SEC Provides Guidance For Mutual Fund Risk Disclosures
By Diana E. McCarthy and Gloria Y. Liu
On September 9, 2019, the Staff (“Staff”) of the Securities and Exchange Commission (“SEC”) Division of Investment Management provided guidance (the “Guidance”) on how to improve principal fund risk disclosures to be more clear and concise for investors. Specifically, the Guidance provided recommendations to improve fund risk disclosures by (i) ordering fund risks by importance, (ii) tailoring fund risks disclosures, (iii) disclosing whether a fund is not appropriate for certain investors, and (iv) offering other disclosure considerations that should be taken into account. The Staff noted that the Guidance was not a rule, regulation or statement of the SEC. Instead, the Guidance may be used to interpret whether certain fund principal risk disclosures require improvement. The recommendations provided in the Guidance are discussed below.
| Approach |
Industry Practice | Guidance |
| Ordering Risks by Importance |
Many funds have listed principal risks in alphabetical order. |
The Guidance strongly encourages all funds to consider listing their principal risks in order of importance, with the most significant risks listed first. The Staff cautions that listing funds’ principal risks in alphabetical order could obscure certain key risks to an extent that the disclosure could potentially be misleading. The Guidance recognizes, however, that ordering risks in order of significance requires subjective determinations. According to the Guidance, funds may reasonably consider different factors in determining which risks are most important and may weigh factors accordingly. In addition, the Guidance indicates that the relative importance of a risk can change, given different market conditions or changes to a fund’s investment strategy. The Guidance suggests that the Staff would generally not expect to comment on a fund’s ordering of risks by importance. |
| Tailoring Risk Disclosures | Many funds may rely on and use generic, standardized risk disclosures when appropriate for certain risks. |
The Guidance encourages funds to tailor risk disclosures to how the particular fund operates, rather than using generic, standardized risk disclosures for each fund. The Guidance also encourages funds to not include risk disclosures that do not apply to the particular fund. |
| Disclosing Whether a Fund Is Appropriate for Certain Investors | Funds may, but are not required to, describe the types of investors the funds are intended for or the types of investment goals that may be consistent with an investment in the funds. |
The Guidance encourages funds to consider disclosing that a fund is not appropriate for certain investors, given the fund’s characteristics. For example, a fund seeking to provide a specific return over a defined period generally may not be appropriate for an investor who does not intend to hold the fund for the specified period. |
Lastly, the Guidance reiterates that there are several other measures that funds can take to enhance their risk disclosures to provide investors with clear, concise, relevant and timely information:
- A fund should present more detailed information about its principal risks in its prospectus outside of the fund’s summary prospectus.
- A fund should disclose nonprincipal risks and nonprincipal investment strategies in the fund’s statement of additional information rather than in the fund’s prospectus, as including this disclosure in the prospectus may overwhelm other important information.
- A fund should periodically review its risk disclosures, including the order of its risks, and should consider whether the disclosures remain adequate given the fund’s characteristics and market conditions.
Practice Points and Tips
Funds may consider reviewing their risk disclosures in light of the Guidance. In doing so, the fund portfolio managers should be consulted for their views on the most significant risks of their investing strategies. Fund boards may also consider reviewing fund risk disclosures from the perspective of the Guidance, both at the time of the launch of a new fund and as part of their review of disclosures during the annual update or more often if market conditions or changes in investing strategies merit reconsideration.
For more information on the SEC Guidance or on investment company regulatory compliance, please feel free to call or e-mail your contact in the Investment Management Group.
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