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.


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Time to Use the Bat Phone: Who to Call When a Compliance Officer Needs Help?

It seems that the burden of work continues to increase for compliance professionals in the investment management industry. While also ensuring that their compliance program is effective, compliance officers must also be aware of cybersecurity threats, business continuity plans, new regulations, changes in business strategy, and more – all while doing this under a work … Continued

Texas Outlaws and a Silver Bullet: Position Limits in the USA

In this first installment on position limits, Regulatory Guidance expert Greg Hotaling surveys the current landscape of position limits imposed for U.S.-listed commodity derivative holdings, which can affect investment firms and other speculative investors regardless of where they are based. Stay tuned for coverage of EU position limits in the next edition. “Who shot J.R.?!” … Continued

FAQs From the Cyber Desk

Cybersecurity is a fast-moving target, so it is not uncommon for firms to have questions when it comes to assessing and understanding their cybersecurity risks. Here at CSS we receive a lot of cybersecurity questions, so we thought we would take the time to answer 10 of the most common Frequently Asked Questions. (1) What … Continued