SEC Proposes Amendments to Investment Company Advertising Rules Affecting Marketing of Target Date Funds

Author:Mr Jeffrey Puretz and Joseph P. Kelly II


The Securities and Exchange Commission ("SEC") on June 16, 2010 proposed amendments to investment company advertising rules that would impact how target date funds are marketed.1 The proposed amendments are intended to provide investors with enhanced disclosure regarding these funds.

Target Date Funds

Many fund complexes offer "target date funds" that contain stated "target dates" in their names (e.g., 2025), which are intended to correspond to the approximate year an investor plans to retire. Typically, target date funds invest in a mix of asset classes and are designed to automatically shift the fund's asset allocation to become more conservative over time. Generally, the fund's asset allocation eventually becomes fixed at a point in time, referred to in the Proposing Release as the "landing point." This automatic shift in asset allocation has been referred to as a target date fund's "glide path."

Background and Scope of Proposed Amendments

Market losses experienced by target date funds in 2008, as well as the wide variation in returns among target date funds with the same stated target date and the growth of target date funds in the 401(k) market,2 have given rise to regulatory concerns regarding whether investors understand the risks associated with target date funds. In particular, the SEC is concerned that the naming conventions used by target date funds have contributed to investor misunderstanding.

The SEC is also concerned that target date funds are marketed as a simple and complete approach to investing, and that investors may not understand the risks. The proposed amendments are intended to address these concerns. The SEC has proposed amendments to Rules 156 and 482 under the Securities Act of 1933, as amended (the "1933 Act"), and Rule 34b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"). Rule 156 sets forth factors to be considered in determining whether investment company sales literature is misleading. Rule 482 governs sales literature and advertisements of investment companies. An advertisement subject to Rule 482 is a type of "prospectus" under Section 10(b) of the 1933 Act,3 and therefore its use may result in prospectus liability. Rule 34b-1 governs advertisements and sales literature of investment companies, including, but not limited to, supplemental sales material that is preceded or accompanied by a statutory prospectus.4

The proposed amendments to Rules 482 and 34b-1 would apply to advertisements and supplemental sales literature that place a "more than insubstantial focus" on one or more target date funds.5 This is intended to allow, among other things, a fund complex to use advertising that shows a list of funds in the complex and their performance without triggering the special disclosure for target date funds called for by the proposed amendments. According to the Proposing Release, what constitutes a "more than insubstantial focus" would depend on the particular facts and circumstances, but is intended to cover a broad...

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