1.1 In July 1995, the IOSCO Working Party on Investment Management ("WP 5") agreed to examine issues relating to risk disclosure in the offering and marketing materials of collective investment schemes ("CIS"). In particular, WP 5 agreed to develop a Paper which would deal with "investor education and the problem of disclosure to CIS investors with particular focus on retail investors, specifically in relation to communicating risk and the limitations of regulatory involvement". This Paper does not, however, deal with issues relating to Investor Education which may be the subject of a separate Paper.

1.2 In addressing these issues, WP 5 considered the core principles relating to disclosure in the Principles for the Regulation of Collective Investment Schemes, which has been adopted by the Technical Committee. In particular, Principle 10 on "Marketing and Disclosure", acknowledges that whilst the approach of members of WP 5 to the content of disclosure documents and advertising varies, at a minimum, it is expected that there is an obligation on CIS to provide such information as an investor (new and existing) would reasonably require to make an informed investment decision and ensure that there is full, accurate and timely disclosure.

1.3 Some of the recent developments which highlight the need for disclosure of risk include the increasing popularity of the CIS as an investment vehicle generally and as a vehicle for retirement savings. In addition, many regulatory authorities are concerned that investment products (for example, derivative products which have various risk / return characteristics), are becoming increasingly complex which makes it difficult for average investors to understand and assess the risk of CIS investing in these products. These developments have highlighted the need to educate investors about risk in general and, more specifically, about the type and level of risk associated with certain CIS products.

1.4 Moreover, recent experience has demonstrated that fluctuations in the market, such as the volatility experienced in the U.S. mortgage­backed securities market in 1994 may affect CIS valuations in a manner that far exceeds public expectations based on historical data.

SCOPE

1.5 Although it is recognized that the legal and regulatory regimes relating to risk disclosure may vary in different jurisdictions, many CIS operators and regulators are globally seeking ways to:

(a) improve the presentation of risk factors in CIS offering documents and advertising; and

(b) ensure that broker­dealers, banks, investment advisers and other financial intermediaries adequately explain the risks of CIS investment to potential investors.

1.6 This Paper explores possible means of pursuing these goals, while also seeking to address the role of regulatory authorities with respect to risk disclosure both by CIS and by financial intermediaries. It is hoped that by improving risk disclosure of CIS products, investors will be better informed with more realistic expectations and that investor complaints relating to investment decisions will be reduced.