Investing in the Dark: Investment Company Disclosure Qualities, Content & Compliance

62 Pages Posted: 16 Aug 2019 Last revised: 13 Sep 2019

See all articles by Anne M. Tucker

Anne M. Tucker

Georgia State University College of Law

Yusen Xia

Georgia State University - Robinson College of Business

Date Written: September 1, 2019


Over 100 million Americans use defined contribution (“DC”) plans to save for retirement—plans that predominantly facilitate invest in investment companies, or funds. Like operating companies, funds are required to disclose information about their operations (i.e., investment strategy) and principal risks. SEC regulations governing these disclosures are intended to help those 100 million DC investors make informed decisions about retirement strategies and risks. For example, SEC requires that investment strategy and risk disclosures be made in “plain English” and use short sentences with active verbs. But have these regulations actually produced accessible disclosures? Scholars have failed to answer this question, focusing instead on operating company disclosures for text mining and econometric scrutiny. Yet, operating company disclosures are a poor proxy to understand investment company disclosures. Despite sharing governance structures and mandatory disclosure regimes, important differences distinguish the two—differences that permeate disclosure content and uses.

In this Article, we examine investment company disclosures, developing and applying text mining tools to examine the content and compliance of 143,000 investment company summary prospectuses filed between 2010-2018. Investment companies appear to comply with “check the box,” regulations. The letter of the law may be easier for funds to follow than the spirit. We find that, despite recent SEC regulations intending to simplify disclosures for the average investor, disclosure length is growing with risk sections nearly doubled in size over the last decade. Examining a variety of readability measures, it is clear that the summary prospectus—the one disclosure most intended for the consumer investor—is hard to read, not in plain English, and hard to comprehend. Funds are writing even the most consumer-facing disclosures primarily for legal and regulatory audiences. Funds’ failures go to the very heart of SEC disclosure regulations—accessible and helpful information to investors.

Using SEC guidance on risks associated with liquidity, market conditions, interest rate, and derivatives, we learn that funds mirror the SEC’s language in describing these risks. We also test code to identify high derivative risk funds that fail to disclose derivatives as an investment strategy. Beyond compliance, investment company disclosures are an unmined stockpile of market insights and risk assessments from the market’s most sophisticated and dominant investors. For example, we observe important time trends in the data presenting an early use case for dynamic risk regulations based on aggregated investment company disclosure text. This paper is the first in a series to introduce and test tools to unlock the black box of investment company disclosures.

Keywords: investment company, mutual funds, text mining, NLP, disclosures, SEC, compliance, risk, investment strategy

JEL Classification: K22, G23, G38, G14

Suggested Citation

Tucker, Anne M. and Xia, Yusen, Investing in the Dark: Investment Company Disclosure Qualities, Content & Compliance (September 1, 2019). Available at SSRN: or

Anne M. Tucker (Contact Author)

Georgia State University College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States
(404) 413- 9179 (Phone)

Yusen Xia

Georgia State University - Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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