[Federal Register Volume 75, Number 120 (Wednesday, June 23, 2010)]
[Proposed Rules]
[Pages 35920-35945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15012]
[[Page 35919]]
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Part V
Securities and Exchange Commission
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17 CFR Parts 230 and 270
Investment Company Advertising: Target Date Retirement Fund Names and
Marketing; Proposed Rule
Federal Register / Vol. 75 , No. 120 / Wednesday, June 23, 2010 /
Proposed Rules
[[Page 35920]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230 and 270
[Release Nos. 33-9126; 34-62300; IC-29301; File No. S7-12-10]
RIN 3235-AK50
Investment Company Advertising: Target Date Retirement Fund Names
and Marketing
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing amendments
to rule 482 under the Securities Act of 1933 and rule 34b-1 under the
Investment Company Act of 1940 that, if adopted, would require a target
date retirement fund that includes the target date in its name to
disclose the fund's asset allocation at the target date immediately
adjacent to the first use of the fund's name in marketing materials.
The Commission is also proposing amendments to rule 482 and rule 34b-1
that, if adopted, would require marketing materials for target date
retirement funds to include a table, chart, or graph depicting the
fund's asset allocation over time, together with a statement that would
highlight the fund's final asset allocation. In addition, the
Commission is proposing to amend rule 482 and rule 34b-1 to require a
statement in marketing materials to the effect that a target date
retirement fund should not be selected based solely on age or
retirement date, is not a guaranteed investment, and the stated asset
allocations may be subject to change. Finally, the Commission is
proposing amendments to rule 156 under the Securities Act that, if
adopted, would provide additional guidance regarding statements in
marketing materials for target date retirement funds and other
investment companies that could be misleading. The amendments are
intended to provide enhanced information to investors concerning target
date retirement funds and reduce the potential for investors to be
confused or misled regarding these and other investment companies.
DATES: Comments should be received on or before August 23, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an e-mail to [email protected]. Please include
File Number S7-12-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-12-10. This file
number should be included on the subject line if e-mail is used. To
help us process and review your comments more efficiently, please use
only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change; we
do not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Devin F. Sullivan, Senior Counsel;
Michael C. Pawluk, Branch Chief; or Mark T. Uyeda, Assistant Director,
Office of Disclosure Regulation, Division of Investment Management, at
(202) 551-6784, 100 F Street, NE., Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is proposing amendments to rules 156 \1\ and 482 \2\
under the Securities Act of 1933 (``Securities Act'') \3\ and rule 34b-
1 \4\ under the Investment Company Act of 1940 (``Investment Company
Act'').\5\
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\1\ 17 CFR 230.156.
\2\ 17 CFR 230.482.
\3\ 15 U.S.C. 77a et seq.
\4\ 17 CFR 270.34b-1.
\5\ 15 U.S.C. 80a-1 et seq.
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Table of Contents
I. Background
A. Growth of Target Date Retirement Funds
B. Recent Concerns About Target Date Funds
II. Discussion
A. Content Requirements for Target Date Fund Marketing Materials
1. Background and Scope of Proposed Amendments
2. Use of Target Dates in Fund Names
3. Asset Allocation Table, Chart, or Graph and Landing Point
Allocation
4. Disclosure of Risks and Considerations Relating to Target
Date Funds
B. Antifraud Guidance
C. Technical and Conforming Amendments
D. Compliance Date
E. Request for Comments on Prospectus Disclosure Requirements
III. General Request for Comments
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Consideration of Burden on Competition and Promotion of
Efficiency, Competition, and Capital Formation
VII. Initial Regulatory Flexibility Analysis
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
Text of Proposed Rule Amendments
I. Background
A. Growth of Target Date Retirement Funds
Over the past two decades, there has been a sizable shift in how
Americans provide for their retirement needs. Previously, many
Americans were able to rely on a combination of Social Security and
company-sponsored defined benefit pension plans.\6\ Today, however,
defined benefit pension plans are less common and individuals are
increasingly dependent on participant-directed vehicles, such as 401(k)
plans,\7\ that make them responsible for accumulating sufficient assets
for their retirement.\8\
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\6\ See, e.g., United States Government Accountability Office,
Retirement Savings: Automatic Enrollment Shows Promise for Some
Workers, but Proposals to Broaden Retirement Savings for Other
Workers Could Face Challenges, at 3 (Oct. 2009) (stating that
``[t]raditionally, employers that sponsored retirement plans
generally established `defined benefit' plans'').
\7\ A 401(k) plan is a defined contribution plan that meets the
requirements for qualification under Section 401(k) of the Internal
Revenue Code (26 U.S.C. 401(k)).
\8\ Department of Labor data indicate that the number of active
participants in defined benefit plans fell from about 27 million in
1975 to approximately 20 million in 2006, whereas the number of
active participants in defined contribution plans increased from
about 11 million in 1975 to 66 million in 2006. See Request for
Information Regarding Lifetime Income Options for Participants and
Beneficiaries in Retirement Plans, 75 FR 5253, 5253-54 (Feb. 2,
2010) (joint request for information from the Department of the
Treasury and the Department of Labor).
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As a result, Americans are increasingly responsible for
constructing and managing their own retirement portfolios. Effective
management of a retirement portfolio can be a challenging task,
requiring significant knowledge and commitment of time.\9\
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\9\ See, e.g., Testimony of Barbara D. Bovbjerg, Director,
Education, Workforce, and Income Security, United States Government
Accountability Office, before the U.S. Senate Special Committee on
Aging, 401(k) Plans: Several Factors Can Diminish Retirement
Savings, but Automatic Enrollment Shows Promise for Increasing
Participation and Savings, at 5-6 (Oct. 28, 2009), available at
http://www.gao.gov/new.items/d10153t.pdf (attributing the failure of
some employees to participate in defined contribution plans to ``a
tendency to procrastinate and follow the path that does not require
an active decision'').
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[[Page 35921]]
Target date retirement funds (hereinafter ``target date funds'')
are designed to make it easier for investors to hold a diversified
portfolio of assets that is rebalanced automatically among asset
classes over time without the need for each investor to rebalance his
or her own portfolio repeatedly.\10\ A target date fund is typically
intended for investors whose retirement date is at or about the fund's
stated target date. Target date funds generally invest in a diverse mix
of asset classes, including stocks, bonds, and cash and cash
equivalents (such as money market instruments). As the target date
approaches and often continuing for a significant period thereafter, a
target date fund shifts its asset allocation in a manner that is
intended to become more conservative--usually by decreasing the
percentage allocated to stocks.\11\
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\10\ See, e.g., Youngkyun Park, Investment Behavior of Target-
Date Fund Users Having Other Funds in 401(k) Plan Accounts, 30
Employee Benefit Research Institute Issue Brief, at 2 (Dec. 2009).
\11\ See, e.g., Josh Charlson et al., Morningstar Target-Date
Series Research Paper: 2009 Industry Survey, at 6 (Sept. 9, 2009)
(``2009 Morningstar Paper''); Investment Company Institute, 2010
Investment Company Fact Book, at 116 (2010) (``2010 Fact Book'').
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Managers of target date funds have stated that, in constructing
these funds, they attempt to address a variety of risks faced by
individuals investing for retirement, including investment risk,
inflation risk, and longevity risk.\12\ Balancing these risks involves
tradeoffs, such as taking on greater investment risk in an effort to
increase returns and reduce the chances of outliving one's retirement
savings.\13\ Further, target date fund managers have taken different
approaches to balancing these risks, and thus target date funds for the
same retirement year have had different asset allocations.\14\
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\12\ See, e.g., Transcript of Public Hearing on Target Date
Funds and Other Similar Investment Options before the U.S.
Securities and Exchange Commission and the U.S. Department of Labor,
at 62 (June 18, 2009), available at http://www.sec.gov/spotlight/targetdatefunds/targetdatefunds061809.pdf (``Joint Hearing
Transcript'') (testimony of John Ameriks, Principal, Vanguard
Group).
\13\ See id. at 23-24 (testimony of Richard Whitney, Director of
Asset Allocation, T. Rowe Price).
\14\ See 2009 Morningstar Paper, supra note 11, at 6
(attributing variations in asset allocations to philosophical
differences among fund companies' asset allocators and their
approaches to balancing risks).
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The schedule by which a target date fund's asset allocation is
adjusted is commonly referred to as the fund's ``glide path.'' The
glide path typically reflects a gradual reduction in equity exposure
before reaching a ``landing point'' at which the asset allocation
becomes static. For some target date funds, the landing point occurs at
or near the target date, but for other funds, the landing point is
reached a significant number of years--as many as 30--after the target
date.\15\ While there are some target date funds with landing points at
or near the target date, a significant majority have landing points
after the target date.\16\
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\15\ Based on Commission staff analysis of registration
statements filed with the Commission.
\16\ Of the nine largest target date fund families representing
approximately 93% of assets under management in target date funds,
the period of time between the target date and the landing point is
0 years for one fund family, 7 years for one fund family, 7-10 years
for one fund family, 10 years for one fund family, 10-15 years for
two fund families, 20 years for one fund family, 25 years for one
fund family, and 30 years for one fund family. The largest families
were determined based on Commission staff analysis of data as of
March 31, 2010, obtained from Morningstar Direct.
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Since the inception of target date funds in the mid-1990s, assets
held by these funds have grown considerably. Today, assets of target
date funds registered with the Commission total approximately $270
billion.\17\ Target date funds received approximately $43 billion in
net new cash flow during 2009, $42 billion during 2008, and $56 billion
during 2007, compared to $22 billion in 2005 and $4 billion in
2002.\18\
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\17\ Based on Commission staff analysis of data as of March 31,
2010, obtained from Morningstar Direct.
\18\ See 2010 Fact Book, supra note 11, at 173 (Table 50).
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Recently, target date funds have become more prevalent in 401(k)
plans as a result of the designation of these funds as a qualified
default investment alternative (``QDIA'') by the Department of Labor
pursuant to the Pension Protection Act of 2006.\19\ The QDIA
designation provides liability protection for an employer who sponsors
a defined contribution plan and places contributions of those plan
participants who have not made an investment choice into a target date
fund or other QDIA.\20\ According to one study, 70% of U.S. employers
surveyed now use target date funds as their default investment.\21\
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\19\ See Default Investment Alternatives Under Participant
Directed Individual Account Plans, 72 FR 60452, 60452-53 (Oct. 24,
2007) (``QDIA Adopting Release''). Under the Pension Protection Act,
the Department of Labor was directed to adopt regulations that
``provide guidance on the appropriateness of designating default
investments that include a mix of asset classes consistent with
capital preservation or long-term capital appreciation, or a blend
of both.'' Pension Protection Act of 2006, Public Law 109-280.
\20\ See QDIA Adopting Release, supra note 19, 72 FR at 60452-
53. As an alternative to a target date fund as a QDIA, Department of
Labor regulations permit a plan sponsor to select a ``balanced
fund'' that is consistent with a target level of risk appropriate
for participants of the plan as a whole or a ``managed account''
that operates similarly to a target date fund. 29 CFR 2550.404c-
5(e)(4)(ii)-(iii).
\21\ Margaret Collins, Target-Date Retirement Funds May Miss
Mark for Unsavvy Savers, Bloomberg (Oct. 15, 2009) (citing a Mercer,
Inc. study of more than 1,500 companies).
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B. Recent Concerns About Target Date Funds
Market losses incurred in 2008, coupled with the increasing
significance of target date funds in 401(k) plans,\22\ have given rise
to a number of concerns about target date funds. In particular,
concerns have been raised regarding how target date funds are named and
marketed.
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\22\ See Investment Company Institute, The U.S. Retirement
Market, Third Quarter 2009, at 31 (Feb. 2010) (approximately 67% of
assets held by target date funds as of September 30, 2009, were
attributable to defined contribution plans).
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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.\23\
Investment losses for funds with a target date of 2010 averaged nearly
24% in 2008, ranging between approximately 9% and 41% \24\ (compared to
losses for the Standard & Poor's 500 Index (``S&P 500''), the Nasdaq
Composite Index (``Nasdaq Composite''), and the Wilshire 5000 Total
Market Index (``Wilshire 5000'') of approximately 37%, 41%, and 37%,
respectively).\25\ By contrast, in 2009, returns for 2010 target date
funds ranged between approximately 7% and 31%, with an average return
of approximately 22% \26\ (compared to returns for the S&P 500, Nasdaq
Composite, and Wilshire 5000 of approximately 26%, 44%, and 28%,
[[Page 35922]]
respectively).\27\ Although the 2009 returns were positive, the
differences between 2008 and 2009 returns demonstrate significant
volatility. In addition, 2009 returns, like 2008 returns, reflect
significant variability among funds with the same target date.
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\23\ See, e.g., Gail MarksJarvis, Missing Their Marks; Target
Date Funds Took Too Many Risks for 401(k) Investors Nearing
Retirement, Chicago Tribune (Mar. 22, 2009); Mark Jewell, Not All
Target-Date Funds Are Created Equal, Associated Press (Jan. 15,
2009).
\24\ Based on Commission staff analysis of data obtained from
Morningstar Direct. See also Pamela Yip, Losing Sight of Retirement
Goals; Target-Date Mutual Funds Aren't Always on the Mark, Dallas
Morning News (May 11, 2009) (reviewing 2008 performance of target
date funds); Robert Powell, Questions Arise on Target-Date Funds
after Dismal 2008, MarketWatch (Feb. 4, 2009) (same).
\25\ See S&P 500 monthly and annual returns, available at http://www.standardandpoors.com/indices/market-attributes/en/us; Nasdaq
Composite Index performance data, available at http://www.nasdaq.com/aspx/dynamic_charting.aspx?symbol=IXIC&selected=IXIC; and Wilshire Index
Calculator, available at http://www.wilshire.com/Indexes/calculator/.
\26\ Based on Commission staff analysis of data obtained from
Morningstar Direct.
\27\ See supra note 25.
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While the variations in returns among target date funds with the
same target date can be explained by a number of factors, one key
factor is the use of different asset allocation models by different
funds, with the result that target date funds sharing the same target
date have significantly different degrees of exposure to more volatile
asset classes, such as stocks.\28\ Equity exposure has ranged from
approximately 25% to 65% at the target date and from approximately 20%
to 65% at the landing point.\29\ We note that opinions differ on what
an optimal glide path should be.\30\ An optimal glide path for one
investor may not be optimal for another investor with the same
retirement date, with the optimal glide path depending, among other
things, on an investor's appetite for certain types of risk, other
investments, retirement and labor income, expected longevity, and
savings rate.
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\28\ See 2009 Morningstar Paper, supra note 11, at 6-9.
\29\ Based on Commission staff analysis of registration
statements filed with the Commission.
\30\ See, e.g., statement of Joseph C. Nagengast, Target Date
Analytics LLC, at 2 (May 22, 2009), available at http://www.sec.gov/comments/4-582/4582-3.pdf (stating that ``the glide path must be
designed to provide for a predominance of asset preservation as the
target date nears and arrives''); Josh Cohen, Russell Investments,
Twelve Observations on Target Date Funds, at 2 (Apr. 2008),
available at http://www.dol.gov/ebsa/pdf/cmt-06080910.pdf (arguing
against high equity allocations at the target date). But see Anup K.
Basu and Michael E. Drew, Portfolio Size Effect in Retirement
Accounts: What Does It Imply for Lifecycle Asset Allocation Funds,
35 J. Portfolio Mgmt. 61, 70 (Spring 2009) (suggesting that ``the
growing size of the plan participant's contributions in later years
calls for aggressive asset allocation--quite the opposite of the
strategy currently followed by lifecycle asset allocation funds'');
Joint Hearing Transcript, supra note 12, at 103 (testimony of Seth
Masters, Chief Investment Officer for Blend Strategies and Defined
Contributions, AllianceBernstein) (stating that the objective of
target date funds should not be to minimize risk and volatility
nearing retirement, but rather to minimize the risk that
participants will run out of money in retirement).
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In June 2009, the Commission and the Department of Labor held a
joint hearing on target date funds.\31\ Representatives of a wide range
of constituencies participated at the hearing, including investor
advocates, employers who sponsor 401(k) plans, members of the financial
services industry, and academics. Some participants at the hearing
spoke of the benefits of target date funds (for example, as a means to
permit investors to diversify their holdings and prepare for
retirement), but a number raised concerns, particularly regarding
investor understanding of the risks associated with, and the
differences among, target date funds. Some of these concerns revolved
around the naming conventions of target date funds and the manner in
which target date funds are marketed.
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\31\ See Joint Hearing Transcript, supra note 12.
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One concern raised at the hearing was the potential for a target
date fund's name to contribute to investor misunderstanding about the
fund. Target date fund names generally include a year, such as 2010.
