SEC Wants More Risk Disclosure for Emerging Markets Funds
The Disclosure Review and Accounting Office (DRAO) of the SEC’s Division of Investment Management has warned registered funds that invest in emerging markets to review and enhance risk disclosures. The DRAO is reviewing disclosures in light of enhanced risks in emerging markets including lack of transparency, different regulatory standards, and limited investor protections. DRAO advises funds to tailor disclosures to account for liquidity limitations, political risk, different regulatory and auditing standards, limitations on shareholder rights and remedies, and less reliable information. DRAO, which will heighten reviews, requires both actively managed and index funds to reconsider disclosures. DRAO is also concerned about investments in companies in countries (e.g. China) that place material limitations on PCAOB inspections.
The markets already place a risk premium on emerging market investing. Will increased disclosure affect this premium by scaring away potential investors? Will increased disclosure slow the ability of new funds to come to market? Will enhanced disclosure pressure emerging market companies to become more transparent?