Spurred by investor losses last year in traditionally safe fixed-income funds, the Securities and Exchange Commission is looking to change the way investment risk is explained in fund prospectuses.
The agency is wading through 3,745 written responses to a call for suggestions released in March.
Government, industry, and consumer interest in straight talk about mutual fund risk is undeniable. But fund executives question whether a mutual fund prospectus can simultaneously provide meaningful disclosure and conform to the SEC's drive for simplification.
"Our goals are to find ways for funds to communicate risk to investors in understandable terms," said Susan Nash, senior special counsel at the SEC's investment management division.
But Ms. Nash said it's still too early to tell whether the SEC will decide whether a formal regulation is necessary.
Few executives with bank and nonbank mutual fund programs would find fault with the intentions behind the SEC's call for ideas. Yet the imposition of uniform requirements on a variety of mutual funds makes some of them nervous.
"Coming up with a standard for the industry is a good goal to have," said George Martinez, senior vice president and director of legal and compliance services for Bisys Fund Services, a division of Bisys Group. But developing standards that convey useful information to investors of varying sophistication is a huge challenge, he added.
In particular, some executives worry about the SEC's highlighting of several statistical measures of fund risk, such as standard deviation or the academic measure of reward to volatility known as the Sharpe Ratio.
"Most Americans have never taken a statistics course, and 98% of those who have would classify it as their least favorite subject," said Jim Kermes, chief executive of Glenmede Trust Co., Philadelphia. "To use highfalutin statistics is self-defeating, because you'll lose the public."
But more user-friendly alternatives that would qualitatively label fund risk also raise red flags among some executives.
A star system alone could obscure subtle but important differences between similar funds. Whether a bond fund uses derivatives to hedge risk or enhance yield might be hidden by a one-note rating system, according to Robert Kniejski, president of Wachovia Investments, whose Biltmore Funds prospectuses rely on written discussion of risk.
Pictures may replace, or at least supplement, the many words most prospectuses use to describe investment risks. Mr. Kermes, for one, supports graphics such as bar charts of historical fund performance to communicate volatility visually rather than numerically.
But some industry observers worry that highlighting risk could spook consumers into overly conservative investments, paradoxically creating a risk through portfolios that won't meet investors' long-term needs.
"Trying to sell them up the risk curve is difficult enough for proprietary fund customers," said Rhona Heyl, a consultant with Optima Group, Fairfield, Conn.
She wonders whether all the talk of risk might drive retail investors away from higher-yielding investments that, in the right dose, could provide adequate returns and portfolio diversification.
Regardless of whatever scheme eventually is put into place, "the market will always create circumstances where a given risk assessment will be wrong," said Donald W. Smith, a securities attorney at Kirkpatrick & Lockhart, Washington.
He argued that few would have predicted 10 years ago that in 1994 a "safe" investment like a government bond fund would get killed the same year that "risky" technology funds boomed.
