The SEC issued proposed amendments to Rule 482 under the Securities Act of 1933, as amended (the “Securities Act”), and Rule 34b-1 under the Investment Company Act of 1940, as amended, that are designed primarily to provide additional information about target date funds to potential investors. Because of the impact of market events in 2008 on target date funds and their increased importance as retirement savings investment vehicles, the SEC has devoted particular attention to issues raised by target date funds. In 2009, target date funds were the subject of a joint hearing by the SEC and DOL and congressional testimony by SEC Chairman Mary L. Schapiro and Andrew J. Donohue, Director of the SEC’s Division of Investment Management (as discussed in the May 26, 2009 Alert). In 2010, the SEC and DOL subsequently issued a joint bulletin designed to provide basic information to Directors on target date funds (as discussed in the May 18, 2010 Alert). The major elements of the proposed amendments (the “Amendments”) are described below.
Definition of Target Date Fund and Scope of the Amendments
The Amendments 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 preservation 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 (“Target Date Funds”). For purposes of the Amendments, the “Target Date” of a Target Date Fund is deemed to be either: (i) the date, including a year, included in the name of the Target Date Fund, or (ii) if no date is used in the name of the Fund, the date described in the fund’s prospectus as the approximate date that an investor is expected to retire or cease purchasing fund shares.
The Amendments would, in general terms, apply to advertisements and supplemental sales literature (collectively, “Marketing Materials”) that place more than an insubstantial focus on one or more Target Date Funds. Whether Marketing Materials place a more than insubstantial focus on one or more Target Date Funds will be based on the facts and circumstances surrounding the Marketing Materials. Materials that may not be primarily focused on marketing Target Date Funds (e.g., a complete list of each fund within a fund complex, together with their performance), but that are nonetheless considered Marketing Materials under Rules 482 and 34b-1 would not be deemed to place a more than insubstantial focus on Target Date Funds; however, materials related to a specific Target Date Fund or to multiple Target Date Funds that are designed to market the Target Date Fund or Target Date Funds to investors will be deemed to place a more than insubstantial focus on Target Date Funds.
Use of Target Dates in Fund Names
Under the Amendments, Marketing Materials placing more than an insubstantial focus on one or more Target Date Funds, and that include the name of a Target Date Fund that includes a Target Date (e.g., XYZ 2030 Fund), would be required to disclose the percentage allocations among types of investments (each an “Asset Class”), such as equity securities, fixed income securities, and cash and cash equivalents, for the Target Date Fund. The Amendments do not specify the Asset Classes to be used or the methodology for calculating allocations; however, the Asset Classes disclosed in Marketing Materials would need to conform to the asset allocation disclosure contained in the fund’s prospectus. Target Date Funds that operate as funds-of-funds would have to disclose the percentage allocations among Asset Classes of the investments made by underlying funds, not the allocation among underlying funds. A Target Date Fund that is permitted to invest within a percentage range in an Asset Class could disclose the range in response to the Amendment.
If Marketing Materials were submitted for publication prior to a fund’s Target Date, they would have to disclose the Target Date Fund’s intended allocation among Asset Classes at the Target Date. Alternatively, if the Marketing Materials were submitted for publication at or after the Target Date of the Target Date Fund, the Marketing Materials would have to disclose the Target Date Fund’s actual allocation among Asset Classes as of the most recent calendar quarter end. In either case, the disclosure would have to clearly indicate that the allocations among Asset Classes are as of the Target Date or quarter end, as applicable.
The Asset Class disclosure would have to appear immediately adjacent to the first use of the Target Date Fund’s name in print Marketing Materials, or immediately following the Target Date Fund’s name in radio or television Marketing Materials; and in either case, would have to be presented in a manner reasonably calculated to draw investor attention to the information.
