioners--fund companies still could be held liable for printing false or misleading facts. Yet they would be able to word their messages more creatively than is currently the case.

Each ad would have to include key facts that are central to investing in a mutual fund, such as information on performance, fees, minimum purchase amounts and redemption procedures. On the other hand, companies would be able to “advertise more freely and disseminate (other) valuable information” that is not typically contained in the prospectus, according to the proposal.

The SEC plan would exert the largest impact on no-load funds, which are not sold by brokers and thus must rely more heavily on advertising to reach potential customers. Currently, no-load investors need to order an application and prospectus and wait up to a week or more for this material to arrive in the mail before returning the application with a check.

The Investment Company Institute, a Washington-based trade group that represents nearly the entire fund industry, has been lobbying in favor of the so-called off-the-page ad proposal for more than two years. The procedure is already being used in the United Kingdom to market the British equivalent of mutual funds, says Matthew P. Fink, president of the institute. “We think it ought to be tried here,” he says.

The SEC proposal aims in part to put the two main segments of the U.S. fund industry on an equal footing. Currently, brokers selling load products to the public can get a transaction confirmed the same day they recommend an investment, even if they’ve made their sales pitch over the phone without first supplying the client with a prospectus. Existing regulations put no-load companies at an “unwarranted competitive disadvantage,” says the SEC staff report.

Not all no-load companies are lining up behind the proposal.

“We don’t know why a person would need to move so quickly,” says Brian Mattes, spokesman for the Vanguard Group, a large no-load fund family based in Valley Forge, Pa. “Why spend a day or less rushing into an investment you might hold for 20 or 30 years?”

Michelle A. Smith, head of the Kansas City-based Mutual Fund Education Alliance, a group of leading no-load companies, confirms that the group’s member firms hold “divergent opinions” on this topic. “There are concerns people would invest too rapidly without checking the parameters,” she says. “Some (members) wonder whether this makes it too easy to invest.”

Proponents point out that investors wouldn’t be forced to buy shares directly from an off-the-page advertisement. Any such ads would be required to mention that full prospectuses are available on request. “I view this as an issue of customer convenience,” says Charles E. Vieth, head of retail marketing for T. Rowe Price Associates, another large no-load family based in Baltimore. “Nobody says investors have to buy (in this manner). They can still send for additional information first.”

In fact, Vieth predicts that most people would still choose to receive the full prospectus before investing, except perhaps when buying money-market funds, which are homogenous, low-risk products.

The off-the-page proposal not only is subject to approval by SEC commissioners but still might undergo some modification. For example, the SEC staff left open the question of whether investors purchasing shares in this manner should be allowed a short-term window during which they can review the full prospectus--and back out of a transaction.

Under one scenario envisioned by the SEC staff, purchase money would be held in an escrow account and not invested until the close of the waiting period. Under another, investors could be liable for price fluctuations during the review period but would be able to recoup any sales charges.

What’s in a Prospectus

A recent proposal from the staff of the Securities and Exchange Commission would allow investors to purchase mutual funds without first receiving a fund’s disclosure document, known as the prospectus. Instead, investors could buy shares after reading an advertisement, completing an application coupon and mailing it in with their checks.

Although the proposal is still subject to approval and modification, the following key information, contained in each fund’s prospectus, would almost certainly need to be listed in the ads:

* Investment objective

* Performance results

* Sales charges

* Fees and expenses

* Minimum purchase amounts

* Reinvestment options

* Redemption procedures

* Shareholder services