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Getting Ahead of the Curve on Prospectuses

by Mike Ma

On Dec 30 of last year, industry pundit Chuck Jaffe issued a pretty gloom prognosis of the SEC's goals to reform the mutual fund prospectus. He wrote:

"The Securities and Exchange Commission is pushing for new prospectuses, but the proposals aren't such a radical change that the average investor will actually read the dumb things, let alone understand them."

Furthermore, other Chairman Cox's colleague Commissioners echoed concerns about the reforms:

"Several Commissioners voiced reservations that they hope will be addressed in the public comments. For example, Commissioner Paul Atkins questioned whether quarterly updating of the summary prospectus was necessary and whether disclosure of top ten holdings should be included in the summary. Commissioner Kathleen Casey wondered if the financial intermediary disclosure could describe concisely conflicts of interest arising from compensation arrangements. In addition, the Commissioners stressed the need for input from retail investors on the proposal. The Staff indicated that it will attempt to obtain the opinions of retail investors and likely will conduct investor testing, focus groups and individual interviews."

My question is:

Why do we have to wait for the SEC to prescribe it for us to make a change? Can't we move first? For an industry that cries foul at the mere scent of regulation, aren't we bringing it on ourselves by dragging our feet in reform? Most free market theorists would posit that that industry should be able to match customer demand faster than government policy can.

Haven't we learned from other industries that good design is good business? We should be taking the guidelines that the SEC is proposing, aiding in the innovation and development of these principles, and bringing ideas to match shareholder needs, instead of waiting for the ink to dry on mandatory reform. If you need proof, I encourage you to look at the Design Council's research that that shows share prices of companies using design effectively have outperformed the FTSE All-Share index by 200 per cent over ten years.

Luckily, a few firms get it. More firms should follow the examples that BlackRock and John Hancock's product information pages are setting in creating user experience. I strongly suggest all firms look at the user-centric model in these fact sheets to see if there is some common-sense user innovation we can provide ahead of the SEC's prospectus regulations.

If we want to be free of -- or at least less constrained by -- regulation, we as an industry need to earn it. Advancing the prospectus ahead of the compliance curve seems like a sensible place to start.