RCA - November 1996 - Ask The Analyst - International Risk Disclosure

Q: When must communications with the public include an explanation of the special risks associated with international investing?

A: All communications with the public must provide a balanced presentation of risk and reward. Any discussion of the merits of investing outside the United States must be balanced by a commensurate discussion of the risks associated with such an investment. The level of detail provided about the security and the characteristics of the security itself determine the extent of the required risk information. For example, merely mentioning that a mutual fund invests internationally may require a brief statement that the investor should see the risk factors section in the prospectus for details regarding this strategy. In contrast, a longer discussion of the merits of international, as opposed to domestic, markets requires further and more specific disclosure in the communication itself. For example, in addition to a reference to the prospectus for information on international risk, such a communication must identify specific risks such as currency fluctuations, differences in accounting practices, and political factors. Finally, a communication that devoted several pages of text to a description of an international fund's merits and the merits of investments abroad would need to provide a more substantial risk factors section. The relative risk of the fund may also change the level of risk disclosure required. For example, an advertisement for a fund exclusively devoted to investments in overseas emerging markets must reflect a higher degree of risk disclosure than a similar advertisement for a fund that invests in large capitalization stocks in developed markets overseas.