SEC Publishes Accounting and Disclosure Information Bulletin Regarding SEC Yield for Funds that Invest in TIPS

The staff (Staff) of the Division of Investment Management’s Disclosure Review and Accounting Office issued an Accounting and Disclosure Information (ADI) bulletin recently encouraging funds (TIPS Funds) that invest significantly in Treasury Inflation-Protected Securities (TIPS) and advertise SEC Yield to consider their yield calculation methodology and the adequacy of related disclosures. The Staff issued the ADI bulletin out of concern that, during periods of rising inflation, investors may be misled by TIPS Funds that report “exceptionally high” SEC Yields that vary significantly from month-to-month and may not be replicated (the ADI bulletin does not define “exceptionally high”).

The principal of TIPS increases with inflation and decreases with deflation to keep the principal constant on an after-inflation basis. This adjustment to principal is not explicitly addressed in applicable requirements setting forth the SEC Yield calculation methodology. Thus, there is variation in how TIPS Funds treat these adjustments of principal when calculating SEC Yield. The ADI bulletin notes that some TIPS Funds have elected to include the adjustment, while others have not. The Staff notes that while both approaches are consistent with the required calculation methodology, a TIPS Fund should choose the methodology it believes is most informative to investors.

If a TIPS Fund has elected to include the inflation adjustments to principal when advertising its SEC Yield, the Staff suggests that the TIPS Fund explain to investors that the adjustment may cause the yield to vary substantially from month-to-month. Additionally, if the sales literature of a TIPS Fund includes an exceptionally high SEC Yield, the Staff believes the TIPS Fund should disclose:

• that the yield is attributable to the rise in the inflation rate because the inflation adjustment to principal is treated as income; and
• that the 30-day inflation adjustment may cause the SEC Yield to vary substantially from one month to the next and may not be repeated.

The Staff also notes that the above disclosure points should be tailored to current market conditions and other circumstances affecting the TIPS Fund. Additionally, as an alternative to the above, the Staff stated it would not object to a TIPS Fund including an inflation adjustment that uses a 12-month lookback period, rather than annualizing the 30-day period, so long as the TIPS Fund discloses that the SEC Yield reflects the impact of inflation over the prior 12-month period, which is treated as income.

The Staff also stated that financial intermediaries that disclose SEC Yields prepared by TIPS Funds should also include any accompanying disclosures prepared by the TIPS Funds.

The ADI bulletin can be found here.