Investment Company Advertising: Target Date Retirement Fund Names and Marketing, 35920-35945 [2010-15012]
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Federal Register / Vol. 75, No. 120 / Wednesday, June 23, 2010 / Proposed Rules
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml);
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–12–10 on the subject line;
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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.
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ACTION:
Proposed rule.
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.
Comments may be
submitted by any of the following
methods:
ADDRESSES:
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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
(https://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
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 17
CFR 230.156.
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.
2 17
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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 participantdirected vehicles, such as 401(k) plans,7
that make them responsible for
accumulating sufficient assets for their
retirement.8
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
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).
9 See, e.g., Testimony of Barbara D. Bovbjerg,
Director, Education, Workforce, and Income
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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
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
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
https://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’’).
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’’).
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 https://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
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
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
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.
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).
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
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U.S. employers surveyed now use target
date funds as their default investment.21
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.
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%,
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).
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).
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 https://www.standardandpoors.com/
indices/market-attributes/en/us; Nasdaq Composite
Index performance data, available at https://
www.nasdaq.com/aspx/dynamic_charting.aspx?
symbol=IXIC&selected=IXIC; and Wilshire Index
Calculator, available at https://www.wilshire.com/
Indexes/calculator/.
26 Based on Commission staff analysis of data
obtained from Morningstar Direct.
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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.
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.
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
27 See
28 See
supra note 25.
2009 Morningstar Paper, supra note 11, at
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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 https://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 https://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).
31 See Joint Hearing Transcript, supra note 12.
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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.
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
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
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 https://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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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
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
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 https://www.sec.gov/
comments/4-582/4582-1a.pdf.
38 Id.
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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.
39 See Investor Bulletin: Retirement Funds (May 6,
2010), available at https://www.sec.gov/investor/
alerts/tdf.htm and https://investor.gov/investorbulletin-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
https://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
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
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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
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
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.
45 Proposed rules 482(b)(5)(ii), (iii), (iv), and (v);
proposed rule 34b–1(c).
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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.
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.
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
46 Proposed rule 482(b)(5)(i)(A); proposed rule
34b–1(c).
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.’’).
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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
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
48 See
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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.
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
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
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.
50 Proposed rule 482(b)(5)(iii); proposed rule 34b–
1(c).
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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
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.
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.
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
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.
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).
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 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.
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
56 Based on Commission staff analysis of
registration statements filed with the Commission.
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).
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prospectus or oral communication,
subject to a reasonable care defense.59
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
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
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’’).
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)].
62 Based on Commission staff review of
prospectuses filed with the Commission.
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deviate materially from the stated
ranges.
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
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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
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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
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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 crossreference 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
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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
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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?
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• 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
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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?
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
63 15
U.S.C. 80a–34(d).
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)].
64 See
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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.
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
65 Proposed
rule 482(b)(5)(iv); proposed rule 34b–
1(c).
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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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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
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 fiveyear 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
67 Proposed
68 Proposed
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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:
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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
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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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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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
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
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.
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
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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
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
72 Proposed rule 482(b)(5)(ii)(C); proposed rule
34b–1(c).
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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
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
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?
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).
76 See proposed rule 482(b)(5)(iii).
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• 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
• 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
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.
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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
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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.
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.
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
78 Proposed rule 482(b)(6); proposed rule
34b–1(c).
79 Proposed rule 482(b)(5)(ii)(A); proposed rule
34b–1(c).
80 See discussion supra Part I.B.
81 Proposed rule 482(b)(5)(ii)(B); proposed rule
34b–1(c).
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35933
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.
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
82 See notes 37–38 and discussion at
accompanying text.
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 https://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
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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?
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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
frequently adjustments might be made, and criteria
and limits for making adjustments).
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)].
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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.
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
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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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.
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.
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
89 Proposed
rule 156(b)(4)(i).
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 https://
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).
91 Proposed rule 156(b)(4)(ii).
90 The
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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.
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?
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• 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?
35935
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:
• 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
92 Paragraphs (a) and (b) are the only paragraphs
of current rule 34b–1.
93 See Items 2, 3, 4, and 9 of Form N–1A [17 CFR
239.15A and 274.11A].
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.’’
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?
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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,
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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
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.
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
94 17
CFR 230.498.
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.’’
98 15 U.S.C. 77j(b).
99 15 U.S.C. 80a–33(b).
95 44
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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.
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;
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(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.
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.
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
target date funds × 15 hours = 5,355 hours.
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.
