Norm Champ, Director of the SEC’S Division of Investment Management, highlighted potential issues with alternative mutual fund disclosures in a recent speech. Champ acknowledged that clear and concise disclosure can be difficult because of the “heightened risks” presented in valuation, liquidity, and leverage in these funds coupled with the complexities of the strategies employed. He noted that such complexity can make providing the information needed by an average investor to determine investment suitability “challenging.”
Champ urged funds to reassess the adequacy of current disclosures, focusing on accuracy, completeness, and use of plain English. He noted that the SEC staff is concerned that the strategies actually employed by the funds do not always match up with the strategies and risks disclosed. Further, Champ passed on the staff’s view that prospectus disclosure should provide “a complete risk profile of the fund’s investment as a whole,” encouraging a focus on the degree of economic exposure created by the strategy. He noted that in some instances small uses of derivatives can create large risks and in some instances heavy use of derivatives can have no substantial impact on risk. Champ suggested that in conjunction with annual registration statement updates, “a fund generally should assess, based upon its actual operations, whether it is meeting the requirements to completely and accurately disclose its anticipated principal investment strategies and risks.” The review should also extend to marketing materials, Champ noted.
The text of the speech can be found here.