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SEC Starts a Broad Program to Increase Investor Protection

By Albert B. Crenshaw
The Washington Post
WASHINGTON

The Securities and Exchange Commission is launching a wide-ranging effort to increase protections for individuals who invest in stocks, bonds and mutual funds, and to "take the mystery" out of key documents mutual funds give to their investors, Chairman Arthur Levitt said Thursday.

The initiative, which includes offering consumer information through electronic bulletin boards, an 800-number for investors, simpler language in some securities documents and a revamped consumer affairs office, is part of a reorientation of the SEC toward greater involvement of consumers in carrying out the agency's mandate of consumer protection, Levitt said.

Officials in a number of mutual fund companies applauded the effort. "Anything that's more user friendly is something that we would embrace," said Diane Coffey of the Dreyfus Corp., a large fund operator recently acquired by Mellon Bank.

The changes are motivated, in part, because of the enormous sums Americans have invested in securities markets, especially through mutual funds (more than $2 trillion) and the growing sense among regulators that many of these investors don't really know what they are doing.

About 28 percent of all U.S. households now own mutual funds, up from 6 percent in 1980, according to an estimate by Kemper Securities analyst David Hale. When direct stock market investment is included, the number of families with such investments is one out of every three, Levitt said Thursday.

"There's a new economic fact of life in America, one whose significance has not yet sunk it. For the first time in history, (mutual fund) assets have surpassed commercial bank deposits. We've gone from a nation of savers to a nation of investors," Levitt said in a speech at the National Press Club.

But thousands of them are making inappropriate investments, losing money they thought was federally insured, or being swindled by con artists, he said.

The SEC's "traditional venue" has been lawyers, accountants, brokers and other professionals so "most of the actions we take every day affect the industry directly and investors indirectly," Levitt said. "We've been protecting investors, but we really haven't been talking to them.

"The new realities of our marketplace call for a new approach," he said.

Levitt said the agency is making a major effort to make mutual fund prospectuses - the legal document describing each fund, its strategy, goals and risks-more comprehensible to investors. Typically, prospectuses consist of page after page of dense legal language.

Much of this arcane legal language results from industry compliance with SEC rules, Levitt conceded. "The law of unintended results has come into play. Our passion for full disclosure has created fact-bloated reports, and prospectuses that are more redundant than revealing."

So he has enlisted the aid of the industry to try to develop a plain-English, one-page summary to go with the traditional prospectus and serve as a guide. He persuaded renowned investor Warren Buffett to translate a jargon-laden paragraph from a typical prospectus into plain English, and Buffett was able to do so.

Levitt said fund operators that offer clearer prospectuses will get expedited review from the agency.