On June 16, 2010, the Securities and Exchange Commission (SEC) proposed amendments to Rule 156 and Rule 482 under the Securities Act of 1933 (Securities Act) and Rule 34b-1 under the Investment Company Act of 1940 (1940 Act) that address issues relating to the marketing materials of target date retirement funds (Target Date Funds).1 The proposed amendments to Rule 482 and Rule 34b-1, if adopted, would generally require Target Date Funds’ marketing materials to include disclosure of their asset allocation on the target retirement date (or current calendar quarter if such target date is past); a table, chart or graph depicting the fund’s asset allocation over time, and statements that would warn investors that a Target Date Fund should not be selected based solely on age or retirement date, that a Target Date Fund is not a guaranteed investment and that stated asset allocations may be subject to change. The proposed amendments to Rule 156, if adopted, would provide that investment company marketing materials could be considered misleading if they (i) emphasize a single factor, such as an investor’s age or tax bracket, as the basis for determining that an investment is appropriate or (ii) contain 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.
Target Date Funds, also called lifecycle funds, are designed to allow investors to invest in one mutual fund that will provide exposure to a diversified portfolio of assets that is rebalanced automatically over time. Target Date Funds invest in either a portfolio of assets or in other underlying mutual funds. In either case, the allocation of portfolio assets, or the allocation of the underlying funds, focuses on an assorted selection of equity, fixed-income; or cash holdings as determined by the fund’s investment strategy, which is typically designed for investors planning to retire and leave the workforce on, or within a few years of, a target date. Normally, the target date is expressly stated in the fund’s name, such as the “Retirement Fund 2030.” Over time, the allocation of the portfolio assets becomes less focused on equity securities and more focused on fixed-income securities as the target date approaches (commonly called the glide path). The glide path eventually reaches a “landing point” at which time the asset allocation becomes static. For some Target Date Funds, the landing point occurs at or near the retirement date, but for others the landing point may be many years after the target date. Target Date Funds have been marketed as a vehicle that simplifies the retirement savings process through the automatic rebalancing feature by saving investors from having to rebalance their investment portfolios on their own.
Due in part to investor perception that Target Date Funds offer a simple, safe, and convenient method of saving for retirement, these funds have become increasingly popular. Assets of registered Target Date Funds are approximated at $270 billion. Target Date Funds are also often used as the default investment for 401(k) plan participants who have not chosen their investments under the plan.
The market decline of 2008, however, raised serious concerns about how Target Date Funds are named and marketed. Target Date Funds that were close to reaching their target date suffered significant losses in 2008, and there was a wide variation in returns among Target Date Funds with the same target date. For example, investment losses for funds with a target date of 2010 averaged nearly -24 percent in 2008, ranging between approximately -9 percent to -41 percent. One significant factor in explaining the variation of returns was the varying degrees of equity exposure in Target Date Funds with the same target date. Equity exposure ranged from 25 percent to 65 percent at target date and 20 percent to 65 percent at landing point.
In 2009, the SEC and the Department of Labor held a joint hearing concerning Target Date Funds. Among a number of concerns expressed about Target Date Funds was that the naming convention used by Target Date Funds may contribute to investor misunderstanding. Investors may expect that at the target date, most, if not all, of their fund’s assets will be invested conservatively to provide for retirement needs. In addition, concerns were expressed about the marketing of these funds as a “simple solution” for retirement needs. Regulators noted that while an investor’s retirement date is a factor for determining whether a fund is appropriate, other factors exist, including appetite for risk, other investments, retirement and labor income, expected longevity, and savings rate.
New Content Requirements for Target Date Fund Marketing Materials
The SEC proposed to amend Rule 482 under the Securities Act and Rule 34b-1 under the 1940 Act to require any advertisement that places “more than an insubstantial focus”2 on one or more Target Date Funds3 to include the following:
1. Asset Allocation Disclosure for Funds With a Target Date4 in their Name. A Target Date Fund that includes a target date in its name must disclose the percentage allocations among the types of investments (e.g., equity, fixed-income, cash and cash equivalents and not types of investment companies if the target date is a fund of funds) immediately adjacent (or immediately following in a radio or television advertisement) to the first use of the Target Date Fund’s name and in a manner reasonably calculated to draw an investor’s attention to the information.
The proposed amendments seek to address the SEC’s concern that investors are relying on the name of a Target Date Fund as the sole source of the fund’s strategies and risks. Although simply providing final asset allocation levels may not extensively advise investors of the fund’s strategies and risks, the SEC believes that the insertion of the asset allocation disclosure would “counterbalance any misimpression” that a fund is conservatively managed when, in fact, it is not.
