The Promise & Perils of Plain English Mutual Fund Disclosures

50 Pages Posted: 16 Aug 2019 Last revised: 28 Jun 2021

See all articles by Anne M. Tucker

Anne M. Tucker

Georgia State University College of Law

Yusen Xia

Georgia State University - Robinson College of Business

Date Written: June 2, 2021

Abstract

We examine mutual funds’ compliance with the SEC’s ‘plain English’ rules promising to make disclosures accessible to ordinary investors through short and easy-to-read statements. We find that summary prospectus (497K) risk sections have nearly doubled in size over the last decade. Also, both risk and strategy sections are hard to read. Next, we explore if fund disclosure attributes signal information about fund performance, even in the absence of price discovery. Using a two-way fixed effect regression analysis with an interaction term, we show a relationship between plain English attributes and fund returns and volatility. Easy-to-read principal risk sections are associated with higher fund returns and volatility, but we find the opposite with investment strategy sections. We also explore whether readability effects persist in funds with high derivative word counts, a proxy for strategic and semantic complexity. We link the different information signals between the two sections to content and regulatory differences. Our findings highlight enforcement opportunities for the SEC.

Keywords: investment company, mutual funds, text mining, NLP, disclosures, SEC, compliance, risk, investment strategy

JEL Classification: K22, G23, G38, G14

Suggested Citation

Tucker, Anne M. and Xia, Yusen, The Promise & Perils of Plain English Mutual Fund Disclosures (June 2, 2021). Available at SSRN: https://ssrn.com/abstract=3436952 or http://dx.doi.org/10.2139/ssrn.3436952

Anne M. Tucker (Contact Author)

Georgia State University College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States
(404) 413- 9179 (Phone)

Yusen Xia

Georgia State University - Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
154
Abstract Views
1,229
rank
239,223
PlumX Metrics