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A paired samples test was used to compare the two groups of prospectuses. The two groups were signicantly dierent (at the 0.001 level). Therefore, Hypothesis 4 is rejected and it is possible to say that the 2002 prospectuses are easier to read than the 1994 prospectuses according to the Smog test.
CONCLUSIONS The main purpose of this study has been to investigate how mutual fund companies responded to the SECs adoption of Rule 421 requiring that mutual fund prospectuses be made more readable. A sample of 48 prospectuses from funds that have millions of investors and over a trillion dollars of assets were taken from both pre- and post-Rule 421 periods. The Investment Objective sections of these funds were tested using four dierent readability measures to determine their readability levels. The study found that nearly all of the prospectuses from pre-Rule 421 had poor readability levels. As a practical matter, investors had to have four-year college educations or higher to read many of these prospectuses. The post-Rule 421 prospectuses displayed large and signicant improvements in readability under all of the dierent readability measures. Furthermore, all the readability tests indicate that most of the new prospectuses can be read by someone with less than a high school education. The results of this study indicate that mutual fund companies complied with the SECs Rule 421 to make mutual fund prospectuses more readable than they have been in the past. Furthermore, this study reveals that while just a few years ago most mutual fund prospectuses were dense and largely unreadable, today they are much more accessible. Finally, the study gives evidence that objective measures of readability can identify better readability with results similar to subjective evaluations.

ACKNOWLEDGMENT This research was supported in part by a research grant from the College of Business and Technology at Western Illinois University. REFERENCES (1) Subramanian, R., Insley, R. G. and Blackwell, R. D. (1993) Performance and readability: A comparison of annual reports of protable and unprotable corporations, Journal of Business Communication, Vol. 30, No. 1, pp. 4961. (2) Kinnersley, R. and Fleischman, G. (2001) The readability of governments letter of transmittal relative to public company managements discussion and analysis, Journal of Public Budgeting, Accounting and Financial Management, Vol. 13, No. 1, pp. 122. (3) Hochhauser, M. (2001) Lost in the ne print: Readability of nancial privacy notices, Privacy Rights Clearinghouse website: www.privacyrights.org. (4) Courtis, J. K. (1984) An investigation into annual report readability and corporate risk-return relationships, Accounting and Business Research, Vol. 16, No. 64, pp. 285294. (5) Courtis, J. K. and Hassan, S. (2002) Reading ease of bilingual annual reports, Journal of Business Communication, October, Vol. 39, No. 4, pp. 394413. (6) Courtis, J. K. (1998) Annual report readability variability: Tests of the obfuscation hypothesis, Accounting, Auditing & Accountability Journal, Vol. 11, No. 4, pp. 459471. (7) Moore, E. M. and Shuptrine, F. K. (1993) Warranties: Continued readability problems after the 1975 Magnuson-Moss warranty act, Journal of Consumer Aairs, Vol. 27, No. 1, pp. 2336. (8) Mader, T. J. and Playe, S. J. (1997) Emergency medicine research consent form readability assessment, Annals of Emergency Medicine, Vol. 29, No. 4, pp. 534539. (9) Harr, J. and Kossack, S. (1990) Employee benet packages: How understandable are they?, Journal of Business Communication, Vol. 27, No. 2, pp. 185200.

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(10) Rudd, R. E. and Cotton, T. (1998) An overview of medical and public health literature addressing literacy issues: An annotated bibliography, National Center for the Study of Adult Learning and Literacy, Harvard Graduate School of Education.

(11) Securities and Exchange Commission (1998) A Plain English Handbook: How to Create Clear SEC Disclosure Documents, Washington, DC. (12) Flesch, R. (1948) A new readability yardstick, Journal of Applied Psychology, Vol. 32, No. 3, pp. 221233.

APPENDIX Reg. } 230.421.

(a) The information required in a prospectus need not follow the order of the items or other requirements in the form. Such information shall not, however, be set forth in such fashion as to obscure any of the required information or any information necessary to keep the required information from being incomplete or misleading. Where an item requires information to be given in a prospectus in tabular form it shall be given in substantially the tabular form specied in the item. (b) You must present the information in a prospectus in a clear, concise and understandable manner. You must prepare the prospectus using the following standards: (1) Present information in clear, concise sections, paragraphs, and sentences. Whenever possible, use short, explanatory sentences and bullet lists; (2) Use descriptive headings and subheadings; (3) Avoid frequent reliance on glossaries or dened terms as the primary means of explaining information in the prospectus. Dene terms in a glossary or other section of the document only if the meaning is unclear from the context. Use a glossary only if it facilitates understanding of the disclosure; and (4) Avoid legal and highly technical business terminology. Note to 230.421(b): In drafting the disclosure to comply with this section, you should avoid the following: 1. Legalistic or overly complex presentations that make the substance of the disclosure dicult to understand; 2. Vague boilerplate explanations that are imprecise and readily subject to dierent interpretations; 3. Complex information copied directly from legal documents without any clear and concise explanation of the provision(s); and 4. Disclosure repeated in dierent sections of the document that increases the size of the document but does not enhance the quality of the information. (c) All information required to be included in a prospectus shall be clearly understandable without the necessity of referring to the particular form or to the general rules and regulations. Except as to nancial statements and information required in a tabular form, the information set forth in a prospectus may be expressed in condensed or

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summarized form. In lieu of repeating information in the form of notes to nancial statements, references may be made to other parts of the prospectus where such information is set forth. (d) (1) To enhance the readability of the prospectus, you must use plain English principles in the organization, language, and design of the front and back cover pages, the summary, and the risk factors section. (2) You must draft the language in these sections so that at a minimum it substantially complies with each of the following plain English writing principles: (i) Short sentences; (ii) Denite, concrete, everyday words; (iii) Active voice; (iv) Tabular presentation or bullet lists for complex material, whenever possible; (v) No legal jargon or highly technical business terms; and (vi) No multiple negatives. (3) In designing these sections or other sections of the prospectus, you may include pictures, logos, charts, graphs, or other design elements so long as the design is not misleading and the required information is clear. You are encouraged to use tables, schedules, charts and graphic illustrations of the results of operations, balance sheet, or other nancial data that present the data in an understandable manner. Any presentation must be consistent with the nancial statements and non-nancial information in the prospectus. You must draw the graphs and charts to scale. Any information you provide must not be misleading. Instruction to 230.421. You should read Securities Act Release No. 33-7497 (January 28, 1998) for information on plain English principles. http://www.sec.gov/divisions/corpn/forms/regc.htm#presentation

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