The year is intended as the approximate year of an investor's
retirement, and an investor may use the date contained in the name to
identify a fund that appears to meet his or her retirement needs.\32\
This naming convention, however, may contribute to investor
misunderstanding of target date funds.\33\ Investors may not
understand, from the name, the significance of the target date in the
fund's management or the nature of the glide path up to and after that
date. For example, investors may expect that at the target date, most,
if not all, of their fund's assets will be invested conservatively to
provide a pool of assets for retirement needs.\34\ They also may
mistakenly assume that funds that all have the same date in their name
are managed according to a uniform asset allocation strategy.\35\
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\32\ See, e.g., statement of Karrie McMillan, General Counsel,
Investment Company Institute, at Target Date Fund Joint Hearing
(June 18, 2009) (``McMillan statement''), available at http://www.dol.gov/ebsa/pdf/ICI061809.pdf, at 6-7 (stating that the
expected retirement date that is used in target date fund names is a
point in time to which investors easily can relate).
\33\ See, e.g., Joint Hearing Transcript, supra note 12, at 65
(testimony of Marilyn Capelli-Dimitroff, Chair, Certified Financial
Planner Board of Standards, Inc.) (stating that target date funds
may be ``fundamentally misleading'' to investors because they can be
managed in ways that are inconsistent with reasonable expectations
created by the names).
\34\ See id. at 87 (testimony of David Certner, Legislative
Counselor and Legislative Policy Director, AARP) (hypothesizing that
investors who were looking at 2010 target date funds were ``thinking
something much more conservative than maybe the theoretical notions
of what the payouts are going to be over a longer lifetime
period'').
\35\ See id. at 272 (testimony of Ed Moore, President, Edelman
Financial Services) (asserting that the practice of funds referring
to themselves by year is misleading because each fund is permitted
to create its own asset allocation in the absence of industry
standards regarding portfolio management and construction).
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Another concern raised at the hearing was the degree to which the
marketing materials provided to 401(k) plan participants and other
investors in target date funds may have contributed to a lack of
understanding by investors of those funds and their associated
investment strategies and risks. A number of hearing participants
expressed concern regarding target date fund marketing. For example,
one participant stated that ``there are significant problems with how
[target date funds] are presently marketed,'' and that ``what is
lacking is clear and understandable information on the investment
strategy and potential risks associated with that strategy.'' \36\
Another participant cited a survey that her organization had conducted,
which involved showing a composite description of target date funds
derived from actual marketing materials to survey subjects, the
majority of whom perceived that those materials made ``a promise that
[did] not, in fact, exist.'' \37\ According to that participant, some
of the survey respondents who reviewed the marketing materials thought
that target date funds made various promises, such as ``funds at the
time of retirement,'' a ``secure investment with minimal risks,''
similarity to ``a guaranteed investment'' during a market downturn, or
``a comfortable retirement.'' \38\
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\36\ Id. at 153 (testimony of Mark Wayne, National Association
of Independent Retirement Plan Advisors).
\37\ Id. at 178 (testimony of Jodi DiCenzo, Behavioral Research
Associates). A copy of the survey results is available at http://www.sec.gov/comments/4-582/4582-1a.pdf.
\38\ Id.
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Our staff has reviewed a sample of target date fund marketing
materials and found that the materials often characterized target date
funds as offering investors a simple solution for their retirement
needs. The materials typically presented a list of funds with different
target dates and invited investors to choose the fund that most closely
matches their anticipated retirement date. Even though the marketing
materials for target date funds often included some information about
associated risks, they often accompanied this disclosure with slogan-
type messages or other catchphrases encouraging investors to conclude
that they can simply choose a fund without any need to consider their
individual circumstances or monitor the fund over time.
The simplicity of the messages presented in these marketing
materials at times belies the fact that asset allocation strategies
among target date fund managers differ and that investments that are
appropriate for an investor depend not only on his or her retirement
date, but on other factors, including appetite for certain types of
[[Page 35923]]
risk, other investments, retirement and labor income, expected
longevity, and savings rate. The investor is, in effect, relying on the
fund manager's asset allocation model, which may or may not be
appropriate for the particular investor. The model's assumptions could
be inappropriate for an investor either from the outset or as a result
of a change in economic or other circumstances, such as job loss,
unexpected expenditures that lead to decreased contributions, or
serious illness affecting life expectancy.
As a first step to address potential investor misunderstanding of
target date funds, the Commission recently posted on its investor
education Web site a brochure explaining target date funds and matters
that an investor should consider before investing in a target date
fund.\39\ Today, we are proposing to take another step to address the
concerns that have been raised. We are proposing amendments to rule 482
under the Securities Act and rule 34b-1 under the Investment Company
Act that, if adopted, would require a target date fund that includes
the target date in its name to disclose the fund's asset allocation at
the target date immediately adjacent to (or, in a radio or television
advertisement, immediately following) the first use of the fund's name
in marketing materials. We are also proposing amendments to rule 482
and rule 34b-1 that, if adopted, would require enhanced disclosure in
marketing materials for a target date fund regarding the fund's glide
path and asset allocation at the landing point, as well as the risks
and considerations that are important when deciding whether to invest
in a target date fund. Finally, we are proposing amendments to rule 156
under the Securities Act that, if adopted, would provide additional
guidance regarding statements in marketing materials for target date
funds and other investment companies that could be misleading. The
amendments that we are proposing in this release are intended to
address the concerns that have been raised regarding the potential for
investor misunderstanding to arise from target date fund names and
marketing materials.
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\39\ See Investor Bulletin: Retirement Funds (May 6, 2010),
available at http://www.sec.gov/investor/alerts/tdf.htm and http://investor.gov/investor-bulletin-target-date-retirement-funds/?preview=true&preview_id=1154&preview_nonce =908a042f2f/. This
brochure is also posted on the Department of Labor's Web site and is
available at http://www.dol.gov/ebsa/pdf/TDFInvestorBulletin.pdf.
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II. Discussion
A. Content Requirements for Target Date Fund Marketing Materials
We are proposing to amend our rules governing investment company
marketing materials to address concerns regarding target date fund
names and information presented in target date fund marketing
materials. To address concerns that a target date fund's name may
contribute to investor misunderstanding about the fund, we are
proposing to require marketing materials for a target date fund that
includes the target date in its name to disclose, together with the
first use of the fund's name, the asset allocation of the fund at the
target date.
We are also proposing to require enhanced disclosures to address
concerns regarding the degree to which the marketing materials provided
to 401(k) plan participants and other investors in target date funds
may have contributed to a lack of understanding by investors of those
funds and their associated strategies and risks. First, we are
proposing amendments that would require target date fund marketing
materials that are in print or delivered through an electronic medium
to include a table, chart, or graph depicting the fund's glide path,
together with a statement that, among other things, would highlight the
fund's asset allocation at the landing point. Radio and television
advertisements would be required to disclose the fund's asset
allocation at the landing point. Second, we are proposing amendments
that would require a statement 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 a target date fund's
stated asset allocations may be subject to change. These enhanced
disclosure requirements would apply to all target date funds, including
those that do not include a date in their names, except that the
landing point disclosures for radio and television advertisements would
apply only to target date funds that include a date in their names.
1. Background and Scope of Proposed Amendments
Rule 482 under the Securities Act permits investment companies to
advertise information prior to delivery of a statutory prospectus.\40\
Rule 482 advertisements are ``prospectuses'' under Section 10(b) of the
Securities Act.\41\ As a result, a rule 482 advertisement need not be
preceded or accompanied by a statutory prospectus.\42\ Rule 34b-1 under
the Investment Company Act prescribes the requirements for supplemental
sales literature (i.e., sales literature that is preceded or
accompanied by the statutory prospectus).\43\ We are proposing to amend
rules 482 and 34b-1 to require enhanced disclosures to be made in
target date fund marketing materials, whether or not those materials
are preceded or accompanied by a fund's statutory prospectus.\44\
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\40\ ``Statutory prospectus'' refers to the prospectus required
by Section 10(a) of the Securities Act [15 U.S.C. 77j(a)]. In 2009,
the Commission adopted rule amendments that, for mutual fund
securities, permit certain statutory prospectus delivery obligations
under the Securities Act to be satisfied by sending or giving key
information in the form of a summary prospectus. See Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26,
2009)] (amending rule 498 under the Securities Act).
\41\ 15 U.S.C. 77j(b).
\42\ Under the Securities Act, the term ``prospectus'' generally
is defined broadly to include any communication that offers a
security for sale. See Section 2(a)(10) of the Securities Act [15
U.S.C. 77b(a)(10)]. Section 5(b)(1) of the Securities Act [15 U.S.C.
77e(b)(1)] makes it unlawful to use interstate commerce to transmit
any prospectus relating to a security with respect to which a
registration statement has been filed unless the prospectus meets
the requirements of Section 10 of the Securities Act [15 U.S.C.
77j]. Because a rule 482 advertisement is a prospectus under Section
10(b), a rule 482 advertisement need not be preceded or accompanied
by a statutory prospectus to satisfy the requirements of Section
5(b)(1).
\43\ 17 CFR 270.34b-1. Under Section 2(a)(10)(a) of the
Securities Act [15 U.S.C. 77b(a)(10)(a)], a communication sent or
given after the effective date of the registration statement is not
deemed a ``prospectus'' if it is proved that prior to or at the same
time with such communication a statutory prospectus was sent or
given to the person to whom the communication was made.
\44\ The proposed amendments would apply to any investment
company registered under Section 8 of the Investment Company Act [15
U.S.C. 80a-8] or separate series of a registered investment company
that meets the proposed definition of target date fund.
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We are proposing that the amendments apply to advertisements and
supplemental sales literature that place a more than insubstantial
focus on one or more target date funds.\45\ Under the proposal, 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. Our intention in proposing the
``more than insubstantial focus'' test is to cover a broad range of
materials. Materials that relate exclusively to one or more target date
funds would be covered. Some 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, also
would be covered because they include information about
[[Page 35924]]
target date funds that is more than insubstantial. We do not, however,
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), but that
are nonetheless considered advertisements or supplemental sales
literature under rules 482 and 34b-1.
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\45\ Proposed rules 482(b)(5)(ii), (iii), (iv), and (v);
proposed rule 34b-1(c).
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For purposes of the proposed amendments, a ``target date fund''
would be defined 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.\46\ This definition is
intended to encompass target date funds that are marketed as retirement
savings vehicles and that have given rise to the concerns described in
this release.
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\46\ Proposed rule 482(b)(5)(i)(A); proposed rule 34b-1(c).
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The proposed definition is intended to ensure that the proposed
amendments would apply to all funds that hold themselves out to
investors as target date funds, including those that qualify under the
Department of Labor's QDIA regulations. The proposed definition is
similar to the description of a target date fund provided in the
Department of Labor's QDIA regulations.\47\ However, we are not
proposing to apply certain eligibility criteria of a QDIA, namely, that
a target date fund apply generally accepted investment theories, be
diversified so as to minimize the risk of large losses, and change its
asset allocations and associated risk levels over time with the
objective of becoming more conservative with increasing age. Because we
believe that investors in any fund that holds itself out as a target
date fund would benefit from the disclosures that we are proposing,
regardless of whether the fund is eligible for QDIA status, the
proposed definition is not limited only to those funds that meet the
more restricted criteria required for QDIA status and the resulting
liability protection for plan sponsors. In addition, unlike the
Department of Labor's description, the proposed definition refers to a
fund's investment objective or strategy, rather than how the fund is
``designed.'' While we believe that these two concepts generally are
equivalent, we are proposing that the definition refer to the fund's
``investment objective or strategy'' because funds are required to
disclose their investment objectives and strategies in their statutory
prospectuses.\48\
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\47\ See 29 CFR 2550.404c-5(e)(4)(i) (defining as a permissible
QDIA ``an investment fund product or model portfolio that applies
generally accepted investment theories, is diversified so as to
minimize the risk of large losses and that is designed to provide
varying degrees of long-term appreciation and capital preservation
through a mix of equity and fixed income exposures based on the
participant's age, target retirement date (such as normal retirement
age under the plan) or life expectancy. Such products and portfolios
change their asset allocations and associated risk levels over time
with the objective of becoming more conservative (i.e., decreasing
risk of losses) with increasing age.'').
\48\ See Items 2, 4, and 9 of Form N-1A.
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We request comment on the scope of the proposed amendments and, in
particular, on the following issues:
Does the proposed definition of ``target date fund'' cover
the types of funds that should be subject to the proposal, or should we
modify the definition in any way? The proposed definition requires that
a target date fund have both equity and fixed income exposures. Is this
condition too restrictive? For example, could a fund market itself as a
target date fund, yet not include equity exposure and/or fixed income
exposure, and therefore not be subject to the proposed amendments?
Would the proposed definition cover types of funds other than target
date funds that are designed to meet retirement goals? If so, is this
appropriate or should the definition be modified? Should our proposal
cover any fund with a date in its name?
We are proposing that the amendments apply to marketing
materials that place a more than insubstantial focus on one or more
target date funds. Is this limitation appropriate, or should any or all
of the proposed amendments apply to all marketing materials that
include any reference to a target date fund? Should specific types of
materials be exempted from the rule? If so, how should this exemption
be defined? Is the ``more than insubstantial focus'' standard
sufficiently clear in this context or should it be modified? Is there
an alternative standard that would satisfy the Commission's objectives
and be easier to apply? Should the Commission provide further guidance
on facts and circumstances that would cause marketing materials to be
considered to place a more than insubstantial focus on one or more
target date funds? If so, what should this guidance be?
2. Use of Target Dates in Fund Names
We are proposing to require a target date fund that includes the
target date in its name to disclose, together with the first use of the
fund's name, the asset allocation of the fund at the target date.\49\
This proposed requirement would apply to advertisements and
supplemental sales literature that place a more than insubstantial
focus on one or more target date funds. This proposal is intended to
convey information about the allocation of the fund's assets at the
target date and reduce the potential for names that include a target
date to contribute to investor misunderstanding of target date funds.
For example, if a target date fund remains significantly invested in
equity securities at the target date, the proposed disclosure would
help to reduce or eliminate incorrect investor expectations that the
fund's assets will be invested in a more conservative manner at that
time.
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\49\ Based on Commission staff analysis of data obtained from
Morningstar Direct, the Commission staff believes that all funds
operating as target date funds currently contain a date in their
names.
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The proposal would amend rule 482 under the Securities Act and rule
34b-1 under the Investment Company Act to require that an advertisement
or supplemental sales literature that places a more than insubstantial
focus on one or more target date funds, and that uses the name of a
target date fund that includes a date (including a year), must disclose
the percentage allocations of the fund among types of investments
(e.g., equity securities, fixed income securities, and cash and cash
equivalents) as follows: (1) An advertisement, or supplemental sales
literature, that is submitted for publication or use prior to the date
that is included in the name would be required to disclose the target
date fund's intended asset allocation at the date that is included in
the name and must clearly indicate that the percentage allocations are
as of the date in the name; and (2) an advertisement, or supplemental
sales literature, that is submitted for publication or use on or after
the date that is included in the name would be required to 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
allocations are as of that date.\50\
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\50\ Proposed rule 482(b)(5)(iii); proposed rule 34b-1(c).
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As described in the preceding paragraph, for target date fund
advertisements and supplemental sales literature that are submitted for
publication or use on or after the target date, we are proposing to
require disclosure of the target date fund's current asset allocation,
rather than the fund's intended target date asset allocation. We
believe that after the
[[Page 35925]]
target date has been reached, the fund's asset allocation at the target
date is of limited relevance to investors and may be confusing or
misleading if disclosed prominently with the name. However, we believe
that disclosure of the current asset allocation is important to prevent
investors from wrongly concluding that the fund is invested more
conservatively than is the case. The rule, as proposed, would require
disclosure of the actual current asset allocation when the target date
that is included in the name, which may be a year, has been reached. As
a result, the rule would require the current allocation to be used
beginning on January 1 of the target date year even if the fund reaches
its target date allocation later in the year. We believe that this is
appropriate because investors who have reached their retirement year
may retire at any point in that year, so that the current allocation
may be more relevant than the intended allocation later in the year.
Under the proposal, the required disclosure regarding the asset
allocation must appear immediately adjacent to (or, in a radio or
television advertisement, immediately following) the first use of the
fund's name. Furthermore, the disclosure would be required to be
presented in a manner reasonably calculated to draw investor attention
to the information.\51\
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\51\ Id. The requirement that the target date asset allocation
be presented in a manner reasonably calculated to draw investor
attention to the information is the same presentation requirement
that applies to certain legends required in advertisements and
supplemental sales literature delivered through an electronic
medium. See rule 482(b)(5); rule 34b-1. We do not believe that the
presentation requirements set forth in current rule 482(b)(5) for
certain legends required in print advertisements and supplemental
sales literature (e.g., type size and style) would be appropriate
for the proposed target date asset allocation disclosure. For
example, if the name of the target date fund in an advertisement is
presented in a very large type size, but the major portion of the
advertisement is presented in significantly smaller type size, rule
482(b)(5) would permit the use of the smaller type size, which may
not be sufficient to attract investor attention.
