Fidelity Institutional Retirement Services Co. has gained clearance from the Securities and Exchange Commission to distribute shortened summary investment documents instead of prospectuses to participants enrolling in 401(k) plans.
Other firms are expected to take advantage of the SEC's go-ahead although, because the letter was narrowly worded, it is up to the judgment of each firm's legal counsel whether their specific facts conform to those in the Fidelity situation, said Robert E. Plaize, assistant director of the SEC's division of investment management.
"This is something we as an industry look on favorably, although it's an interpretation of a fairly narrow application of Rule 482" of the Securities Act of 1933, said Chris Wloszczyna, spokesman for the Investment Co. Institute, Washington.
Mr. Plaize agreed with Fidelity's assertion that sending summary prospectuses would not violate the rule covering advertisements because enrollment materials are directed to the plan sponsor, not to a seller of fund shares. Rule 482 says fund companies cannot include purchase applications in advertising materials.
Not only will the ruling save fund companies the costs of supplying sometimes a dozen 40-page prospectuses to each employee, depending on the number of options an employer offers, it also will make it easier for participants to make investment decisions, observers say.
"It's a case where less is more," said Robert Pozen, Fidelity's general counsel.
The letter was written on Fidelity's behalf by Richard M. Phillips, a partner with Kirkpatrick & Lockhart in Washington.
SEC officials felt there was a big difference between marketing to retail investors and enrolling in an employer's plan, he said.
"We will now have a very useful document that will allow excellent opportunities for people to compare funds. You can see a whole array quickly in a user-friendly and easily comparable form," Mr. Pozen said.
Fund companies will note in the summary materials that prospectuses are available on request, he added.
Before the no-action letter, it was all or nothing.
In order for a company to send sales literature, it had to send prospectuses.
William Arnone, national director-large employee group services of Ernst & Young L.L.P., said: "I would think (summary material will) be likely to be read by more people than a prospectus is. The question is how meaningful is the content and how is it structured."
A version of the summary prospectus also will be tested beginning this summer for retail investors.
So-called "profile prospectuses" will start appearing by August with existing prospectuses for some major mutual funds.
The SEC has been talking about the creation of a profile prospectus for several months, with the assistance of eight major fund groups, including Fidelity Investments and T. Rowe Price Associates Inc.
The profile prospectus will not replace the basic prospectus, but will essentially be a "wrapper" around the prospectus. The profile prospectus will provide a simple explanations of several key points: the fund's investment goals, the fund's fees, its long-term performance (expressed in bar charts) and what type of investor the fund should attract.
"Within two months, we expect to approve the fund prospectuses with the fund companies," said SEC Chairman Arthur Levitt.