WASHINGTON -- Securities and Exchange Commission member Richard Roberts charged yesterday that mutual funds aren't telling investors enough about derivatives investments and activities.
"Sufficient information must be provided to the marketplace in a timely manner concerning the derivatives activities of mutual funds and of publicly held companies," Roberts said at a fixed-income conference in New York City. "This is not the case currently."
The SEC staff recently examined the derivatives disclosures of 100 investment companies and found that current mutual fund disclosure regarding derivatives is frequently insufficient.
Roberts said the descriptions that mutual funds provide in prospectuses about derivatives use are long and technical, leaving investors in the dark about a fund's derivatives activities.
"Such descriptions are not useful for the potential mutual fund investor, who needs to know what the derivatives activities of the fund are and the nature and level of risks involved in order to make an informed investment decision," Roberts said.
Investment companies need to provide more useful information, steering away from boilerplate language, he said. "They should disclose the objective of their derivatives transactions, discuss the risks involved, and quantify the percentage level of fund assets in derivatives, if the level is significant," Roberts said.
Roberts also warned that mutual fund managers using derivatives need to take the necessary steps to adhere to the daily pricing requirements of SEC rules. He added that securities firms that sell derivatives to mutual funds should be able to supply secondary market liquidity and adequate pricing information.
"One logically would question if a derivative security is a suitable investment for a mutual fund if the fund could not reasonably be expected to price the security daily in compliance with the Investment Company Act," Roberts said.