Mutual Fund Risk Disclosure

Form N-1A, Item 16(b) Description of the Fund and Its Investments and RisksInvestment Strategies and Risks requires a Registrant to “describe any investment strategies, including a strategy to invest in a particular type of security used by an investment adviser of the Fund in managing the Fund that are not principal strategies and the risks of those strategies.” In addition, Item 16(d) Temporary Defensive Position states: “if applicable, the types of investments that a Fund may make while assuming a temporary defensive position describes in response to Item 9(b).” Funds, and publicly traded securities, issued under other regulations may have similar requirements.

16(b) does qualify or limit risk disclosure to “reasonably likely” unlike other references in N-1A and adopting releases.  Reasonably likely does have not a precise definition, precise fact pattern, or precise quantitive measure.  Rather, it looks to what a Prudent Man would do.

Would a “Prudent Man” (Board) conclude it appropriate not to disclose the risks of U.S. Treasury securities knowing the:

  • unabated trajectory of annual deficits, debt outstanding and liabilities,
  • unsustainable fiscal path,
  • public warnings,
  • risks,
  • knowledge and perceptions of individual retail investors and registered financial advisors,
  • projected slowing down of GDP growth with a growing debt burden,
  • partisanship of the two major political parties with each adding to the risk while neither taking serious action to address the deficits and debt,
  • the President’s attempted politicalization of the Federal Reserve,
  • the unpredictability of the President, who some might say has not demonstrated risk management skills,
  • and their individual and cumulative effects on the financial markets, Funds, and investors?

Some Funds currently disclose certain risks of investing in U.S Government Obligations. The following disclosure was updated in a fund registration statement in February 2019 – pre COVID-19.


U.S. Government Obligations. U.S. Government securities include direct obligations issued by the United States Treasury, such as U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury bonds (generally maturities of greater than ten years). They also include U.S. Government agencies and instrumentalities that issue or guarantee securities, such as the Federal Home Loan Banks, FNMA and the Student Loan Marketing Association. Except for U.S. Treasury securities, obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some, such as those of the Federal Home Loan Banks, are backed by the right of the issuer to borrow from the U.S. Treasury, others by discretionary authority of the U.S. Government to purchase the agencies’ obligations, while still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assess a claim against the United States itself in the event the agency or instrumentality does not meet its commitment.

The total public debt of the United States, financed via Treasury securities, as a percentage of gross domestic product has grown rapidly since the beginning of the 2008–2009 financial downturn. This growth is forecasted to continue on a trajectory that is considered by the U.S. government to be unsustainable. Although high debt levels do not necessarily indicate or cause economic problems, they may create certain systemic risks that can adversely impact markets and security valuations if sound debt management practices are not timely and successfully implemented by the U.S. government. A high national debt can raise concerns that the U.S. government will not be able to make principal or interest payments when they are due, economic growth could slow. This increase has also necessitated the need for the U.S. Congress to negotiate adjustments to the statutory debt limit to increase the cap on the amount the U.S. government is permitted to borrow to meet its existing obligations and finance current budget deficits. In August 2011, S&P lowered its long term sovereign credit rating on the U.S. In explaining the downgrade at that time, S&P cited, among other reasons, controversy over raising the statutory debt limit and growth in public spending. In August 2019, the President of the United States signed into law the Bipartisan Budget Act of 2019, a two-year deal to July 2021, to suspend the statutory debt limit removing the threat of a U.S. debt default, at that time, and significantly raising federal spending beyond the limits of the Budget Control Act of 2011. Any controversy or ongoing uncertainty regarding the statutory debt limit negotiations, or the size and trajectory of total public debt, may impact the U.S. long term sovereign credit rating and may cause market uncertainty. As a result, market prices and yields of securities supported by the full faith and credit of the U.S. government may be adversely affected. The high and rising national debt may have serious negative consequences for the U.S. economy and may adversely impact other securities in which the Fund may invest.