04/13/19 AT LAST, THE READABLE PROSPECTUS

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AT LAST, THE READABLE PROSPECTUS

The applicability of the general information and administrative procedures set forth below accordingly will vary depending on the investor and the recordkeeping system established for a shareholder's investment in the Fund. Participants in 401(k) and other plans should first consult with the appropriate persons at their employer or refer to the plan materials before following any of the procedures below.
-- from State Street Research Equity Income Fund prospectus

With prose like that, it's no wonder investors throw mutual-fund prospectuses right in the trash. Such documents have been written more to protect against legal liability than to give useful information, says John Markese, president of the American Association of Individual Investors. But in its revised prospectus, that 11-line mess becomes one simple thought: ''If you are investing through a large retirement plan or other special program, follow the instructions in your program materials.''
State Street and other mutual-fund companies are making their prospectuses more readable, thanks to two recent Securities & Exchange Commission rulings. In late January, the SEC mandated that companies write all investment documents in plain English by Dec. 1, 1999. Then, in March, it said funds could sell their wares using a three- to six-page document called a profile rather than a lengthy prospectus.
The SEC also revised disclosure requirements. For example, the prospectus may omit the voting requirements for modification of shareholder rights. But it must now include more useful risk info such as a volatility analysis of the portfolio.
According to the SEC, the new prospectus language must follow six basic writing principles: use of active, not passive voice; short sentences; everyday words; lists of bullet points for complex material; no legal jargon or highly technical business terms; and no multiple negatives. ''We're not dumbing down the information, we're making it conversational,'' says Josiah Fisk, a writing consultant in New Salem, Mass., who worked on State Street's prospectuses.
To find out how accessible the new documents have become, BUSINESS WEEK asked Mark Hochhauser, a readability consultant in Golden Valley, Minn., to compare old and new prospectuses from the following funds: John Hancock Sovereign Balanced, Stagecoach National Tax Free, State Street Equity Income, USAA Income Stock, and Vanguard/Windsor II. Hochhauser took about 100 sentences per prospectus and then ran them through eight software programs that analyzed such information as reading grade level and number of words per sentence.
On average, he found the old prospectuses were written at a college-graduate reading level, while the revisions met college-sophomore standards. Words per sentence fell from 25 to 21 (15 to 20 is optimal). Active-voice sentences vs. those in the passive voice rose to 49% from 33% (60% is best), and complicated sentences fell to 33% from 50% (20% is the goal). Visually, the documents have improved as well. Each uses icons, color, and more readable type. A big change is the summary at the beginning that tells who should invest in the fund.
There are still problems, however. It's easy for your eyes to glaze over the financial highlights. But here, the mutual-fund companies' hands are tied, since the SEC requires such disclosure. Kathleen Clarke, assistant director of the SEC's Investment Management Div., says an initiative is under way to revise the financial statements. Meanwhile, prospectus reform is on the right track.
Toddi Gutner

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