A Consumer Protection Approach to Mutual Fund Disclosure and the Limits of Simplification
84 Pages Posted: 24 Mar 2010 Last revised: 1 Apr 2010
Date Written: March 23, 2010
The SEC’s recently adopted summary disclosure initiative for mutual funds improves disclosure for average investors by making fund disclosure more understandable and accessible, but it also reveals a fundamental defect in the SEC’s entire approach to policy in this area. The initiative - the latest in a series of fund disclosure initiatives stretching over a 30 year period - seeks to improve the quality of fund offering disclosure for average investors by embracing what the SEC has dubbed a “layered disclosure” approach. The key elements of this approach are: (i) funds may use a radically simplified and standardized offering document in lieu of a statutory prospectus; and (ii) investors obtain enhanced electronic access to a full range of more comprehensive fund disclosure documents. The goal is to reduce disclosure costs for funds and enable each investor to choose the level of disclosure detail that best suits his or her inclinations. While these changes will undoubtedly provide some benefits for average investors, it is doubtful that these refinements will produce dramatic improvements in the quality of investor’s investment decisions. This article instead advances an alternative approach toward fund disclosure policy that embraces a more assertive consumer protection orientation. This approach differs from the SEC’s in giving priority to strategies designed to improve the quality of average investors’ fund investment decisions rather than merely making disclosure more understandable. The assertive consumer protection approach advocated in this article seeks regulatory policies to change investor behavior by counteracting known behavioral biases of average investors (a policy goal sometimes knows as “debiasing”), including policies aimed directly at investor decision-making and other policies aimed at enhancing the utility of third parties who are in a position to influence investors (a form of structural debiasing). The article presents several concrete recommendations for implementing such an approach: (i) the SEC should impose tighter content restrictions on Internet sales literature and supplement existing content requirements for summary disclosure; (ii) the SEC should rethink its approach to layered disclosure (i.e., the current scheme that requires average investors to choose their desired level of disclosure detail) and instead move toward a scheme tailored to the distinct information needs of two different end-user constituencies: average investors and investment professionals; and (iii) the SEC should impose heightened procedural accountability standards for investment professionals to improve the advice received by clients regarding fund selection recommendations and to promote competition among funds based on investment merit.
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