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Our proposal would amend rules 482 and 34b-1 to address the use of
target date fund names that include the target date. We emphasize that
investors should not rely on a fund's name as the sole source of
information about the fund's investments and risks. A fund's name, like
any other single item of information about the fund, cannot provide
comprehensive information about the fund. In the case of target date
funds, the fund's name provides no information about the asset
allocation or portfolio composition. However, target date fund names
are designed to be significant to investors when selecting a fund.\52\
For that reason, the Commission is proposing amendments to rules 482
and 34b-1 that are intended to address the potential of target date
fund names to confuse or mislead investors regarding the allocation of
a fund's assets at its target date.
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\52\ See, e.g., McMillan statement, supra note 32, at 6-7
(stating that the expected retirement date that is used in target
date fund names is a point in time to which investors easily can
relate).
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Under the proposal, a fund's intended asset allocation at the
target date (or, for periods on and after the target date, a fund's
actual asset allocation as of the most recent calendar quarter) would,
in essence, serve to alert investors to the existence of investment
risk associated with the fund at and after the target date. In
proposing the amendments, we do not intend to suggest that the asset
allocation, by itself, is a complete guide to the investment strategies
or risks of a fund at and after the target date. Rather, the asset
allocation may help counterbalance any misimpression that a fund is
necessarily conservatively managed at the target date or thereafter or
that all funds with the same target date are similarly managed. There
could be other ways of pursuing this goal that could result in more
concise disclosure and perhaps simpler categorizations and computations
by funds. These could include requiring marketing materials to disclose
some, but not all, of a target date fund's asset allocation, such as
the equity allocation,\53\ the cash and cash equivalent allocation,\54\
or the non-cash allocation.\55\ We have proposed requiring disclosure
of the entire asset allocation because we believe that this disclosure
may convey better information about investment risk than alternatives
that disclose only part of the asset allocation, but we request comment
on the alternatives.
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\53\ Although the equity allocation may not be a precise proxy
for investment risk, it has been observed that past performance for
2010 target date funds has generally, but not universally, followed
the equity allocations. See Josh Charlson et al., Morningstar
Target-Date Series Research Paper: 2010 Industry Survey, at 9 (Mar.
15, 2010).
\54\ By including only the cash and cash equivalent allocation,
investors would be alerted to the percentage allocation of the
investments with the least investment risk.
\55\ Inclusion of the non-cash allocation would alert investors
to the percentage allocation of investments that have more
investment risk than cash and cash equivalents.
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The proposal does not prescribe either the asset classes to be used
in disclosing a target date fund's asset allocation or the methodology
for calculating the percentage allocations. Instead, each target date
fund will determine which asset classes to present and the methodology
for calculating the percentage allocations. The purpose of the proposal
is to address the potential of target date fund names to confuse or
mislead investors by conveying some information about the fund's asset
allocation at and after the target date. While we recognize that it is
useful for investors to be able to compare target date funds and
request comment on what additional requirements would best facilitate
this, our goal in this proposal is not to prescribe a single metric
that can be used by investors to compare target date funds and select
among them. For this reason, and because asset allocation models are
subject to continuing refinement and development (such as the
introduction of exposure to additional asset classes in order to
increase diversification), at this time we are not proposing to
prescribe either the specific asset classes to be used in disclosing
the asset allocation or the specific methodology for calculating the
percentage allocations. However, we request comment on whether such
requirements would be useful to investors. We note that current target
date fund prospectuses typically use asset classes such as ``equity,''
``fixed income,'' and ``cash and cash equivalents.'' \56\ If the rule
is adopted as proposed, we would expect that many target date funds
would use these asset classes in making the required disclosure.
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\56\ Based on Commission staff analysis of registration
statements filed with the Commission.
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Although we are not proposing required categories or calculation
methodologies, we emphasize that, as with any disclosure contained in
advertisements and supplemental sales literature, the disclosure of the
asset allocation would be subject to the antifraud provisions of the
federal securities laws.\57\ Compliance with the specific requirements
of rule 482 and rule 34b-1 does not relieve an investment company of
any liability under the antifraud provisions of the federal securities
laws.\58\ Moreover, rule 482 advertisements are also subject to Section
12(a)(2) of the Securities Act, which imposes liability for materially
false or misleading statements in a
[[Page 35926]]
prospectus or oral communication, subject to a reasonable care
defense.\59\
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\57\ See, e.g., Section 17(a) of the Securities Act [15 U.S.C.
77q]; Section 10(b) of the Securities Exchange Act of 1934 [15
U.S.C. 78j(b)]; Section 34(b) of the Investment Company Act [15
U.S.C. 80a-33].
\58\ See Investment Company Act Release No. 26195 (Sept. 29,
2003) [68 FR 57760, 57762 (Oct. 6, 2003)] (emphasizing that
advertisements under rule 482 and supplemental sales literature
under rule 34b-1 are subject to the antifraud provisions of the
federal securities laws).
\59\ See id. (stating that when ``we initially proposed rule 482
in 1977, we indicated that rule 482 advertisements would be subject
to [S]ection 12(a)(2) of the Securities Act and the antifraud
provisions of the federal securities laws'' and noting that
``[s]ince then we have reiterated that compliance with the `four
corners' of rule 482 does not alter the fact that funds * * * are
subject to the antifraud provisions of the federal securities laws
with respect to fund advertisements'').
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The proposal requires disclosure of the asset allocation among
``types of investments.'' While many target date funds invest
indirectly in underlying asset classes by investing in other investment
companies,\60\ we would not consider it sufficient for a target date
fund to disclose percentage allocations to investments in types of
investment companies. Instead, by ``types of investments,'' we mean the
underlying asset classes in which the target date fund invests, whether
directly or through other funds. For example, a target date fund that
is subject to the proposed rule would be required to disclose its
percentage allocation to equity securities, rather than to equity
funds. We believe this approach would provide better information
because investment companies are not required to be fully invested in
one type of investment.\61\
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\60\ Based on Commission staff analysis of registration
statements filed with the Commission.
\61\ For example, a fund whose name suggests that it focuses its
investments in equity securities must have a policy to invest, under
normal circumstances, at least 80% of its net assets, plus the
amount of any borrowing for investment purposes, in equity
securities. Rule 35d-1(a)(2)(i) under the Investment Company Act [17
CFR 270.35d-1(a)(2)(i)].
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Target date fund prospectuses today typically disclose specific
percentage allocations to various asset classes at the target date.
While fund prospectuses sometimes note that there may be small
variations from those percentages, they do not typically disclose broad
ranges of potential percentage allocations.\62\ If the proposal were
adopted, we would not view it as inconsistent with the rule for a fund
to disclose a range of potential percentages that is consistent with
its prospectus disclosures. We would not expect the ranges disclosed to
be broad ranges of percentage allocations, nor would we expect ranges
to replace the specific percentage allocations disclosed in the
prospectus. Moreover, it would be inconsistent with the rule and
potentially misleading for a fund to include a range, with the intent
of investing only at one end of the range. In addition, representations
about ranges of potential percentage allocations may be misleading if
funds deviate materially from the stated ranges.
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\62\ Based on Commission staff review of prospectuses filed with
the Commission.
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We request comment on the proposed required disclosure of a target
date fund's target date (or current) asset allocation, and, in
particular, on the following issues:
The proposed requirement to disclose the target date (or
current) asset allocation together with the first use of a target date
fund's name would apply only if the fund's name includes a date. Should
the proposed requirement apply to all target date funds, including
those that do not include a date as part of their name?
For target date fund marketing materials that are
submitted for publication or use prior to the target date, we are
proposing to require disclosure of the fund's intended asset allocation
at the target date. For materials that are submitted for publication or
use on or after the target date, we are proposing to require disclosure
of the fund's actual asset allocation as of the most recent calendar
quarter ended prior to the submission of the materials. Is this
appropriate? Should the proposed requirements apply only to marketing
materials that are submitted for publication or use prior to the target
date? Should marketing materials that are submitted for publication or
use on or after the target date provide disclosure of the fund's asset
allocation as of the target date, rather than the fund's actual asset
allocation as of the most recent calendar quarter ended prior to the
submission of the materials?
Should we require disclosure of the current allocation
beginning on January 1 of the target date year, or should we instead
require disclosure of the intended target date allocation until the
particular date within the target date year upon which the target date
allocation is reached? Which of these approaches would be more helpful
and less confusing to investors? Which of these approaches would be
easier for funds to implement? Is there a different approach that we
should consider in the fund's target date year?
The proposal would require disclosure of the target date
(or current) asset allocation of the fund to appear immediately
adjacent to (or, in a radio or television advertisement, immediately
following) the first use of the fund's name. Is this sufficient? For
example, should this information be disclosed each time the fund's name
appears or is used in marketing materials? Should this information be
disclosed where the fund's name is presented most prominently (e.g.,
where the fund's name is written in the largest font size)? Should this
information be disclosed in a location other than immediately adjacent
to or immediately following the fund's name?
Under the proposal, the fund's target date (or current)
asset allocation would be required to be presented in a manner
reasonably calculated to draw investor attention to the information.
Are there other presentation alternatives that may better highlight
this information for investors (e.g., requirements as to font size,
type style, separate box, etc.)? Are any or all of the presentation
requirements that currently apply to certain legends in written
advertisements under rule 482(b)(5) more appropriate?
Should we prescribe the specific format for the target
date (or current) asset allocation disclosure in order to foster more
effective communication? For example, should we require a table, chart,
or graph?
Should marketing materials for a target date fund that
includes a date in its name, as proposed, be required to include the
fund's allocation across all types of investments, or should target
date fund marketing materials be required to disclose some, but not
all, of the fund's asset allocation, such as the equity allocation, the
cash and cash equivalent allocation, or the non-cash allocation? Would
any of these approaches be more effective than the proposal at
conveying investment risk at or after the target date? Alternatively,
would any of the approaches confuse or mislead investors by conveying
only a partial allocation or cause investors to rely excessively on
information about their exposure to a particular asset class? Are any
of these approaches and/or the proposal easier for funds to implement,
for example, because the necessary asset categorizations or
computations would be simpler? Are there allocations for other
categories or sub-categories of investments that should be required to
be disclosed in target date fund marketing materials?
How effective is disclosure of the target date (or
current) asset allocation in conveying level of investment risk and/or
other information to investors and in preventing investors from being
confused or misled? Do investors need other information along with
allocation percentages in order to understand the significance of those
percentages? For example, do they need information about the long-term
performance, risks, and volatility of different asset classes? If so,
how should this be conveyed (e.g., in marketing materials,
prospectuses, educational materials, or through other means)? Should we
require this
[[Page 35927]]
information to be provided by target date funds to investors?
The proposal would require that a target date fund's
target date (or current) asset allocation be disclosed together with
the first use of the fund's name in marketing materials. Furthermore,
the disclosure would be required to be presented in a manner that is
reasonably calculated to draw investor attention to the information.
What effect might this disclosure have on investor behavior? 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 the fund's name? Would the proposed disclosure reduce
investor overreliance on the fund's name? Will it improve investor
understanding of a fund's investment strategy, portfolio construction,
risk factors, and overall suitability as an investment? To what extent,
if any, might the prominent disclosure of the asset allocation have the
effect of conferring special significance on the information? Would the
prominent disclosure of the asset allocation place appropriate
significance on the information? Would investors instead place undue
emphasis on a fund's target date (or current) asset allocation because
of the prominence of the disclosure? How would investors' consideration
of the target date (or current) asset allocation disclosure be affected
by the proposed required disclosure of the glide path and landing point
information described in Part II.A.3 below? Would this additional
disclosure serve to prevent undue emphasis by investors on the target
date (or current) asset allocation disclosure?
Would our proposal encourage or discourage investors from
seeking further information about a target date fund's glide path or
other relevant information? For example, would investors examine the
fund's entire glide path, which would also be required to be disclosed
prominently in marketing materials under our proposals, as described in
Part II.A.3 below? Would investors instead overemphasize the fund's
target date or current allocation? Would investors rely more heavily on
a target date fund's marketing materials if the target date or current
asset allocation was included, and if so, would they be less likely to
seek more information about the fund? To what extent might the special
emphasis on asset allocation at the target date cause investors to
prioritize investment risk at a particular moment in time over
longevity risk, inflation risk, or other risks? Is additional
disclosure required to focus attention on inflation and longevity
risks? Do target date funds' current advertising practices, coupled
with the fact that our advertising rules permit the inclusion of
information about longevity and inflation risks, suggest that the
Commission needs to require disclosure with respect to these risks, or
would these risks be adequately addressed in fund marketing materials
without the need for additional regulation? Is there any evidence that
target date funds have failed, or are likely to fail, to provide
adequate information about inflation and longevity risks absent
regulation by the Commission?
Is there additional disclosure, or a disclaimer, that
could be provided in connection with the required asset allocation
disclosure that could reduce the likelihood that investors might focus
too much on asset allocation at the target date? For example, should
the disclosure concerning a fund's target date (or current) asset
allocation be accompanied by a cross-reference to the disclosure of
risks and considerations relating to target date funds discussed in
Part II.A.4 below? Would such a cross-reference reduce the possibility
that an investor might overemphasize the target date asset allocation
disclosure? What are the potential consequences for investors if they
were to place too much emphasis on investment risk at the target date
without giving appropriate consideration to longevity, inflation, or
other risks? Is additional disclosure necessary to aid investors'
evaluation of longevity, inflation, or other risks? If so, what
disclosure should be required? Would the proposed asset allocation
disclosure cause investors to seek professional advice? We would be
particularly interested in any empirical data on investor behavior that
would address these questions, including empirical data on how fund
investors make investment decisions and the role of fund names in those
decisions.
To what extent might target date fund managers take steps
in response to the proposed required disclosure of the target date (or
current) asset allocation? For example, might target date fund managers
change asset allocations at the target date as a result of the proposed
required disclosure and its potential impact on investor behavior?
Would fund managers provide additional disclosure about how to evaluate
the asset allocation in order to address any possibility that investors
may overemphasize the target date asset allocation because of the
prominence of the disclosure? Would a fund manager's investment
strategy, portfolio construction, selection of asset categories
disclosed, and marketing change as a result of the proposal's required
disclosure of target date (or current) asset allocation? For example,
might fund managers compose the fund's fixed-income allocation
differently to take on additional investment risk, in order to seek
higher returns, while showing a lower equity allocation at or after the
target date?
Should the proposal be modified in any manner to address
any impact that it may have on fund investor or manager behavior?
Should we specify the particular categories of investments
for which allocations must be shown and how these categories should be
defined? If so, what should they be (e.g., equity securities, fixed
income securities, and cash and cash equivalents)? Should these broad
asset classes be further subdivided, such as based upon maturity and
credit quality for fixed income securities, or capitalization and
market type (e.g., domestic, foreign, and emerging market) for equity
securities? How should the use of alternative investment strategies
(e.g., hedging strategies) be reflected in the particular categories of
investments for which allocations must be shown? Should we require
funds to expressly disclose the use of leverage arising from borrowings
or derivatives in their asset allocations? If so, how? Would specifying
the particular categories of investments for which allocations must be
shown result in greater comparability among target date funds?
Should we 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? Are investors
likely to attempt to compare target date (or current) asset allocations
among target date funds and, if so, will they be able to make
appropriate comparisons or will they be confused or misled if funds
have used different methodologies? If we were to adopt a methodology,
should the asset allocation percentages be calculated against a
particular base (e.g., net assets, net assets plus the amount of
borrowings for investment purposes, total assets, or total
investments)? Depending on the base selected, could situations arise
where a fund's aggregate asset allocation exceeds 100%, such as in
situations where the fund engages in borrowing or invests in
derivatives that involve leverage? Would this confuse or mislead
investors? To what extent do target date funds, or their underlying
funds, engage in borrowing or invest in derivatives that involve
leverage? Under the proposal, would the disclosed target date (or
current) asset allocations for funds that do and do not use leverage
[[Page 35928]]
be meaningful, or would they have any potential to confuse or mislead
investors? Are there methodologies that could accurately convey to
investors differences in investment risk between a fund that uses
leverage, either through borrowing or investing in derivative
instruments, and a fund that does not use leverage?
If we do not specify the particular categories of
investments or prescribe a methodology for calculating a fund's
percentage allocations, would target date fund managers select the
categories and methodologies in a manner that results in a high degree
of correlation between the fund's investment risk implied by its asset
allocation and its actual investment risk, or might they select
categories and methodologies that result in disclosed allocations that
do not accurately reflect investment risk? Would the prominence of the
disclosure in marketing materials affect managers' behavior in
selecting categories and methodologies? Would the flexibility to choose
categories of investments and the methodology for calculating
percentage allocations result in presentations that are materially
misleading?
Other than prescribing categories of investments or the
methodology for calculating percentage allocations, are there other
means to enhance comparability among target date and current asset
allocations? To what extent should we seek to enhance comparability
among these disclosures?
Would permitting target date funds to include a range to
be allocated to each class limit the effectiveness of the proposed
amendments? For example, are there ranges that would be so broad that
they would render the information conveyed essentially meaningless?
Would permitting any range be problematic, regardless of how broad or
narrow? Would permitting ranges result in the potential for abuse?
Should there be limitations on the size of the range (e.g., 2%, 5%, or
10%) or should a range not be permitted?
