Regulating Dynamic Risk in Changing Market Conditions

How successful are the SEC’s attempts to regulate dynamic risk in financial markets? Using mutual fund disclosure data from two financial shocks—the Puerto Rican debt crisis and COVID-19—we find evidence that SEC open-ended regulations, like the obligation to disclose changing market conditions, are largely successful in regulating dynamic, future risk. We find evidence of widespread and, often, detailed disclosures for new risks. But not all funds disclose new risks, and those that do vary in specificity ranging from individualized to generic disclosures. This creates perverse incentives for funds to opt-out of disclosure or downplay threats with boilerplate language when new risks are emerging. We recommend several SEC interventions to improve dynamic risk disclosures including empirically monitoring disclosures, issuing guidance when problematic variation is observed, and enforcing disclosure standards.