(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

SEC Proposes Summary Fund Prospectus, Adopts Small Business Rules

The SEC has proposed for comment a short summary mutual fund prospectus that can be delivered to investors electronically or on paper at the investor's option. The summary will include key information about a fund's top 10 portfolio holdings, investment advisers, portfolio managers and purchase procedures. The full statutory prospectus would continue to be available for investors that want additional information. Commissioner Paul Atkins said he has certain reservations about the proposal, including the requirement for quarterly updates, but hopes it addresses the problems that prevented the profile prospectus, adopted nearly 10 years ago, from being widely used.

Under the proposal, multi-fund prospectuses will have to present information separately for each fund. The staff advised that it borrowed certain elements from the NASD's Profile Plus, including the idea of embedded hyperlinks to underlying information. The staff believes the industry will print prospectuses on demand for investors that continue to request paper filings, rather than stockpile print copies that may have to be thrown away.

Commissioner Kathleen Casey believes the sample summary prospectus, which is attached to the release, will help funds draft the new document, if adopted. She also believes that the ability to incorporate information by reference should allay concerns about liability. Ms. Casey encouraged the staff to conduct focus groups to ensure that the summary prospectus is user-friendly.

Small Business Rule Amendments

The SEC last week adopted three of the six reform measures proposed to modernize the disclosure requirements for smaller companies. Corporation Finance Director John White said the remaining three initiatives should be ready for consideration by the Commission in the near future. The final rules reflect one significant change from the proposing release, which is the removal of the tolling provision to suspend the Rule 144 holding period for the length of time that a holder of restricted securities engages in hedging activities.

Johanna Vega Losert, an attorney-adviser in the Division of Corporation Finance, explained that the staff was persuaded by the public commenters that a reintroduction of the tolling provision would unnecessarily complicate Rule 144. Securities holders and intermediaries would incur significant costs to monitor hedging activities to comply with the provision, she said, while there is no strong evidence that hedging activities have resulted in abuses in the Rule 144 context. Losert advised that the staff will continue to monitor the hedging activities of restricted securities holders to ensure that further action is not needed.

The revisions to Rule 144 shorten the holding period for restricted securities from one year to six months if the issuer has been subject to the Exchange Act reporting requirements for at least 90 days before the sale of the securities. The one-year holding period remains for restricted securities of nonreporting companies. The revisions also simplify Rule 144 compliance for a shareholder who is not an affiliate of the issuer. The adopting release also codifies several Rule 144 interpretive positions. White reported that the division has published a booklet, written in a question-and-answer format, to assist smaller companies in complying with the amended rules.

The new rules, which will be effective 60 days after publication in the Federal Register, create a new category of smaller reporting companies which have less than $75 million in public equity float. The scaled disclosure requirements were moved to Regulation S-K and the current "SB" forms will be eliminated. Small companies may continue to use the SB forms for periodic reports until they file their next annual report.

The Commission also approved two new exemptions from the Exchange Act registration provisions for compensatory employee stock options. The exemptions will prevent a company from triggering Exchange Act filing obligations based on the issuance of compensatory stock options to employees, directors, consultants and advisers, to the extent permitted under Rule 701.