Improved Fund Shareholder Reports & Disclosures
By Toppan Merrill
1 min read | Industry Insights Insights Home

Shareholder Reports-2

In a substantial August 5, 2020, release (the Proposal), the U.S. Securities and Exchange Commission (SEC) proposed changes to the existing disclosure framework applicable to mutual funds and exchange-traded funds (open-end funds), which, if adopted, would represent a comprehensive refinement to the current framework and notably change the form and content of information made available to open-end fund shareholders.

The Proposal follows the SEC’s 2018 release seeking industry comments on the current investor experience and disclosure framework for retail fund investors, which received comment from notable industry participants and from retail investors who were invited to submit a short “feedback flier” questionnaire related to improving fund disclosure. Improvement of the Main Street or retail investor experience, including the design, delivery, and content of disclosure, has been a priority for the SEC and its Division of Investment Management under current Chairman Jay Clayton. 

The Proposal contains significant changes to the form and content of the prospectus and shareholder reports currently received by shareholders of open-end funds, as discussed below: 

Shareholder Reports

  • Under the Proposal, shareholder reports would be tailored to the needs of retail shareholders. Shareholder reports would be designed to highlight, among other information, fund expenses, performance information, including a concise management discussion of fund performance, illustrations of holdings, and certain material fund changes. 

  • The Proposal seeks changes to the format and presentation of shareholder reports to present information in a consistent order. It encourages open-end funds to use graphic or text features in the reports, such as tables, bullet points, and question-and-answer formats. In addition, it provides flexibility for open-end funds to make electronic versions of their shareholder reports with interactive features. 

  • Certain information currently included in an open-end fund’s shareholder report and of less relevance to retail shareholders, such as a schedule of investments, would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the SEC on Form N-CSR.

  • The Proposal includes a hypothetical, new streamlined shareholder report, including a comparison to an existing shareholder report. The Proposal also included a new “feedback flier” to solicit feedback on the proposed changes. 

Prospectus:

  • The Proposal would create Rule 498B, under which investors would continue to receive a fund prospectus in connection with an initial investment in an open-end fund, but funds would discontinue the practice of delivering annual prospectus updates to shareholders.

  • Instead of annually providing prospectus updates to existing shareholders, open-end funds would provide relevant information to shareholders through the new shareholder report format (including a summary in the annual report of material changes to the fund over the prior year) and by providing timely notifications regarding material fund changes as they occur. Current versions of the fund’s prospectus would remain available online and would be delivered to shareholders upon request in paper or electronically, consistent with the shareholder’s delivery preference. 

  • Open-end fund prospectus disclosure related to fund fees (the presentation of which would also be updated in shareholder reports) and risks would be amended to help improve investor comprehension. Specifically, the current fee table in the summary section of a fund’s prospectus would be replaced with a simplified “fee summary,” and the existing fee table would be moved to another section of the statutory prospectus. The Proposal would also modify the current prospectus fee table requirements by refining the scope of funds that must disclose acquired fund fees and expenses (AFFE), permitting funds that invest 10 percent or less of their total assets in acquired funds to omit the AFFE line item in the fee table, and instead disclose the amount of the fund’s AFFE in a footnote to the fee table and fee summary. 

  • Prospectus risk disclosure would be modified by streamlining it in the prospectus to focus on essential information, and clarify current form requirements that emphasize the disclosure of “principal” risks.

Rule 30e-3:

  • In tandem with the SEC’s 2018 request for comment, the SEC adopted Rule 30e-3 (Rule 30e-3) under the Investment Company Act of 1940 which allowed for funds to use a “notice and access” method for the delivery of shareholder reports. Rule 30e-3 is available for use by funds on January 1, 2021. 

  • The Proposal would amend the scope of Rule 30e-3 to exclude open-end funds. By sending tailored annual and semi-annual reports under the Proposal, funds would be satisfying shareholder report transmission requirements more directly than they would via the current Rule 30e-3 notices, the SEC said.

Advertising Rule Amendments:

  • The Proposal would also amend specific investment company advertising rules to standardize certain fee- and expense-related information across fund advertisements (and to be consistent with prospectus requirements) with the stated purpose of promoting more transparent and balanced statements about investment costs.

The Proposal will be published on SEC.gov and in the Federal Register. The public comment period will begin following publication and remain open for 60 days after publication in the Federal Register. 

The SEC’s proposal and form amendments are available at:

https://www.sec.gov/rules/proposed/2020/33-10814.pdf.

A copy of the SEC’s Hypothetical Streamlined Shareholder Report is available at: https://www.sec.gov/files/final_2020_im_annual-shareholder report.pdf

Source:  Troutman Pepper

 

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Toppan Merrill


Toppan Merrill, a leader in financial printing and communication solutions, is part of the Toppan Printing Co., Ltd., the world's leading printing group, headquartered in Tokyo with approximately US$14 billion in annual sales. Toppan Merrill has been a pioneer and trusted partner to the financial, legal and corporate communities for five decades, providing secure, innovative solutions to complex content and communications requirements. Through proactive partnerships, unparalleled expertise, continuous innovation and unmatched service, Toppan Merrill delivers a hassle-free experience for mission-critical content for capital markets transactions, financial reporting and regulatory disclosure filings, and marketing and communications solutions for regulated and non-regulated industries. With global expertise in major capital markets, Toppan Merrill delivers unmatched service around the world.


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