The proposal focuses on the asset allocation at the target
date because the target date is included in the fund's name. Should
target date fund marketing materials be required to include the asset
allocation as of the landing point in close proximity to the fund name,
either in lieu of, or in addition to, the asset allocation as of the
target date? Should target date fund marketing materials submitted for
publication or use prior to the target date be required to include the
asset allocation as of a current date either in lieu of, or in addition
to, the asset allocation as of the target date?
Is it appropriate and feasible to require a target date
fund that invests in other funds to disclose its asset allocation at or
after the target date in terms of types of investments (e.g., equity
securities, fixed income securities, and cash and cash equivalents)?
Should we instead require a target date fund that invests in other
funds to base its asset allocation on the types of funds in which it
invests (e.g., equity funds, fixed income funds, money market funds),
either because this approach would provide better information to
investors or would be simpler and more cost-effective for funds to
implement? If so, how should funds be categorized? For example, in
order to be characterized as an equity fund for this purpose, should a
fund be required to invest 100% of its assets in equity securities or
80% or some other percentage? Would this methodology result in
overstatement or understatement of a particular type of investment, and
could it lead to an inaccurate depiction of a target date fund's asset
allocations?
To what extent do fund investors understand the
significance of asset allocation, including the relationship between
asset allocation and investment risk, inflation risk, and longevity
risk? Are there alternative means of providing investors with important
information regarding target date funds in lieu of, or in addition to,
requiring disclosure of the target date (or current) asset allocation?
For example, should target date fund 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?
In addition to, or in lieu of, the proposed disclosure of
the target date asset allocation, should there be additional disclosure
immediately adjacent to a target date fund name indicating whether the
glide path extends to the target date or through the life expectancy of
the investor? If so, what would be the most effective way to concisely
disclose such information? What are the ramifications to investor
behavior of disclosing the date through which the glide path is
managed?
Should we require target date fund names, or disclosures
immediately adjacent to those names, to provide more information to
investors regarding a target date fund's landing point and/or asset
allocations at the landing point? Should we, for example, require that
any date used in the name of a target date fund be the landing point
rather than the target date except in cases where the landing point and
the target date are the same? What impact would this have? Would it,
for example, make it easier for investors to compare target date funds
and select an appropriate fund? Should we, instead, require narrative
disclosure to accompany a target date fund name that indicates whether
or not the fund reaches its most conservative allocation at the target
date and, if not, when that point is reached?
Are there additional, or different, amendments to rules
482 and 34b-1 or any other rules that would effectively address the
concerns relating to target date fund names? Section 35(d) of the
Investment Company Act prohibits a registered investment company from
using a name that the Commission finds by rule to be materially
deceptive or misleading.\63\ In 2001, the Commission adopted rule 35d-1
under the Investment Company Act to address certain categories of names
that are likely to mislead an investor about an investment company's
investments and risks.\64\ Should we require the target date asset
allocation to be included as part of the fund's name, so that it would
appear every time the name is used? Should we amend rule 35d-1 to
prohibit the use of a date in target date fund names? Should we amend
rule 35d-1 to only permit target date funds to use the landing point
date in its name, rather than the target date? Should we require the
target date asset allocation to appear adjacent to a fund's name in its
statutory prospectus, summary prospectus, shareholder reports, or other
required filings as well as in marketing materials?
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\63\ 15 U.S.C. 80a-34(d).
\64\ See Investment Company Act Release No. 24828 (Jan. 17,
2001) [66 FR 8509 (Feb. 1, 2001)], as corrected by Investment
Company Act Release No. 24828A (Mar. 8, 2001) [66 FR 14828 (Mar. 14,
2001)].
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3. Asset Allocation Table, Chart, or Graph and Landing Point Allocation
We are proposing amendments to rules 482 and 34b-1 to require that
advertisements and supplemental sales literature that are in print or
delivered through an electronic medium, and that place a more than
insubstantial focus on one or more target date funds, include a
prominent table, chart, or graph that clearly depicts the percentage
allocations among types of investments (e.g., equity securities, fixed
income securities, and cash and cash equivalents) over the entire life
of the fund or funds at identified periodic intervals that are no
longer than five
[[Page 35929]]
years in duration.\65\ The table, chart, or graph would also be
required to clearly depict the percentage allocations among types of
investments at the inception of the fund or funds, the target date, the
landing point, and, in the case of an advertisement or supplemental
sales literature that relates to a single target date fund, as of the
most recent calendar quarter ended prior to the submission of the
advertisement or supplemental sales literature for publication.\66\ The
table, chart, or graph requirement would apply to all target date
funds, including those that do not have dates in their names.
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\65\ Proposed rule 482(b)(5)(iv); proposed rule 34b-1(c).
\66\ Cf. rule 482(d)(3)(ii) (requiring any quotation of average
annual total return contained in an advertisement to be current to
the most recent calendar quarter ended prior to submission of the
advertisement for publication).
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The term ``target date'' is defined in the proposed amendments as
any date, including a year, that is used in the name of a target date
fund. If no date is used in the name, the ``target date'' is 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.\67\ We are proposing to define the term ``landing point'' as the
first date, including a year, at which the asset allocation of a target
date fund reaches its final asset allocation among types of
investments.\68\
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\67\ Proposed rule 482(b)(5)(i)(B).
\68\ Proposed rule 482(b)(5)(i)(C).
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We are proposing periodic intervals of no longer than five years
because the Commission staff has observed a number of presentations of
target date fund glide paths in statutory prospectuses and marketing
materials that use five-year intervals, and five-year intervals appear
to be effective in conveying information about how the asset allocation
changes over time. We considered other intervals, including longer
intervals (such as ten years) and shorter intervals (such as one year).
However, we are concerned that longer intervals may not provide enough
information about how and when the asset allocation changes, while
shorter intervals may produce a presentation that is cluttered and
potentially confusing to investors.
The proposed table, chart, or graph requirement is intended to
ensure that investors who receive target date fund marketing materials
also receive basic information about the glide path. If marketing
materials relate to a single target date fund, the table, chart, or
graph must clearly depict the actual percentage allocations among types
of investments from the inception of the fund through the most recent
calendar quarter ended prior to the submission of the materials for
publication and the future intended percentage allocations of the fund.
This requirement is intended to ensure that marketing materials that
are focused on a single target date fund provide information about the
fund's historical and intended future asset allocations. In addition,
the table, chart, or graph must identify the periodic intervals and the
inception date, target date, landing point, and most recent calendar
quarter end using specific dates. In the case of single fund marketing
materials, we believe that the use of specific dates, rather than the
number of years before or after retirement, may be easier for investors
to understand. Examples of presentations that may be appropriate for a
single target date fund include the following:
[[Page 35930]]
[GRAPHIC] [TIFF OMITTED] TP23JN10.006
If marketing materials relate to multiple target date funds with
different target dates that all have the same pattern of asset
allocations, the proposal would permit the materials to include either
separate presentations for each fund that meet the requirements
described in the preceding paragraph or a single table, chart, or graph
that clearly depicts the intended percentage allocations of the funds
among types of investments and that identifies the periodic intervals
and other required points using numbers of years before and after the
target date. This would be the case, for example, when a fund family
advertises all of its target date funds in a single advertisement, and
the target date funds all share a common glide path.\69\ We believe
that this approach for advertisements focusing on multiple target date
funds is appropriate because a generic table, chart, or graph
illustrating the glide path for all of the funds may be able to
effectively convey the asset allocation for each of the particular
funds at various dates along the glide path. Examples of presentations
of a generic table, chart, or graph that may be appropriate for a
multiple fund advertisement are as follows:
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\69\ For example, a fund family could have 2010, 2020, and 2030
target date funds. All three would share a common glide path, but
the 2020 fund would reach each point on the glide path 10 years
after the 2010 fund, and the 2030 fund would reach each point on the
glide path 20 years after the 2010 fund.
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[[Page 35931]]
[GRAPHIC] [TIFF OMITTED] TP23JN10.007
If the proposal were adopted, a target date fund whose asset
allocations may vary within a range (e.g., target date allocations of
40%-50% equity securities, 40%-50% fixed income securities, 0%-10% cash
and cash equivalents) should present the range in its table, chart, or
graph. In the case of marketing materials that relate to a single
target date fund, ranges, if applicable, should be shown for future
periods, but could not be shown for past periods, because the fund
would be required to show its actual allocations for past periods. As
noted above, it would be inconsistent with the rule and potentially
misleading for a target date fund to include ranges with the intent of
investing only at one end of the ranges.\70\
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\70\ See note 62 and discussion at accompanying paragraph.
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We believe that it is important for target date funds to highlight
certain key information about the glide path--that the asset allocation
changes over time; that the asset allocation becomes fixed at the
landing point, as well as the final allocation; and any discretion by
the fund's adviser to modify the glide path shown. We believe that a
target date fund's final asset allocation is important information for
investors.\71\ Investors need to consider whether a particular target
date fund's final allocation, and the date that the final allocation is
reached, are consistent with the investor's goals.
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\71\ See, e.g., Joint Hearing Transcript, supra note 12, at 154
(testimony of Mark Wayne, National Association of Independent
Retirement Plan Advisors) (discussing disclosure of the landing
point for target date fund glide paths).
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For these reasons, we are proposing to require that the proposed
table, chart, or graph be immediately preceded by a statement that
helps explain the table, chart, or graph to investors in the case of
advertisements and supplemental sales literature that (i) relate to a
single target date fund and are submitted for publication prior to the
landing point; or (ii) relate to multiple target date funds with
different target dates that all have the same pattern of asset
allocations. The statement would be required to include the following
information: (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); an explanation that the asset
allocation becomes fixed at the landing
[[Page 35932]]
point; and the intended percentage allocations among types of
investments (e.g., equity securities, fixed income securities, and cash
and cash equivalents) at the landing point; and (iii) whether, and the
extent to which, the intended percentage allocations among types of
investments may be modified without a shareholder vote. We are not
proposing any particular presentation requirements for the statement
because we propose to require the statement to immediately precede the
table, chart, or graph, which must itself be prominent. For that
reason, we believe that more specific presentation requirements, such
as font size, are unnecessary.
We are not proposing to require the explanatory statement in
advertisements and supplemental sales literature that relate to a
single target date fund that are submitted for publication on or after
the landing point. Because the landing point will have already been
reached, the disclosure that the asset allocation changes over time and
the landing point disclosures will be of limited, if any, relevance to
investors. However, the marketing materials would nonetheless be
required to include a statement that advises an investor whether, and
the extent to which, the intended percentage allocations among types of
investments may be modified without a shareholder vote.\72\
---------------------------------------------------------------------------
\72\ Proposed rule 482(b)(5)(ii)(C); proposed rule 34b-1(c).
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We are not proposing to apply the table, chart, or graph
requirement or a similar requirement to radio or television
advertisements because it appears to be difficult to convey this
information effectively in those media and could result in the
imposition of very substantial costs for additional advertising time.
We believe, however, that investors who are attempting to determine
whether a target date fund is an appropriate investment would consider
the disclosure of the landing point and the fund's asset allocation at
the landing point to be important information. Therefore, we are
proposing to amend rules 482 and 34b-1 to require that a radio or
television advertisement that is submitted for use prior to the landing
point and that places a more than insubstantial focus on one or more
target date funds, and that uses the name of a target date fund that
includes a date (including a year), must disclose the landing point, an
explanation that the allocation of the fund becomes fixed at the
landing point, and the intended percentage allocations of the fund
among types of investments (e.g., equity securities, fixed income
securities, and cash and cash equivalents) at the landing point.\73\ We
are limiting this disclosure to advertisements that relate to funds
whose name includes a date because those advertisements would be
required to contain the target date allocation,\74\ and we are
concerned that investors understand that the target date allocation is
not the final allocation. The proposed disclosure would be required to
be given emphasis equal to that used in the major portion of the
advertisement.\75\
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\73\ Proposed rule 482(b)(5)(v). As discussed in Part II.A.4
infra, radio and television advertisements that place a more than
insubstantial focus on one or more target date funds must also
include a statement that advises an investor whether, and the extent
to which, the intended percentage allocation of the target date fund
among types of investments may be modified without a shareholder
vote. See proposed rule 482(b)(5)(ii)(C).
\74\ See proposed rule 482(b)(5)(iii).
\75\ See proposed rule 482(b)(6); proposed rule 34b-1(c). This
is the same requirement that currently applies to certain legend-
type disclosures under rule 482(b)(5), which we propose to renumber
as rule 482(b)(6).
---------------------------------------------------------------------------
We are not proposing to require the landing point disclosures in
radio and television advertisements that are submitted for use at and
after the landing point. The reason is that those advertisements would
be required to contain the fund's actual asset allocation as of the
most recent calendar quarter, which should be the same as, or more
relevant than, the fund's past asset allocation at the landing
point.\76\
---------------------------------------------------------------------------
\76\ See proposed rule 482(b)(5)(iii).
---------------------------------------------------------------------------
We request comment on the proposed asset allocation table, chart,
or graph and related narrative disclosure and, in particular, on the
following:
Is the proposed definition of ``target date'' appropriate?
Should it be modified in any way? Do all target date funds use a target
date in their names or prospectuses? Do any target date funds use an
alternative to a specific target date in their names or prospectuses?
For example, do some target date funds provide a range of years (e.g.,
2010-2014)? If so, should we modify the definition of ``target date''
to reflect this?
As proposed, the amendments, with the exception of the
amendments relating to radio and television advertisements that use the
name of a target date fund that includes a date, would apply to all
target date funds. Should any or all of the proposed amendments apply
only to target date funds that include a date in their name? Should
radio and television advertisements for target date funds be required
to include the target date and/or landing point asset allocations,
whether or not the fund name includes a date?
Would the proposed table, chart, or graph requirement be
helpful to investors? Should we prescribe the specific format of the
table, chart, or graph in order to enhance comparability for investors?
For example, would one form (e.g., graph) be more easily understandable
by investors than another (e.g., table)? Should we try to enhance
comparability among target date funds by prescribing a methodology for
calculating a fund's percentage allocations? Should we specify the
particular types of investments for which allocations must be shown in
the table, chart, or graph and how these types should be defined? \77\
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\77\ We have raised a number of questions on methodology and
types of investments in our request for comment in Part II.A.2
regarding disclosure of asset allocation at the target date in
proximity to fund names. Commenters are invited to address those
questions on methodology and types of investments with respect to
the table, chart, or graph as well.
---------------------------------------------------------------------------
Should the table, chart, or graph be required to be
prominent? Are there other presentation requirements that would be more
appropriate?
Should the table, chart, or graph, as proposed, be
required in supplemental sales literature that is preceded or
accompanied by a statutory prospectus, or is it unnecessary in those
instances because sufficient information is contained in the
prospectus?
Are the differences in requirements for marketing
materials that relate to a single target date fund and multiple target
date funds appropriate, or should they be modified? Should the table,
chart, or graph for a single target date fund be required to show the
fund's actual historical asset allocations? Will the use of actual
historical asset allocations be helpful or confusing to investors in
cases where a fund has changed from its previous glide path? Should the
table, chart, or graph for a single target date fund instead be
permitted to show the current glide path that is common to all target
date funds in a fund family? Would it be misleading for marketing
materials for a single target date fund to omit the fund's historical
asset allocations?
Should the table, chart, or graph for a single target date
fund be required to clearly depict the current asset allocation? Should
we, as proposed, require the asset allocation as of the most recent
calendar quarter ended prior to the submission of the marketing
materials for publication? Are there any circumstances where we should
permit the table, chart, or graph for a single target date fund to
exclude asset allocations for past periods? If we
[[Page 35933]]
permit a single target date fund to exclude past asset allocations in
any circumstances, should we nonetheless prohibit a fund from excluding
past asset allocations if the marketing materials contain past
performance information for the fund? Are past asset allocations
helpful to allow an investor to assess the performance of the target
date fund relative to the risk taken? Would disclosure of past
performance information without disclosure of past asset allocations
confuse or mislead investors?
Is the proposed maximum five-year interval for the table,
chart, or graph appropriate? Should it be shorter (e.g., 1 year or 3
years) or longer (e.g., 10, 15, or 20 years)? Are there any periods for
which intervals of shorter duration should be shown? For example,
should the table, chart, or graph depict the five years before the
target date and/or landing point using one-year intervals? Is it
necessary to require any particular interval? Is it also appropriate to
require asset allocations at the fund's inception, target date, and
landing point, as proposed?
Would the proposed required statement preceding the table,
chart, or graph be helpful to investors? Is any of the information
unnecessary? Is there additional information that should be required to
be included in the proposed statement? Should we prescribe the
particular content of the statement? What would be the clearest plain
English format for the statement? Should any particular presentation
requirements, such as font size or style, apply to the statement that
is required to accompany the table, chart, or graph? Should we require
marketing materials that relate to a single target date fund that are
submitted for publication on or after the landing point to include the
explanatory statement preceding the table, chart, or graph?
