SEC Proposes an Overhaul of Fund Disclosures
Written by Jasmin Sethi for SCA client, Morningstar.
The Securities and Exchange Commission is considering a major proposal that would dramatically change the disclosures that investors receive when investing in a mutual fund. The heart of the proposal is a new, concise annual report that is visually engaging and presents important information to investors in an easy-to-read format. The updated report will include information on the fund's performance, material changes, principal risks, and other appropriate information.
The proposal is a great opportunity to empower investors, but it could do more.
Although the SEC's proposal generally improves transparency and accessibility for shareholders, Morningstar recommends several improvements that will enhance investment disclosures and further help people understand their investments.
Better Performance Data Will Allow for Comparability
Investors need more details on performance reporting in annual reports to effectively compare investments. For example, the SEC proposes one- and 10-year performance information, while we recommend one-, three-, five-, and 10-year returns because many will be better served by an immediate or intermediate time horizon.
Returns also need to be properly benchmarked. The SEC's limitation of benchmarks to broad-based indexes is unsuitable for many investment strategies, such as funds focused on value stocks or multi-asset strategies. A balanced strategy investing in stocks and bonds is not treated properly if benchmarked to the S&P 500.
