Improving Mutual Funds’ Principal Risks Disclosure

The Securities and Exchange Commission (SEC) has for years stressed that registrants’ disclosure in regulatory filings needs to be written in “plain English.” The SEC’s Disclosure Review and Accounting Office recently reiterated the plain English directive in “ADI 2019 – 08 – Improving Principal Risks Disclosure.” The guidance focuses specifically on making disclosure of principal risks in a registered fund’s prospectus understandable for investors. The SEC views principal risks as those risks that are reasonably likely to adversely affect a fund’s net asset value, yield and total return.

The SEC’s guidance suggests the following approaches to principal risk disclosure to assist with providing clarity for investors:

  • Ordering risk by importance
  • Tailoring risk disclosures
  • Affirmatively stating that a particular fund is not appropriate for certain investors
  • Providing additional, more detailed information about a principal risk elsewhere in a prospectus
  • Disclosing non-principal risks in the Statement of Additional Information rather than the prospectus
  • Periodically reviewing risk disclosures, including the order in which they are listed, and evaluate their adequacy

With respect to ordering risks by importance, the guidance is simple: put the most significant risk first. The SEC understands that listing risks in this manner is a subjective determination and has stated that it would generally not comment on the order. The SEC’s view is that listing risks in other manner could assist with obscuring them.

Additionally, risks need to be tailored to the fund’s or fund family’s investment strategy, investment vehicles and the impact of market conditions, among other things. This is a lot like drafting policies and procedures. The disclosure cannot be off-the-shelf or one-size-fits-all. Think about unique qualities or factors pertaining to a fund and describe the associated risks.

Implementing this guidance can be incorporated into a fund’s existing procedures for reviewing and revising prospectuses and other disclosure documents. In other words, maintain the same process while keeping this guidance top of mind, and revise the disclosure as necessary. Also discuss the SEC’s expectations with other members of a fund’s review team so that other perspectives and input can be included.


If you need help with addressing your risk disclosures or other mutual fund compliance issues, explore our services and then contact us.


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