SEC: Take Care When Saying Who Should Own a Product

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.