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.