Asset Allocation Table, Chart, or Graph and Landing Point Allocation
Under the Amendments, Marketing Materials (whether printed or delivered through an electronic medium), that place a more than insubstantial focus on one or more Target Date Funds would also be required to include a prominent table, chart, or graph that clearly depicts the percentage allocations among Asset Classes over the life of the Target Date Fund at identified periodic intervals that are no longer than five years in duration (the “Graphic Depiction”). Additionally, the Graphic Depiction would be required to depict the percentage allocations among Asset Classes at (i) the inception of the Target Date Fund, (ii) the Target Date, (iii) the first date, including a year, at which the Target Date Fund reaches its final allocation among Asset Classes (the “Landing Point”), and, (iv) in the case of Marketing Materials that relate to a single Target Date Fund, as of the most recent calendar quarter ended prior to the submission of the Marketing Materials for publication. The requirement to include a Graphic Depiction would apply to all Target Date Funds, including those that do not include the Target Date in their name.
The Amendments would also require that Marketing Materials related to a single Target Date Fund submitted for publication prior to the Landing Point or to multiple Target Date Funds with different Target Dates that all have the same pattern of allocation among Asset Classes include a statement immediately preceding the Graphic Depiction that provides the following information: (i) that the allocation among Asset Classes will change over time; (ii) the Landing Point (or for a multiple Target Date Fund presentation, the number of years after the Target Date at which the Landing Point will be reached), an explanation that the allocation among Asset Classes will become fixed at the Landing Point, and the intended allocation among Asset Classes at the Landing Point; and (iii) whether, and the extent to which, the intended allocation among Asset Classes may be modified without a shareholder vote.
The requirement to include a Graphic Depiction would not apply to radio or television Marketing Materials; however, any radio or television Marketing Materials that place a more than insubstantial focus on a Target Date Fund that includes the Target Date in its name would have to disclose (i) the Landing Point, (ii) an explanation that the allocation among Asset Classes becomes fixed at the Landing Point, and (iii) the intended allocation among Asset Classes at the Landing Point.
Disclosure of Risks and Considerations Relating to Target Date Funds
The Amendments would require Marketing Materials that place more than an insubstantial focus on one or more Target Date Funds to include statements advising the investor (i) to consider, in addition to his or her age or retirement date, other factors, including the investor’s risk tolerance, personal circumstances, and complete financial situation, (ii) that an investment in the Target Date Fund is not guaranteed and that it is possible to lose money by investing in the Target Date Fund, including at and after the Target Date, and (iii) unless disclosed as part of the statement immediately preceding the Graphic Depiction, whether, and the extent to which, the intended allocation among Asset Classes of the Target Date Fund may be modified without a shareholder vote.
Although the Amendments contain no express provision relating to board oversight, the release proposing the Amendments states that the SEC expects a Target Date Fund’s board of directors to monitor the exercise of any discretion an investment manager may have to modify the fund’s “glide path.”
The SEC is also proposing amendments to the general anti-fraud guidance regarding investment company sales literature provided in Rule 156 under the Securities Act. Specifically, Rule 156 would be amended to clarify that statements regarding the appropriateness of an investment in an investment company could be misleading if they (i) place emphasis 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) suggest, whether express or implied, that investing in the securities of an investment company is a simple investment plan or that it requires little or no monitoring by the investor. The proposed changes would apply to all types of investments companies, not just Target Date Funds.
The Amendments do not propose any changes to current prospectus disclosure requirements; however, in addition to requesting comments on the Amendments, the SEC is requesting comments on whether current prospectus disclosure for Target Date Funds is sufficient. In making this request, the SEC notes that current prospectuses for Target Date Funds generally include the following elements, which the SEC believes must be disclosed as part of a Target Date Fund’s principal investment strategies and principal investment risks: (1) a description of the glide path, often presented as a table or graph broken down by Asset Class; (2) the significance of specific points along the glide path, such as the Target Date and the Landing Point, and any flexibility retained by the investment manager to deviate from the glide path; and (3) the specific risks attendant to investments in Target Date Funds, such as the risk of loss up to and after the Target Date, and the risk of loss due to the absence of guarantees associated with the investment. The SEC requests comment on whether such disclosure should be expressly required by Form N-1A, and whether any additional disclosures should be required in Target Date Fund prospectuses.
Request for CommentsComments on the Amendments and on the necessity for adopting express prospectus disclosure requirements for Target Date Funds are due by August 23, 2010.