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Read Before You Weep - Simpler Prospectuses

Federal regulators want mutual funds to talk to investors in plain English instead of prospectese

Mutual funds churn out reams of federally mandated documents to tell people how their money will be managed.

Problem is, nobody seems to read them.

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In one focus group of investors studied by the Securities and Exchange Commission (SEC), only one participant even mentioned using a fund prospectus, the document that's supposed to inform consumers about risks, costs, and investment strategy, so they can make an informed choice.

Even investors who do read prospectuses complain of obfuscation.

"They always cite cumulative numbers, not annual averages," for performance, gripes Steven Gildea, a Boston investor who has purchased several funds.

Others criticize the documents for not being specific enough about investment strategies and their risks.

Enter SEC chairman Arthur Levitt, with a controversial proposal to cut through the jargon.

Mr. Levitt says he ran up against puzzling prospectuses when he rolled his personal money into mutual funds 1993.

So he has gone on the warpath to "wage a revolution against oppressive English.... More disclosure is not always better disclosure," he says.

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Recently he proposed new regulations that would:

* Require that funds stay at least 80 percent true to their names. For example, a "Japanese bond" fund must have 80 percent or more of its money in Japanese bonds.

* Allow fund "profiles" to substitute for full-fledged prospectuses. The profiles would summarize investment strategies, risks, performance, fees, tax implications, purchase and redemption procedures, and details about the fund manager and investment adviser. They would also chart a fund's performance against that of a major market index, such as the Standard & Poor's 500 or the Nasdaq.

Fund companies would still be required to send prospectuses to investors, but not until after they had purchased shares.

The profiles would not be required, but in practice might become a chief marketing tool of fund companies.

* Revise prospectuses to highlight what makes one fund different from another. The new prospectuses would begin with a summary of risks versus returns, then move into a description of a fund's overall risks (as opposed to the risks of its individual holdings that many prospectuses now contain), a bar chart of 10-year returns, a performance comparison with a broad-based market index, and a fee table that groups all information regarding fees and expenses together.

Information that is the same for many funds - technical, legal, and operational matters - would move to the statement of additional information, which is available on request.

In addition, investors in retirement plans would not have to weed through irrelevant rules for nonretirement accounts.

The SEC would reject prospectuses that are not clear and user friendly.

While Levitt's goals win widespread praise, not everyone likes the specifics.

Some experts see the profiles as a poor - albeit readable - substitute for more detailed information.

The proposals, made by Levitt Feb. 25, are now in a six-month comment period, after which the SEC will make a decision.

Levitt says he hopes to foster a competitive atmosphere in the industry to write prospectuses for investors rather than regulators.

To Levitt, the timing of these "plain English" reforms is crucial. More investors hold more money in stocks than ever before - some $3.5 trillion. Many of these investors have never experienced a prolonged market downturn, and Levitt worries that those who don't understand risk may react "precipitously and carelessly" in a bear market "at great cost to themselves and our markets."

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