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Regulation and Compliance > Federal Regulation > SEC

SEC: Take Care When Saying Who Should Own a Product

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The U.S. Securities and Exchange Commission wants investment companies to think harder when suggesting whether a particular product is appropriate for a particular type of customer.

The SEC has tried to make that point by including a proposed amendment to Rule 156, a regulation that implements the Security Act of 1933, in the new proposed rules on target-date funds.

The amendment would deal with investment company suggestions about what type of customer should consider buying a product.

A target-date fund is a mutual fund or other investment option, such as a variable annuity investment option, with an asset allocation that shifts more toward bonds and other fixed-income securities, and away from stocks, as holders near the year when they hope to retire.

Some target-date funds marketed to older workers have proved to be far more variable in the past 2 years than holders had expected, and the SEC now wants investment companies to do more to make investors aware of a fund’s possible exposure to stock market risk, by, for example, putting a tagline describing a target-date fund’s asset allocation percentages after the fund name.

The proposed Rule 156 appropriateness amendment would affect all types of investment companies and investment funds, not just target-date funds, officials say in a preamble to the proposed target-date fund rules.

The amended rule would indicate that “a statement suggesting that securities of an investment company are an appropriate investment could be misleading in two circumstances,” officials say.

An appropriateness statement could be misleading “because of representations, whether express or implied, that investing in the securities is a simple investment plan or that it requires little or no monitoring by the investor,” officials say.

“While target date funds are designed to make it easier for investors to hold a diversified portfolio of assets that is rebalanced automatically among asset classes over time, the selection of an appropriate fund does not entail a simple decision,” officials say. “The fact that target date fund managers have adopted very different asset allocation strategies is itself indicative of the complexity involved in selecting an appropriate asset allocation.”

An appropriateness statement also could be misleading, officials say, if a company “indicates that one factor, such as age or tax bracket, make a product appropriate for a particular type of customer.”

Undue emphasis on one factor could lead a consumer to fail to consider other important factors, such as the investor’s financial situation and tolerance to risk, officials say.

“We have included tax bracket as an example of a factor that could be overemphasized by some investment companies, for example, tax-exempt funds or variable annuity issuers, and not because it has been emphasized by target date funds,” officials say.


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