SUBMISSION OF INSTITUTE'S RISK DISCLOSURE RESEARCH AND SUPPLEMENTAL COMMENT LETER TO THE SEC

April 9, 1996 TO: BOARD OF GOVERNORS No. 14-96 CLOSED-END FUND COMMITTEE No. 11-96 DIRECT MARKETING COMMITTEE No. 9-96 MARKETING POLICY COMMITTEE No. 13-96 PUBLIC INFORMATION COMMITTEE No. 11-96 RESEARCH COMMITTEE No. 17-96 SALES FORCE MARKETING COMMITTEE No. 11-96 SEC RULES COMMITTEE No. 25-96 SHAREHOLDER COMMUNICATIONS COMMITTEE No. 7-96 RISK DISCLOSURE TASK FORCE RE: SUBMISSION OF INSTITUTE’S RISK DISCLOSURE RESEARCH AND SUPPLEMENTAL COMMENT LETER TO THE SEC ______________________________________________________________________________ The Institute recently submitted a supplemental comment letter to the Securities and Exchange Commission in response to the Commission
s concept release on investment company risk disclosure. The Institute
s letter also enclosed our comprehensive research entitled "Shareholder Assessment of Risk Disclosure Methods." Attached is a copy of the Institute
s supplemental comment letter and research report. Based on the results of this research, the Institute
s supplemental comment letter recommends that the Commission adopt the ten-year bar graph and more focused narrative disclosure requirements. In addition, the letter urges that the Commission avoid the pitfalls of a mandated, numerical risk measurement. The findings of the Institute
s research include the following:
Mutual fund investors care about risk and typically inquire about risk before making fund purchases.
Notions of "risk" differ among shareholders and risk appears to be a multifaceted concept for most shareholders.
Investors find narrative disclosure useful to their evaluation of risk. For example, 51% of respondents stated that they are very confident of their ability to use narrative disclosure to assess the risk of a single fund.
Graphic presentation also would help investors. For example, 51% of respondents stated that they are very confident of their ability to use a ten-year total return bar graph to compare the risks of several funds.
Quantitative risk measurements would complicate an evaluation of mutual fund risk for most investors. Most investors -- including those who have used quantitative risk measurements -- are not very confident of their ability to use these measurements in the future.
Quantitative risk measurements have a strong potential to confuse or mislead investors. For example, the short-term volatility measured by standard deviation or beta is not particularly relevant for long-term investors. Yet a significant percentage of investors who rely upon these measurements are long-term investors. For further information about the Institute
s research report, or for more copies of the report, please call Vicki Leonard-Chambers at 202/326-5918. Matthew P. Fink President Attachment