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SUMMARY PROSPECTUS
SUMMARY PROSPECTUS
Registered investment companies (often called mutual funds) file disclosure materials in accorda ce with Rule 497 of the Securities Exchange Act of 1933. Since 2010, all disclosures are available through the SEC’s EDGAR filing system. Funds may satisfy their information delivery obligations by providing investors with the Summary Prospectus.
WHY THE 497K?
WHY THE 497K?
This mandatory disclosure is intended for the investing consumer, and as such, must be written in plain English and subject to strict content rules. The summary prospectus mandates disclosures of investment objectives, costs, fees, investment strategies, principle risks, management, purchase and redemption information, taxes, and financial intermediary compensation. This text-based disclosure provides a concise and comprehensive view of a fund. We mine the text to study mutual funds practices, compliance, and performance.
WORKING PAPER:
Smelcer, S. N., A. Tucker and Y. Xia. Copy, Paste, Disclosure: The Informative Value of Boilerplate in Mutual Fund Disclosures. working paper. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4753030
Abstract:
The Securities and Exchange Commission (SEC) has attempted to curb mutual funds’ use of repetitive language in investor-facing disclosures—sometimes described as boilerplate—by issuing a variety of cautionary regulations and enforcement actions against offenders. Yet funds persist in using such language. Excessive boilerplate undermines the SEC’s aim of comprehensive disclosures and frequently attracts comments from SEC staff during the filing process. Yet boilerplate in contracts and other types of disclosures provides stability and reduces transaction costs. If boilerplate is expressly prohibited by the SEC, why do funds continue to use it? And what roles might it play in mutual fund disclosures?
We argue that boilerplate language is meaningfully related to both fund characteristics and changes in investment strategy. Funds minimize both internal and regulatory costs by employing boilerplate language. As a result, high rates of change should signal changing conditions and strategies.
We find support for this theory through a large-scale quantitative analysis of year-to-year changes in disclosure text for all mutual fund disclosures filed from 2011 through 2022. Our empirical results support our proposition that disclosure language can provide meaningful indicators of fund behavior and suggest a nuanced story about the tensions between stability and change.
First, we observe significant fund family effects in the data. All funds are more likely to repeat language related to their investment strategy. But funds in the same family are significantly more likely to use the same recycled language as compared to funds not in the same family. Second, we find that funds with innovative or evolving strategies are less likely to repeat language about their investment strategies from year to year than funds with more stable strategies. This includes funds marketed as “ESG” funds. Perhaps most importantly, we find that major changes to disclosure language relative to other filings signal statistically significant changes in the mix of a fund’s portfolio.
Collectively, our findings contribute to the existing literature on consumer protection, drafting, and the regulation of mutual fund markets. We argue that the SEC should closely monitor funds that excessively employ repetitive language, especially when changes occur only in the strategy section while the risk section remains unaltered, as this raises compliance concerns. Our approach offers the SEC a quantitative enforcement tool to identify and address excessive boilerplate. No longer does the detection of repetitive language rely solely on the examiner’s judgment, as the tools discussed in this Article offer a more efficient enforcement mechanism.
RESEARCH PUBLICATION:
Tucker, A., Reiser, D.B., and Y. Xia. Is 2024 past peak ESG?. Harvard Law School Forum on Corporate Governance, September 16, 2024. https://corpgov.law.harvard.edu/2024/09/16/is-2024-past-peak-esg/
Until recently, new ESG funds–both active and passive–seemingly flooded the U.S. (and global) markets to match investor demand. After years of ESG (and its alter-ego anti-ESG) being a part of the cultural zeitgeist, the trend has reversed. In the first half of 2024, the U.S. ESG market experienced net outflows of over $13 billion, on the heels of a $9 billion outflow in 2023.
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Smelcer, S. N., A. Tucker and Y. Xia. Aggregated Risks: Mutual Fund Disclosures & Market Risks. Journal of Corporation Law, 49 (1), 49-102, 2023.
Abstract:
Disclosures, when used as a regulatory tool, purport to inform consumers. But scholars widely agree that disclosures miss the mark when it comes to shaping consumer behavior. Unlike other mandated consumer disclosures, however, the Securities and Exchange Commission (“SEC”) requires funds to report their perceptions of changing market conditions that impact a fund’s investments. As a result, aggregated risk statements provide market information about new and evolving risks over and above the insights to be gleaned from any single risk disclosure. A descriptive analysis of all narrative risk disclosures made by U.S. mutual funds from 2011 through 2022 supports our thesis. Leveraging social science theories of risk and uncertainty, we measure and describe the choices funds make in depicting changing market conditions. We locate these risks and uncertainties along a distribution from common and manageable to uncommon and catastrophic. We then assess funds’ disclosure of changing market conditions using a “most likely” case design—examining funds’ disclosure of (1) increasing inflation, (2) public health crises, and (3) severe weather events resulting from climate change. Each present either a risk—meaning that the universe of bad outcomes is known and can be accounted for—or uncertainty—meaning that the universe of outcomes is not known and cannot be meaningfully estimated. We find statistically significant changes in disclosure language in response to external events that shape funds’ understanding of market risk. Our findings suggest that quantitative text analysis can help the SEC determine whether funds are taking their disclosure obligations seriously. But it can also help regulators, market participants, and researchers better understand how funds conceptualize and operationalize dynamic risk. This provides a starting point for better understanding future market movements.
