SEC Issues Statement on Summary Prospectus Risk Disclosures for Mutual Funds

The staff of the SEC Division of Investment Management (the “Staff”) recently issued an Accounting and Disclosure Information statement summarizing its views regarding certain matters related to the way that mutual funds disclose the principal risks of investing in a fund within their summary prospectuses (the “Statement”).[1]  In the Statement, the Staff notes that it has observed in some summary prospectuses that mutual funds are providing “risk disclosures that are overly lengthy and technical,” which “can make it difficult for investors to identify and understand they key risks of an investment.”[2]  To improve principal risk disclosure, the Staff encourages mutual funds to adopt the following practices as they relate to the summary prospectus:

    1. List principal risks in order of importance, with the most significant risks appearing first, and avoid presenting principal risks in alphabetical order which could obscure the importance of key risks;[3]

    2. Tailor principal risk disclosures for each fund in a fund group rather than relying on “generic, standardized, risk disclosures across funds”;[4] and

    3. Consider disclosing that the fund is not appropriate for certain investors given the funds characteristics (e.g., a fund seeking to provide a defined return over a one year period would generally not be appropriate for an investor that does not intend to hold the fund for the full one year period).

The Staff also reminds funds that the purpose of the summary prospectus is to provide investors a concise summary of key information about a fund, including its principal risks. In order to avoid overwhelming or confusing investors, more detailed information about a fund’s principal risks should be included in the statutory prospectus and non-principal risks should be included in the statement of additional information).[5]

The Statement is not surprising, particularly with respect to the ordering of risk factors, as it echoes comments that the Staff has been making for a number of years. While alphabetizing risk factors has been (and continues to be) a common industry practice, more recently the Staff has strongly encouraged a move towards ordering by importance.  Many practitioners, however, have continued to push back on this, recognizing: the benefits of alphabetizing for investors (i.e., ease of reference when trying to locate particular risks); the potential risks associated with the judgment calls necessary to organize risk factors by order of importance; and noting that Form N-1A does not require any particular ordering of risk factors.

Those responsible for drafting and filing mutual fund summary prospectuses, statutory prospectuses, and statements of additional information (e.g., mutual fund director or trustees, legal counsel, investment advisers, and administrators) should continue to thoughtfully evaluate their fund’s disclosure of principals risks, including the approach taken to ordering principal risks.  Experienced legal counsel can help in understanding and balancing the risks of each approach, and in understanding how the fund’s approach compares to the approach of its peers.

If you have questions about the Statement or about the regulation of mutual funds in general, please feel free to contact us.

By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton




[1] SEC, ADI 2019-08 Improving Principal Risks Disclosure, (principal risks are those that are reasonably likely to adversely affect the fund’s net asset value, yield, and total return.)

[2] Id.

[3] Id. (the Statement stated that in “extreme cases” presenting principal risks in alphabetical order “could result in a fund’s key risks being obscured to such an extent that it could render the disclosure potentially misleading.”)

[4] Id.

[5] Id.

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