
[Federal Register Volume 79, Number 68 (Wednesday, April 9, 2014)]
[Proposed Rules]
[Pages 19564-19569]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07869]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 270

[Release Nos. 33-9570; 34-71861; IC-31004; 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; request for additional comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the period for public comment on rule amendments it proposed 
in 2010, Investment Company Advertising: Target Date Retirement Fund 
Names and Marketing, Securities Act Release No. 9126 (June 16, 2010). 
Among other things, the proposed amendments would, if adopted, require 
marketing materials for target date retirement funds (``target date 
funds'') to include a table, chart, or graph depicting the fund's asset 
allocation over time, i.e., an illustration of the fund's so-called 
``asset allocation glide path.'' In 2013, the Commission's Investor 
Advisory Committee (``Committee'') recommended that the Commission 
develop a glide path illustration for target date funds that is based 
on a standardized measure of fund risk as a replacement for, or 
supplement to, the proposed asset allocation glide path illustration. 
The Commission is reopening the comment period to seek public comment 
on this recommendation.

DATES: The comment period for the proposed rule published on June 23, 
2010 (75 FR 35919), is reopened. Comments should be received on or 
before June 9, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File No. S7-12-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to 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 email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 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: J. Matthew DeLesDernier, Senior 
Counsel, at (202) 551-6792, Investment Company Rulemaking Office, 
Division of Investment Management, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is reopening the period for 
public comment on proposed rule amendments that are intended to provide 
enhanced information to investors concerning target date funds and 
reduce the potential for investors to be confused or misled regarding 
these funds.\1\ In particular, the Commission is requesting comment on 
the recommendations of the Committee relating to the development of a 
risk-based glide path illustration.
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    \1\ Investment Company Advertising: Target Date Retirement Fund 
Names and Marketing, Securities Act Release No. 9126 (June 16, 2010) 
[75 FR 35920 (June 23, 2010)] (``Proposing Release'').
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I. Background

    A target date fund is 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, and 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 generally 
is intended to become more conservative--usually by decreasing the 
percentage allocated to stocks. 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 by the Department of 
Labor pursuant to the Pension Protection Act of 2006.\2\ In 2013, 
assets of target date funds registered with the Commission exceeded 
$500 billion, having grown from about $250 billion at the beginning of 
2010.\3\
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    \2\ See Default Investment Alternatives Under Participant 
Directed Individual Account Plans, 72 FR 60452, 60452-53 (Oct. 24, 
2007).
    \3\ Morningstar Fund Research, Target Date Series Research 
Paper: 2013 Survey, available at https://corporate.morningstar.com/us/documents/ResearchPapers/2013TargetDate.pdf (last visited Feb. 
27, 2014).
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    In June 2010, the Commission proposed rule amendments intended to 
provide enhanced information to investors concerning target date funds 
and to reduce the potential for investors to be confused or misled 
regarding these funds. Among other things, the proposal would, if 
adopted, amend rule 482 \4\ under the Securities Act of 1933 
(``Securities Act'') \5\ and rule 34b-1 \6\ under the Investment 
Company Act of 1940 (``Investment Company Act'') \7\ to require certain 
marketing materials for target date funds to include a table, chart, or 
graph depicting the fund's asset allocation over time, i.e., an 
illustration of the fund's so-called ``asset allocation glide path.'' 
\8\ The proposed

[[Page 19565]]