101 357
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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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
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
104 357 funds × 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 × 0.15 × 1 hour × 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 × 0.15 × 1 hour × 3.6 responses
= 193 hours).
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 × 0.7 responses per fund = 250
responses.
111 See supra note 105.
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most recent calendar quarter ended
would be approximately 37 hours.112
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
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
jlentini on DSKJ8SOYB1PROD with PROPOSALS3
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 × 0.15 × 1 hour × 0.7 responses = 37 hours).
113 357 funds × 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 × 2 hours × 0.25 × 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 × 2 hours
× 0.25 × 3.6 responses = 643 hours).
117 These estimates are based on the Commission
staff’s review of a sample of target date fund
materials filed with FINRA.
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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
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
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
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
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 × 2 hours × 0.25 × 0.7 responses = 125
hours).
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 × 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.
124 11,544 responses × 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.
127 We believe that it is usual and customary for
investment companies to periodically update and
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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.
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
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 × $2,900 per target date
fund = $1,035,300.
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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.
jlentini on DSKJ8SOYB1PROD with PROPOSALS3
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
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.
130 See
supra note 17 and accompanying text.
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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
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35939
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
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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.
jlentini on DSKJ8SOYB1PROD with PROPOSALS3
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
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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.
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
The Commission also estimates that
there will be ongoing costs associated
with the proposed requirement that a
131 Based on Commission staff review of
registration statements filed with the Commission.
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 × $237 per hour + 5 hours ×
$291 per hour = $3,825).
133 See supra note 128 and accompanying text.
134 $3,825 in internal costs per fund × 357 target
date funds + $2,900 in external costs per fund × 357
target date funds = $2,400,825.
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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
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
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
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 × $237 per hour + 0.5 hour ×
$291 per hour = $264).
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 × $237 per hour + 1 hour
× $291 per hour = $528).
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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
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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
137 15
U.S.C. 78w(a)(2).
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
138 15
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35941
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
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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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.
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
143 5
U.S.C. 603 et seq.
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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
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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
144 17
CFR 230.157; 17 CFR 270.0–10.
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.
145 Commission
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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.
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
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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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,
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35943
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:
• 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
147 Public Law 104–21, Title II, 110 Stat. 857
(1996).
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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
(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:
17 CFR Part 230
Advertising, Investment companies,
Reporting and recordkeeping
requirements, Securities.
§ 230.482 Advertising by an investment
company as satisfying requirements of
Section 10.
*
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:
§ 230.156 Investment company sales
literature.
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*
*
*
*
*
(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
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*
*
*
*
(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
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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
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Federal Register / Vol. 75, No. 120 / Wednesday, June 23, 2010 / Proposed Rules
jlentini on DSKJ8SOYB1PROD with PROPOSALS3
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
VerDate Mar<15>2010
17:55 Jun 22, 2010
Jkt 220001
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:
35945
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 § 230.482 of this chapter’’ in
paragraph (a) and paragraph (b)(1)(i) to
read ‘‘paragraph (b)(6) of § 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:
§ 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 § 230.482 of
this chapter) must contain the
information required by paragraphs
(b)(5)(ii), (iii), and (iv) of § 230.482 of
this chapter, presented in the manner
required by those paragraphs and by
paragraph (b)(6) of § 230.482 of this
chapter.
Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37, and 80a–39, unless otherwise
noted.
By the Commission.
Dated: June 16, 2010.
Elizabeth M. Murphy,
Secretary.
*
[FR Doc. 2010–15012 Filed 6–22–10; 8:45 am]
PO 00000
*
*
*
*
5. Section 270.34b–1 is amended by:
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]]>Agencies
[Federal Register Volume 75, Number 120 (Wednesday, June 23, 2010)]
[Proposed Rules]
[Pages 35920-35945]
From the Federal Register Online via the Government Printing 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 (https://www.sec.gov/rules/proposed.shtml);
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-12-10 on the subject line; or
Use the Federal eRulemaking Portal (https://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 (https://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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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
https://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'').
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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 https://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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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 https://www.standardandpoors.com/indices/market-attributes/en/us; Nasdaq
Composite Index performance data, available at https://www.nasdaq.com/aspx/dynamic_charting.aspx?symbol=IXIC&selected=IXIC; and Wilshire Index
Calculator, available at https://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.
---------------------------------------------------------------------------
\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 https://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 https://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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\31\ See Joint Hearing Transcript, supra note 12.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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 https://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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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 https://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 https://www.sec.gov/investor/alerts/tdf.htm and https://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 https://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 disclo
