Statement of Paul Schott Stevens
Investment Company Institute
Before an SEC Interactive Data Roundtable
June 12, 2006
Table of Contents
Thank you, Chairman Cox, members of the Commission, Mr. Donohue, and Ms. Nash, for this opportunity to present the views of the Investment Company Institute.
The Commission deserves great credit for recognizing that the time is right to seize upon the potential of the World Wide Web as a means to better inform investors. In 2005, an ICI survey found that 90 percent of U.S. fund investors have access to the Internet. Most of them use it regularly, very often for financial purposes. Just as important, the Internet can serve as far more than a stand-in for paper documents. As you have observed, Chairman Cox, the Internet can put investors in the driver’s seat when it comes to information about their investments.
I am pleased to report that the ICI has launched a groundbreaking project to help realize that vision. We are working to extend the XBRL taxonomy to cover the risk/return summary included at the front of fund prospectuses. ICI has engaged PricewaterhouseCoopers to help develop this new taxonomy. We’ve also formed a broad working group, enlisting our members along with other stakeholders who will be involved in XBRL reporting for mutual funds. We expect to complete this project by the first quarter of 2007. Then, ICI will launch an educational program to encourage mutual funds to use this tagging in their EDGAR filings.
What is the significance of this effort? The current XBRL tagging system for mutual funds principally focuses on financial statements. For operating companies, the financials contain most of the information shareholders want. But for mutual fund investors, financial statements are of secondary importance. By contrast, for almost a decade under the SEC’s disclosure rules, the risk/return summary has highlighted the crucial information that investors use in deciding which funds to buy.
ICI research confirms that recent fund buyers look primarily for information included in the risk/return summary – such as a fund’s fees and expenses, its historical performance, and its risk characteristics. XBRL tagging can help turn the risk/return summary into an even more powerful tool than the Commission envisioned when it adopted it in 1998 as a way to help investors compare one fund with another.
To our knowledge, ICI is the only U.S. financial-services industry organization actively working to extend XBRL beyond financial data. Widespread use of this new taxonomy will introduce millions of investors and their advisers to the benefits of XBRL. We’re proud to be leading this new effort.
Beyond XBRL, we urge the Commission to consider other reforms that will bring fund disclosure into the 21st Century.
In the new system we envision, funds and their intermediaries would deliver a clear, concise disclosure document to investors, much like the profile prospectus. This document would include a prominent statement that additional detailed disclosures – the prospectus and statement of additional information – are available at the fund’s website or, upon request, in paper form.
Under such a win-win system, all investors would receive the most important information about a fund. It would come to them in a form far more likely to be used. But all investors and other market participants would still have available to them the full panoply of information contemplated by the Commission’s rules.
In addition, it seems clear that substantial numbers of investors are prepared to rely exclusively on electronic communications with their fund company. To serve this group of investors, the Commission should clarify that it will allow Internet-only mutual funds or fund share classes.
The Commission also should look to harness the power of the Internet as a tool for providing important point-of-sale disclosures to brokerage customers. We agree with NASD Chairman Robert Glauber that this should extend not just to mutual funds but also to ETFs, separately managed accounts, and annuities.
In summary: If we take advantage of the best that the Internet offers, we can craft a fund disclosure system that will serve the broad interests of the financial marketplace and also the interests of average fund shareholders. Disclosure that millions more shareholders actually use! That, Chairman Cox, would be a true revolution – one that is within our reach.
The Investment Company Institute 1 commends Chairman Cox and the Securities and Exchange Commission for scheduling this very timely series of roundtable discussions on use of the Internet to provide investors and analysts with better information about mutual funds and operating companies.
The Commission’s specific attention to mutual funds and their investors is welcome and appropriate. Mutual funds are the investment of choice for millions of Americans saving for retirement, for their children’s education and for other important financial goals. Today, nearly 54 million U.S. households and more than 91 million individual investors own funds. 2
The Institute has encouraged the Commission to conduct a careful review of the mutual fund disclosure system. 3 We hope that these roundtable discussions will provide valuable insights for the review process, and we certainly appreciate the opportunity to provide our views.
