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Firms Begin to Embrace Summary Prospectus

Cost Savings of as Much as 60% Turn Large Fund Companies Into Early Adopters


While mutual funds aren't technically required to start using the short-form, summary prospectus until 2011, companies that switch early could see significant savings in printing and mailing costs.

Late last year, the Securities and Exchange Commission pushed through a requirement for a short, three- or four-page, plain-English summary of a fund's basic information-such as the fund's objectives, fees, investment strategies, risks and returns, portfolio managers and tax information-intended to replace the full, statutory prospectus that firms have been mailing clients and potential clients for years.

Fund companies can start mailing the summary prospectus now, in lieu of the statutory version, although the rule does not become mandatory until Jan. 1, 2011.

"The purpose of the summary prospectus is to provide key information to investors in a short, easy-to-read document that provides access to as much or as little information as they care to see," said Francine Rosenberger, a partner at K&L Gates during a webinar last Tuesday on the summary prospectus rule and Form N-1A changes. "The SEC staff has been searching for ways to entice investors into reading information related to investments."

Operating under the idea that it's safer to send investors everything than be accused of holding back key information, fund companies have continued to mail out gigantic prospectuses that are often hundreds of pages long and include way more information than the vast majority of investors care to read. In fact, most investors admit they simply toss the large, intimidating documents directly into the trash.

The result has been a gargantuan waste of paper, resources and money.

The SEC tried the short-form prospectus idea about 10 years ago, but made it voluntary and kept the requirement to send the full prospectus. Not surprisingly, few companies jumped at the chance to take on even more work.

The new requirement has the summary prospectus replace the statutory version, with the caveat that the summary will contain directions to the printable and savable online version of the statutory prospectus and make it clear that a free, printed version of the statutory prospectus is available upon request.

"Some people will still ask for companies to mail them a full prospectus, due to the high cost of printer ink and paper and also for the convenience of getting information sent to them, but I think very few people will ask for it," said Peter Suhr, executive vice president of enterprise solutions for Capital Fulfillment Group.

Printing and mailing a smaller document could save some companies millions of dollars, Suhr said. Fund companies will still have to pay legal and filing fees, but most firms could see overall savings of around 60%, he said.

Firms that could save the most are larger companies with 80 to 100 funds that combine funds and send investors information on every fund they offer, even if the investor is only interested in one or two of the funds, he said.

"When you decide to split the books, you stop sending irrelevant information," he said.

Firms traditionally hire one printer who works around the clock for weeks to get all the prospectuses for the year printed at the same time. Firms mail out everything at the same time and then warehouse a few thousand extra prospectuses in case anyone asks for them. If part of the information changes over the course of the year, firms simply add a few more pages to the prospectus and mail it out to people who ask for it.

"Under the old system, it was cheaper to stick an extra supplement into the prospectus than to print a new one," Suhr said. "Now with print-on-demand, firms can put together a much thinner, streamlined kit that's cheaper to ship."

Because the summary documents are smaller in length, they can fit onto an ordinary printing press, which expands the selection of available printers, thus creating a more competitive environment, he said.

"Firms are keen on having smaller documents that are printed on demand, rather than stored as inventory," said Jeff Levering, vice president of corporate development at NewRiver Inc.

Some companies will choose to maintain printing in-house, while others will want to outsource to full-service printers, Levering said. "There are a lot of advantages, but doing nothing will become very expensive for fund companies and their distributors."

Specifically, the new changes are to Rule 498, replacing all the requirements for the original profile prospectus, and include major changes to forms N-1A, N-4 and N-14, as well as corresponding changes to other rules and forms, including Rules 497 and 482, Rosenberger said.