On March 9, 2016, the staff of the SEC’s Division of Investment Management issued a Guidance Update advising funds to review risk disclosures on an ongoing basis and consider their adequacy and completeness in light of changing market conditions. Noting the importance to investors of full and accurate information about fund risks and that “different risks may be heightened or lessened at different points in time,” the staff explained that its guidance is intended to address the changes in a fund’s susceptibility to risk that may result from market developments and the need for funds to review and assess risk disclosures in light of changing market conditions. To this end, the staff identified certain steps that funds and their advisers should consider to help provide “robust” risk disclosures to investors. In addition, the staff recommends that a fund’s adviser should consider reporting to the board on its process for evaluating fund risk disclosures and whether changes to risk disclosure are appropriate.

In the guidance, the staff suggests that funds: actively monitor market conditions and assess their impact on fund risks, “as a normal part of day-to-day operations”; determine whether material fund risks have been adequately communicated to investors in existing disclosures; and communicate any material risks to investors that are not adequately communicated in current disclosure materials. Unless a particular method of communication (such as a prospectus supplement) is required by the federal securities laws, the Guidance Update indicates that funds should consider the appropriate means of communicating updated risk considerations to investors, including through the prospectus or shareholder reports, as well as less formal methods, such as website disclosure and letters to investors.

As to the type of market developments that the staff views as potentially warranting updated disclosures, the Guidance Update states that in reviewing fund disclosures the staff observed a number of instances where funds have updated disclosures to address current market conditions. In this regard, the staff cites as examples: 

1. disclosures by fixed income funds regarding interest rate risk, liquidity risk and duration risk in connection with potential increases in interest rates by the Federal Reserve; and

2. disclosures by funds with investments in Puerto Rico debt securities in light of the Commonwealth’s significant financial difficulties, including budget deficits and ratings downgrades.

The Guidance Update is available at: https://www.sec.gov/investment/im-guidance-2016-02.pdf.