Fund firms offering government bond funds need take care in how they disclose the extent to which they use agency issues rather than direct obligations of the government. The warning comes directly from the SEC in a letter sent to the ICI, reports the Wall Street Journal.

The SEC staff is concerned that some government bond funds may have reduced the prominence of these disclosures by including them in statements of additional information that are not immediately accessible to shareholders. In the letter, the SEC states that the disclosure should be made in the risk/return summary of the prospectus itself.

The letter did offer a concession from the SEC to the fund industry. It affirmed that government funds will not have to change their name even if a substantial share of the fund is invested in agency debt as both Fannie Mae and Freddie Mac debt falls under the government rubric.

The letter may mark a reversal of the SEC's practice of allowing fund firms to provide basic disclosure in the body of communications while relegating the detailed disclosure to footnotes and additional statements.

The issue at hand -- how to disclose that a fund may invest in agency debt rather than direct Treasury debt -- was raised by recent concerns about the fiscal health of Fannie Mae in wake of earnings restatements at the agency. Other debt is also issued by Freddie Mac and Sallie Mae.  

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