On June 16, the SEC approved the proposal of amendments to its mutual fund advertising rules, Securities Act rules 156 and 482 and Investment Company Act rule 34b-1. The rules are intended to address the concerns about investor misunderstanding arising from target date fund names and marketing materials. The rules proposed would address the following areas of concern:
Fund Name and Target Date Asset Allocation
The SEC's proposal would require marketing materials for a target date fund that includes the target date in its name to disclose the asset allocation of the fund among types of investments. The types of investments - such as equity securities, fixed income securities, or cash - would need to appear with the funds name the first time the fund's name is used.
Asset Allocation Table, Chart, or Graph
The SEC's proposal would require marketing materials that are in print or delivered electronically to include a prominent table, chart, or graph that clearly depicts the asset allocations among types of investments over the entire life of the fund. These proposals would also require that the table, chart, or graph be immediately preceded by a statement explaining that the asset allocation changes over time, noting that the asset allocation eventually becomes final and stops changing, stating the number of years after the target date at which the asset allocation becomes final, and providing the final asset allocation.
Risks and Considerations
The SEC's proposal would require target date marketing materials to include a statement informing the investor:
- To consider the investor's risk tolerance, personal circumstances, and complete financial situation.
- That an investment in the fund is not guaranteed and that it is possible to lose money by investing in the fund, including at and after the target date.
- Whether, and the extent to which, the intended percentage allocations of a target date fund among types of investments may be modified without a shareholder vote.
The SEC proposed changes to its antifraud guidance to note that a statement in marketing materials suggesting that securities of an investment company are an appropriate investment could be misleading because of:
- The emphasis it places on a single factor, such as age or tax bracket, as the basis for determining that an investment is appropriate.
- Representations that investing in the securities is a simple investment plan or requires little or no monitoring.
- The proposed amendments to the antifraud guidance would apply to all types of investment companies, including target date funds.
Comments on the rule proposal will be due 60 days after the release is published in the Federal Register, likely late August or early September. Comments may be viewed at: http://sec.gov/comments/s7-12-10/s71210.shtml
The full text of the target date rule proposal is available at: http://sec.gov/rules/proposed/2010/33-9126.pdf