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SEC Staff Warns Against “Disclosure Creep”

Posted in Investment Adviser Regulation

The staff of the SEC’s Division of Investment Management warned against “disclosure creep” invading fund prospectuses in regulatory guidance posted in June 2014.

In reviewing registrant filings, the staff cited a “significant number of prospectuses,” which contained disclosure that is “complex, technical and duplicative.”  Moreover, it found many Summary Sections to be “unnecessarily long.”

The staff guidance breaks no new ground.  Rather, it provides a concise primer of Form N-1A’s layered prospectus disclosure requirements.  Among other things, the guidance reminds registrants to:

  • Limit the Summary Section to prescribed disclosures
  • Avoid unnecessary and confusing cross-references
  • Clearly identify principal investment strategies versus non-principal strategies
  • Generally be mindful of the SEC’s plain English requirements

The staff’s guidance comes in the context of “disclosure creep.” Disclosure creep refers to the incremental growth of prospectus disclosure over time, added in response to regulatory developments, such as new rules, criticisms in OCIE deficiency letters, SEC enforcement actions and private litigation.   This phenomenon occurs because lawyers view robust prospectus disclosure as a first line of defense to enforcement actions or litigation against a fund or its adviser.

But, the staff reminds us, registrants must place disclosures in the right place.  Lengthy disclosures about non-principal strategies belong in the statement of additional information, not the Summary Prospectus.  In any event, the disclosures must comply with the SEC’s plain English requirements.

Registrants should take note that they may be found liable for disclosing too much in the wrong places.