SEC Suggests Steps to Improve Principal Risks Disclosures

SEP 20, 2019 | PRACTUS LLP

SEC Suggests Steps to Improve Principal Risks Disclosures

“Any fool can make things bigger, more complex, and more violent. It takes a touch of genius – and a lot of courage – to move in the opposite direction.”
Albert Einstein

On September 9, 2019, the Division of Investment Management (IM) of the Securities and Exchange Commission (SEC) issued disclosure guidance (so-called accounting and disclosure information) addressing mutual fund principal risk disclosure in summary prospectuses.1  The guidance sets forth several suggestions to improve principal risk disclosure.  

Setting the Table

  • What are “Principal Risks”?  According to IM, they include risks that are reasonably likely to adversely affect a fund’s net asset value, yield and total return.2
  • What factors can affect a fund’s principal risks?  These will include the fund’s:
    • investment objective(s);
    • holdings;
    • investment strategies; and
    • structure.

Suggestions for Improving Principal Risk Disclosure

  • Ordering Risks by Importance.
    • IM recommends this instead of ordering risks alphabetically.  IM also recognizes that this judgment is subjective, can change over time and observed that “we would not generally expect to comment on a fund’s ordering of risks by importance.”
  • Tailoring Risk Disclosures.
    • – tailor risk disclosure that is specific to the fund in light of the way the fund is managed.
    • – principal risk disclosure that discusses investments not identified in the fund’s principal investment strategies.  
  • Disclosing that a Fund is Not Appropriate for Certain Investors. 
    • IM encouraged funds to consider disclosing that a fund is not appropriate for certain investors given the fund’s characteristics.

PRACTUS TIP: We recommend, particularly with respect to intermediary-sold funds, that a fund think long and hard before adding this type of disclosure. An intermediary may have a good reason to recommend a particular type of fund to an investor even if the fund may not be appropriate to other similarly situated investors. This disclosure may create a trap for the unwary. Moreover, the SEC itself previously considered requiring funds to disclose the types of investors for whom a fund may be an appropriate or inappropriate investment. The SEC received significant negative comment on its proposal and determined to permit, but not require, this type of disclosure.

  • Other Disclosure Considerations.
    • IM reiterated that principal risks should be summarized in a summary prospectus, and that more detailed information should be presented elsewhere in the prospectus.
    • IM encouraged funds to disclose non-principal risks and non-principal investment strategies in their statements of additional information, not in their prospectuses. 
    • Funds are encouraged to review periodically their risk disclosures, including the order in which principal risks are presented, to assess whether the disclosures remain adequate.


A few key takeaways for funds and those responsible for preparing their disclosure documents:

  1. Summarize your principal risks in your summary prospectus.
  2. Explain your principal risks in more detail elsewhere in your statutory prospectus.
  3. Relegate discussions of non-principal risks and non-principal investment strategies to the SAIs.
  4. Make sure your principal investment risks tie back to your principal investment strategies.
  5. Order your risks by importance; review them as market conditions and investment techniques change.
  6. It’s better for a fund complex to tailor risk disclosures to the risks of particular funds rather than use cookie cutter risk disclosures for all funds.  
  7. While the IM staff would like you to identify investors for whom a fund may not be appropriate, be willing to disappoint them.

1 Improving Principal Risks Disclosure, Division of Investment Management Accounting and Disclosure Information 2019-08 (Sept. 9, 2019) (ADI 2019-08)  (visited Sept. 11, 2019).
2 Principal risks also include risks to which the Fund’s portfolio as a whole is subject.  Form N-1A, Item 4(b)(1)(i).

Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

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