Wednesday, November 19, 2008

SEC Adopts Summary Prospectus

At the SEC's open meeting this morning, the Commission postponed consideration of proposed rules applicable to NRSROs to another day, but adopted the Summary Prospectus proposal issued in November of 2007.   

As we described in yesterday's post about the open meeting, the Summary Prospectus may hold many benefits for investors and funds.  Based on the comments received by the SEC, the proposal's marriage of simplified presentation of essential fund data and access via Internet was widely praised. Although the Staff did take some criticisms to heart in the adopting release, eliminating the disclosure of the top-ten portfolio holdings, and making other more minor adjustments to the timing of availablility of Internet data and to dates for filing with the Commission. 

Though this new Summary Prospectus does not change the nature of directors' liability for the accuracy of the prospectus and registration statement, it does, to a certain extent, change liability with respect to the mechanics and timing of prospectus delivery. In doing so, the Commission addresses some of the percieved problems with the Summary Prospectus's predecessor, the Profile Prospectus, adopted in 1998. 

One flaw with the Profile Prospectus was the perceived possibility that funds would be found liable for information that is in the full statutory prospectus but not in the abbreviated Profile which is provided to investors. The Commission deals with this by stating that the Summary Prospectus would incorporate by reference the full statutory prospectus and by stating that the Summary Prospectus would be part of the fund’s registration statement for purposes of section 10(b) of the Securities Act, but not for purposes of the liability provisions of section 11.  In this manner, the Summary Prospectus differs from the Profile Prospectus, which strictly forbid incorporation by reference, and required actual delivery of the full prospectus at statutorily mandated times.

Implicit in the legal basis for the Summary Prospectus is that it is not a substitute for the statutory, or Section 5(b), prospectus, but rather represents an alternative means of satisfying the prospectus delivery requirements.  Thus, not only would the Summary Prospectus incorporate the full prospectus by reference, but a fund using a summary prospectus would also be required to post it on its website, and maintain hyperlinks between the summary document and the full prospectus and SAI.  (Funds would also be required to provide investors with a paper copy of the full prospectus on request).

According to the Investment Management Staff presenting at today's meeting, the effective date of the new rules is February 28, 2009, meaning funds may begin delivering the Summary Prospectus and providing access to their full prospectuses and SAIs via Internet after that date. 

An archive of today's open meeting is available at:

The full text of the final release should be avaiable in upcoming weeks.