The Securities and Exchange Commission’s (SEC) Division of Investment Management recently cautioned mutual funds, exchange traded funds, and other registered investment companies to keep their risk disclosures updated regularly. In a new guidance issued on March 9, the Division highlighted the importance of disclosing risks related to changing market conditions in assisting investors in evaluating investment risks.
The Division suggested funds actively monitor market conditions and their impact on fund risks, assess whether material fund risks have been adequately communicated to investors in current disclosure materials, and communicate any such material risks to investors that are not adequately communicated in current disclosures. The key concern is that changing market conditions could cause what was an appropriate disclosure to become inaccurate or incomplete over time.
For example, in light of the current historically low interest rates, certain fixed income funds have recently been making disclosures regarding interest rate risk and its secondary effects of liquidity risk and duration risk. Similarly, the developing Puerto Rican debt crisis has triggered updated disclosure by Puerto Rican debt funds and certain tax-exempt funds with significant exposure to Puerto Rican debt. We assume most funds are already monitoring such market developments for their own business purposes. These examples merely illustrate the promptness and thoroughness with which the Division expects funds to disclose new material risks, whether by a prospectus, shareholder report, or less formal methods, like website disclosures and letters to shareholders. IM Guidance Update 2016-02.