table, chart, or graph requirement was intended to ensure that 
investors who receive target date fund marketing materials also receive 
basic information about the glide path. In April 2012, we reopened the 
rulemaking comment period and asked for public comment in light of 
empirical research undertaken by a consultant on the Commission's 
behalf relating to individual investors' understanding of target date 
funds.\9\
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    \4\ 17 CFR 230.482.
    \5\ 15 U.S.C. 77a-z-3.
    \6\ 17 CFR 270.34b-1.
    \7\ 15 U.S.C. 80a.
    \8\ We also proposed amendments to rule 482 under the Securities 
Act and rule 34b-1 under the Investment Company Act to require that 
certain target date fund marketing materials disclose information 
about the risks and considerations that are important for an 
investor who is deciding whether to invest in a target date fund. We 
proposed amendments to these rules to require a target date fund 
that includes the target date in its name to disclose its allocation 
of assets at the fund's target date immediately adjacent to the 
first use of the fund's name in marketing materials. Finally, we 
proposed amendments to rule 156 under the Securities Act to provide 
more guidance about statements that could be misleading in marketing 
materials for target date funds and other investment companies. 17 
CFR 230.156.
    \9\ Investment Company Advertising: Target Date Retirement Fund 
Names and Marketing, Securities Act Release No. 9309 (Apr. 3, 2012) 
[77 FR 20749 (Apr. 6, 2012)].
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    In April 2013, the Investor Advisory Committee \10\ recommended, 
among other things, that the Commission develop a glide path 
illustration for target date funds that is based on a standardized 
measure of fund risk as either a replacement for, or supplement to, the 
proposed asset allocation glide path illustration. The Committee also 
recommended that the Commission adopt a standard methodology or 
methodologies to be used in the risk-based glide path illustration.\11\ 
The Committee stated that much of the differences in risk among target 
date funds can be explained by differences in asset allocation models 
and glide paths, but that choices of assets within the various asset 
classes and other risk management practices can also have a significant 
impact on fund risk levels. The Committee also stated that asset 
allocation may mask significant differences in the risk levels of funds 
with apparently similar or even identical asset allocation glide paths, 
particularly when the asset classes are defined broadly. The Committee 
therefore opined that a glide path illustration based on an 
appropriate, standardized measure of fund risk would be more accurate 
than an illustration based on asset allocation alone. The Committee 
suggested that, to promote comparability, risk-based illustrations 
should be based on a standardized measure of risk. The Committee did 
not recommend a particular risk measure or methodology for a risk-based 
glide path for target date funds, but suggested that the Commission 
focus on factors such as volatility of returns or maximum exposure to 
loss, which the Committee stated are directly relevant to the primary 
concerns of those approaching retirement.
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    \10\ Section 911 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act added section 39 to the Securities Exchange 
Act of 1934, which establishes the Investor Advisory Committee. The 
Committee advises and consults with the Commission on regulatory 
priorities, issues, and initiatives and submits findings and 
recommendations to the Commission. 15 U.S.C. 78pp(a). The Commission 
reviews the findings and recommendations of the Committee and 
determines what action, if any, to take. 15 U.S.C. 78pp(g).
    \11\ Recommendation of the Investor Advisory Committee: Target 
Date Mutual Funds (Apr. 11, 2013), available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-recommendation-target-date-fund.pdf. The Committee also recommended that the 
Commission (i) adopt a standard methodology or methodologies to be 
used in the asset allocation glide path illustration; (ii) require 
target date fund prospectuses to disclose and clearly explain the 
policies and assumptions used to design and manage the target date 
offerings to attain the target risk level over the life of the fund; 
(iii) consider testing various approaches to providing disclosure 
that a target date fund is not guaranteed in order to determine the 
most effective approach and then mandate that approach; and (iv) 
amend the fee disclosure requirements for target date funds to 
provide better information about the likely impact of fund fees on 
total accumulations over the expected holding period of the 
investment. Id.
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II. Request for Comment