We agree with Chairman Cox that the Internet and other technological advances provide unique opportunities for funds to better serve investors’ information needs. This statement will discuss the growth of the Internet and its potential as a tool for better informing investors; the Institute’s plans to promote the Commission’s interactive data initiative and to develop and encourage the use of data-tagging standards that will best serve mutual fund investors; and the Institute’s specific recommendations for Commission actions to improve the fund disclosure system in light of developments in technology and the evolving needs of investors.
The Internet has enormous potential as a tool for communicating effectively with fund shareholders. In a remarkably short period of time, the Internet has transformed and accelerated our ability to gather and distribute information. While early Internet users were mostly young, high-income, highly educated people, 4 today a majority of every age, income and education group has Internet access. 5
Rapid growth in Internet access and usage is particularly evident among mutual fund investors. An Institute study conducted last year found that nearly 90 percent of mutual fund investors have access to the Internet. 6 About two-thirds of those with Internet access go online at least once a day. Three quarters of fund investors who go online use the Internet to access their bank or investment accounts. Nearly 60 percent of fund investors who go online use the Internet to obtain investment information.
As in the case of the general population, mutual fund investors’ Internet access has sharply increased across all demographic groups. Consider the change in just five years, from 2000 to 2005. Among fund investors age 65 or older, Internet access more than doubled, from 30 percent to over 60 percent. Internet access among fund investors with a high school education or less almost doubled, to 72 percent. And among fund investors with household incomes less than $50,000, Internet access increased by almost two-thirds, to more than 75 percent.
As it has considered relying more heavily on the Internet to provide required disclosure, the Commission has sought to pace its proposals to the level of Internet access of the investing public. The Commission, like others, has recognized that Internet use has expanded greatly. 7 The Institute’s findings on Internet access and usage show that mutual fund investors in particular are comfortable using and relying on Internet technology. These findings indicate that fund investors are equipped and ready now for a new disclosure regime that takes greater advantage of the Internet.
III. The Institute believes that the use of interactive data in mutual fund disclosure will benefit mutual fund investors, and strongly supports the Commission’s initiative
The Institute supports Chairman Cox’s efforts to promote interactive data. As the Chairman has noted, effective use of available technology will “change the game for millions of ordinary investors.” 8 The SEC’s eXtensive Business Reporting Language (XBRL) initiative is designed to help “put investors in the driver’s seat” by facilitating automated search, retrieval and analysis of tagged data. By enabling investors and others to manipulate data, to perform analysis and comparisons, and to “drill down” deeper into layers of information, interactive data can truly increase the value of information made available to the public. 9 XBRL data tagging also will enable the Commission to review filings more efficiently.
To date, the SEC’s voluntary XBRL filing program has focused on financial data. The Institute is encouraging its members to participate in this voluntary initiative. Unlike with operating companies, however, mutual fund financial statements do not provide the information that investors most commonly rely upon in making investment decisions. 10 Therefore, a broader taxonomy that goes beyond financial data will increase XBRL’s value to fund investors.
The Institute has embarked on a major project to begin the development of that broader taxonomy. To our knowledge, the Institute is the first U.S. financial services industry organization that is working to extend the use of XBRL beyond financial data. We plan to extend the existing XBRL taxonomy to cover the risk/return summary currently contained in all mutual fund prospectuses. This summary includes:
- the fund’s investment objectives/goals;
- the fund’s principal investment strategies;
- the principal risks of investing in the fund (including a narrative description of these risks and graphic presentations of historical fund performance); and
- the standardized fund fee table. 11
It is appropriate to focus on the risk/return summary because it contains information that is critical to investors and that lends itself well to fund analyses and comparisons. In fact, this was the original purpose of the risk/return summary. In proposing the risk/return summary in 1997, the Commission stated that the summary “would provide all investors with key information about a fund in a standardized, easily accessible place that could be used to evaluate and compare fund investments.” 12 Making this information interactive will help fulfill the risk/return summary’s intended purpose.
