Sometimes lawyers and not regulators are to blame for excessive bureaucracy in compliance. Jay G Baris of the New York law firm of Morrison & Foerster explains why.

The US Securities and Exchange Commission's Division of Investment Management has recently issued a warning that "disclosure creep" might be pervading fund prospecti. Jay G Baris of the New York law firm of Morrison & Foerster penetrates the confusion.

In reviewing 'registrant filings' [an SEC 'filing' is defined as a type of formal document that someone - perhaps a regulated entity – has sent to the SEC and a 'registrant' appears to be a mutual fund that fills in Form N1A when it wants to 'register' - a term that might entail some kind of request for permission to operate under the Investment Company Act 1940] the regulators have become aware of a significant number of prospecti that contain disclosures that are "complex, technical and duplicative." Moreover, they have found many summary sections to be "unnecessarily long."

The SEC warning breaks no new ground but provides a concise primer about Form N-1As [registration statements that investment companies use to create new open-end mutual funds] layered prospectus disclosure requirements. Among other things, the guidance reminds registrants to:

• limit the summary section to prescribed disclosures;

• avoid unnecessary and confusing cross-references;

• clearly identify "principal investment strategies versus non-principal strategies";

• generally be mindful of the SEC's plain English requirements.

"Disclosure creep" refers to the incremental growth of prospectus disclosure over time, added in response to regulatory developments such as new rules, criticisms in 'deficiency letters' that the OCIE [the SEC's Office of Compliance Inspections and Examinations] has written, SEC enforcement actions and private litigation. This phenomenon occurs because lawyers view extensive prospectus disclosure as a first line of defence to enforcement actions or litigation against a fund or its adviser.

But, the SEC reminds us, registrants must place disclosures in the right place. Lengthy disclosures about non-principal strategies [i.e. investment strategies and risks that are not of 'principal' importance] belong in the statement of additional information, not in the summary prospectus. At any event, the disclosures must comply with the SEC's plain English requirements.

Registrants should take note that they may be found liable for disclosing too much in the wrong places.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice that applies to particular situations.

* Jay G Baris is the chair of Morrison & Foerster's Investment Management Practice and a partner there. He can be reached at jbaris@mofo.com or on +1 (212) 468-8053.