    The Commission has decided to reopen the comment period to address 
the Committee's recommendation that the Commission develop a risk-based 
glide path illustration for target date funds. We also invite 
additional comment on any other aspect of the recommendations and 
accompanying material submitted by the Committee, on our proposal, and 
on any other matters that may have an effect on the proposal.
    In our target date fund proposal, we asked for comment on whether 
the proposed disclosure requirements would adequately convey the risks 
associated with a target date fund. For example, we asked if the 
proposed disclosure of asset allocation would effectively convey the 
level of a fund's investment risk to investors, and if the emphasis on 
asset allocation might cause investors to prioritize investment risk 
over longevity risk, inflation risk, or other risks.\12\ We also asked 
whether fund managers might take on more risk than the asset allocation 
would reflect.\13\ We also sought comment on whether the rule should 
require disclosure of a risk rating based on a scale or index that 
could be compared to other target date funds.\14\
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    \12\ Proposing Release, supra note 1, at 35926-27.
    \13\ Id. at 35927 (``Would a fund manager's investment strategy, 
portfolio construction, selection of asset categories disclosed, and 
marketing change as a result of the proposal's required disclosure 
of target date (or current) asset allocation? For example, might 
fund managers compose the fund's fixed-income allocation differently 
to take on additional investment risk, in order to seek higher 
returns, while showing a lower equity allocation at or after the 
target date?'').
    \14\ Id. at 35928.
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    The comments that we received on this issue, however, were limited. 
Some commenters suggested alternative approaches to the glide path 
illustration that would require a risk-based illustration, rather than 
an illustration of the fund's changing investments in asset classes 
over time. For example, commenters recommended that we require: (i) 
Portfolio risk-related information, data, or graphs along with asset 
allocation information; \15\ (ii) the planned risk level in the glide 
path disclosure, for example, by presenting the planned standard 
deviation of returns over the life of the fund; \16\ (iii) a color- and 
number-coded risk spectrum showing a fund's position relative to an 
appropriate target date fund index; \17\ or (iv) whether the fund 
reflects aggressive, moderate, or conservative risk characteristics, 
based on certain benchmarks.\18\ Another commenter expressed skepticism 
about the feasibility of establishing a standardized risk rating for 
target date funds, and stated that developing such a rating would be 
``an enormous undertaking with questionable benefit that is 
significantly beyond the scope'' of the rulemaking.\19\
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    \15\ See Comment Letter of Chao & Company, Ltd. (July 6, 2012).
    \16\ See Comment Letter of Foliofn Investments Inc. (Mar. 28, 
2011); Comment Letter of Foliofn Investments Inc. (May 21, 2012).
    \17\ See Comment Letter of Wells Fargo (May 21, 2012).
    \18\ See Comment Letter of SST Benefits Consulting (Apr. 9, 
2012).
    \19\ See Comment Letter of the Investment Company Institute 
(Aug. 23, 2010).
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    Because of the limited nature of the comments received, and in 
light of the Committee's recommendation, we believe further comment in 
this area would be helpful. As set out further below, we request 
comment on whether we should develop a glide path illustration for 
target date funds that is based on a standardized measure of risk as 
either a replacement for, or supplement to, our proposed asset 
allocation glide path. We ask that any comment provide specific 
examples and available data in support of the comment.
    Management of Target Date Funds According to Risk. We request 
comment on the degree to which managers of target date funds use 
measures of risk as part of their investment strategy.
     Are target date fund strategies primarily based on a 
changing target risk level or a changing target asset

[[Page 19566]]