We have engaged PricewaterhouseCoopers to assist us in extending the existing investment company taxonomy to cover the risk/return summary. PwC is a member of XBRL International and has played a key role in developing the XBRL taxonomy covering investment company financial statements.
To assist the Institute and PwC in this effort, we have formed a working group of interested parties, including legal, accounting, compliance and technology professionals from ICI member firms, SEC filing agents, independent fund administrators and software companies. As all of these organizations will play key roles in implementing XBRL, their participation is critical to the success of this initiative.
The extended taxonomy project is set to begin on June 12, 2006. We expect to complete our work on the risk/return summary by year end, and to make a final version of the extended taxonomy available during the first quarter of 2007. At that time, assuming that the SEC amends its voluntary XBRL reporting program to allow it, the Institute intends to encourage the use of XBRL tagging for the risk/return summary in EDGAR filings, and to offer various forms of educational assistance to members and industry service providers to support the launch of the taxonomy.
Applying XBRL tags to the risk/return summaries to all of the funds in a complex will be no small feat. Unlike typical operating companies, whose XBRL-related efforts are limited to applying XBRL tags to one set of financial statements, a mutual fund complex can have dozens or even hundreds of funds, each with its own disclosure that must be tagged. 13 Even after the risk/return summary taxonomy is implemented, the number of funds in each complex increases the challenges involved in making sure that fund companies and their service providers can tag data accurately and efficiently in an ongoing manner.
Making interactive mutual fund data a reality will provide significant benefits to investors, their financial advisers and other market participants. But it is only one component of a broader disclosure reform initiative that we urge the Commission to undertake. Just as technology makes interactive data possible, it also provides an historic opportunity for the Commission to make improvements that will bring the fund disclosure system into the 21st century.
Under the current paper-based system of fund disclosure, a single document – the fund prospectus – must serve multiple purposes. The prospectus is used, for example, to inform millions of investors, thousands of intermediaries, numerous other market participants such as fund analysts and financial advisers, the media, and the Commission itself. Not all of these constituencies (or their individual constituents) have the same interests, needs and uses for the information. The prospectus must be crafted to meet legal requirements and thereby protect the fund and its adviser against legal liability under the securities laws. The SEC’s disclosure regime makes extensive information available to the public, and that transparency is a hallmark of mutual funds. But the attempt to satisfy so wide a range of purposes with one document has resulted in lengthy, complex and detailed prospectuses that are not well suited to the objective of informing investors.
The experience with fund shareholder reports is similar. In both cases, competing objectives and the constraints of a paper-based system have led to documents so long and uninviting that many people do not read them. Recent Institute research concerning investor preferences for mutual fund information confirms that fund prospectuses and shareholder reports are not meeting the needs of many investors. 14 Most shareholders find prospectuses difficult to understand and too long, and about half of those surveyed feel the same way about shareholder reports.
Our research shows that shareholders prefer a concise summary of key mutual fund information. 15 This finding comes as no surprise. Indeed, to the Commission’s credit, it recognized this years ago; the fund profile and the risk/return summary in fund prospectuses developed in the late 1990s were designed to respond to the need for a concise summary of key fund information and to facilitate comparisons among funds. 16 Today, the Internet provides a mechanism for building on those concepts and addressing the issues that have prevented previous disclosure reform initiatives from realizing their full potential.
Advances in technology, the widespread use of the Internet by mutual fund investors, and compelling data about investors’ information preferences make this a most opportune time for the Commission, in consultation with all stakeholders, to develop a new fund disclosure approach that takes greater advantage of the Internet. Outlined below are some of the key elements of an approach that we recommend.
