January 20, 1995
TO: BOARD OF GOVERNORS No. 14-95
SEC RULES COMMITTEE No. 9-95
RE: INSTITUTE LETTER TO SEC STAFF ON STANDARDIZED RISK MEASURES
______________________________________________________________________________
The Institute recently submitted a letter to the SEC staff to express its preliminary views
on the feasibility of adopting a standardized measure of risk for mutual funds. A copy of the
letter is attached.
The letter states that, while the Institute is strongly in favor of providing investors with
clear and effective risk disclosure, "none of the [risk measurement] approaches suggested to
date is without problems and it remains to be demonstrated that any of them will serve and
advance the interests of fund shareholders." Accordingly, the letter recommends that the
Commission proceed cautiously on this project, and that it issue a general concept release on
this issue before making a formal rule proposal.
The letter sets forth the following as preliminary conclusions based on the deliberations
of the Institute’s task force: (1) because "risk" is a multifarious concept, it is not feasible to
develop a single, all-encompassing measure of a mutual fund’s risk; (2) it is imperative that any
measure ultimately adopted be transparent and readily explicable to the investing public; (3)
measures such as duration that focus only upon certain risk factors (e.g., interest rate risk) are
apt to be more misleading than illuminating; and (4) historically based measures of volatility
such as standard deviation raise some difficult issues that require further study.
The letter suggests that as an alternative to requiring funds to disclose their average
portfolio duration, the Commission consider requiring funds with a stated maturity policy to
have commensurate average portfolio durations, at least under normal market conditions. (For
example, a fund with "short term" in its name could be required to have an average portfolio
duration of less than 3 or 4 years.) The letter recognizes, however, that several significant
matters would first have to be resolved, most notably the development of some standardized
methodologies for computing duration.
We will keep you advised of developments as the Commission continues its
consideration of this issue.
Paul Schott Stevens
General Counsel
Attachment