We are proposing that radio and television advertisements
provide information relating to the landing point. Should this
information be required in marketing materials that are submitted for
use on or after the landing point? Is there additional information that
should be required to be included in radio and television
advertisements? For example, is there a means of effectively
communicating information comparable to that contained in the table,
chart, or graph requirement in radio or television advertisements?
4. Disclosure of Risks and Considerations Relating to Target Date Funds
We are proposing to amend rules 482 and 34b-1 to require target
date fund advertisements and supplemental sales literature that place a
more than insubstantial focus on one or more target date funds to
include a statement that is intended to inform an investor regarding
certain risks and considerations that are important when deciding
whether to invest in a target date fund. Because of the importance of
this information, we are proposing that the required statement be
subject to the presentation requirements that currently apply to other
important legend disclosures under rules 482 and 34b-1.\78\ In
addition, because we believe that this disclosure would be pertinent to
investors in all target date funds, including those that do not have a
date in their names, the statement would be required in the marketing
materials for all target date funds, regardless of whether a fund
includes a date in its name.
---------------------------------------------------------------------------
\78\ Proposed rule 482(b)(6); proposed rule 34b-1(c).
---------------------------------------------------------------------------
First, the statement would be required to advise an investor 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.\79\ As described
above, our staff has reviewed a sample of target date fund marketing
materials and observed that these materials often characterize target
date funds as offering investors a simple solution for their retirement
needs, such as by inviting investors to choose the fund whose target
date most closely matches their anticipated retirement date.\80\ In
addition, the inclusion of a date in a target date fund's name, as is
typically the case today, provides a mechanism by which an investor may
identify a fund that appears to meet his or her retirement needs based
simply on a retirement date. As a result, we believe that it is
important to highlight the fact that the appropriateness of a target
date fund investment depends not only on age or retirement date, but on
other factors.
---------------------------------------------------------------------------
\79\ Proposed rule 482(b)(5)(ii)(A); proposed rule 34b-1(c).
\80\ See discussion supra Part I.B.
---------------------------------------------------------------------------
Second, the statement would be required to advise an investor that
an investment in the fund is not guaranteed and that it is possible to
lose money by investing in the fund, including at and after the target
date.\81\ Concerns have been raised about the degree to which marketing
materials for target date funds may have contributed to a lack of
understanding by investors of those funds and their associated
investment strategies and risks. Investors may expect that at the
target date, most, if not all, of their fund's assets will be invested
conservatively to provide a pool of assets for retirement needs. Some
marketing materials may be misperceived as promising minimal risks or a
guaranteed investment.\82\ To address potential investor
misunderstanding with respect to the safety of target date funds,
particularly at and after an investor's retirement, the proposed
amendments would require target date fund marketing materials to alert
investors to the risk of loss.
---------------------------------------------------------------------------
\81\ Proposed rule 482(b)(5)(ii)(B); proposed rule 34b-1(c).
\82\ See notes 37-38 and discussion at accompanying text.
---------------------------------------------------------------------------
Third, unless disclosed as part of the statement immediately
preceding the table, chart, or graph that is required in marketing
materials that are in print or delivered through an electronic medium,
the statement would be required to advise an investor whether, and the
extent to which, the intended percentage allocations of a target date
fund among types of investments may be modified without a shareholder
vote.\83\ Target date funds are designed to make it easier for
investors to hold a diversified portfolio of assets that is rebalanced
automatically among asset classes over time. A target date fund's
disclosed intended asset allocations over time are a principal
distinguishing feature of the fund. The proposed amendments are
intended to inform investors of any flexibility that the fund and its
investment adviser retain to modify allocations from time to time. We
would note that, because a target date fund is, in essence, marketing
the expertise of its manager in designing appropriate asset allocations
over the long term, as a general matter, we would not expect target
date funds to modify their glide paths frequently. In addition, we
would expect that a manager would have a sound basis for any changes to
a target date fund's glide path. Further, we would expect 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.\84\
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\83\ Proposed rule 482(b)(5)(ii)(C). See proposed rule
482(b)(5)(iv)(C) (statement required to precede table, chart, or
graph). See also note 71 and discussion at accompanying paragraph
(discussion of statement required to precede table, chart, or
graph).
\84\ Cf. Independent Directors Council, Board Oversight of
Target Retirement Date Funds (2010), available at http://www.ici.org/idc/idc_directors_resources/idc_public_other_publications/10_idc_trdf (suggesting that a target date fund board
may want to ask questions about the adviser's flexibility to
actively adjust asset allocation along the glide path to take into
account market conditions, how frequently adjustments might be made,
and criteria and limits for making adjustments).
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[[Page 35934]]
We request comment generally on the proposed required statement
regarding risks and considerations and, in particular, on the following
issues:
The proposed amendments apply to all target date funds.
Should the proposed amendments apply only to target date funds that
include a date in their name?
Will the proposed required statement that is intended to
inform an investor regarding important risks and considerations be
effective? Should the proposed requirement be modified? Are any of the
proposed disclosures not relevant or helpful in the case of some or all
target date funds? Should additional disclosures be required? Should we
prescribe the particular language of the statement?
As proposed, the existing presentation requirements under
rules 482 and 34b-1 would apply to the proposed new statement. Should
they be modified in any way for this context?
Are there additional rule amendments that would address
any concerns regarding target date fund marketing materials? For
example, should such materials disclose the past performance of the
fund's asset allocation model or similar models? If this information
should be disclosed, would this information be more appropriately
included in prospectuses or shareholder reports?
B. Antifraud Guidance
Rule 156 under the Securities Act provides guidance on the types of
information in investment company sales literature that could be
misleading. It applies to all sales literature, whether or not those
materials are preceded or accompanied by the fund's statutory
prospectus.\85\ Under rule 156, whether a statement involving a
material fact is misleading depends on an evaluation of the context in
which it is made. Rule 156 outlines certain situations in which a
statement could be misleading. These include certain general factors
that could cause a statement to be misleading,\86\ as well as
circumstances where representations about past or future investment
performance \87\ and statements involving a material fact about the
characteristics or attributes of an investment company \88\ could be
misleading.
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\85\ Rule 156(c) under the Securities Act [17 CFR 230.156(c)]
defines ``sales literature'' to include ``any communication (whether
in writing, by radio, or by television) used by any person to offer
to sell or induce the sale of securities of any investment
company.''
\86\ A statement could be misleading because of (i) other
statements being made in connection with the offer of sale or sale
of the securities in question; (ii) the absence of explanations,
qualifications, limitations, or other statements necessary or
appropriate to make such statement not misleading; or (iii) general
economic or financial conditions or circumstances. See rule
156(b)(1) under the Securities Act [17 CFR 230.156(b)(1)].
\87\ Representations about past or future investment performance
could be misleading because of statements or omissions made
involving a material fact, including situations where (i) portrayals
of past income, gain, or growth of assets convey an impression of
the net investment results achieved by an actual or hypothetical
investment which would not be justified under the circumstances; and
(ii) representations, whether express or implied, are made about
future investment performance. See rule 156(b)(2) under the
Securities Act [17 CFR 230.156(b)(2)].
\88\ A statement involving a material fact about the
characteristics or attributes of an investment company could be
misleading because of (i) statements about possible benefits
connected with or resulting from services to be provided or methods
of operation which do not give equal prominence to discussion of any
risks or limitations associated therewith; (ii) exaggerated or
unsubstantiated claims about management skill or techniques,
characteristics of the investment company or an investment in
securities issued by the company, services, security of investment
or funds, effects of government supervision, or other attributes;
and (iii) unwarranted or incompletely explained comparisons to other
investment vehicles or to indexes. See rule 156(b)(3) under the
Securities Act [17 CFR 230.156(b)(3)].
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We are proposing to amend rule 156 to address certain statements
suggesting that securities of an investment company are an appropriate
investment. Marketing materials for target date funds often focus to a
significant extent on the purpose for which (i.e., to meet retirement
needs) and the investors for whom (i.e., investors of specified ages
and retirement dates) the funds are intended. In light of the nature of
target date fund marketing materials, and the concerns that have been
raised about those materials, we are proposing to amend rule 156 to
address statements that relate to the appropriateness of an investment.
While target date funds are the immediate impetus for the proposed
amendments to rule 156, the proposed amendments, like the current
provisions of rule 156 would, if adopted, apply to all types of
investment companies. This reflects our view that certain types of
statements or representations have the potential to mislead investors,
regardless of the type of investment company that is the subject of
these statements.
The proposed amendments to rule 156 would provide that a statement
suggesting that securities of an investment company are an appropriate
investment could be misleading in two circumstances. First, such a
statement could be misleading because of 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.\89\ Age and tax
bracket are specified in the proposed rule language as examples of
factors that could be overemphasized within sales literature, but this
is not intended to suggest that they are the only factors whose
overemphasis could cause sales literature to be misleading.
---------------------------------------------------------------------------
\89\ Proposed rule 156(b)(4)(i).
---------------------------------------------------------------------------
This proposed provision of the rule arises out of our recognition
that while target date funds use investor ages and expected retirement
dates as a mechanism by which an investor may identify a fund that
appears to meet his or her retirement needs, undue emphasis on the
single factor of age or retirement date could cause an investor to fail
to consider other factors, such as the investor's particular financial
situation, personal circumstances, and risk tolerance, that are
important in selecting an appropriate investment.\90\ This could result
in investor confusion, and, in some circumstances, could even result in
an investor being misled. We have included tax bracket as an example of
a factor that could be overemphasized by some investment companies, for
example, tax-exempt funds or variable annuity issuers, and not because
it has been emphasized by target date funds.
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\90\ The models used for asset allocation in target date funds
are based on additional factors and not solely on an investor's
retirement date. For example, target date fund models may make
certain assumptions about investors' contributions, salary
increases, loans, and distributions that may vary widely across
investors in the same age or retirement groups. See J.P. Morgan
Asset Management, Ready! Fire! Aim? How Some Target Date Fund
Designs are Missing the Mark on Providing Retirement Security to
Those Who Need It Most at 7-9 (Oct. 2007), available at http://www.dol.gov/ebsa/pdf/TDFSupp6.pdf (observing that differences in
these assumptions have a large impact on the assets projected to be
available at retirement).
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Second, a statement suggesting that securities of an investment
company are an appropriate investment could be misleading under the
proposed amendment because of 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.\91\ While
target date funds are designed to make it easier for investors to hold
a diversified portfolio of assets that is rebalanced automatically
among asset classes over time, the selection of an appropriate fund
does not entail a simple decision. The fact that target date fund
managers have adopted very different asset allocation strategies is
itself indicative of the complexity involved in selecting an
appropriate asset allocation and, as discussed in the preceding
paragraph, the selection of
[[Page 35935]]
appropriate investments involves the consideration of multiple factors.
Similarly, a decision to invest in an investment company of another
type is not a simple decision, as it involves numerous considerations,
including the investment objectives and strategies, costs, and risks of
the fund and the investor's complete financial situation, personal
circumstances, and risk tolerance.
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\91\ Proposed rule 156(b)(4)(ii).
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In addition, while a particular target date fund could be an
appropriate investment at the time the fund was initially selected by
the investor, this may change over time as, for example, the investor
experiences changes in his or her life expectancy or other personal
circumstances, financial condition, or risk tolerance. This is equally
true of all types of investment companies. As a result, the Commission
is concerned that representations that an investment in the securities
of a target date fund or other investment company is a simple
investment plan or requires little or no monitoring by the investor
have the capacity to confuse and potentially to mislead investors.
These representations may dissuade an investor from sufficient
examination of the investment objectives and strategies, costs, and
risks of a target date fund or other investment company and of the
appropriateness of an initial or additional investment in the fund,
given the investor's complete financial situation, personal
circumstances, and risk tolerance. These representations may also
dissuade an investor from monitoring an investment or conducting a
periodic review and assessment of the fund's performance and continuing
fit with the investor's objectives and changing life situation.
We request comment on the proposed amendments to rule 156 and, in
particular, on the following issues:
Are the proposed amendments to rule 156 appropriate?
Should the proposed amendments apply to all investment companies or
only to target date funds? If the proposed amendments are not made
applicable to all investment companies, are there types of funds other
than target date funds (e.g., balanced or lifestyle funds), to which
the proposed amendments should apply?
Will the proposed amendments to rule 156 discourage
marketing materials for target date funds and other funds that have the
potential to confuse or mislead investors? Are there additional
amendments to rule 156 that would help to emphasize the obligations
under the antifraud provisions of funds and their underwriters and
dealers and that would address concerns regarding target date fund
marketing materials?
Are there any factors, in addition to age and tax bracket,
that should be included in the proposed amendments as examples of
single factors that could be overemphasized in determining whether an
investment is appropriate?
C. Technical and Conforming Amendments
We are proposing technical and conforming amendments to rule 34b-1.
We are proposing to remove references to paragraphs (a) and (b) of rule
34b-1 in the introductory text and the note to introductory text to
indicate, in a more straightforward manner, that the references are to
the entirety of rule 34b-1.\92\ We are also proposing to revise the
heading of the current note that follows paragraph (b) of rule 34b-1 to
state explicitly that the note applies to paragraph (b). We are also
proposing amendments to cross-references in rule 34b-1 to reflect the
proposed redesignation of paragraph (b)(5) in rule 482 as paragraph
(b)(6). In addition, we are proposing to replace the reference to
``NASD Regulation, Inc.'' in the note to paragraph (h) of rule 482 with
``Financial Industry Regulatory Authority, Inc.''
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\92\ Paragraphs (a) and (b) are the only paragraphs of current
rule 34b-1.
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D. Compliance Date
If the proposed amendments to rules 482 and 34b-1 are adopted, the
Commission expects to require target date fund advertisements and
supplemental sales literature that are used 90 days or more after the
effective date of the amendments to comply with the amendments. If the
proposed amendments to rule 156 are adopted, the Commission expects
that the amendments to rule 156 will take effect immediately upon the
effective date of the amendments.
The Commission requests comment on the proposed compliance dates.
Are the proposed periods an appropriate transition period for
compliance, or should they be shorter or longer? Should the Commission
require compliance with rules 482 and 34b-1 based on the date that
advertisements and supplemental sales literature are used or the date
that advertisements and supplemental sales literature are submitted for
publication, or should it require compliance on some other basis?
E. Request for Comments on Prospectus Disclosure Requirements
The amendments that we are proposing address the concerns that have
been raised regarding the potential for investor misunderstanding to
arise from target date fund names and marketing materials. In this
release, we are not proposing amendments to the prospectus disclosure
requirements. A target date fund is currently required to disclose,
among other things, its investment objective, principal investment
strategies, including the particular type or types of investments in
which the fund principally invests or will invest, the principal risks
of investing in the fund, and its fees and expenses.\93\ Our staff has
examined the prospectus disclosures made by a number of target date
funds in their registration statements filed with the Commission and
has observed that, pursuant to existing requirements, target date fund
prospectuses generally disclose:
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\93\ See Items 2, 3, 4, and 9 of Form N-1A [17 CFR 239.15A and
274.11A].
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A description of the glide path of the target date fund,
often presented as a table or graph broken down by asset class, such as
equity securities, fixed income securities, and cash and cash
equivalents;
The significance of specific points along the glide path,
such as the target date used in the fund's name and the landing point,
and any flexibility retained by the investment adviser to deviate from
the glide path; and
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.
We believe that these disclosures are material to target date fund
investors and required to be disclosed as part of the discussion of a
fund's principal investment strategies and principal investment risks.
We are, however, concerned that there may be disclosures about target
date funds that are important to investors and that are not required by
our current prospectus and registration statement line item disclosure
requirements, and we request comment on this matter.
We request comment on prospectus disclosure requirements for target
date funds and, in particular, on the following issues:
Generally, Form N-1A, the registration form for mutual
funds, does not prescribe separate requirements for different types of
funds. Should Form N-1A be amended to provide specific requirements for
target date funds? If so, what types of disclosures should be
addressed?
Should target date fund prospectuses and/or statements of
additional information be expressly
[[Page 35936]]
required to disclose the fund's landing point? Should we expressly
require disclosure as to whether the target date fund manager is
managing the fund ``to'' the stated target date or ``through'' that
date, e.g., based on life expectancy?
Should target date fund prospectuses and/or statements of
additional information be expressly required to disclose the underlying
assumptions that led the target date fund manager to select the fund's
current glide path? For example, should a target date fund prospectus
or statement of additional information be required to disclose the
manager's assumptions, such as assumptions about life expectancy,
inflation, savings rate, other investments, retirement and labor
income, and withdrawal rates, that were used in construction of its
asset allocation glide path? Would this disclosure help an investor
and/or the investor's financial adviser to determine whether a
particular target date fund is appropriate for the investor? Would this
disclosure assist investors by facilitating the ability of third party
information providers to publish comparisons across target date funds?
Would investors be able to make effective use of this information by
themselves? Or would this disclosure confuse and/or overwhelm
investors?
Should a target date fund be expressly required to
disclose in its prospectus or statement of additional information the
flexibility retained by the target date fund manager to change the
glide path in the future? 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?