- provide a clear, concise disclosure document (similar to a fund profile) to all investors, in paper form or, at the investor’s election, electronically; 17
- prominently advise investors that additional, more detailed information (i.e., the prospectus and statement of additional information) is available; and
- make the prospectus and statement of additional information available online and paper copies available promptly upon request at no additional charge.
Although our proposed approach would require that the concise disclosure document be provided in paper unless requested electronically, it nonetheless represents a significant step forward in use of the Internet. First, individuals who want to learn more about a fund may be more likely to use the Internet to do so. Additionally, once XBRL-tagged risk/return summaries are available, the concise disclosure document could inform investors that certain information is available in an interactive format on the Internet. This may result in a greater migration toward the use of technology, as investors begin to understand the enhanced analytical capabilities provided by interactive data.
The Commission should also consider following a similar approach with respect to fund shareholder reports. Streamlined shareholder reports could focus on the information shareholders find most useful (e.g., fund management’s discussion of fund performance). Information that may be of interest only to some shareholders and other market participants, such as the financial statements, could be made available electronically.
2. Benefits of the proposed approach
Our proposed approach would introduce greater flexibility into the fund disclosure system. First and foremost, it would ensure that all investors receive a high quality, plain English document highlighting key information about funds. As supported by our recent research findings, investors would benefit because – in comparison to the prospectus they currently receive – they would be far more inclined to use such a document. The same would be true of streamlined shareholder reports.
Meanwhile, making additional, more detailed information available online would enable investors, their financial advisers and other market participants to access and analyze the levels and types of data most important to them. As a result, our proposed approach would serve the varying needs of all consumers of mutual fund information without any net loss in the amount of information available to investors and the marketplace at large. As Institute President Paul Stevens observed in remarks at the National Press Club earlier this year, “the Internet offers the ultimate a la carte menu: Those who want more extensive information can get it. Those who don’t can access or be provided the essential information they need, in a form they are likely to use.” 18 In addition, over time, we would expect this approach to dovetail with Commission and industry efforts to enable investors and others to retrieve and manipulate key fund information and make comparisons among funds (using XBRL).
3. Addressing concerns that have hindered past disclosure simplification efforts
Despite the considerable effort involved in developing past disclosure simplification initiatives, their success has been limited. The fund profile, for example, foundered in part because liability concerns prohibited it from being used as a short-form, stand-alone document. For funds to adopt our proposed approach, the Commission must conclude that providing a concise disclosure document, and making the prospectus available on the Internet – and in paper upon request - satisfies funds’ legal obligations under the federal securities laws.
In addition, as the Commission recognized in its last major disclosure simplification effort, achieving the goals of simplified disclosure “necessitates discipline on the part of the Commission and its staff, as well as on the part of funds and their advisors.” 19 If additional disclosure requirements are warranted in the future, the Commission should carefully consider whether the information required is of key importance to investors and, if not, should require only that it be made available primarily online (with paper copies available upon request).
To facilitate greater use of the Internet for disclosure purposes right away, the Commission should clarify that it is legally permissible to offer all-electronic funds or share classes. Some investors may prefer to do business with fund companies wi thout ever receiving any paper.20 Funds or share classes for which all required disclosures and statements are provided solely through electronic means could benefit from reduced expenses.
The Commission approved an all-electronic insurance product in 2001, but stated in its order that “our decision to declare this registration statement effective reflects the particular facts and circumstances applicable here,” and that, in light of the enactment of the Electronic Signatures in Global and National Commerce Act, “we are currently reviewing whether our previous pronouncements on electronic delivery should be modified.” 21 No additional interpretive guidance has been offered since that time, so it remains unclear whether similar offerings may go forward today without specific Commission approval. Given advances in Internet technology, security, access and usage, the Commission should clarify its position and remove any regulatory obstacles to electronic-only fund offerings.
D. Adopt workable and effective point of sale disclosure requirements for funds and other investments
The Commission has proposed to require brokers to provide investors, at the point of sale, with information about costs and potential conflicts of interest related to the sale of fund shares. 22 The Institute continues to support such a requirement in concept, but we believe two changes to the Commission’s proposal are essential before it goes forward.
