SEC Division of IM Provides Guidance on "Risk Legends"

The SEC Division of Investment Management provided guidance on the "risk legend" used by non-transparent exchange-traded funds (“ETFs”).

The SEC stated that exemptive relief has, to date, been provided to a number of sponsors to "operate actively managed ETFs that do not provide daily portfolio transparency (non-transparent ETFs)." Under the terms of the relief, non-transparent ETFs must use a risk legend to identify for investors the differences between the non-transparent ETF and fully transparent, actively managed ETFs. The risk legend must also highlight certain costs and risks unique to non-transparent ETFs, and it must appear in the prospectus, fund website and marketing materials.

The Division recommended that non-transparent ETFs may either use (i) use the text and formatting of the risk legend included in their exemptive order, or (ii) use new text and formatting outlined in the guidance. The Division issued the guidance in response to potential space limitations in certain digital advertisements (e.g., small banner ads), which make it difficult for recipients of the exemptive relief to word and format the legend as required under the relevant exemptive order.

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