2. Prominent Table, Chart or Graph Depicting the Glide Path (Applies to All Target Date Funds Even Those Without a Target Date in Their Name). A print advertisement or an advertisement delivered through an electronic medium must clearly depict the percentage allocations of the Target Date Fund among types of investments (e.g., equity, fixed-income, cash and cash equivalents) over the entire life of the Target Date Fund at identified periods that are no longer than five years and include the Target Date Fund’s inception, target date, and landing point.
- Advertisements Used Prior to Target Date Must Show Allocation as of the Target Date. Any advertisement submitted for publication or use prior to the target date that is included in the Target Date Fund’s name must disclose the Target Date Fund’s intended asset allocation at the target date and clearly indicate that the percentage allocations are as of the target date.
- Advertisements Used After the Target Date Must Disclose the Target Date Fund’s Actual Asset Allocation as of the Most Recent Calendar Quarter. An advertisement that is submitted for publication or use on or after the target date that is included in the Target Date Fund’s name must disclose the Target Date Fund’s actual asset allocation as of the most recent calendar quarter ended prior to the submission of the advertisement for publication or use and must clearly indicate that the percentage allocation are as of that date.
3. Other General Disclosure Required for Advertisements With More Than an Insubstantial Focus on Target Date Funds. An advertisement with more than an insubstantial focus on Target Date Funds must also disclose that: (i) investors should consider, in addition to age or retirement date, other factors such as the investor’s risk tolerance, personal circumstances and complete financial situation; (ii) an investment is not guaranteed and it is possible to lose money in a Target Date Fund; and (iii) stated asset allocation changes may be modified without a shareholder vote. The SEC noted that because a Target Date Fund is essentially “marketing the expertise of its manager in designing appropriate asset allocations over the long term, as a general matter, [the SEC] would not expect Target Date Funds to modify their glide paths frequently.” The SEC also expects a Target Date Fund’s board of directors to “monitor both the frequency and nature of the manager’s exercise of its flexibility to modify the fund’s glide path.”
- Single Target Date Fund Advertisement Must Include Actual Percentages at Specific Dates. In the case of an advertisement relating to a single Target Date Fund, the table, chart or graph must clearly (i) depict the actual percentage of allocations among the types of investments from the inception date of the Target Date Fund through the most recent calendar quarter ended prior to the submission of the advertisement for publication, (ii) show the future intended percentage allocations among the types of investments, and (iii) identify the periods using specific dates.
- Multiple Target Date Fund Advertisement. If the advertisement relates to multiple Target Date Funds with different target dates that all have the same pattern of asset allocations, the advertisement may either include separate presentations for each Target Date Fund that meets the same requirements applicable for single Target Date Fund advertisements or may include a single chart, table or graph that clearly depicts the intended percentage allocations of the Target Date Funds among types of investments and identifies the periods and other required points using number of years before and after the target date (as opposed to a specific date).
- Required Legends With Chart, Graph or Table. If an advertisement relates to a single Target Date Fund and is submitted prior to the landing point or relates to multiple Target Date Funds with different target dates that all have the same pattern of asset allocations, the table, chart or graph must be immediately preceded by statements that explain: (i) the asset allocation changes over time; (ii) the landing point (or in the case of a table, chart or graph for multiple Target Date Funds, the number of years after the target date at which the landing point will be reached); (iii) an explanation that the asset allocation becomes fixed at the landing point; (iv) the intended percentage allocations among types of investments at the landing point and (v) whether and the extent to which the intended percentage allocation among types of investments may be modified without a shareholder vote.
4. Landing Point Disclosure in Radio/Television Advertisement for Target Date Funds That Include a Date in Their Name. A radio or television advertisement that is submitted for use prior to the landing point must include a statement that includes the landing point, an explanation that the asset allocation becomes fixed at the landing point, and the intended percentage allocations of the fund among types of investments at the landing point.
The SEC also proposed to amend Rule 156 of the 1940 Act to provide additional guidance as to misleading statements in investment company marketing materials. If adopted, the proposed amendments would actually apply to all types of investment companies, not just Target Date Funds. The proposal provides that a statement could be considered misleading if it suggests a fund is an appropriate investment because of: (i) the emphasis it places on a single factor, such as an investor’s age or tax bracket, as the basis for determining that an investment is appropriate or (ii) 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.
Comment Period and Questions Raised by the SEC
The SEC sought comments on a number of aspects related to its proposal, and some of the questions raised by the SEC are summarized below. Any comments should be submitted to the SEC on or before Aug. 23, 2010.
Questions About the Scope of the SEC’s Proposed Rules
Questions About the Asset Allocation Disclosure
- Does the proposed definition of Target Date Fund cover the types of funds that should be subject to the proposals?
- Is the requirement that a Target Date Fund have equity and fixed-income exposures too restrictive?
