Concrete steps for disclosure

Your Funds

Your Money


When Christopher Cox got in front of the Senate banking committee late last month and said that improving mutual fund disclosure is the "central focus" of the Securities and Exchange Commission, there was a scary and disappointing sense of deja vu.

Improving disclosure has been a big issue with the last five chairmen of the SEC, so Cox is hardly alone in pandering to the enormous chunk of the investing (and voting) public that owns funds.

So if Cox is serious about improving disclosures - rather than just adding to the list and clogging the paperwork even more - here are a few things he might consider:

Give an assessment of how funds work together.

Money managers are loath to offer anything that even hints at investment advice, yet they know that investors are not well served when they buy several funds with significant overlap in their holdings.

Management knows which combinations of funds would create a false sense of diversification; they could do the analysis and issue a warning whenever funds are one-quarter identical.

Discuss whether a fund belongs in a taxable account.

Funds are now required to show after-tax returns, which would be sufficient if investors actually paid much attention to that part of the prospectus.

Management may be mostly worried about gross income, assuming that investors would recognize the potential tax consequences and hold the fund only in a tax-advantaged account.

That's a lousy assumption. Instead, management should make a statement suggesting whether - due to past tax experience - the fund is appropriate for a taxable account.

Require personalized disclosures in fund statements.

If fund companies can calculate an investor's individual fund returns, they can tailor an investor's costs and expenses.

This is information that should go into the regular statement - and not the prospectus - so that the fund shows investors their profit or loss over a certain period of time, followed by a line showing investors how much they paid during the period for that gain or loss.

Bring back the profile prospectus. Make its use mandatory.

In the mid-1990s, the fund industry created the "profile prospectus," a summary document that answered 11 critical questions. Those questions covered the fund's objective, what the fund can invest in, whom it is appropriate for, the fund's costs and fees, past performance, how someone buys and sells, and more. It never caught on because fund companies feared it was not sufficient to protect them from shareholder suits.

A two-page summary of these key points - at the front of the prospectus - would ensure that investors at least get the bare minimum they should know out of the paperwork.

Highlight prospectus changes. Don't hide them.

Fund firms change their operating rules all the time.

Fund firms should take a page from sports rulebooks, with up-front details of any changes made from one year to the next, explaining why the amendment was necessary. Then, within the body of the prospectus, all changes should be printed in special lettering so that shareholders know something new is in place.

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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