First, the Commission should designate the Internet as the primary medium for providing point of sale disclosure. 23 The Commission’s proposal, for all practical purposes, would require brokers to deliver paper copies of point of sale disclosure before executing transactions, which would disrupt the current broker sales model. The Internet makes it possible to provide timely information, in a way that is consistent with how brokers conduct business with their customers (i.e., typically by phone or over the Internet, rather than in face-to-face meetings). 24
The approach we recommend is consistent with Chairman Cox’s efforts to promote greater use of technology to help investors. It will make it easy for investors who are interested in more detailed information to obtain it (e.g., through hyperlinks to fund prospectuses). It also will facilitate comparisons among funds and among brokers.
Second, and of equal importance, the policy goals underlying point of sale disclosure for mutual funds are no less valid in the context of other investments that brokers sell. The SEC therefore should revise its proposal to extend point of sale disclosure requirements to other investment products. The Institute agrees with NASD Chairman Robert Glauber’s recent recommendations in this regard. 25 Without this change, the requirements will unfairly discourage brokers from selling mutual funds.
The Institute also appreciates Mr. Glauber’s offer to work with the fund industry to facilitate the implementation of point of sale disclosure onc e new requirements are adopted.26
As Chairman Cox has recognized, the Commission has before it an historic opportunity to harness technology to serve investors. Institute research illustrates that the time has come to take full advantage of the many benefits technology has to offer to better inform mutual fund investors, their financial advisers and the marketplace at large. Our XBRL project and the new approach to mutual fund disclosure that we recommend are intended to help the Commission achieve this goal. We look forward to working with the Commission on these initiatives.
1 ICI members include 8,698 open-end investment companies (mutual funds), 656 closed-end investment companies, 166 exchange-traded funds, and five sponsors of unit investment trusts. Mutual fund members of ICI have total assets of approximately $9.378 trillion (representing 98 percent of all assets of U.S. mutual funds); these funds serve approximately 89.5 million shareholders in more than 52.6 million households.
3 See, e.g., Letter from Paul Schott Stevens, President, Investment Company Institute, to Mr. Christopher Cox, Chairman, U.S. Securities and Exchange Commission, dated Aug. 4, 2005.
4 Pew Internet & American Life Project, Internet: The Mainstreaming of Online Life, Trends 2005, at 59.
5 Mediamark Research Inc.
6 Investment Company Institute, Mutual Fund Shareholders’ Use of the Internet, 2005, Research Fundamentals, Vol. 15, No. 2, February 2006, available at http://www.ici.org/pdf/fm-v15n2.pdf. A copy of this report is attached as Appendix A.
7 In its recent proposal concerning Internet availability of proxy materials, for example, the Commission cited data indicating that “up to 75% of Americans have access to the Internet in their homes, and that this percentage is steadily increasing among all age groups.” SEC Release Nos. 34-52929; IC-27182 (Dec. 8, 2005), 70 Fed. Reg. 74598, 74599 (Dec. 15, 2005).
8 Speech by SEC Chairman: Opening Remarks to the Practicing Law Institute’s SEC Speaks Series (March 3, 2006).
9 Most investors who own mutual funds outside of defined contribution plans invest through financial intermediaries. Many of these investors conduct some research on their own. In addition to providing new capabilities to those investors who wish to research and compare different funds, XBRL data tagging may benefit fund investors indirectly by assisting their financial intermediaries in analyzing fund information.
10 Investment decisions regarding operating companies are generally driven by comparisons between investors’ assessments of the value of a company (based in part on its financial statements) and the market’s assessment of the company’s value, as indicated by its market capitalization. By contrast, an investment company’s market capitalization is directly tied to the assets it holds; there is no subjectivity in its share price. A mutual fund investment decision, therefore, is less likely to be based on the valuation of the investment company than on factors such as fees, risks, market conditions, and past performance.