- Is the “more than insubstantial focus” standard sufficiently clear or should there be an alternative standard?
- Should the proposed requirements apply only to materials that are submitted for publication or use prior to the target date?
- Should a Target Date Fund’s marketing materials be required to disclose a risk rating based on a scale or index (e.g., 1 through 5, with 1 being least risky) that could be compared to other Target Date Funds? If so, how would such a scale or index be designed? Should the scale or index reflect only investment risk, or should it also take into account longevity and/or inflation risk?
Questions About the Glide Path
- Should the proposed requirement to disclose the target date (or current) asset allocation together with the first use of a Target Date Fund’s name apply only to a fund that includes a target date in its name?
- Within the percentage allocation, should a range be permitted for each asset class?
- Should a Target Date Fund that invests in other funds disclose its asset allocation in terms of types of investment (e.g., equity, fixed-income, cash and cash equivalents) or the types of funds in which it invests?
- Should the broad asset classes be further divided, based upon for example, maturity and credit quality for fixed-income securities or capitalization and market type (e.g., domestic, foreign and emerging market)? How should alternative investment strategies be reflected?
- Should the allocation be as of January 1 of the target date year or another date?
- Should the asset allocation information be disclosed in a location other than immediately adjacent to or immediately following the fund’s name? Should it be disclosed each time the fund’s name is used?
- Do investors need other information along with the allocation percentages in order to understand the significance of the percentages, such as information on the long-term performance, risks and volatility of different asset classes?
- Is the proposed disclosure of a Target Date Fund’s asset allocation likely to be an effective way to reduce investor misunderstanding or confusion with respect to a fund’s name?
- Should the SEC attempt to enhance comparability among Target Date Funds by prescribing a methodology for calculating a fund’s percentage allocations at and after the target date?
Questions About the Landing Point
- Should there be additional disclosure immediately adjacent to a Target Date Fund’s name indicating whether the glide path extends to the target date or through the life expectancy of the investor?
- Should a Target Date Fund’s prospectuses and/or statements of additional information be expressly required to disclose the underlying assumptions that led the Target Date Fund’s manager to select the fund’s current glide path?
- Should a Target Date Fund be expressly required to disclose in its prospectus or statement of additional information the number of times that it has previously changed its glide path and/or the number of times that Target Date Funds in the same complex have previously changed their glide paths and the reasons for those changes?
Questions Regarding the Asset Allocation Table, Chart or Graph
- Should the landing point allocation be disclosed in addition to or in place of the target date allocation?
- Should Target Date Funds provide more information regarding its landing point or asset allocation at landing point?
Questions Regarding the Anti-fraud Guidance
- Should the SEC prescribe the specific format of the table, chart or graph in order to enhance comparability for investors?
- Is the proposed maximum five-year interval appropriate? Should it be shorter or longer?
- Are there other presentation alternatives that may better highlight this information for investors?
- Should the proposed amendments apply to all investment companies or only Target Date Funds?
- Are there any other factors aside from age and tax bracket that are examples of single factors that could be overemphasized in determining whether an investment is appropriate?
The new content requirements under Rule 482 and Rule 34b-1 would become effective 90 days after the effective date of the proposed amendments, while the amendments to Rule 156 would be effective immediately upon the effective dates of the amendments.
1 Investment Company Advertising: Target Date Retirement Fund Names and Marketing, SEC Release Nos. 33-9126, 34-62300, IC-29301 (June 16, 2010).
2 Under the proposed rules, whether advertisements or supplemental sales literature place a more than insubstantial focus on one or more Target Date Funds would depend on the particular facts and circumstances. The SEC intends to cover a broad range of materials. For example, “materials that relate exclusively to one or more Target Date Funds would be covered” as well as “materials that cover a broad range of funds, such as a bound volume of fact sheets that include Target Date Funds or a Web site that includes Web pages for Target Date Funds.” The SEC does not intend to cover “materials that may not be primarily focused on marketing Target Date Funds to investors (e.g., a complete list of each fund within a fund complex, together with its performance).”
3 Proposed Rule 482(b)(5)(i)(A) would define a Target Date Fund as “an investment company that has an investment objective or strategy of providing varying degrees of long-term appreciation and capital preservations through a mix of equity and fixed-income exposures that changes over time based on an investor’s age, target retirement date or life expectancy.”
4 Proposed Rule 482(b)(5)(i)(B) would define a target date as “any date, including a year, that is used in the name of a Target Date Fund or if no date is used in the name of a Target Date Fund, the date described in the fund’s prospectus as the approximate date that an investor is expected to retire or cease purchasing shares of the fund.”
5 Proposed Rule 482(b)(5)(i)(C) would define landing point as “the first date, including a year, at which the asset allocation of a target date reaches its final asset allocation among types of investments.”
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