ONLINE APPENDIX of the PAPER: Online_Appendix_Aggregated Risks_Paper.pdf
RESEARCH PUBLICATION:
Tucker, A.,Y. Xia and S. N. Smelcer. Text, Tone, and Legal Language: Analyzing Mutual Fund Disclosure Sentiment. American Business Law Journal, 61 (1), 57-86, 2024.
Abstract:
When filing mandatory Securities and Exchange Commission (SEC) disclosures, mutual funds must comply with the letter of the law by including required information. But funds must also pay attention to how the information is communicated and any impressions created by the language to meet the SEC's objective of informing ordinary investors. How do funds comply with the spirit of SEC regulations? One evaluative tool is disclosure tone—how positive or negative the language is. Following finance research models built to study company disclosures, we develop customized dictionaries specific to mutual fund disclosures. We then introduce a novel sentiment scoring framework that generates a transparent sentence- and disclosure-level score for our sample of 164,602 mutual fund summary prospectuses (497k) from 2010 to 2020. Descriptive analysis validates our dictionary by showing meaningful and statistically significant differences across disclosure sections, CRSP categories, and time. Principal Risk (PR) sections are more negative (and uniformly so) than Investment Strategy (IS) sections across time. Similar to finance literature finding that firm disclosure tone and textual attributes predict performance, stock volatility, capital costs, and retail investor behavior, our model results show relationships between mutual fund disclosure tone and fund attributes, performance, and disclosures, which further validate our sentiment scoring framework. The results also illustrate content differences between the Principal Risk and Investment Strategy sections while highlighting the role of legal language in setting the overall disclosure tone. Our context-sensitive approach provides researchers and regulators with a tool to better assess what fund disclosures are saying and how they say it. These persistent differences in PR and IS estimated information signals map onto content regulations and suggest a rich field for future research and regulatory insights.
Mutual Fund Sentiment Word Types:
Mutual Fund Sentiment Word Dictionary
An Example to Demonstrate How to Calculate Mutual Fund Disclosure Sentiment
Sentiment Code and a Data Sample to Run the Code
RESEARCH PUBLICATION:
Tucker, A. M. and Y, Xia. Promise & Peril of Plain English: Mutual Fund Disclosure Readability. Harvard Business Law Review, 13 (1), 59-113, 2023.
Abstract:
The SEC requires mutual funds to write disclosures for the average investor using plain English. These requirements make funds’ investment strategies and associated risks transparent and accessible to investors. Improved investor understanding furthers the SEC’s regulation-through-disclosure regime. But our examination of funds’ summary prospectuses—an abbreviated discussion of a fund’s strategies and risks—suggests that funds often fail to meet the plain English standard. Our analysis of all summary prospectuses filed between 2010 and 2020 reveals that mutual funds write long, hard-to-read, and complex disclosures. Importantly, we find that failure to draft disclosures in plain English is more than a technical error. Using a regression model, we find that positive past returns predict easier-to-read disclosures, but an increase in fund risk predicts harder-to-read disclosures. Further, we find that compliance with other metrics of plain English, like short sentences and active voice, predicts easier-to-read disclosures. In other words, compliance in one dimension of plain English writing suggests compliance in other aspects as well. Our results suggest several recommendations. The SEC should update their plain English guidance and adopt text mining measures to better monitor and enforce disclosure standards. Finally, given the incentives to draft overinclusive and exhaustive disclosures, the SEC should issue guidance on liability for summary prospectus risk omissions if full disclosure is made elsewhere.
RESEARCH PUBLICATION:
Smelcer, S. N., A. Tucker and Y. Xia. Regulating dynamic risk in changing market conditions. William & Mary Business Law Review, Vol 13, Iss. 3 (2022)
https://scholarship.law.wm.edu/wmblr/vol13/iss3/4/
Abstract:
How successful are the SEC’s attempts to regulate dynamic risk in financial markets? Using mutual fund disclosure data from two financial shocks—the Puerto Rican debt crisis and COVID-19—this Article finds evidence that SEC open-ended regulations, like the obligation to disclose changing market conditions, are largely successful in capturing dynamic, future risk. Funds engage in widespread and, often, detailed disclosures for new risks—although these disclosures vary widely in specificity. But not all funds disclose new risks. This creates perverse incentives for funds to opt out of disclosure or downplay threats with boilerplate language when new risks are emerging. We [CA1] recommend several SEC interventions to improve dynamic risk disclosures including empirically monitoring disclosures, issuing guidance when problematic variation is observed, and enforcing disclosure standards.
THE CLS BLUE SKY BLOG
Tucker, A.,Y. Xia and S. N. Smelcer. Pandemic Disclosures: Covid-19 as a "Current Market Condition" for Mutual Funds
CONTACT US
CONTACT US
The mutual fund research lab at Georgia State University is comprised of Faculty and students from both the College of Law and the Robinson College of Business. Our research is ongoing and includes sentiment, as well as compliance, and performance focused projects. For more information, please contact us.
Anne Tucker
Anne Tucker
Robert Cotten Alston Chair in Corporate Law
School of Law, University of Georgia
https://www.law.uga.edu/index.php/profile/anne-m-tucker
Dr. Susan Navarro Smelcer
Dr. Susan Navarro Smelcer
Assistant Professor of Politics and International Affairs
Wake Forest University
https://politics.wfu.edu/faculty-and-staff/susan-navarro-smelcer/
Dr. Yusen Xia
Dr. Yusen Xia
Anne and Michael D. Easterly Distinguished Professor
Director, Institute for Insight
https://robinson.gsu.edu/profile/yusen-xia/
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