The Promise & Perils of Plain English Mutual Fund Disclosures

52 Pages Posted: 16 Aug 2019 Last revised: 19 Aug 2020

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: August 15, 2020

Abstract

In this Article, we examine the content and compliance of mutual fund summary prospectuses. Fund disclosures are subject to `plain English' requirements promising to make disclosures accessible to ordinary investors and level the investment playing field. Despite recent SEC regulations intending to simplify disclosures for the average investor, we find that disclosure length is growing with risk sections nearly doubled in size over the last decade. A variety of readability and complexity measures also show that the summary prospectus—the disclosure most intended for the consumer investor—is not written in plain English but is hard to read. Our findings have broad policy implications, exposing potential peril for ordinary investors. We also explore the impact of fund disclosures on fund performance including monthly returns and risks (volatility and diversification). A two-way fixed effect regression analysis with interaction terms establishes a relationship between readability, fund performance, and volatility. Risk and strategy sections embed different information signals. Readability effects on fund return and volatility change from negative to positive moving from the risk to the strategy section models. Further, non-boilerplate derivative disclosures mute strategy section readability effects indicating semantic complexity necessitated by complex investment strategies, whereas high risk section readability is bloating and obfuscation.

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 (August 15, 2020). 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

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