Has the Security and Exchange Commission’s Rule 421 made mutual fund prospectuses more accessible?
| Pages | 51-63 |
| Date | 01 March 2004 |
| DOI | https://doi.org/10.1108/13581980410810687 |
| Published date | 01 March 2004 |
| Author | Don T. Johnson |
| Subject Matter | Accounting & finance |
Has the Security and Exchange Commission’s
Rule 421 made mutual fund prospectuses
more accessible?
Don T. Johnson
Received (in revised form): 17th November, 2003
Department of Marketing and Finance, Stipes 430, Western Illinois University, Macomb, IL 61455,
USA; tel: +1 309-298-1198; fax: +1 309-298-2198; e-mail: DT-Johnson@wiu.edu
Dr Don T. Johnson is a professor of
finance at Western Illinois University, a
large public university in the upper mid-
western USA. He has a Doctorate of Philo-
sophy in real estate from the University of
Georgia in Athens, Georgia, USA. He has
published papers in a variety of journals
including Financial Services Review,Jour-
nal of Investing,Managerial Finance,Jour-
nal of Contemporary Business Issues,
Journal of Public Budgeting and Finance
and the Journal of the Academy of
Finance.
ABSTRACT
KEYWORDS: mutual fund prospectus,
readability, Security and Exchange Com-
mission, plain English, Rule 421
A mutual fund must provide prospectuses to
each potential investor before the fund may
accept monies from that individual. The pro-
spectuses are a major source of information
about the fund and yet they have historically
been largely unreadable by the public. While
the poor readability has been a problem in the
past, it is becoming a greater problem as the
number of individuals responsible for their own
investment decision making increases. Recognis-
ing this problem, the Securities and Exchange
Commission (SEC) adopted Rule 421 in
1998, requiring that prospectuses be made more
readable as measured by a subjective reading of
the document. This study applies four objective
tests to mutual fund prospectuses from both pre-
and post-Rule 421 periods and finds substantial
evidence that mutual fund companies have com-
plied with Rule 421 and are producing prospec-
tuses that are much more readable and accessible
by the general public.
INTRODUCTION
In a regulated capitalist economic system
the market works more efficiently when all
the participants are well informed.
Towards that end, in the USA regulators
have required publicly traded companies to
make available to the public, through
direct communications with their share-
holders and via filings with the Securities
and Exchange Commission (SEC), large
amounts of information. Individual inves-
tors can then use that information to make
informed choices. As a matter of public
policy, regulators are concerned about the
quantity, quality, accuracy, reliability and
accessibility of the information provided
by companies. There has been widespread
news coverage of some companies circum-
venting or violating disclosure regulations.
(Witness the trials of former executives of
companies such as Enron, Tyco and
HealthSouth, just to name a few. Execu-
tives at mutual fund companies where
Page 51
Journal of Financial Regulation and Compliance Volume 12 Number 1
Journal of Financial Regulation
and Compliance, Vol. 12, No. 1,
2004, pp. 51–63
#Henry Stewart Publications,
1358–1988
To continue reading
Request your trial