The SEC has been focusing on digitally transforming and modernizing all aspects of fund operations for many years. That effort serves multiple purposes, but the primary objective is to make data consumption easier for the SEC and performance data more accessible for shareholders and consumers. Changes like the new Tailored Shareholder Reports requirement will make fund costs and performance more transparent and easier to understand.
While digital transformation and simplification is a win for consumers, the shift to comply for investment companies is significant. The new rules change more than how annual and semiannual reports are created and filed for open-end funds; they also affect Form N-CSR filings.
With much of the discussion and focus on the “new” visually engaging Tailored Shareholder Report, significant changes related to Form N-CSR must be considered as well. With the introduction of Inline XBRL (iXBRL) and the updated items 7 to 11, what is surprising is that there has been very little discussion about these changes. Being prepared for the changes is the best way to ensure regulatory compliance and protect your fund from incurring additional costs.
On May 4, 2023, the SEC’s Office of Structured Disclosure released the initial draft of the Open-End Fund (OEF) XBRL taxonomy. The Commission is requiring open-end management investment companies to tag shareholder report disclosures in iXBRL, with the elements needed to tag these disclosures in the new OEF taxonomy.
A draft version of the OEF taxonomy and taxonomy guide have been posted to the SEC website, with the files available at https://www.sec.gov/structureddata/dera_taxonomies. Sample filings using the draft OEF taxonomy have also been posted and can be found at https://xbrl.sec.gov/oef/2023/oef23-samples-2023-05-02.zip.
The OEF taxonomy is based on disclosure requirements and is not limited to any specific form or EDGAR submission type. The taxonomy has two required entry points, one for each set of disclosure requirements. Form N-1A submissions that have a Risk/Return Summary use the “oef-rr” entry point. Forms such as N-CSR, that have a Shareholder Report, use the “oef-sr” entry point.
The incorporation of the two entry points into one taxonomy will require changes to how Open-End Prospectuses are tagged as the new Shareholder Report tagging has some common concepts and data structuring conventions as Risk/Return, and are both covered by OEF.
A facelift for a form that has not changed in years
While the Tailored Shareholder Reports requirement will reduce the number of pages that currently exist for each annual and semiannual report, the SEC will still require much of the information as part of the modified N-CSR requirement. To ensure the information is still publicly available, the SEC has significantly modified the N-CSR form to accommodate the more extensive, detailed information previously issued in the reports.
Form N-CSR will require information that was previously required in the shareholder report, to be moved to the following location within the form:
Item 7a. Financial Statements; including Schedules of Investment
Item 7b. Financial Highlights
Item 8. Changes in and Disagreements with Accountants
Item 9. Disclosure of Proxy Voting Policies
Item 10. Remuneration Paid to Directors, Officers and Others
Item 11. Statement Regarding the Basis for Approval of Investment Advisory Contract
Content that was previously items 7 to 13 will remain in the N-CSR but have been renumbered as items 12 to 18. Another significant change in the ruling, Item 1A of the N-CSR, which previously consisted of the full Annual or Semi-Annual Report, will include the filer’s iXBRL tagged Tailored Shareholder Reports for each individual share class using the OEF taxonomy.
The SEC also adopted amendments to Form N-1A that will eliminate a fund’s ability to provide a summary schedule in lieu of providing a complete schedule of portfolio investments as part of the financial statements. Because a fund’s full schedule of investments will only be included on Form N-CSR and on a website, continuing to allow funds to use the summary schedule is unnecessary.
Items 8 through 11 have been created for information about major changes and other finance-related topics not included in the tailored shareholder report (Items 1a, 7a or 7b). When restructuring filing data, remember that required data not included in the Tailored Shareholder Reports must be made available online within 60 days of the period end and, upon request, mailed within 3 business days of the request.
Website hosting requirements
These changes also affect the information reported on your website. Funds have the flexibility of posting the entire Form N-CSR on their website but are minimally required to post new items 7 to 11, along with the tailored reports. Integrating the layered disclosure format into your website gets a bit trickier. Although Rule 30e-3 will no longer be available, two elements of the rule will carry forward:
- An investor must be able to navigate from the fund’s landing page to each of the required documents with a single mouse click or tap.
- Funds must continue to host the First and Third Quarter Holdings Reports, to include 1 year of performance reporting.
The new Tailored Shareholder Report Rule introduces multiple new levels of complexity related to the filing and presentation of information.
Why be concerned about the N-CSR form changes?
Assembling and managing N-CSR filings can be a complex task. The introduction of the new rule will significantly change existing workflows. Although the tailored reports have captured most of the attention, these other significant changes need to be addressed in order to ensure successful compliance with the rule.
Here are a few critical steps to ensure your fund files the N-CSR correctly the first time.
Critical steps for SEC filing compliance
- Familiarize yourself with the required changes.
- Discuss the changes with the financial reporting/fund accounting department to ensure their understanding of what is needed.
- Document each new N-CSR form element
- Be prepared for iXBRL compliance by choosing a partner who understands the requirements and timelines.
Toppan Merrill has been helping funds with their required financial reporting for decades. We continually monitor the SEC modernization updates and can help with formatting, inline XBRL and website display architecture for the new Tailored Shareholder Report requirements. Our experts are in constant contact with the SEC to clarify rules and ensure our clients are in full compliance.
We have simple and straightforward plans that can help you bring your filing and reporting into compliance with minimal effort on your end. If you have any questions about the Tailored Shareholder Report Rule, client communications systems or other matters concerning the 1940 Securities Act, the experts at Toppan Merrill can help. Visit ToppanMerrill.com, connect with us via email@example.com or phone at 800.688.4400.
Guy Stanzione, Compliance Services Director at Toppan Merrill
Guy Stanzione has worked in the financial services, shareholder communication, printing and compliance services industry since January 1981. He started his career at R.R. Donnelley and has been with Toppan Merrill since April 1999. Guy has held various account management positions and has been serving as Toppan Merrill’s SEC Compliance Services Director since June 2010, focusing primarily on 1933 & 1940 Act regulations.
Guy is also the Product Manager for several of Toppan Merrill’s Investment Company solutions for regulatory document preparation, filing and distribution as well as automation technologies. Throughout his career, he has focused on understanding the evolving regulatory framework for asset managers, while building a network of resources within the industry and the SEC.
Guy graduated from Rutgers University with Bachelor of Arts degrees in Business Administration and Business & Administrative Communications.