Should a target date fund be expressly required to
disclose in its prospectus or statement of additional information the
latitude it has to deviate from its stated glide path, the
circumstances under which it may deviate from its stated glide path,
past instances when it has deviated from its stated glide path, and the
reasons for any past deviations?
Should we expressly require disclosure in the prospectus
or statement of additional information regarding the use of any
commodities, derivatives, or other alternative investments by a target
date fund? Should we expressly require disclosure regarding the effect
of leverage on a target date fund's asset allocation, whether
attributable to borrowing, derivative investments, or other sources?
If we require new line item disclosures that are specific
to target date funds, should these be included in the prospectus or the
statement of additional information? If they should be in the
prospectus, should they be required to be included in the summary
section at the front of the prospectus and in the summary prospectus,
if any, that a fund chooses to use under rule 498 under the Securities
Act.\94\
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\94\ 17 CFR 230.498.
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III. General Request for Comments
The Commission requests comment on the amendments proposed in this
release, whether any further changes to our rules or forms are
necessary or appropriate to implement the objectives of our proposed
amendments, and on other matters that might affect the proposals
contained in this release.
IV. Paperwork Reduction Act
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\95\ We are submitting the proposed
collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\96\ The titles for the
existing collections of information are: (1) ``Rule 482 under the
Securities Act of 1933 Advertising by an Investment Company as
Satisfying Requirements of Section 10''; and (2) ``Rule 34b-1 (17 CFR
270.34b-1) under the Investment Company Act of 1940, Sales Literature
Deemed to Be Misleading.'' \97\ An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
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\95\ 44 U.S.C. 3501, et seq.
\96\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\97\ Rule 156 does not contain ``collection of information''
requirements within the meaning of the PRA. The proposed amendments
to rule 156 also do not involve a ``collection of information.''
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Rule 482 (OMB Control No. 3235-0565) was adopted pursuant to
Section 10(b) of the Securities Act.\98\ Rule 34b-1 (OMB Control No.
3235-0346) was adopted pursuant to Section 34(b) of the Investment
Company Act.\99\ Rules 482 and 34b-1, including the proposed
amendments, contain collection of information requirements. Rule 482
permits a registered investment company to advertise information prior
to delivery of a statutory prospectus. Rule 34b-1 prescribes the
requirements for supplemental sales literature (i.e., sales literature
that is preceded or accompanied by the statutory prospectus).
Compliance with the rules is mandatory. Responses to the disclosure
requirements will not be kept confidential.
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\98\ 15 U.S.C. 77j(b).
\99\ 15 U.S.C. 80a-33(b).
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We are proposing amendments to rules 482 and 34b-1 that would apply
to advertisements and supplemental sales literature that place a more
than insubstantial focus on one or more target date funds.
Specifically, we are proposing amendments to rules 482 and 34b-1 that
would require a target date fund that includes the target date in its
name to disclose the target date (or current) asset allocation of the
fund immediately adjacent to (or, in a radio or television
advertisement, immediately following) the first use of the fund's name
in advertisements and supplemental sales literature. The Commission is
also proposing amendments to rules 482 and 34b-1 that would require
enhanced disclosure in advertisements and supplemental sales literature
for a target date fund regarding the fund's glide path and asset
allocation at the landing point, as well as the risks and
considerations that are important when deciding whether to invest in a
target date fund.
The information required by the proposed amendments is primarily
for the use and benefit of investors. The amendments that we are
proposing in this release are intended to address concerns that have
been raised regarding the potential for investor misunderstanding to
arise from target date fund names and marketing materials. The
additional information that would be required to be disclosed pursuant
to the collection of information provisions of the proposed amendments
would address these concerns regarding investor protection.
The proposed amendments to rule 482 require: (i) For advertisements
relating to a target date fund whose name includes a date, disclosure
of the asset allocation of the fund at the target date (or for
advertisements that are submitted for publication or use on or after
the target date, a fund's actual asset allocation as of the most recent
calendar quarter ended prior to the submission of the advertisement for
publication or use); (ii) for print or electronic advertisements
relating to a single target date fund, a table, chart, or graph that
depicts the actual percentage allocation of the fund among types of
investments from the inception of the fund through the most recent
calendar quarter ended prior to the submission of the advertisement for
publication and the future intended allocations of the fund;
[[Page 35937]]
(iii) for print or electronic advertisements relating to multiple
target date funds with different target dates that all have the same
pattern of asset allocations, either separate presentations for each
target date fund that meet the requirements of clause (ii) or a single
table, chart, or graph that depicts the intended allocations of the
funds among types of investments; (iv) for advertisements that relate
to a single target date fund and are submitted for publication prior to
the landing point or that relate to multiple target date funds with
different target dates that all have the same pattern of asset
allocations, a statement preceding the table, chart, or graph that
explains the table, chart, or graph and provides certain information
about the glide path and landing point; (v) enhanced disclosures
relating to the landing point in radio and television advertisements
that are submitted for use prior to the landing point for funds whose
names include a target date; and (vi) statements alerting investors to
certain risks and considerations relating to an investment in a target
date fund. The proposed amendments to rule 34b-1 would apply the same
requirements, other than those described in clause (v), to supplemental
sales literature.
The PRA burden estimates for the proposed amendments to rules 482
and 34b-1 are based on the Commission staff's experience with the
various types of investment companies registered with the Commission,
including PRA burden estimates that the Commission has used for other
requirements. The Commission estimates that there are approximately 357
funds that are either a registered management investment company or a
separate series of a registered management investment company that
would fall within the proposed definition of ``target date fund'' for
purposes of the proposed amendments to rules 482 and 34b-1.\100\ We
believe that part of the PRA burden will be incurred on an initial one-
time basis and that part of the PRA burden will be ongoing.
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\100\ This estimate is based on Commission staff analysis of
data obtained from Morningstar Direct. The Commission staff believes
that all funds that meet the proposed definition of a target date
fund currently use a date in their names and would be subject to all
of the proposed amendments to rules 482 and 34b-1.
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The Commission estimates that internal marketing personnel and
compliance attorneys of a target date fund subject to the proposed
amendments would spend, as an initial one time burden in order to
comply with the proposed amendments, an average of 15 hours, consisting
of: (1) One hour to prepare and review the fund's intended target date
(or current) asset allocation disclosure; (2) 10 hours to prepare and
review the table, chart, or graph that depicts the glide path of the
fund, the statement preceding the table, chart, or graph, and the
enhanced disclosures relating to the landing point in radio and
television advertisements; and (3) four hours to prepare and review the
statement alerting investors to certain risks and considerations
relating to an investment in a target date fund. We estimate the
initial one-time burden for all target date funds to comply with the
proposed amendments to be approximately 5,355 hours.\101\ Because the
disclosures proposed to be required under rules 482 and 34b-1 are the
same, we believe that the hour burden associated with initial
compliance would not be duplicated under both rules and do not believe
that there would be any additional burden associated with rule 34b-1
because the proposed amendments would not affect the level of review
needed by funds to comply with rule 34b-1. Therefore, we have assigned
the initial one-time burden to rule 482.
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\101\ 357 target date funds x 15 hours = 5,355 hours.
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We also estimate certain ongoing costs with respect to
advertisements and supplemental sales literature associated with the
proposed amendments to rules 482 and 34b-1. First, we anticipate that
there will be ongoing costs associated with the proposed requirement
that a target date fund submitting an advertisement or supplemental
sales literature for publication or use on or after the date that is
included in the fund's name must disclose, immediately adjacent to the
fund's name, the fund's actual asset allocation as of the most recent
calendar quarter ended prior to the submission of the advertisement. We
estimate that internal marketing personnel and compliance attorneys of
a target date fund subject to the proposed amendments would spend an
average of one hour per response on an ongoing basis to update the
asset allocations disclosed immediately adjacent to the fund's name.
We estimate that 58,368 responses \102\ to rule 482 are filed
annually by 3,540 registered investment companies offering
approximately 16,225 funds, or approximately 3.6 responses per fund
annually.\103\ Therefore, we estimate that the 357 target date funds
would file 1,285 responses to rule 482 annually.\104\ Of these
responses, we estimate that 15% would be responses submitted on or
after the date that is included in the fund's name.\105\ In the first
year, we estimate that the ongoing burden associated with the proposed
requirement that a target date fund submitting an advertisement on or
after the date that is included in the fund's name must disclose the
fund's actual asset allocation as of the most recent calendar quarter
ended would be 139 hours.\106\ In each subsequent year, we estimate
that the ongoing burden associated with this requirement would be 193
hours.\107\
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\102\ The estimated number of responses to rule 482 is composed
of 58,093 responses filed with the Financial Industry Regulatory
Authority, Inc. (``FINRA'') and 275 responses filed with the
Commission in 2009.
\103\ 58,368 responses / 16,225 funds = 3.6 responses per fund.
\104\ 357 funds x 3.6 responses per fund = 1,285 responses.
\105\ Based on Commission staff analysis of data as of March 31,
2010, obtained from Morningstar Direct, 47 target date funds contain
a date in the name that is on or before the year 2010. This amounts
to approximately 13% of the 357 target date funds (357 target date
funds / 47 target date funds = 13%), which we have rounded up for
purposes of our estimates to 15%.
\106\ Because we have assumed in the first year that one
response will not impose any burden beyond the initial one time
burden of 15 hours, target date funds submitting an advertisement
for publication on or after the date that is included in the fund's
name would bear an ongoing burden of 1 hour with respect to the
remaining 2.6 responses (357 target date funds x 0.15 x 1 hour x 2.6
responses = 139 hours).
\107\ In subsequent years, the ongoing cost burden for target
date funds submitting an advertisement for publication on or after
the date that is included in the fund's name would equal 193 hours
(357 target date funds x 0.15 x 1 hour x 3.6 responses = 193 hours).
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With regard to rule 34b-1, we estimate that 11,544 \108\ responses
are filed annually by 3,540 registered investment companies offering
approximately 16,225 funds, or approximately 0.7 responses per fund
annually.\109\ Therefore, we estimate that the 357 target date funds
would file approximately 250 responses to rule 34b-1 annually.\110\ Of
these responses, we estimate that 15% would be responses submitted on
or after the date that is included in the fund's name.\111\ Therefore,
we estimate that the ongoing annual burden associated with the
requirement that a target date fund submitting supplemental sales
literature on or after the date that is included in the fund's name
must disclose the fund's actual asset allocation as of the
[[Page 35938]]
most recent calendar quarter ended would be approximately 37
hours.\112\
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\108\ The estimated number of responses to rule 34b-1 is
composed of 10,904 responses filed with FINRA and 640 responses
filed with the Commission in 2009.
\109\ 11,544 responses / 16,225 funds = 0.7 responses per fund.
\110\ 357 funds x 0.7 responses per fund = 250 responses.
\111\ See supra note 105.
\112\ We estimate that 15% of the 357 target date funds would be
required to update the fund's actual asset allocation as of the most
recent calendar quarter immediately adjacent to the fund's name and
bear an ongoing burden of 1 hour with respect to the 0.7 average
annual responses (357 target date funds x 0.15 x 1 hour x 0.7
responses = 37 hours).
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Second, we further estimate that there will be ongoing costs
associated with the requirement that, in advertisements and
supplemental sales literature that relate to a single target date fund,
the table, chart, or graph must clearly depict the actual percentage
allocations among types of investments from the inception of the fund
through the most recent calendar quarter ended prior to the submission
of the materials for publication and the future intended percentage
allocations of the fund. We estimate that internal marketing personnel
and compliance attorneys of a target date fund subject to the proposed
amendments would spend an average of two hours per response on an
ongoing basis for single-fund advertisements and supplemental sales
literature to comply with the proposed table, chart, or graph
requirement.
We estimate that the 357 target date funds would file 1,285
responses to rule 482 annually.\113\ Of these responses, we estimate
that 25% would be single fund advertisements and 75% would be multiple
fund advertisements.\114\ In the first year, we estimate that the
ongoing burden associated with the proposed table, chart, or graph
requirement for single target date fund responses would be 464
hours.\115\ In each subsequent year, we estimate that the ongoing
burden associated with the proposed table, chart, or graph requirement
for single target date fund advertisements would be 643 hours.\116\
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\113\ 357 funds x 3.6 responses per fund = 1,285 responses.
\114\ These estimates are based on the Commission staff's review
of a sample of target date fund materials filed with FINRA.
\115\ Because we have assumed in the first year that one
response will not impose any burden beyond the initial one time
burden of 15 hours, each of the 357 target date funds would bear an
ongoing burden of 2 hours for single target date fund advertisements
with respect to 25% of the remaining 2.6 responses (357 target date
funds x 2 hours x 0.25 x 2.6 responses = 464 hours).
\116\ In subsequent years, the ongoing cost burden for single
target date fund advertisements would equal 643 hours (357 target
date funds x 2 hours x 0.25 x 3.6 responses = 643 hours).
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Of the approximately 250 responses to rule 34b-1 annually, we also
estimate that 25% would be single fund supplemental sales literature
and 75% would be multiple fund supplemental sales literature.\117\ We
estimate that the ongoing burden associated with the proposed table,
chart, or graph requirement for single target date fund supplemental
sales literature would be approximately 125 hours.\118\
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\117\ These estimates are based on the Commission staff's review
of a sample of target date fund materials filed with FINRA.
\118\ We estimate 357 target date funds would bear an ongoing
burden of 2 hours for single target date fund supplemental sales
literature with respect to 25% of the 0.7 average annual responses
(357 target date funds x 2 hours x 0.25 x 0.7 responses = 125
hours).
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Based on the foregoing estimates, the hour burden associated with
the proposed amendments to rule 482 over three years would be
approximately 7,630 hours.\119\ Because the PRA estimates represent the
average burden over a three-year period, we estimate the average annual
hour burden for target date funds to comply with the proposed
amendments to rule 482 to be approximately 2,543 hours.\120\ The PRA
burden associated with rule 482 is presently estimated to be 5.16 hours
per response, for a total annual hour burden of 301,179 hours.\121\
Therefore, we estimate that if the proposed amendments to rule 482 are
adopted, the total annual hour burden for all funds to comply with the
requirements of rule 482 would be 303,722 hours,\122\ or 5.20 hours per
response.\123\
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\119\ We estimate that the total incremental hour burden
associated with the proposed amendments to rule 482 over three years
would be 7,630 hours (5,355 hours for initial compliance + 603 hours
in year 1 (139 hours + 464 hours) + 836 hours in year 2 (193 hours +
643 hours) + 836 hours in year 3 (193 hours + 643 hours) = 7,630
hours).
\120\ 7,630 hours / 3 years = 2,543 hours.
\121\ 58,368 responses x 5.16 hours per response = 301,179
hours.
\122\ 301,179 hours + 2,543 hours = 303,722 hours.
\123\ 303,722 hours / 58,368 responses = 5.20 hours per
response.
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The PRA burden associated with rule 34b-1 is presently estimated to
be 2.41 hours per response, which, when multiplied by our estimate of
11,544 total annual responses to rule 34b-1, provides a total annual
hour burden of 27,821 hours.\124\ Therefore, we estimate that if the
proposed amendments to rule 34b-1 are adopted, the total annual hour
burden for all funds to comply with the requirements of rule 34b-1
would be 27,983 hours,\125\ or approximately 2.42 hours per
response.\126\
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\124\ 11,544 responses x 2.41 hours per response = 27,821 hours.
\125\ 27,821 hours + 37 hours + 125 hours = 27,983 hours per
year.
\126\ 27,983 hours / 11,544 responses = 2.42 hours per response.
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We anticipate that target date funds would also incur initial one
time external costs, such as the costs of modifying and reformatting
layouts and typesetting, and no ongoing external costs.\127\ We
estimate that these initial external costs would be approximately
$2,900 per target date fund,\128\ or $1,035,300 in the aggregate,\129\
which we have assigned to rule 482.
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\127\ We believe that it is usual and customary for investment
companies to periodically update and replace marketing materials. We
have proposed a 90-day transition period for the proposed amendments
to rules 482 and 34b-1 to minimize the burden on target date funds.
\128\ This estimate is based on the estimate of $2,417 for
external costs that we made in 2003 when we last amended rules 482
and 34b-1. See Investment Company Act Release No. 26195 (Sept. 29,
2003) [68 FR 57760, 57771 (Oct. 6, 2003)]. We have adjusted our
estimate to account for an increase of 19.4% in the consumer price
index between 2003 and 2009, based on Commission staff analysis of
data obtained from the Bureau of Labor Statistics.
\129\ 357 target date funds x $2,900 per target date fund =
$1,035,300.
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Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comments to: (1)
Evaluate whether the proposed collection of information is necessary
for the proper performance of the functions of the agency, including
whether the information will have practical utility; (2) evaluate the
accuracy of the Commission's estimate of burden of the proposed
collections of information; (3) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) evaluate whether there are ways to minimize the
burden of the collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology. We request comment and supporting
empirical data on our burden and cost estimates for the proposed
amendments, including the external costs that target date funds may
incur.
Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the
Office of Management and Budget, Attention Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Washington, DC 20503 and should send a copy to
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-9303, with reference to File No.
S7-12-10. Requests for materials submitted to OMB by the Commission
with regard to these collections of information should be in writing,
refer to File No. S7-12-10, and be submitted to the Securities and
Exchange Commission, Office of Investor Education and Advocacy, 100 F
Street, NE., Washington, DC 20549-0213. OMB is required to make a
decision concerning the collections of information between 30 and 60
days
[[Page 35939]]
after publication of this release. Consequently, a comment to OMB is
best assured of having its full effect if OMB receives it within 30
days after publication.
V. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. The Commission is proposing amendments to rules 482 and 34b-
1 that would apply to advertisements and supplemental sales literature
that place a more than insubstantial focus on one or more target date
funds. Specifically, the Commission is proposing amendments to rules
482 and 34b-1 that would require a target date fund that includes the
target date in its name to disclose the target date (or current) asset
allocation of the fund immediately adjacent to (or, in a radio or
television advertisement, immediately following) the first use of the
fund's name in advertisements and supplemental sales literature. The
Commission is also proposing amendments to rules 482 and 34b-1 that
would require enhanced disclosure in advertisements and supplemental
sales literature for a target date fund regarding the fund's glide path
and asset allocation at the landing point, as well as the risks and
considerations that are important when deciding whether to invest in a
target date fund. Finally, the Commission is proposing amendments to
rule 156 that would provide additional guidance regarding statements in
sales literature for target date funds and other investment companies
that could be misleading.
A. Benefits
While difficult to quantify, we believe the benefits to investors
resulting from the proposed amendments would be significant given the
approximately $270 billion in assets held by target date funds
registered with the Commission.\130\
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\130\ See supra note 17 and accompanying text.
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The proposed amendments to rules 482 and 34b-1 that would require a
target date fund that includes the target date in its name to disclose
the target date (or current) asset allocation of the fund immediately
adjacent to (or, in a radio or television advertisement, immediately
following) the first use of the fund's name in advertisements and
supplemental sales literature are intended to convey information about
the target date (or current) allocation of the fund's assets and reduce
the potential for names that include a target date to contribute to
investor misunderstanding of target date funds. For example, if a
target date fund remains significantly invested in equity securities at
the target date, the proposed disclosure would help to reduce or
eliminate incorrect investor expectations that the fund's assets will
be invested in a more conservative manner at that time.
In the case of target date funds, the names are designed to be
significant to investors when selecting a fund. The proposed amendments
are intended to benefit investors by reducing the potential of target
date fund names to confuse or mislead investors regarding the fund's
target date (or current) asset allocation.
The proposed amendments to rules 482 and 34b-1 are intended to
benefit investors by requiring enhanced disclosure in advertisements
and supplemental sales literature to provide investors basic
information about the fund's glide path, in order to facilitate more
informed investment decisions. Print and electronic marketing materials
would be required to include a prominent table, chart, or graph that
clearly depicts the percentage allocations of the fund among types of
investments over the entire life of the target date fund. The proposed
required statement preceding the table, chart, or graph would explain
the table, chart, or graph and include the following information: (i) A
statement that the fund's 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), an explanation that the allocation
of the fund becomes fixed at the landing point, and the percentage
allocations of the fund among types of investments (e.g., equity
securities, fixed income securities, and cash and cash equivalents) at
the landing point; and (iii) whether, and the extent to which, the
intended percentage allocations of the fund among types of investments
may be modified without a shareholder vote. The proposed table, chart,
or graph requirement would present information regarding the glide path
as a graphical illustration, which may benefit investors by providing
the information in a manner that is likely to be more easily understood
by investors than if the information were presented in narrative
format. The proposed required statement preceding the table, chart, or
graph may benefit investors by helping them to better understand the
table, chart, or graph.
While the proposed table, chart, or graph requirement would not
apply to radio and television advertisements, we propose to require
that radio or television advertisements that are submitted for use
prior to the landing point, that place a more than insubstantial focus
on one or more target date funds, and that use the name of a target
date fund that includes a date (including a year) must disclose the
landing point, an explanation that the allocation of the fund becomes
fixed at the landing point, and the percentage allocations of the fund
among types of investments (e.g., equity securities, fixed income
securities, and cash and cash equivalents) at the landing point. This
disclosure would benefit investors by alerting them that the target
date allocation is not the final allocation.
The proposed statement on risks and considerations that are
important when deciding whether to invest in a target date fund would
benefit investors who review marketing materials for target date funds
by providing them with information that will help prevent several types
of misunderstandings about target date funds. Target date fund
marketing materials would be required to advise an investor 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. Marketing materials
also would be required to advise an investor that an investment in the
target date fund is not guaranteed and that it is possible to lose
money by investing in the fund, including at and after the target date.
Finally, marketing materials would be required to advise an investor
whether, and the extent to which, the intended percentage allocations
of a target date fund among types of investments may be modified
without a shareholder vote. Better understanding of target date funds
may result in investors making better informed decisions in line with
their investment goals.
In addition to the benefits discussed above, the proposed
amendments to rules 482 and 34b-1 may enhance efficiency by making it
easier for investors to make more informed investment decisions. This
ability to make more informed investment decisions may also lead to
increased competitiveness among target date funds. We also believe
that, as a result of investors making better informed investment
decisions, companies would be able to allocate resources more
efficiently in line with preferences for risk and returns.
We are proposing to amend rule 156 to provide that a statement in
investment company sales literature that suggests that securities of an
investment
[[Page 35940]]
company are an appropriate investment could be misleading because of
the emphasis it places on a single factor, such as an investor's age or
tax bracket, as the basis for determining that the investment is
appropriate, or 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. This proposal is
intended to reduce the potential for certain types of statements or
representations to mislead investors. Marketing materials for target
date funds often focus to a significant extent on the purpose for which
(i.e., to meet retirement needs) and the investors for whom (i.e.,
investors of specified ages and retirement dates) the funds are
intended. In light of the nature of target date fund marketing
materials, and the concerns that have been raised about those
materials, we are proposing to amend rule 156 to address statements
that relate to the appropriateness of an investment. While target date
funds are the immediate impetus for the proposed amendments to rule
156, the proposed amendments, like the current provisions of rule 156
would, if adopted, apply to all types of investment companies. This
reflects our view that certain types of statements or representations
have the potential to mislead investors, regardless of the type of
investment company that is the subject of these statements.
B. Costs
Our proposed amendments to rules 482 and 34b-1 would require a
target date fund that includes the target date in its name to disclose
the target date (or current) asset allocation of the fund immediately
adjacent to (or, in a radio or television advertisement, immediately
following) the first use of the fund's name in advertisements and
supplemental sales literature. The proposed amendments to rules 482 and
34b-1 would also require enhanced disclosure in advertisements and
supplemental sales literature for a target date fund regarding the
fund's glide path and asset allocation at the landing point, as well as
the risks and considerations that are important when deciding whether
to invest in a target date fund.
We believe that a target date fund would not incur significant
costs in providing the disclosures required by rules 482 and 34b-1
because that information should be readily available to the fund. We
note that many target date funds already provide the required
information in their prospectuses, such as a table, chart, or graph
depicting the asset allocation over time.\131\ Furthermore, Commission
staff observed in its review of a sample of marketing materials that
some materials currently contain statements similar to those contained
in the proposed amendments (i.e., advising an investor to consider, in
addition to age or retirement date, other factors; that an investment
in a target date fund is not guaranteed; and that it is possible to
lose money by investing in a target date fund). As a result, we believe
that the costs associated with the disclosure of the proposed required
information will be limited.
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\131\ Based on Commission staff review of registration
statements filed with the Commission.
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The Commission estimates that funds would incur one time initial
costs in modifying their current marketing materials to meet the
proposed disclosure requirements. For example, funds may have to modify
and reformat their layouts and typesetting in order to convert existing
marketing materials to meet the enhanced disclosure requirements of the
amended rules. The Commission estimates that there are approximately
357 target date funds that would be required to comply with the
proposed amendments. Based on our PRA analysis, we estimate that the
one time initial costs for each target date fund attributable to the
proposed amendments would be approximately $3,825 in internal costs for
marketing personnel and compliance attorneys to prepare and review the
revised marketing materials \132\ and $2,900 in external costs for
modifying and reformatting layouts, typesetting, and printing for new
advertisements.\133\ We estimate that the aggregate initial one time
costs imposed by the proposed amendments would be approximately $2.4
million.\134\
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\132\ With respect to our initial one time internal burden
estimate of 15 hours, we estimate that marketing personnel will
spend 10 hours to prepare the revised marketing materials and
compliance attorneys will spend 5 hours to review the materials. See
supra note 101 and discussion at accompanying paragraph. The hourly
wage rate of $237 for a marketing manager and $291 for a compliance
attorney is based on the salary information from the Securities
Industry and Financial Markets Association, Report on Management &
Professional Earnings in the Securities Industry 2009, modified to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits, and overhead. Therefore,
the internal costs associated with this burden equals $3,825 per
target date fund (10 hours x $237 per hour + 5 hours x $291 per hour
= $3,825).
\133\ See supra note 128 and accompanying text.
\134\ $3,825 in internal costs per fund x 357 target date funds
+ $2,900 in external costs per fund x 357 target date funds =
$2,400,825.
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The Commission also estimates that there will be ongoing costs
associated with the proposed requirement that a target date fund
submitting an advertisement or supplemental sales literature for
publication or use on or after the date that is included in the fund's
name must disclose, immediately adjacent to the fund's name, the fund's
actual asset allocations as of the most recent calendar quarter ended
prior to the submission of the advertisement or supplemental sales
literature. Based on our PRA analysis, we estimate that the ongoing
cost for each advertisement or supplemental sales literature piece for
a target date fund that would be required to disclose the fund's actual
asset allocation as of the most recent calendar quarter ended would be
approximately $264 in costs for internal marketing personnel and
compliance attorneys to prepare and review the revised marketing
materials.\135\
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\135\ With respect to our ongoing internal burden estimate of 1
hour per advertisement or supplemental sales literature piece for a
target date fund that would be required to disclose the fund's
actual asset allocation as of the most recent calendar quarter
ended, we estimate that the marketing personnel will spend 0.5 hours
to prepare the revised marketing materials and compliance personnel
will spend 0.5 hours to review the marketing materials. For hourly
wage rates, see supra note 132. Therefore, the internal costs
associated with this burden equal $264 per response (0.5 hour x $237
per hour + 0.5 hour x $291 per hour = $264).
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The Commission further estimates that target date funds would incur
ongoing costs associated with the requirement that marketing materials
that are focused on a single target date fund provide information about
the fund's actual and intended asset allocations in the proposed table,
chart, or graph. Based on our PRA analysis, we estimate that the
ongoing costs for each single target date fund advertisement or
supplemental sales literature piece attributable to the proposed table,
chart, or graph requirement would be approximately $528 in costs for
internal marketing personnel and compliance attorneys to prepare and
review the revised marketing materials.\136\
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\136\ With respect to our ongoing internal burden estimate of 2
hours per single target date fund marketing materials, we estimate
that marketing personnel will spend 1 hour to prepare the revised
marketing materials and compliance personnel will spend 1 hour to
review the marketing materials. For hourly wage rates, see supra
note 132. Therefore, the internal costs associated with this burden
equal $528 per response (1 hour x $237 per hour + 1 hour x $291 per
hour = $528).
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We do not anticipate that target date funds will incur any
significant ongoing external costs in connection with the proposed
amendments. While we anticipate that target date funds will bear
external costs (such as the costs of modifying and reformatting
layouts, typesetting, and printing for new marketing materials) in
complying with
[[Page 35941]]
the proposed amendments, we believe that these costs would largely be
borne as one time costs when target date funds initially comply with
the proposed rule and not on an ongoing basis.
In considering the proposed amendments to rules 482 and 34b-1, the
Commission was mindful of ways to minimize costs. For example, with
respect to the table, chart, or graph requirement for marketing
materials that relate to multiple target date funds with different
target dates that all have the same pattern of asset allocations, the
proposal would permit the materials to include either separate
presentations for each fund or a single generic table, chart, or graph
illustrating the glide path for all the funds. In addition, our
proposal to require target date fund marketing materials to include a
prominent table, chart, or graph would not apply to radio and
television advertisements because, among other things, we determined
that it could result in the imposition of very substantial costs for
additional advertising time. Our proposal permits more limited
disclosure in a radio or television advertisement for a fund whose name
includes a target date of the landing point, an explanation that the
allocation of the fund becomes fixed at the landing point, and the
percentage allocations of the fund among types of investments at the
landing point.
Rule 156 is an interpretive rule that provides guidance to
investment companies regarding the applicability of the antifraud
provisions of the federal securities laws. The proposed amendment to
rule 156 would provide additional guidance regarding statements in
sales literature for target date funds and other investment companies
that could be misleading. Funds may incur some one-time costs in
reviewing their marketing materials for consistency with the proposed
interpretive guidance set forth in the amendments to rule 156. However,
we expect such review to be largely incorporated into the review
associated with complying with the proposed amendments to rules 482 and
34b-1. As a result, we do not expect that significant costs would be
associated with the review for compliance with rule 156. In addition,
because we believe that investment companies already review their sales
literature for misleading statements, we believe that the proposed
amendment to rule 156 would not impose significant compliance costs on
target date funds or other investment companies on an ongoing basis.
We request comment on the nature and amount of our estimates of the
costs of the additional disclosure that would be required if our
proposals were adopted.
C. Request for Comments
We request comments on all aspects of this cost-benefit analysis,
including identification of any additional costs or benefits of, or
suggested alternatives to, the proposed amendments. Commenters are
requested to provide empirical data and other factual support for their
views to the extent possible. In particular, we request comment on the
following issues:
Should any adjustments be made to our quantitative
estimates of costs?
If the proposed amendments are adopted, what changes in
behavior by either investors or target date fund managers may result,
and what would be the associated benefits and costs?
Are there any additional costs that target date funds
would likely incur with respect to their marketing materials in order
to comply with the proposed amendments other than those mentioned in
the cost-benefit analysis? For example, we have not identified any
quantifiable ongoing external costs to comply with the proposed
amendments. Are there quantifiable ongoing costs that a target date
fund would likely incur to comply with the proposed amendments?
VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation
Section 23(a)(2) \137\ of the Securities Exchange Act of 1934
(``Exchange Act'') \138\ requires the Commission, in adopting rules
under the Exchange Act, to consider the impact that any new rule would
have on competition and prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. Further, Section
2(c) of the Investment Company Act,\139\ Section 2(b) of the Securities
Act,\140\ and Section 3(f) of the Exchange Act \141\ require the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\142\
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\137\ 15 U.S.C. 78w(a)(2).
\138\ 15 U.S.C. 78a et seq.
\139\ 15 U.S.C. 80a-2(c).
\140\ 15 U.S.C. 77b(b).
\141\ 15 U.S.C. 78c(f).
\142\ The Commission is proposing amendments to rule 34b-1
pursuant to authority set forth in Sections 34(b) and 38(a) of the
Investment Company Act. For a discussion of the effects of the
proposed amendments to rule 34b-1 on efficiency, competition, and
capital formation, see Parts IV, V, and VII.
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We are proposing amendments to rule 482 that would apply to
advertisements that place a more than insubstantial focus on one or
more target date funds. Specifically, we are proposing amendments to
rule 482 that would require a target date fund that includes the target
date in its name to disclose the target date (or current) asset
allocation of the fund immediately adjacent to (or, in a radio or
television advertisement, immediately following) the first use of the
fund's name in advertisements. We are also proposing amendments to rule
482 that would require enhanced disclosure in advertisements for a
target date fund regarding the fund's glide path and asset allocation
at the landing point, as well as the risks and considerations that are
important when deciding whether to invest in a target date fund.
Finally, we are proposing amendments to rule 156 that would provide
additional guidance regarding statements in sales literature for target
date funds and other investment companies that could be misleading.
The proposed amendments may enhance efficiency by making it easier
for investors to make more informed investment decisions. For example,
if a target date fund remains significantly invested in equity
investments at the target date, the proposed disclosure would help to
reduce or eliminate incorrect investor expectations that the fund's
assets will be invested in a more conservative manner at that time. The
proposed amendments may also enhance efficiency by providing investors
with readily available information about certain considerations and
risks of the fund and the manner in which the fund's asset allocation
may change over time. The proposed amendments to rule 156 regarding
investment company sales literature would apply to all investment
companies and may enhance efficiency by providing clearer guidance as
to what may constitute misleading information in sales literature for
target date funds and other investment companies.
We anticipate that improving investors' ability to make informed
investment decisions may also lead to increased competitiveness among
target date funds. The transparency resulting from the enhanced
disclosure in marketing materials may promote competition by promoting
better informed decisions by investors who are considering target date
funds along with
[[Page 35942]]
other types of investments. Increased transparency and investor
awareness of target date fund asset allocations may also spur further
innovation in the design of target date fund asset allocation models by
fund sponsors due to enhanced competition. Finally, although target
date funds may compete with similar non-investment company products
that have similar investment objectives, we do not believe that the
proposed amendments will significantly affect the competitiveness of
target date funds in comparison with these other products.
