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Our Take Blog

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SEC Staff Tells Funds to Review Derivatives Disclosures

SEC Staff Tells Funds to Review Derivatives Disclosures

The Staff of the SEC’s Division of Investment Management, in a letter to the Investment Company Institute, urges all funds to review disclosure concerning derivatives in registration statements, shareholder reports, and financial statements. Critical of generic disclosure that are either “highly abbreviated” or “lengthy, often highly technical,” the Staff urges funds to tailor derivatives disclosure to a fund’s economic exposure to derivatives and describe their use (e.g. hedging, speculation, market exposure). The tailored disclosure applies to the principal risks so that investors receive a “complete risk profile.” The Staff advises that the Management Discussion of Fund Performance in annual reports should also address the impact of derivatives on investment performance, especially where the registration statement describes derivatives investing as a principal investment strategy. The Staff also urges a review of qualitative disclosure about derivatives in financial statements and recommends identifying derivatives counterparties.


OUR TAKE: Some of the generic derivatives disclosure has arisen because registrants have become uncertain about the disclosure required. This letter to the ICI certainly helps. Perhaps, the SEC should consider an amendment to Form N-1A.

http://www.sec.gov/divisions/investment/guidance/ici073010.pdf
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