SEC IM Staff Issues Guidance Update on Disclosure Related to Current Market Conditions

March 29, 2016

The staff of the U.S. Securities and Exchange Commission Division of Investment Management (Staff) has issued an IM Guidance Update on fund disclosure regarding risks related to current market conditions (Guidance Update). Indicating that “[d]egree of risk is dynamic in nature rather than static,” the Guidance Update provides the Staff’s view that “undertaking [designated] steps on an ongoing basis should help [mutual funds, exchange-traded funds and other registered investment companies] in providing risk disclosures to investors that remain robust in changing market conditions.” 

The Staff discussed two examples where updated disclosures “highlight current conditions in a manner that we believe can make risk disclosure more timely, more meaningful, and more complete” – (1) disclosures by fixed income funds with respect to interest rate, liquidity and duration risks; and (2) disclosures as to fund exposure to Puerto Rican debt securities. 

Suggested Steps 

In order to provide risk disclosure that remains current and relevant, the Staff suggested that funds take the following steps on an ongoing basis. 

  • As an initial matter, a fund should monitor market conditions and their impact on fund risks to determine whether changing conditions will affect the fund and the fund’s investment risks. The Staff indicated that this is implicit in “prudent portfolio management” and “a normal part of day-to-day operations.” 
  • Following any determination that there has been such a risk impact, a fund should assess whether fund risks have been adequately communicated to investors in light of current market conditions. If so, the fund should then consider the significance and materiality of the change for investors, as well as whether the fund’s current disclosures remain sufficient. 
  • If a fund determines that its risk disclosures are no longer adequate given current market conditions, the fund should communicate with investors and provide updated information. The Staff indicated that such communication should be in accordance with federal securities laws, but otherwise provided leeway as to the appropriate manner of such communication. The Guidance Update lists as possibilities formal communications (in fund prospectuses or shareholder reports) and less formal means (e.g., website disclosure or letters to shareholders). 

Illustrations of Updated Risk Disclosure Noted by Staff 

The Staff pointed to two illustrations of “types of disclosures that a fund may wish to consider.” First, the Staff discussed disclosures by fixed income funds related to interest rate risk, liquidity risk and duration risk. Second, the Staff discusses disclosures related to investments in debt securities issued by the Commonwealth of Puerto Rico. The Staff expressed its belief that comparable disclosures “could help investors better evaluate the risks of investment in the fund in light of changing circumstances.” 

Fixed Income Funds 

The first example relates to the current potential for a rise in interest rates, as well as the resulting “secondary impacts” of increased liquidity and duration risks. The Staff discussed its observations as to the content of disclosures, as well as the methods of communication, undertaken by firms. The Staff notes that disclosures have included references to historically low interest rates and government policy that may affect interest rates. The Staff further noted that such disclosures have appeared in prospectuses and shareholder reports and on fund websites. With respect to liquidity risk, the Staff indicated that investors may benefit from disclosure explaining that a rise in interest rates may result in volatility and increased redemptions, which in turn could result in the fund being forced to liquidate portfolio securities at disadvantageous prices. The Staff also indicated that, as longer-term securities may be more sensitive to changes in interest rates, disclosure of related duration risk “may be effective in communicating to investors [this] heightened risk.” 

Puerto Rico Debt 

In the second example, because of the Puerto Rican government’s recent failures to make scheduled payments on its obligations, the Staff discussed its observations of disclosures by “funds that have significant exposure to Puerto Rico debt.” The Staff noted that, in addition to disclosing that the fund invests in Puerto Rico debt, some funds have included in their prospectuses, shareholder reports or on their websites explicit disclosures regarding Puerto Rico’s financial difficulties and recent downgrades in the ratings of Puerto Rican debt, as well as the resulting increased risk to investors. 


The Guidance Update emphasizes the need for funds to monitor current market conditions, as well as their related risk disclosures, on an ongoing basis. Further, the Staff “believes that a fund’s adviser should consider providing information to the fund board on the steps taken by the adviser to evaluate fund risk disclosures and consider whether changes are appropriate.”

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