allocation over time, or some combination of these approaches? If 
target risk levels are used, what risk measures are generally employed?
     Do managers instead first set an asset allocation strategy 
and then monitor the risks that follow from the asset allocation? If 
so, what risk measures do they generally monitor?
     Are there other ways in which target date fund managers 
use risk measures? If so, please describe those ways and the particular 
risk measures used.
    Usefulness and Understandability of Risk Measures. We request 
comment on whether there are quantitative measures of risk that would 
be useful to and understandable by investors as the basis for a target 
date fund risk-based glide path illustration.\20\ We note that there 
are a variety of quantitative measures of risk used in the financial 
services industry. Some target date funds already provide quantitative 
risk measures in certain materials on a historical basis.\21\ For 
example, the risk associated with a portfolio can be captured by the 
variability of its returns, measured by the standard deviation \22\ (or 
volatility) or semi-variance of those returns.\23\ Both of these risk 
measures are ``total risk measures'' that quantify the total 
variability of a portfolio's returns around, or below, its average 
return. Another risk measure is ``beta,'' which specifically measures 
the sensitivity of the portfolio's return to the market's return. The 
market's beta is by definition equal to 1. Portfolios with betas 
greater than 1 tend to move more than one-for-one with the market's 
return, and portfolios with betas less than 1 tend to move less than 
one-for-one with the market's return. Determination of a fund's beta 
requires the selection of a benchmark market index to which one 
compares the portfolio's returns.
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    \20\ In 1995, the Commission issued a release requesting comment 
on how to improve risk disclosure for investment companies, 
including ways to increase the comparability of fund risk levels. 
Improving Descriptions of Risk by Mutual Funds and Other Investment 
Companies, Investment Company Act Release No. 20974 (Mar. 29, 1995) 
[60 FR 17172 (Apr. 4, 1995)] (``Risk Concept Release''). In 
particular, the Risk Concept Release requested comment on whether 
quantitative risk measures--such as standard deviation, beta, and 
duration--would help investors evaluate and compare fund risks. We 
received over 3,700 comment letters, mostly from individual 
investors. Commenters confirmed the importance of risk disclosure to 
investors when evaluating and comparing funds and highlighted the 
need to improve risk disclosures in fund prospectuses. Although more 
than half of the individual commenters and some industry members 
expressed a desire for some form of quantitative risk information, 
commenters did not broadly support any one risk measure, and the 
Commission acknowledged that investors have a wide range of ideas of 
what ``risk'' means. See Registration Form Used by Open-End 
Management Investment Companies, Investment Company Release No. 
23064 (Mar. 13, 1998) [63 FR 13916, 13929 (Mar. 23, 1998)] 
(``Registration Form Adopting Release''). In 1997, the Commission 
proposed a requirement that a fund's prospectus include a bar chart 
showing the fund's annual returns for 10 calendar years, noting that 
over 75% of individual investors responding to the Risk Concept 
Release favored a bar chart presentation of fund risks. See 
Registration Form Used by Open-End Management Investment Companies, 
Investment Company Act Release No. 22528 (Feb. 27, 1997) [62 FR 
10898, 10904 (Mar. 10, 1997)]. The Commission subsequently adopted 
the bar chart requirement, which was intended to illustrate 
graphically the variability of a fund's returns and thus provide 
investors with some idea of the risk of an investment in the fund. 
See Registration Form Adopting Release, at 13922.
    \21\ Based on a staff review of target date fund marketing 
materials.
    \22\ See, e.g., Morningstar Investing Glossary: Standard 
Deviation, Morningstar, http://www.morningstar.com/InvGlossary/standard_deviation.aspx (last visited Jan. 17, 2014) (``Investors 
use the standard deviation of historical performance to try to 
