SEC risk alert: ETFs, mutual funds providing flawed disclosures

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(Photo: SEC)

The Securities and Exchange Commission’s exam division has found mutual funds and exchange-traded funds have provided flawed or missing disclosures to investors around matters like fees, investment strategies and fund performance, the agency warned Tuesday.

The disclosures were made in fund filings, advertisements, sales literature and other shareholder communications.

The Division of Examinations conducted a series of exams that focused on mutual funds and exchange-traded funds to assess industry practices and regulatory compliance in areas that may have an impact on retail investors, also known as “RIC Initiatives.”

In a Risk Alert released Oct. 26, the SEC provided observations made by exam staff in exams of more than 50 fund complexes — covering more than 200 funds and/or series of funds — and nearly 100 advisors.

In conducting the exams, the exam division issued deficiency letters to some firms, but not others.

Observations in the risk alert, however, can assist all funds in assessing compliance risks, the agency said.

Exam staff observed funds that had inaccurate, incomplete or omitted disclosures on a variety of advertising and sales literature-related topics, such as:

  1.  Investment strategies and portfolio holdings.
  2.  The differences in investment objective between predecessor and successor funds.
  3.  Inception dates.
  4.  Funds’ expenses, contractual expense limitations or expense ratios.
  5. Average total returns or gross expenses and net expenses.
  6. Performance information not disclosed with the required legends.
  7. Awards received for fund performance.
  8. Weighting of index constituents in the benchmark index.
  9. Methodologies for calculating the performance of the benchmark index.
  10. Differences in holdings, risk and volatility between the broad-based and bespoke indexes used for performance comparisons.
  11. Composition of index used for performance comparisons.

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