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SEC Adopts Summary Prospectus Rule Changes

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  • Baker, John
    The Securities and Exchange Commission has adopted revisions to Form N-1A, the registration statement for mutual funds, to require funds to provide a summary
    Message 1 of 1 , Jan 14, 2009
      The Securities and Exchange Commission has adopted revisions to Form N-1A, the registration statement for mutual funds, to require funds to provide a summary section at the front of the prospectus, consisting of key information about the fund. Release Nos. 33-8998, IC-28584 (Jan. 13, 2009). The SEC also adopted rule amendments allowing mutual funds to satisfy their prospectus delivery requirements with a summary prospectus containing the same information as the prospectus summary. The changes to Form N-1A are the most extensive since the current version of the form was adopted in 1998 and will require every mutual fund to revise its prospectus, whether or not it chooses to use a summary prospectus. The amendments include unrelated disclosure amendments for exchange-traded funds.

      The summary section of the prospectus will provide information on the fund's (1) investment objectives, (2) costs, (3) principal investment strategies, risks, and performance, (4) investment advisers and portfolio managers, (5) purchase and sale and tax information, and (6) financial intermediary compensation, in that order. The summary is intended to be concise and is expected to be three or four pages long. For multiple fund prospectuses, each fund must have its own summary section, except for certain information that is common to multiple funds. The summary section will not include the fund's ten largest holdings, as the SEC had proposed (and, consequently, summary prospectuses will not have to be updated quarterly).

      For funds that choose to use a summary prospectus, the rules reflect carefully tiered levels of issuer obligations:

      --A summary prospectus may be used to offer the fund's shares if it meets the content requirements of revised Rule 498. Essentially, these require that the summary prospectus provide the same information as the prospectus summary section, plus required legends. The summary prospectus may also incorporate by reference information contained in the statutory prospectus and statement of available information, as well as information in shareholder reports that already is incorporated by reference into the statutory prospectus. Information incorporated by reference is considered to be conveyed when the summary prospectus is received, for liability purposes under the Securities Act of 1933. As with the prospectus summary sections, each fund must have its own separate summary prospectus, although the same summary prospectus may cover multiple classes of the same fund.

      --A summary prospectus also meets the prospectus delivery requirements of the 1933 Act if, in addition to the content requirements, the summary prospectus is not bound together with any materials (except for certain variable insurance products) and if the fund posts on its web site its summary prospectus, statutory prospectus, SAI, and most recent annual and semiannual reports to shareholders. Note that the fund does not have to meet these additional requirements if it provides shareholders with a statutory prospectus. A brief failure to meet the web site requirements will not violate the 1933 Act, if the fund has reasonable procedures in place to ensure that the specified materials are available.

      --If a fund uses a summary prospectus to meet the prospectus delivery requirement, the fund or a financial intermediary also is required to send anyone who asks for them copies of the fund's statutory prospectus, SAI, and most recent shareholder reports; the statutory prospectus must be given greater prominence than any accompanying materials (except other summary prospectuses); and the online materials must be convenient for reading and printing. However, failure to meet any of these requirements will be only a rule violation, not a violation of the 1933 Act. This is significant, because 1933 Act violations will give shareholders the right to rescind their purchase and will give the SEC authority to take action under Section 17 of the 1933 Act, the statute's antifraud provision.

      The rule amendments are effective March 31, 2009, and a fund in compliance with the Form N-1A amendments may use a summary prospectus after that date. Initial registration statements, and post-effective amendments that are annual updates or add a new series, must comply with the amendments if they are filed on or after January 1, 2010. The final compliance date for filing amendments is January 1, 2011.

      Post-effective amendments to comply with the changes to Form N-1A should be A amendments, filed under Rule 485(a). A amendments of this type generally become effective 60 days after filing, unless the SEC accelerates effectiveness or the registrant chooses a later effective date. The SEC said it may in appropriate circumstances consider requests by existing funds to file B amendments under Rule 485(b)(1)(vii), which allows immediate effectiveness when filed for a purpose approved by the SEC. Appropriate circumstances may include situations where a fund complex has previously filed under Rule 485(a) post-effective amendments for a number of funds that implement the new requirements.

      The Form N-1A amendments also include several changes applicable to ETFs. These amendments were not included in the original rule proposal, but instead were in the separate rule proposal to grant comprehensive exemptive relief to ETFs. The adoption of the ETF disclosure changes now seems to imply that the SEC does not expect the ETF rule changes to be adopted as quickly, although the SEC's most recent regulatory agenda, which provided information as of October 2, contemplated adoption of those rule changes in November 2008.

      The SEC's 194-page adopting release for its rule changes is available online at


      My post on the proposal is at


      And for my post on the ETF rule proposal, see


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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