predict the range of returns that are most likely for a given fund. 
When a fund has a high standard deviation, the predicted range of 
performance is wide, implying greater volatility.'').
    \23\ Standard deviation measures both ``good'' and ``bad'' 
outcomes, i.e., the variability of returns both above and below the 
average return. Semi-variance, which can be used to measure the 
variability of returns below the average return, reflects a view of 
risk as synonymous with ``bad'' outcomes.
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     Is there a particular quantitative risk measure, or group 
of risk measures, that are helpful in evaluating the risks of target 
date funds? Would fund investors be likely to understand these risk 
measures and be able to effectively use them in making investment 
decisions?
     The Committee recommended that the Commission, in 
determining an appropriate risk measure, focus on factors such as 
maximum exposure to loss or volatility of returns that are directly 
relevant to the primary concerns of those approaching retirement. Do 
commenters agree with this approach? If so, what are the primary 
concerns of those approaching retirement and what specific measures of 
risk would be directly relevant to those concerns? Are there other risk 
factors that are relevant to target date fund investors, including 
longevity risk and inflation risk? In determining an appropriate 
measure of risk, how should various aspects of risk be considered? How 
should concerns of investors at different points in the cycle of 
accumulating and distributing retirement assets be addressed?
     If we require disclosure of a risk measure, should we 
require such disclosure at only a single point in time, such as the 
target date, or should we require disclosure of the measure at multiple 
points over the life of the fund? If the latter, which specific points 
over the life of the fund?
     Should a target date fund be required to disclose the same 
measure or measures that the fund's manager uses to guide its 
management of the fund, or would other measures be more appropriate?
     Should the risk measure reflect the variance, or 
volatility, in returns around the fund's average return? Should the 
measure, instead, reflect the sensitivity of the portfolio's return to 
the market's return? Or should some other type of risk measure be used? 
Should these risk measures reflect the characteristics of nominal 
returns or real returns, which account for the effect of inflation?
    Illustration of Risk Measures. We request comment on whether the 
Commission should develop a glide path illustration for target date 
funds that is based on a standardized measure of fund risk as either a 
replacement for, or supplement to, its proposed asset allocation glide 
path illustration and adopt a standard methodology or methodologies to 
be used in the risk-based glide path illustration.
     Should the rules require a glide path illustration for 
target date funds that is based on a standardized measure of fund risk 
as either a replacement for, or supplement to, the proposed asset 
allocation glide path illustration? Would the inclusion of two glide 
path illustrations in the same document tend to confuse investors, and, 
if so, how could the information be presented in a way that would 
minimize any confusion?
     Would the proposed asset allocation glide path 
illustration, without a risk-based glide path illustration, adequately 
convey risk information to investors? If not, would an asset allocation 
glide path illustration alone adequately convey risk information if we 
specify the particular asset categories required to be shown? If so, 
how narrow should those asset categories be, and what particular asset 
categories should we specify? Could risk information be adequately 
conveyed to investors using narrative disclosures in lieu of a glide 
path illustration?
     What are the advantages and disadvantages of asset 
allocation glide paths and risk-based glide paths relative to each 
other? If the rules should require a risk-based glide path, what risk 
measure(s) should be prescribed and how should the risk measures be 
presented? Please provide specific examples.
     Should a risk-based glide path illustration be required 
for all target date

