b) It is required that the "summary prospectus appear at the front of a fund's prospectus." (Security Exchange Commission (b))
c) Amendments have been made so that the Internet can be used to give important 'information' inclusive of "description of the fund's investment objectives and strategies, fees, risks, and performance." (Security Exchange Commission (b))
d) The Form N-1A, for mutual funds, should have the "key information at the front of its statutory prospectus" regarding "the fund's investment objectives and strategies, risks, and costs. The summary will also include brief information regarding investment advisers and portfolio managers, purchase and sale procedures, tax consequences, and financial intermediary compensation." (Security Exchange Commission (b))
d) It is enough to send the summary prospectus for the delivery requirements if all other information is made freely available online. The 'online materials' has to be accessible and 'in a format' which permits easy navigation and all information must be made downloadable and the investor be permitted to retain the same. However the print copy of the prospectus must be provided on demand on request by the investors. These rules came into effect Feb. 28, 2009, and must be complied by Jan. 1, 2010. (Security Exchange Commission (b))
Thus these regulations are not very difficult to comply and are cost effective when used with the facilities of the internet. Along with the complying of these regulations, the bank must also prepare for internal audits and surprise audits when applicable by the SEC.
The Citigroup Compliance requirements and how to comply
As far as the compliance of the orders above the problem is not complicated.
1. Citibank must create a separate website for the mutual funds it handles, direct and where it is the banker for other funds. Investment Products of the bank like 'Citibank Systematic Investment Plan' and the 'third party Mutual Funds' have to be explained in detail with removal of register words, that is jargon. It is suggested that the bank make use of competent writers and outsource the work of creating a simple and detailed display that explains the working of the mutual funds and how the Bank proposes to handle and govern the operations. Risks must be outlined to the maximum and where the funds are not in the direct control of the bank the agencies must be prevailed upon to create a site of their own and which must be lined to the Bank's site.
2) The bank must create a new summary prospectus and make it available online and in print with the compliance of all regulations. The internet and the e-format an be taken advantage of and the bank is advised to delegate the work of customer interaction to companies which are proficient and experienced in handling online information queries. Accordingly all printed matter must be vetted to see that the provisions of the new Form N-1A, is complied and that the agency with whom the bank contracts for the customer interaction be made responsible for making information available online. Thus the requirements for the print copy of the prospectus should be sent in the daily routine to the investors. All these can be complied with by outsourcing these activities to competent firms who are experts in handling online transactions and daily interactions. In other words the bank must create a separate wing to handle mutual fund operations which in the near future will be extensive. The costs of the change is going to be high and therefore costing for this alternate has to be worked out in terms of both outsourced activities and in-office work and the better option selected.
Internal Audits
To prevent frauds by employees and other mutual fund operators to whom the bank may be the banker, it is suggested that the bank conduct internal audit with a special accounting wing set up for this purpose within the bank or use external auditors to prevent frauds. The bank is advised to conduct for itself the annual "surprise exam" proposed by the SEC. Thus there is a need to enforce strict accounting standards and bank must make sure that it can control the audit of the mutual fund operators allied with it. Contracts must thus be redrafted to include bank initiated audits and disclosures to the public and authorities and where...
Thus the primary need is to create a proper disclosure system.
Changes Proposed in the Legal Disclaimers
The current disclaimer only states that the "Investment Products including those invested under the Citibank Systematic Investment Plan are third party Mutual Funds not bank deposits or obligations of or guaranteed by Citibank N.A., Citigroup Inc., or any of its affiliates or subsidiaries, are not insured by any governmental agency and are subject to investment risks, including the possible loss of the principal amount invested." (Citibank Online) This must be modified to include the right of the customer in reading the jargon less prospectus and a method of reply ought to be devised where either online or by written consent the customer signifies that the prospectus was simple, understandable and the customer has understood the exact meaning and the risks involved in the document. This is important and there is a need to make such a document so that when litigations arise the bank has defense in complying with the statute and the law of estoppels. Thus other than the standard "Mutual Funds are subject to market risk. Please read the offer document carefully before investing." (Citibank Online)
The concurrence of the customer must be obtained online as to the complete understanding of the documents. Finally with proper audit and transparence that bank will be in a safer position with litigation. However there is a need to be aware of issues like the consultants fees which are controversial. Therefore disclosures of such fees and other tariff collected must also be made available with the stipulation that the customer agrees to these fees. However if the court rules other wise, in controversial cases, the bank must have provisions for refunding the collected amounts. It is better to use arbitration rather than court disputes. Thus it will be better to have a named arbitrator and the prospectus subject's disputes to arbitration.
Suggestion for arbitration clause:
It is emphasized that "Arbitration is capable of achieving rapid adjudications that undermine the possibility of extortionate settlements. Arbitration can reduce defense costs. Securities and Exchange Commission -- SEC supervision provides investors with a fair process for the resolution of securities claims. The creation of a system of arbitration that becomes mired in litigation regarding its legitimacy would be counterproductive. Congress or the SEC should begin to implement an arbitration program that ultimately would require agreements to arbitrate all securities disputes involving publicly-traded companies before a SEC-sponsored forum. Under the authority and supervision of the SEC, arbitration of these disputes can be regulated and monitored to preserve substantive fairness while securing the benefits of arbitration, especially lower costs, and arbitration has been a favored method of dispute resolution." (Ramirez, 1055) Therefore the bank must have the arbitration clause in the prospectus and have a named arbitrator approved by the SEC if possible. These changes must be in place by 2010.
References
Citibank Online. Mutual Funds from Citibank: Disclaimer. 2009.
Lowy, Martin. High Rollers: Inside the Savings and Loan Debacle. Praeger Publishers:
New York. 1991.
Oditah, Fidelis. The Future for the Global Securities Market: Legal and Regulatory
Aspects. Clarendon Press: Oxford. 1996.
Ramirez, Steven A. Arbitration and Reform in Private Securities Litigation: Dealing with the Meritorious as Well as the Frivolous. William and Mary Law Review, vol. 40. no. 4, 1999. pp: 1054-1057.
Savage, David. Mutual fund fee case tests what is a reasonable charge. Chicago Tribune,
3 Nov, 2009, p. 4.
Security Exchange Commission (a). Post Madoff Reforms. Washington, D.C. 29 Jun,
2009.
Security Exchange Commission (b). SEC Improves Disclosure for Mutual Fund Investors.
Issued 2008-275. Washington, D.C., 19 November, 2008.
Security Exchange Commission (c). SEC Takes Steps to Address Late Trading, Market
Timing and Related Abuses. Issued 2003-168.Washington, D.C., Dec. 3, 2003.
