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SEC Staff Issues Guidance on Improving Fund Principal Risks Disclosure

On September 9, 2019, the Disclosure Review and Accounting Office staff in the SEC’s Division of Investment Management issued recommendations to mutual funds regarding certain disclosure practices intended to improve principal risk disclosures for the benefit of fund investors. The staff’s guidance was issued as Accounting and Disclosure Information (ADI) 2019-08 – Improving Principal Risks Disclosure.

The ADI includes three primary recommendations:

  • Order Risks by Importance. To better highlight for investors the fund risks that they should consider most carefully, the staff “strongly encourage[s]” all funds to list their principal risks in order of importance, rather than alphabetically. In the staff’s view, an alphabetical listing of risk disclosures could obscure the importance of key risks and, “[i]n some extreme cases,” could render the disclosure potentially misleading. The staff acknowledged that ordering risks based on importance requires subjective determinations that funds are best positioned to make. Importantly, the staff said that it “would not generally expect to comment on a fund’s ordering of risks by importance.”

  • Tailor Risk Disclosures for Each Fund. Although the staff noted that standardized disclosures across funds may be appropriate for certain risks, it encouraged funds to tailor risk disclosures to how the particular fund operates. The staff also observed that certain principal risk disclosures described investments not discussed in the fund’s principal investment strategies, and it encouraged funds to tailor risk disclosures to align with the principal risks associated with an investment in that particular fund.

  • Disclose that a Fund Is Not Appropriate for Certain Investors. The staff encouraged funds to consider disclosing that a fund is not appropriate for certain investors given the fund’s characteristics.

In addition to the foregoing, the staff also reminded funds that the intent of the summary prospectus is to provide investors a concise summary of key information, and that more detailed information about principal risks should be presented elsewhere in the prospectus. The staff also encouraged funds to (1) disclose non-principal risks (and non-principal investment strategies) in the fund’s statement of additional information and (2) periodically review their risk disclosures, including their order, and consider the adequacy of such disclosures in light of the fund’s characteristics and market conditions.

The ADI is available here.

© 2022 Vedder PriceNational Law Review, Volume IX, Number 275
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About this Author

Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jake Wiesen Investment Attorney Vedder Price
Associate

Jake W. Wiesen is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

While in law school, Mr. Wiesen served as Associate Editor of the University of Illinois Law Review, a student attorney for the Civil Litigation Clinic and a teaching assistant for Introduction to Advocacy. He was also the recipient of the CALI Excellence for the Future Award in Administrative Law and Employee Benefits.

Prior to joining Vedder Price, Mr. Wiesen worked as a legal intern for the Chicago Transit Authority and served as a...

312 609 7838
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