The Promise & Perils of Plain English Mutual Fund Disclosures

We examine mutual funds’ compliance with the SEC’s ‘plain English’ rules promising to make disclosures accessible to ordinary investors through short and easy-to-read statements. We find that summary prospectus (497K) risk sections have nearly doubled in size over the last decade. Also, both risk and strategy sections are hard to read. Next, we explore if fund disclosure attributes signal information about fund performance, even in the absence of price discovery. Using a two-way fixed effect regression analysis with an interaction term, we show a relationship between plain English attributes and fund returns and volatility. Easy-to-read principal risk sections are associated with higher fund returns and volatility, but we find the opposite with investment strategy sections. We also explore whether readability effects persist in funds with high derivative word counts, a proxy for strategic and semantic complexity. We link the different information signals between the two sections to content and regulatory differences. Our findings highlight enforcement opportunities for the SEC.