1 See Memorandum to SEC Rules Committee No. 50-95 and Risk Disclosure Task Force, dated March 31, 1995; Closed-End Fund Committee No. 14-95, dated April 3, 1995.
July 31, 1995
TO: CLOSED-END FUND COMMITTEE No. 38-95
SEC RULES COMMITTEE No. 87-95
RISK DISCLOSURE TASK FORCE
RE: INSTITUTE LETTER ON SEC’S RISK DISCLOSURE CONCEPT RELEASE
______________________________________________________________________________
As you know, last spring the Securities and Exchange Commission issued a concept
release requesting comment on ways to improve risk disclosure for mutual funds and other
investment companies.1 The Institute recently submitted a letter recommending steps that the
Commission should take to enhance investor understanding of risk and commenting on the
various approaches discussed in the release. A copy of the Institutes letter, which is briefly
summarized below, is attached.
In its letter, the Institute urges that the Commission take the following actions: (1)
improve narrative risk disclosure to shift the focus from the risks of the particular investments
the fund may make to the overall risks of the fund; (2) require that fund prospectuses include a
bar graph reflecting the funds total return over each of the past ten years (or since its
inception), which would be accompanied by the funds 1, 5 and 10-year average annual returns;
and (3) require funds that hold themselves out as having a stated maturity policy to have a
commensurate duration policy.
The Institute expressed strong opposition to a requirement that funds report a single,
standardized, numerical measurement of risk. The letter states, "This approach is
fundamentally flawed; it rests upon the erroneous assumption that there is a single, optimal
yardstick of investment risk; it ignores the fact that risk is a multifaceted concept, necessarily
having different meanings for different investors; and it poses the significant danger that
investors -- neither understanding the limitations of such measure nor accurately assessing its
relevance and appropriateness to their particular circumstances and investment objectives --
nonetheless will rely upon some all-purpose, government-sanctioned measure of risk to their
detriment." The letter also opposes additional approaches that were raised in the concept
release, including self-assessment of risk and disclosure of the risk management procedures
used by funds.
Amy B.R. Lancellotta
Associate Counsel
Attachment