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funds, regardless of a fund's investment objective or strategies? 
Should a risk-based glide path illustration instead be required only 
for target date funds with an investment objective or strategy of 
managing to a target risk level?
     Should a risk-based glide path illustration be backward-
looking (showing past actual risk measures of a target date fund or 
group of target date funds) or forward-looking (showing projected risk 
targets for a target date fund or family of target date funds)? 
Commenters are asked to address, with specificity, how each of these 
approaches could be applied to a single target date fund or group of 
target date funds. What are the advantages and disadvantages of each 
approach, e.g., ease of construction, understandability, or potential 
to confuse or mislead?
     If we require a risk-based glide path illustration, should 
we prescribe the format of the risk-based glide path illustration 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)?
     If we require a risk-based glide path illustration, should 
we require it to be prominent within the materials where it is 
included? Are there other presentation requirements that would be more 
appropriate?
     Should there be differences in requirements for marketing 
materials that relate to a single target date fund, as compared with 
those that relate to multiple target date funds? Should a risk-based 
glide path illustration for a single target date fund be required to 
show the fund's actual historical risk levels? Would the use of actual 
historical risk levels be helpful or confusing to investors in cases 
where a fund has changed its previous glide path? Should the risk-based 
glide path illustration 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 
risk levels?
     Should the risk-based glide path illustration for a single 
target date fund be required to clearly depict the current risk level? 
Should we require the risk level 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 
risk-based glide path illustration for a single target date fund to 
exclude risk levels for past periods? If we permit a single target date 
fund to exclude past risk levels in any circumstances, should we 
nonetheless prohibit a fund from excluding past risk levels if the 
marketing materials contain past performance information for the fund? 
Are past risk levels 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 
risk levels confuse or mislead investors?
     What is the appropriate maximum interval for depicting a 
fund's risk level over time? Is the maximum five-year interval that we 
proposed for an asset allocation glide path 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 risk-based glide path 
illustration depict the five years before the target date and/or 
landing point (i.e., the date at which the asset allocation becomes 
static) using one-year intervals? Is it necessary to require any 
particular interval? Is it appropriate to require risk levels at the 
fund's inception, target date, and landing point?
     Would a required explanatory statement preceding or 
accompanying the risk-based glide path illustration be helpful to 
investors? What information would be necessary? Should we prescribe the 
particular content of the statement? Should any of the following 
information be required in an explanatory statement: (i) The investment 
risk level changes over time; (ii) the landing point; (iii) an 
explanation that the investment risk level becomes fixed at the landing 
point and the projected risk level at the landing point; (iv) whether, 
and the extent to which, the intended risk levels may be modified 
without a shareholder vote; and (v) an explanation of risks that are 
not captured by the illustration? Should the statement be required to 
use particular language? Should any particular presentation 
requirements, such as font size or style, apply to the statement that 
is required to accompany the risk-based glide path illustration?
     Should radio and television advertisements be required to 
include information about a target date fund's risk-based glide path? 
What information 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 a risk-based 
glide path illustration in radio or television advertisements?
     Should information about a target date fund's risk-based 
glide path be required in marketing materials that are submitted for 
use on or after the landing point?
     Are there alternative presentations of risk-based measures 
that would be more helpful to target date fund investors than a risk-
based glide path? For example, would it be more helpful to require 
disclosure of risk measure targets at particular points in time (e.g., 
target date, landing point) rather than requiring an illustration over 
the whole life of a target date fund? If so, which points in time would 
be most important to investors? Should the measures, for example, focus 
on the target date, landing point, and/or the time period within 5 to 
10 years before and after the target date?
    Placement of Risk-Based Glide Path Illustration. We request comment 
on the materials, if any, in which a risk-based glide path illustration 
for target date funds should be included.
     Are marketing materials for target date funds an 
appropriate location for inclusion of a risk-based glide path 
illustration or other information about risk measures? Should 
illustrations instead be part of the mandated disclosures in a fund's 
summary prospectus, statutory prospectus, statement of additional 
information, shareholder reports, or other reports to the Commission?
    Calculation of Risk Measures. We request comment on whether 
required risk measures, if adopted in final rules, should be based on a 
standardized methodology or methodologies developed by the Commission.
     Should we try to enhance comparability among target date 
funds by prescribing a standardized methodology for computing a fund's 
historical and/or projected risk levels?
     What are the parameters and assumptions that the 
Commission would need to specify in order to prescribe a standardized 
methodology, e.g., the measures to be used, benchmarks, time periods 
over which calculated?
     For risk measures that are calculated using a benchmark 
index (e.g., beta), what issues, if any, are associated with the 
selection of an appropriate benchmark? Do any quantitative risk 
measures rely on assumptions, other than a benchmark, that could lead 
to lack of standardization if not specified by the Commission? Can 
quantitative risk measures be manipulated, and how do the various 
measures differ in their susceptibility to manipulation? How can the 
potential for such manipulation be reduced or eliminated?
     Should the risk measures reflect the target date fund's 
predictions about

