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SEC Adopts Rule Tempering E-Signatures Act

The Securities and Exchange Commission has speedily adopted a rule to permit fund companies to continue to convey sales and marketing materials electronically - particularly on websites - to prospective investors without first supplying them with a prospectus or asking for their permission to provide the prospectus in electronic form.

The SEC adopted Rule 160 on July 27 in response to passsage of the Electronic Signatures Act, which President Clinton signed into law on July 6.

The act would have put constraints on the distribution of sales and marketing materials to prospective investors, said Susan Nash, associate director of the SEC's division of investment management. That is why the electronic signatures bill had a provision allowing the SEC to pass a rule within 30 days of the act's passage permitting this exclusion for fund companies, Nash said.

"The most important thing is that Rule 160 doesn't represent a change, but prevents a change that might have occurred because of the Electronic Signatures Act," Nash said.

"When a fund wants to distribute sales materials, they have to be preceded by prospectuses," Nash said. "The electronic interpretations of the act could have required implicit investor consent to the electronic delivery of a prospectus. However, the act also allowed that consent was not needed if reasonably comparable access to both the sales literature and the prospectus was permitted."

"The commission has taken the position that if both the sales material and a link to obtaining a prospectus are side by side, that is permissible," Nash said. "Or, if a fund company sends an e-mail with sales literature with a prospectus as an attachment, that is also permissible."

However, kasina e-Business Strategy Solutions of New York recently found that of 425 websites of leading fund companies, only 79 percent, or 335, offered prospectuses on their sites, either in electronic form or in the mail, in response to an electronic application, said Lee Kowarski, a consultant with kasina.

Fund companies may also post the content of a prospectus on their websites without labeling it as a prospectus, Nash said.

Industry consultants welcomed the new rule and predicted that it could be a step towards eventually providing prospectuses online.

"Eventually, all content that you can obtain offline, you will be able to get online," Kowarski said.

"The Internet is slowly becoming the window into investments," said David Driskill, president of David Driskill Associates, a mutual fund operations consulting company in Boston. "Even though we have lived with the requirement to provide a prospectus before we provide sales literature, we all know that few investors do more than skim the prospectus. If the SEC is taking this open-minded position about sales literature on websites, the next step may be to allow fund companies to simply post their prospectuses online."

The SEC is continuing to interpret other aspects of the Electronic Signatures Act and "will make further pronouncements about electronic documents," Nash said.