11 See SEC Form N-1A, Items 2-3.
12 SEC Release Nos. 33-7398, IC-22528 (Feb. 27, 1997), 62 Fed. Reg. 10897, 10902 (Mar. 10, 1997) (Registration Form Used by Open-End Investment Management Investment Companies; Proposed Rule). The Commission adopted the risk/return summary in 1998 as part of a major overhaul of mutual fund registration statements. In a related reform, the Commission created a new fund disclosure option, the fund profile, designed to give investors key information about a fund. The fund profile is required to include the same information as the risk/return summary, as well as information about the fund’s portfolio manager(s), how to purchase and sell fund shares, the fund’s distributions and tax treatment, and a summary of services available to fund investors. These latter categories of information are less amenable to comparative analysis than the contents of the risk/return summary, which is why we have focused our XBRL taxonomy project on the risk/return summary. See SEC Release Nos. 33-7512; 34-39748; IC-23064 (Mar. 13, 1998), 63 Fed. Reg. 13916 (Mar. 23, 1998) (Registration Form Used by Open-End Management Investment Companies; Final Rule); SEC Release Nos. 33-7513, IC-23065 (Mar. 13, 1998), 63 Fed. Reg. 13968 (Mar. 23, 1998) (New Disclosure Option for Open-End Management Investment Companies).
13 According to ICI data, the top 350 fund complexes, representing 98 percent of all assets held in open-end mutual funds, have a total of 8,017 individual funds. In other words, mutual fund complexes have an average of 23 funds each, although the actual number of funds per complex ranges from 1 to 278.
14 Investment Company Institute, Understanding Investor Preferences for Mutual Fund Information, Summary of Research Findings (“Understanding Investor Preferences”), 2006, available at http://www.ici.org/pdf/rpt_06_inv_prefs_summary.pdf. A copy of this report is attached as Appendix B.
15 Id. at 4-5.
16 See supra note 12. As discussed in the SEC’s releases, these efforts were supported by substantial empirical evidence developed through research conducted by the Commission and the industry. See, e.g., 63 Fed. Reg. at 13918, 13969. See also Investment Company Institute, The Profile Prospectus: An Assessment by Mutual Fund Shareholders (May 1996), available at http://www.ici.org/pdf/rpt_profprspctus.pdf.
17 Notwithstanding the widespread acceptance and use of the Internet by mutual fund shareholders, the Institute recognizes that some investors do not have Internet access and others prefer to obtain fund information in paper form. At some future time, the Commission may want to consider further developments in technology and trends in the use of the Internet, and reevaluate whether paper delivery of the concise disclosure document should continue to be the default requirement.
18 Address by Paul Stevens, President, Investment Company Institute, “Revolution in Real Time: Using the Internet to Inform Investors Better,” February 14, 2006, National Press Club, Washington, D.C., available at http://www.ici.org/statements/remarks/06_npc_stevens_spch.html.
19 63 Fed. Reg. at 13941.
20 Investors would need to be fully informed of, and agree to, the electronic-only arrangement at the outset, including the fact that if they later chose to receive paper, their shares would either be redeemed or exchanged for shares in a different class.
21 SEC Release No. 8027 (Oct. 25, 2001).
22 SEC Release Nos. 33-8358; 34-49148; IC-26341 (Jan. 29, 2004), 69 Fed. Reg. 6438 (Feb. 10, 2004); see also SEC Release Nos. 33-8544; 34-51274; IC-26778 (Feb. 28, 2005), 70 Fed. Reg. 10521 (Mar. 4, 2005).
23 Paper copies of the required information should be made available upon request.
25 Mr. Glauber recommended extending the requirements to exchange-traded funds, separately managed accounts and annuities. Remarks of Robert Glauber, ICI Annual Meeting (May 18, 2006), available at http://www.nasd.com/PressRoom/SpeechesTestimony/RobertR.Glauber/NASDW_016642, at 4-5.
26 Id. at 4.