[[Page 19568]]

future risk or goals related to future risk? In what manner should 
these risk measures incorporate historical data from a particular 
target date fund or group of target date funds? To what extent can 
historical data predict future risk?
     If a forward-looking risk measure is used, should the risk 
measure be calculated using portfolio-based computation, which 
calculates a portfolio risk measure at each point in time based on the 
historical behavior of the securities or asset classes that the 
portfolio is expected to include at that point in time? Should the risk 
measure instead be a risk objective or target? Do the merits of each 
approach differ among funds or groups of funds with significant 
operating histories, new funds, and/or funds that have flexibility to 
change their risk-based glide paths?
     If a standard based on historical risk characteristics 
were adopted, what requirements should be imposed on funds with a short 
operating history?
     Persons submitting comments are also asked to describe as 
specifically as possible the computation method they would recommend 
for any quantitative risk measure they favor. For example, persons 
favoring standard deviation should specify whether monthly returns, 
quarterly returns, or returns over some other period should be used. As 
another example, persons favoring beta should describe the benchmark or 
benchmarks that should be used. Persons submitting comments are also 
asked to discuss the benefits and limitations associated with their 
recommended method of computation.
    Impact on Investors. We request comment on the impact that 
disclosure of risk measures and risk-based glide paths would have on 
investors.
     Would investors in target date funds be likely to 
understand risk measures, or any related illustrations based on those 
measures? What means could be used to present risk measures for target 
date funds in a way that would be understandable to investors? Could 
investors interpret risk-based illustrations as predicting the future 
returns of the fund? Can future risk levels of a target date fund be 
projected in a manner that is likely to be accurate? Could the use of 
projected or target risk measures be misleading and, if so, under what 
circumstances?
     Would investors be confused if a measure of risk is 
characterized as ``risk''? Should the disclosure of risk measures use 
the term ``risk,'' or some other term such as volatility, variance, or 
variability? Should the terminology distinguish investment risk from 
other risks, e.g., inflation risk or longevity risk?
     How would investor behavior be affected by disclosure of a 
particular risk measure? Could disclosure of risk measures influence 
investors to choose investments that better align with their individual 
investment objective or could it reduce alignment between investment 
objectives and investor behavior? For example, could disclosure of risk 
measures influence investors to choose lower or higher risk investments 
than would be consistent with their goals for accumulating retirement 
assets? Commenters are asked to provide their views and any supporting 
data about the impact of risk measures on investor behavior.
     One potential effect of risk disclosures may be to cause 
investors or fund managers to place too much importance on the prospect 
of investment loss. This effect could potentially be offset by 
counterbalancing information on the prospect of investment gains. To 
what extent should investors receive information on future expected 
returns on investment to accompany information on risk? Would investors 
understand what the information would portray? Would such information 
cause investors to believe that the expected returns imply some level 
of guarantee or projection of future performance? How should this 
expected return be computed if it is required? If investors are to 
receive this information, how best should it be disclosed or presented? 
Should expected return information be provided as a statistic separate 
from risk measures or integrated with risk measures as with a 
confidence interval for returns?
     Would forward-looking disclosures such as projected future 
volatility (or other risk measures) or expected returns give rise to 
potential liability concerns? If so, what relief would be necessary to 
allow funds to provide such disclosures?
     To what extent might special emphasis on investment risk 
level or asset allocation cause investors to prioritize investment risk 
at a particular moment in time over longevity risk, inflation risk, or 
other risks? Should we require additional disclosure to focus investor 
attention on inflation risks and longevity risks? Are there useful 
measures of risk that reflect longevity and inflation risk as well as 
investment risk?
    Effects on Portfolio Management. We recognize that required 
disclosures may affect the management of a fund, such as by causing a 
fund to adopt investment strategies that result in disclosure that 
could be perceived more favorably by investors.
     Comments are requested regarding whether, and how, 
disclosure of a quantitative risk measure or risk-based glide path for 
target date funds might influence portfolio management. What would be 
the associated benefits and detriments? For example, might disclosure 
of a risk measure by target date funds cause those funds to become more 
conservative either throughout their glide paths or at certain points 
on the glide path? If so, how would this affect investors, including 
investors who are accumulating assets for retirement? Commenters are 
asked to provide data about the impact of risk measures on portfolio 
management decisions.
    Benefits and Costs. We request comment on the benefits and costs of 
possible risk disclosure requirements.
     What would be the benefits and costs of requiring a glide 
path illustration for target date funds that is based on a standardized 
measure of fund risk as either a replacement for, or supplement to, our 
proposed asset allocation glide path illustration and adopting a 
standard methodology or methodologies to be used in the risk-based 
glide path illustration? What effects would such a requirement have on 
efficiency, competition, and capital formation? For instance, would 
such disclosure increase allocative efficiency by increasing the 
transparency of the underlying risks of target date investing? Would it 
have an effect on competition among target date funds or between target 
date funds and other types of investment options? Commenters are 
requested to provide empirical data and other factual support for their 
views to the extent possible.
     If we were to require disclosure of a risk-based glide 
illustration, what changes in behavior by either investors or target 
date fund managers may result, and what would be the associated 
benefits and costs?
     To what extent do target date fund managers already 
undertake risk analysis in the course of prudent risk management? Do 
target date funds already calculate the types of risk measures 
discussed above? If so, how and in what form? Is there an industry 
standard for calculation of risk measures, and, if so, what is it?
     If a target date fund does not already calculate the risk 
measures discussed above, what would the costs--such as programming 
costs--of calculating such measures be?
     How would the costs and the effects on efficiency, 
competition, and capital formation of requiring disclosure of a risk-
based glide path compare with the

[[Page 19569]]

costs and effects of the proposed requirements? For example, would a 
risk-based glide path enhance comparability across different target 
date funds?

     Dated: April 3, 2014.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07869 Filed 4-8-14; 8:45 am]
BILLING CODE 8011-01-P


