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The Securities and Exchange Commission is urging mutual fund sponsors to list funds’ principal risks in order of importance and not alphabetically in mutual fund prospectuses.

The agency’s Division of Investment Management stated in a recent notice that some funds appear to list their principal risks in order of importance, with the most significant risks appearing first. “We strongly encourage all funds to consider this approach to better highlight for investors the risks that they should consider most carefully,” IM’s Disclosure Review and Accounting Office said.

IM also recommends that funds “tailor principal risk disclosure rather than utilize generic, standardized disclosure across funds, especially where different funds have differing investment objectives and policies.”

Funds are also encouraged to consider disclosing that a fund is not appropriate for certain investors given the fund’s characteristics.

For example, “a fund seeking to provide a defined return over a specific time period generally may not be appropriate for an investor that does not intend to hold the fund for the specified period,” IM stated. “Highlighting this information may assist investors in making better informed investment decisions in line with their investment goals.”

Further, funds should periodically review their risk disclosures, including the order of their risks, and consider whether the disclosures remain adequate in light of the fund’s characteristics and market conditions, IM said.

In commenting on the notice, Cipperman Compliance Services stated that “new registrants should expect the Disclosure staff to provide significant comments if they merely offer kitchen sink disclosure for principal risks.”

— Check out SEC Warns Advisors to Watch Principal Trading Activity on ThinkAdvisor.