On June 26, 2014, the staff of the SEC’s Division of Investment Management issued guidance related to mutual fund disclosure enhancements adopted in 2009. The guidance is based on comments the staff has provided to a number of registrants since that time and is intended to further the Commission’s goal of improved disclosure to investors.

Background
On January 13, 2009, the Commission adopted amendments to Form N-1A that were designed to provide investors with more readily understandable information in making an investment decision. Under the amendments, certain information is to be written in plain English and appear in a prescribed order at the beginning of the statutory prospectus (i.e., the “Summary Section”). The information required to be presented in the Summary Section consists of Items 2 through 8 of Form N-1A (i.e., disclosure relating to investment objectives, costs, principal investment strategies and risks, performance, investment advisers and portfolio mangers, purchase, sale and tax information and a statement regarding financial intermediary compensation). While the Commission did not impose page limits on the Summary Section (noting that doing so could constrain appropriate disclosure), it emphasized its intent that registrants prepare a con­cise summary that will provide key information to investors.

Coincident with the adoption of the Form N-1A amendments, the Commission also adopted amend­ments to Rule 498 under the Securities Act, providing a new option for satisfying pro­spectus delivery obligations. Under this option, the information that is included in the Summary Section of the statutory prospectus is sent or given to investors in the form of a Summary Prospec­tus. The statutory prospectus is posted publicly on the internet and provided in paper form or via email to investors upon request. While the staff guidance does not specifically involve compliance with Rule 498, it relates to the content of Summary Prospectuses through the dis­closures contained in the Summary Section of the statutory prospectus.

Use of the Summary Prospectus is optional but, according to the staff’s estimate based on the number of Summary Prospectuses filed with the Commission as of March 31, 2014, well in excess of 80% of mutual funds offer investors Summary Prospectuses.

Staff Observations
The staff has observed that there are a significant number of prospectuses in which disclosure in the Summary Section remains complex, technical and duplicative. In the guidance, the staff highlights comments that it has provided to registrants regarding certain rule and form requirements that, while not exhaustive of the disclosure requirements, are in­tended to focus registrants on providing investors with clear and concise disclosure.

• Summarize the Principal Investment Strategies and Risks. The guidance reminds registrants that the layered disclosure regime adopted by the Commission in 2009 may be undermined by Summary Sections that repeat rather than summarize the information available elsewhere in the statutory prospectus. In the staff’s view, the repetition of substantially the same or identical information in response to both Items 4 and 9 often highlights that a registrant has not provided a summary in response to Item 4. When the staff observes a Summary Section that does not appear to summarize a fund’s principal strategies and risks, it will remind the registrant that the Summary Section is intended to summarize key information and that more detailed, non-duplicative information should be presented elsewhere.
• Plain English Requirements. The guidance reminds registrants that Form N-1A requires that the Summary Section be written in plain English. In addition, the guidance further reminds registrants that the prospectus, in its entirety, is subject to the requirement that the information be presented in a clear, concise, and understandable manner. The guidance notes that, notwithstanding these requirements, the staff continues to observe the use of technical terms that are not explained in plain English. The guidance also states that failure to follow the plain English requirements undermines the usefulness of the Summary Section, and, thus, the Summary Prospectus. Therefore, the staff urges registrants to revisit their disclosures in light of these requirements.
• Summary Section Must Only Include Required or Permitted Information. The guidance highlights the Form N-1A requirement that the Summary Section not include disclosure other than that required or permitted by Items 2 through 8. The guidance reminds registrants that a fund may include information elsewhere in the prospectus or in the SAI that is not otherwise required by Form N-1A. The guidance notes that the staff closely scrutinizes the disclosure in the Summary Section, and when in­formation is included that is not required or permitted, it will comment to the registrant that such informa­tion should be moved out of the Summary Section.
• Inclusion of Non-Principal Strategies and Risks in the Prospectus. The guidance reminds registrants that Form N-1A requires a fund to disclose its principal investment strategies and risks in its prospectus and describe any investment strategies and risks that are not principal in the SAI. The guidance notes that Form N-1A permits registrants to include (except in the Summary Section) information in the prospectus that is not otherwise required. The guidance states that many registrants include in their prospectus information related to strategies and risks that are not principal and often do not clearly indicate which of the strategies and risks are principal and which are not principal. Because it believes that this can result in prospectus disclosure that does not clearly and concisely inform investors about how the fund principally intends to invest, the staff has, and will continue to, comment that disclosure should distinguish which of the strategies and risks are principal and which are not principal.
• Avoid Cross-References. The guidance also reminds registrants that cross-references to the SAI or shareholder reports should be avoided. The guidance notes that the staff frequently has observed numerous cross-references in the Summary Section, which it believes can add unnecessary complexity. When appropriate, the staff has, and will continue to, suggest that cross-references be deleted.

Conclusion
The staff urges registrants to review their disclosure in light of this guidance so that the 2009 amendments can have their intended effect of provid­ing investors with clear and concise, user-friendly disclosure.