Investment Product Disclosure

Background

In 2017 net assets of U.S. mutual funds totaled $22.1 trillion. Roughly 45.4 percent of all U.S. households (57.3 million) invested in mutual funds. According to the Investment Company Institute, 48 percent of households with a person age 53 to 71 owned mutual funds in 2017, as did 31 percent of households headed by someone age 72 or older. With more than 114,000 mutual funds available worldwide, it is essential to have clear and full disclosures of information such as fees, tax implications, risks, and administrative costs. Clear and understandable disclosures help investors make appropriate choices.

Yet the information provided on investor statements is confusing and difficult to understand. This is because federal securities laws set technical standards for disclosures. The Securities and Exchange Commission and the Government Accountability Office have found that the information provided on investor statements does not make investors aware of how much they pay in fees. Moreover, an array of charges makes comparison difficult. And current rules do not require complete and timely disclosures of certain types of fees.

INVESTMENT PRODUCT DISCLOSURE: Policy

Promoting transparency and accountability

In this policy: FederalState

Policymakers should promote transparency in the investment industry. Investment options should be explained and disclosed clearly and understandably. Individual investors should be able to understand the fees, costs, and risk associated with the product. Mutual fund prospectuses and other literature, as well as advertisements and other marketing materials, should promote this transparency and comparability across products.

Investment sales professionals, such as brokers, should disclose any commission or other incentives to sell a particular product before the time of sale. (See also Regulation and licensing of professionals giving investment advice policy in this chapter.)

Prospectuses should disclose in plain, easy-to-understand language key information in a standardized fashion. This includes the fund’s yield, before-tax and after-tax performance returns, and administrative costs and risks of investing.

Regulators, industry, and other interest parties should develop simplified, understandable prospectuses and standardized disclosures that consumers are likely to read. They should make more detailed documents available on request.

To the greatest extent possible, disclosures to investors should be made prior to or at the point of sale so that they offer real help in making investment decisions.

Advertisements should not mislead investors about a fund’s safety. Advertisements should disclose the total rate of return and prior fund performance during varying market conditions. An easily understood standard should be established to describe the risks involved in mutual fund investing.

Investment instruments that can be speculative, such as derivatives, should be explained and disclosed clearly so that investors understand the nature of the product.

Bank sales of investments such as mutual funds and annuities must be properly regulated to prevent consumer confusion about the uninsured status of these products and their attendant fees, costs, and risks.

The Securities and Exchange Commission and the states should require broker-dealers to disclose detailed information to investors regarding the total dollar amount and percentage of fees and commissions that investors will pay for investing in a particular product in a clear, standardized format so investors can compare the fees, commissions, and rates of return among various investment products.

Account statements provided to investors should also clearly state the current value of the investments, any change in value during the statement period, the commissions paid at the time of each sale, and the cost of fees on an ongoing basis.

State regulators should have greater authority to review new securities issues. At a minimum, the authority of state officials to review new securities issues should not be further weakened.