With respect to the proposed amendments to rule 156, we believe
that the proposed amendments would not impose any burden on
competition. We believe that the proposed amendments may improve
investors' ability to make informed investment decisions, which thereby
may lead to increased competition among target date funds. We believe
that any costs that might be associated with compliance with the
proposed amendments would be limited and, therefore, would not impose a
burden on competition.
We anticipate that the proposed amendments would have a positive
impact on capital formation. As a result of investors making better
informed investment decisions, companies would be able to allocate
resources more efficiently in line with preferences for risk and return
in the economy. We request comment on whether the proposed amendments,
if adopted, would affect efficiency, competition, and capital
formation. Commenters are requested to provide empirical data and other
factual support for their views if possible.
VII. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with the Regulatory Flexibility Act.\143\ It relates to the
Commission's proposed rule amendments under the Securities Act,
Exchange Act, and the Investment Company Act to our rules governing
investment company advertisements and supplemental sales literature,
which are intended to facilitate investor understanding of target date
funds and reduce the potential for investors to be confused or misled.
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\143\ 5 U.S.C. 603 et seq.
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A. Reasons for, and Objectives of, Proposed Amendments
The Commission is proposing amendments to rules 482 and 34b-1 that
would apply to advertisements and supplemental sales literature that
place a more than insubstantial focus on one or more target date funds.
Specifically, the Commission is proposing amendments to rules 482 and
34b-1 that would require a target date fund that includes the target
date in its name to disclose the target date (or current) asset
allocation of the fund immediately adjacent to (or, in a radio or
television advertisement, immediately following) the first use of the
fund's name in advertisements and supplemental sales literature. The
Commission is also proposing amendments to rules 482 and 34b-1 that
would require enhanced disclosure in advertisements and supplemental
sales literature for a target date fund regarding the fund's glide path
and asset allocation at the landing point, as well as the risks and
considerations that are important when deciding whether to invest in a
target date fund. Finally, the Commission is proposing amendments to
rule 156 that would provide additional guidance regarding statements in
sales literature for target date funds and other investment companies
that could be misleading.
The proposed amendments to rules 482 and 34b-1 are intended to help
address any potential investor misunderstanding that a target date fund
may be invested more conservatively at the target date specified in its
name or that every fund with the same target date in its name is
managed in the same way. The proposed requirement to disclose the
intended asset allocations of a target date fund at the target date
(or, for periods on and after the target date, a fund's actual asset
allocation as of the most recent calendar quarter) would, in essence,
serve to alert investors to the existence of investment risk associated
with the fund at and after the target date. The asset allocation may
help counterbalance any misimpression that a fund is necessarily
conservatively managed at the target date or that all funds with the
same target date are similarly managed. The proposed table, chart, or
graph requirement and landing point disclosure are intended to ensure
that investors who receive target date fund marketing materials also
receive basic information about the fund's glide path. The proposed
amendments requiring disclosure of risks and considerations that are
important when deciding whether to invest in a target date fund are
intended to advise investors who review marketing materials for target
date funds that a fund should not be selected based solely on age or
retirement date, that a target date fund is not a guaranteed
investment, and that a target date fund's stated asset allocation may
be subject to change.
The proposed amendments to rule 156 are intended to emphasize the
potential for certain statements suggesting that securities of an
investment company are an appropriate investment to mislead investors,
in the context of target date funds or other investment companies.
B. Legal Basis
The Commission is proposing amendments to rule 482 pursuant to
authority set forth in Sections 5, 10(b), 19(a), and 28 of the
Securities Act and Sections 24(g) and 38(a) of the Investment Company
Act. The Commission is proposing amendments to rule 34b-1 pursuant to
authority set forth in Sections 34(b) and 38(a) of the Investment
Company Act. The Commission is proposing amendments to rule 156
pursuant to authority set forth in Section 19(a) of the Securities Act
and Sections 10(b) and 23(a) of the Exchange Act.
C. Small Entities Subject to the Rule
For purposes of the Regulatory Flexibility Act, an investment
company is a small entity if it, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less as of the end of its most recent fiscal
year.\144\ Approximately 158 registered investment companies meet this
definition, but the Commission estimates that no target date funds meet
this definition.\145\ The proposed amendments to rules 482 and 34b-1,
if adopted, would apply to registered investment companies that are
target date funds, and therefore we do not expect that they would
affect any small entities. The proposed amendments to rule 156, if
adopted, would apply to all investment companies and may affect the 158
registered investment companies that are small entities, as well as
investment companies that are small entities, but that are not subject
to Investment Company Act registration
[[Page 35943]]
requirements, including 32 business development companies.\146\ Except
for business development companies, we do not collect data to determine
how many investment companies that are not subject to Investment
Company Act registration requirements are small entities. Therefore, we
are unable to determine the total number of small entities that would
be affected by the proposed amendments to rule 156.
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\144\ 17 CFR 230.157; 17 CFR 270.0-10.
\145\ Commission staff determined that each target date fund is
part of a group of related investment companies that had net assets
of more than $50 million as of the end of its most recent fiscal
year. The staff compiled a list of target date funds and aggregate
net target date fund assets based on classifications by Morningstar
Direct. To the extent that a group of related investment companies
had aggregate net target date fund assets of $50 million or less as
reported by Morningstar Direct, the staff reviewed the filings made
with the Commission by the other related investment companies within
that group to determine the aggregate net assets of the target date
funds, together with other related investment companies.
\146\ Examples of investment companies not subject to
registration under Section 8 of the Investment Company Act include
business development companies and employees' security companies.
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D. Reporting, Recordkeeping, and Other Compliance Requirements
We are proposing amendments to rules 482 and 34b-1 that would apply
to advertisements and supplemental sales literature that place a more
than insubstantial focus on one or more target date funds.
Specifically, we are proposing amendments to rules 482 and 34b-1 that
would require a target date fund that includes the target date in its
name to disclose the target date (or current) asset allocation of the
fund immediately adjacent to (or, in a radio or television
advertisement, immediately following) the first use of the fund's name
in advertisements and supplemental sales literature. We are also
proposing amendments to rules 482 and 34b-1 that would require enhanced
disclosure in advertisements and supplemental sales literature for a
target date fund regarding the fund's glide path and asset allocation
at the landing point, as well as the risks and considerations that are
important when deciding whether to invest in a target date fund.
The proposed amendments to rules 482 and 34b-1, if adopted, would
apply to registered investment companies that are target date funds. As
noted earlier, the Commission estimates that no target date funds are
small entities. Therefore, we do not expect that the proposed
amendments to rules 482 and 34b-1 would affect any small entities.
We are also proposing amendments to rule 156 to provide additional
guidance regarding statements in sales literature for target date funds
and other investment companies that could be misleading. Because the
proposed amendment to rule 156 is interpretive and provides guidance as
to when sales literature could be misleading, we believe that the
proposed amendment would not impose significant reporting,
recordkeeping, or other compliance costs on target date funds or other
investment companies.
The Commission solicits comment on these estimates and the
anticipated effect the proposed amendments would have on small
entities.
E. Duplicative, Overlapping, or Conflicting Federal Rules
The Commission believes that there are no federal rules that
duplicate, overlap, or conflict with the proposed amendments.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objective, while
minimizing any significant adverse impact on small issuers. In
connection with the proposed amendments, the Commission considered the
following alternatives: (i) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the proposed amendments for small entities; (iii)
the use of performance rather than design standards; and (iv) an
exemption from coverage of the proposed amendments, or any part
thereof, for small entities.
The Commission believes at the present time that special compliance
or reporting requirements for small entities, or an exemption from
coverage for small entities, would not be appropriate or consistent
with investor protection. The proposed amendments to rules 482 and 34b-
1, if adopted, would apply to registered investment companies that are
target date funds. As noted earlier, the Commission estimates that no
target date funds are small entities. Therefore, we do not expect that
the proposed amendments to rules 482 and 34b-1 would affect any small
entities.
The proposed amendments to rule 156 would apply to all investment
companies, including some that may be small entities, and would provide
additional guidance in determining whether statements contained in
sales literature are misleading. Different requirements for investment
companies that are small entities may create an increased risk that
investors would receive misleading information in sales literature
about target date funds or other investment companies that are small
entities. Therefore, we believe it is important for the proposed
amendments to apply to all investment companies, regardless of size.
We have endeavored through the proposed amendments to minimize the
regulatory burden on all investment companies, including small
entities, while meeting our regulatory objectives. We have endeavored
to clarify, consolidate, and simplify the requirements applicable to
all investment companies, including those that are small entities.
Finally, we do not consider using performance rather than design
standards to be consistent with investor protection in the context of
requirements for investment company marketing materials.
G. Request for Comments
The Commission encourages the submission of written comments with
respect to any aspect of this analysis. Comment is specifically
requested on the number of small entities that would be subject to the
proposed amendments and the likely impact of the proposal on those
small entities. Commenters are asked to describe the nature of any
impact and provide empirical data supporting the extent of the impact.
These comments will be considered in the preparation of the Final
Regulatory Flexibility Analysis if the proposed amendments are adopted
and will be placed in the same public file as comments on the proposed
amendments themselves.
VIII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\147\ a rule is ``major'' if it results or is
likely to result in:
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\147\ Public Law 104-21, Title II, 110 Stat. 857 (1996).
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An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
IX. Statutory Authority
The Commission is proposing amendments to rule 156 pursuant to
authority set forth in Section 19(a) of the Securities Act [15 U.S.C.
77s(a)] and Sections 10(b) and 23(a) of the Exchange Act [15 U.S.C.
78j(b) and 78w(a)]. The Commission is proposing amendments to rule 482
pursuant to authority set
[[Page 35944]]
forth in Sections 5, 10(b), 19(a), and 28 of the Securities Act [15
U.S.C. 77e, 77j(b), 77s(a), and 77z-3] and Sections 24(g) and 38(a) of
the Investment Company Act [15 U.S.C. 80a-24(g) and 80a-37(a)]. The
Commission is proposing amendments to rule 34b-1 pursuant to authority
set forth in Sections 34(b) and 38(a) of the Investment Company Act [15
U.S.C. 80a-33(b) and 80a-37(a)].
List of Subjects
17 CFR Part 230
Advertising, Investment companies, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Rule Amendments
For the reasons set out in the preamble, the Commission proposes to
amend Title 17, Chapter II, of the Code of Federal Regulations as
follows.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for Part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37,
unless otherwise noted.
* * * * *
2. Section 230.156 is amended by adding paragraph (b)(4) to read as
follows:
Sec. 230.156 Investment company sales literature.
* * * * *
(b) * * *
(4) A statement suggesting that securities of an investment company
are an appropriate investment could be misleading 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 the
investment is appropriate; or
(ii) Representations, whether express or implied, that investing in
the securities is a simple investment plan or requires little or no
monitoring by the investor.
* * * * *
3. Section 230.482 is amended by:
a. Redesignating paragraphs (b)(5) and (b)(6) as paragraphs (b)(6)
and (b)(7);
b. Adding new paragraph (b)(5);
c. In newly redesignated paragraph (b)(6), revising the first and
second references ``paragraphs (b)(1) through (b)(4)'' to read
``paragraphs (b)(1) through (b)(4) and paragraph (b)(5)(ii)'';
d. In newly redesignated paragraph (b)(6), revising the third
reference ``paragraphs (b)(1) through (b)(4)'' to read ``paragraphs
(b)(1) through (b)(4) and paragraphs (b)(5)(ii) and (v)''; and
e. Revising the phrase ``NASD Regulation, Inc.'' in the note to
paragraph (h) to read ``Financial Industry Regulatory Authority, Inc.''
The addition reads as follows:
Sec. 230.482 Advertising by an investment company as satisfying
requirements of Section 10.
* * * * *
(b) * * *
(5) Target date funds.
(i) Definitions. For purposes of this section:
(A) Target Date Fund means 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.
(B) Target Date means 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.
(C) Landing Point means the first date, including a year, at which
the asset allocation of a Target Date Fund reaches its final asset
allocation among types of investments.
(ii) An advertisement that places a more than insubstantial focus
on one or more Target Date Funds must include a statement that:
(A) Advises an investor to consider, in addition to age or
retirement date, other factors, including the investor's risk
tolerance, personal circumstances, and complete financial situation;
(B) Advises an investor that an investment in the Target Date
Fund(s) is not guaranteed and that it is possible to lose money by
investing in the Target Date Fund(s), including at and after the Target
Date; and
(C) Unless disclosed pursuant to paragraph (b)(5)(iv)(C) of this
section, advises an investor whether, and the extent to which, the
intended percentage allocations of the Target Date Fund(s) among types
of investments may be modified without a shareholder vote.
(iii) An advertisement that places a more than insubstantial focus
on one or more Target Date Funds, and that uses the name of a Target
Date Fund that includes a date, including a year, must disclose the
percentage allocations of the Target Date Fund among types of
investments (e.g., equity securities, fixed income securities, and cash
and cash equivalents) as follows: (1) An advertisement that is
submitted for publication or use prior to the date that is included in
the name must disclose the Target Date Fund's intended asset allocation
at the date that is included in the name and must clearly indicate that
the percentage allocations are as of the date in the name; and (2) an
advertisement that is submitted for publication or use on or after the
date that is included in the 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 allocations are as of that
date. This information must appear immediately adjacent to (or, in a
radio or television advertisement, immediately following) the first use
of the Target Date Fund's name in the advertisement and must be
presented in a manner reasonably calculated to draw investor attention
to the information.
(iv) A print advertisement or an advertisement delivered through an
electronic medium that places a more than insubstantial focus on one or
more Target Date Funds must include a prominent table, chart, or graph
clearly depicting the percentage allocations of the Target Date Fund(s)
among types of investments (e.g., equity securities, fixed income
securities, and cash and cash equivalents) over the entire life of the
Target Date Fund(s) at identified periodic intervals that are no longer
than five years in duration and at the inception of the Target Date
Fund(s), the Target Date, the Landing Point, and, in the case of an
advertisement that relates to a single Target Date Fund, as of the most
recent calendar quarter ended prior to the submission of the
advertisement for publication. If the advertisement relates to a single
Target Date Fund, the table, chart, or graph must clearly depict the
actual percentage allocations among types of investments from the
inception of the Target Date Fund through the most recent calendar
quarter ended prior to the submission of the advertisement for
publication, clearly depict the future intended percentage allocations
among types of investments, and identify the periodic intervals and
other required points using specific dates (which may include years,
such as 2015 or 2020). If
[[Page 35945]]
the advertisement relates to multiple Target Date Funds with different
Target Dates that all have the same pattern of asset allocations, the
advertisement may include separate presentations for each Target Date
Fund that meet the requirements of the preceding sentence or may
include a single table, chart, or graph that clearly depicts the
intended percentage allocations of the Target Date Funds among types of
investments and identifies the periodic intervals and other required
points using numbers of years before and after the Target Date. If the
advertisement (1) relates to a single Target Date Fund and is submitted
for publication prior to the Landing Point; or (2) 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 a statement explaining the table, chart, or
graph that includes the following information:
(A) The asset allocation changes over time;
(B) 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); an explanation that
the asset allocation becomes fixed at the Landing Point; and the
intended percentage allocations among types of investments (e.g.,
equity securities, fixed income securities, and cash and cash
equivalents) at the Landing Point; and
(C) Whether, and the extent to which, the intended percentage
allocations among types of investments may be modified without a
shareholder vote.
(v) A radio or television advertisement that is submitted for use
prior to the Landing Point and that places a more than insubstantial
focus on one or more Target Date Funds, and that uses the name of a
Target Date Fund that includes a date (including a year), 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 (e.g.,
equity securities, fixed income securities, and cash and cash
equivalents) at the Landing Point.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
4. The authority citation for Part 270 continues to read in part as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
5. Section 270.34b-1 is amended by:
a. Removing the language ``paragraphs (a) and (b) of'' in the
introductory text and the note to introductory text;
b. Revising the references ``paragraph (b)(5) of Sec. 230.482 of
this chapter'' in paragraph (a) and paragraph (b)(1)(i) to read
``paragraph (b)(6) of Sec. 230.482 of this chapter'';
c. Revising the heading to the note following paragraph (b) to read
``Note to paragraph (b)''; and
d. Adding paragraph (c) at the end thereof.
The addition reads as follows:
Sec. 270.34b-1 Sales literature deemed to be misleading.
* * * * *
(c) Sales literature that places a more than insubstantial focus on
one or more Target Date Funds (as defined in paragraph (b)(5)(i)(A) of
Sec. 230.482 of this chapter) must contain the information required by
paragraphs (b)(5)(ii), (iii), and (iv) of Sec. 230.482 of this
chapter, presented in the manner required by those paragraphs and by
paragraph (b)(6) of Sec. 230.482 of this chapter.
By the Commission.
Dated: June 16, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-15012 Filed 6-22-10; 8:45 am]
BILLING CODE 8010-01-P