U.S. regulators say mutual funds are not telling investors enough about why they use derivatives, that some supply "generic" disclosures and that others fail to explain how the products affect performance.
Regulators say they are concerned that the use of derivatives has increased in the mutual fund industry without shareholders' comprehending the risks or investment strategies.
Some funds offer information that "may not be consistent with the intent" of required registration forms, the Securities and Exchange Commission wrote in a July 30 letter to the Investment Company Institute, the industry's biggest trade group.
The SEC also raised concerns about "abbreviated" disclosures that give investors a false sense of security about how much funds rely on derivatives.
"While more abbreviated disclosures could lead some investors to believe that a fund's exposure to derivatives is minimal, we have observed that some funds employing this type of disclosure, in fact, appear to invest significantly in derivatives," wrote Barry Miller, an associate director in the SEC's division of investment management.
As a result of inadequate disclosures, investors may not know which products are used to generate profits, Miller wrote.
He advised all funds that use derivatives to "assess the accuracy and completeness" of their disclosures.
The Washington-based ICI had no immediate comment.
Regulators have previously said they were particularly focused on leveraged and inverse exchange-traded funds, which rely on swaps to amplify profits or post inverse returns to an index.
Such strategies let funds get around restrictions on borrowing imposed under the 1940 Investment Company Act.
The SEC announced in March that it would not approve new ETFs that make significant use of derivatives until the agency has completed an examination of the practice.