The idea of requiring investment fund distributors to provide customers with more concise materials than those available today, for the purpose of informing them better may seem odd at first. However, in practice the measure appears to be coherent. The CVM (Brazilian securities and exchange commission) is betting on it, through a project that simplifies investment fund prospectuses and which is currently underway by the Superintendency of Institutional Investor Relations (SIN).

Currently, investment fund prospectuses fulfill the requirements of Instruction 409, and must contain all of the relevant information relative to investment policy and the risks involved. The length of this checklist is not at all negligible. It includes the fund’s management targets and goals, target group, investment policy and resource allocation ranges (with a description of the analysis process and asset selection), as well as a list of the fund’s service providers, a specification of fees and other expenses, and so on. In total, the rule provides 16 items. In addition to this, there is the self-regulation code by the National Association of Investment Banks (Anbid), which requires that its associates’ prospectuses provide a complete section to cover risk factors. This must include market, credit, liquidity, and other risks. A series of warnings are prescribed to appear right on the prospectus’s cover, such as the one warning the investor to the possibility of negative net equity due to derivative-related operations.

The result of so many requirements is a long, complex document – which, ironically, was initially created for stock-indexed funds to simplify the public’s access to information that, up until then, was available only in the regulations. Now, CVM proposes to solve this equation. On one side are data of great relevance to the fund investor. On the other is the fact that, most times, it does little good to provide that much information if the document doesn’t even get read. Today, upon entering an investment fund, investors need only to acknowledge receipt of the regulations and prospectus. Instruction 409 also acknowledges electronic media as valid and, if the investor so chooses, the manager may use them.

The truth is that, in their current format, prospectuses are more useful to managers’ and distributors’ attorneys willing to ensure their client’s legal safety than to people who wish to make an investment decision. To resolve the matter, the regulator is carving out a prospectus simplification project. In turn, Anbid also plans to produce a proposal to CVM. The idea of Carlos Alberto Rebello, SIN titleholder, is to require that retail-oriented funds – and not all products regulated by Instruction 409, thereby excluding investments targeted at qualified investors – mandatorily distribute a simpler version of the prospectus.

NEW INFORMATION – The “light” prospectus would be about two pages long and include information that is not provided in the prospectus or in the fund’s regulations. One of the items would be a listing of the principal assets that comprise the fund’s portfolio. Another idea is to produce a kind of one-to-ten risk scale. Starting with investments in federal government bonds and progressing to more leveraged products with chances of equity loss, the investor would be enabled to see at what level the chosen fund stands. The simplified prospectuses would also include the information commonly seen in the so-called “slides”, advertising materials used at points of sale. In this group there is the fund’s profitability history, as well as information about strategy, costs, goals, and target group.

From the regulatory point of view, making it mandatory to provide the simplified prospectus would require an amendment to Instruction 409. Today, the regulation prescribes two documents: the regulations – a set of rules that ensures the rights and duties of managers, administrators, and investors – usually extensive and abstrusely written, and the traditional prospectus – which, if the proposal for creation of the simplified version takes root, will only need to be provided at the investor’s request. In order to introduce the simplified version, CVM may choose to replace the current prospectus or to include a third document.

Among those that acknowledge the benefits of the abridged prospectus is Enrico Jucá Bentivegna, an associate at Pinheiro Neto Attorneys’ corporate department. “This would simplify the sale of funds and protect the manager even further.” Daniela Sampaio Doria, also an attorney at the firm, is another defender of the idea. “It’s commendable, because it helps the investor and works as a sort of teaser for the traditional prospectus.”

In practice, however, there is a chance that the opposite will occur. By receiving condensed but sufficient information for rapid decision-making, the investor can grow ever more distant from the complete prospectus. Rebello refutes such a view. According to him, natural person investors still have little expertise in the capital market and many forget that, by investing in an investment fund, they are handing over resources for management by third parties, and not just depositing the money in a financial institution.

Despite the doubt, there is a general perception that the prospectus needs to be simplified. “Our concern is to find the right balance of information quality versus quantity”, says Luisa Saboia, legal manager of resource manager, BNY Mellon, and member of the sub-commission that studies the subject at Anbid. At Mellon, prospectuses produced per the current requirements can be up to 20 pages long. According to Luisa, a way to shorten them and make them more appealing to the investor is to use colloquial language, instead of the traditional “legalese”. “The ideal thing would be not to repeat so much information that is already provided in the regulations and to emphasize complementary data”, affirms Anna Carolina Malta, an attorney at the Barbosa, Müssnich & Aragão law office.

There are doubts regarding whether to turn the simplified prospectus into a third document required by Instruction 409 or to use it to replace the current version. The latter option carries the concern that, upon receiving a smaller amount of information, investors who desire further elucidation will have to resort to the regulations’ endless pages. “If we achieve abridgment down to two pages, the cost won’t be that relevant”, argues Rebello, stressing that new ideas will naturally arouse suspicion. Reconciling the pros and cons is his current challenge, although he does have time. The superintendent expects the new rule to be completed by September 2009, whereupon he intends to leave CVM.