SEC Requires Tailored Shareholder Reports and Amends Fund Advertising Rules
SEC Requires Tailored Shareholder Reports and Amends Fund Advertising Rules
Recently, the U.S. Securities and Exchange Commission (SEC) adopted rule and form amendments for registered open-end funds (Final Rules) that will substantially change the form and content of fund shareholder reports. The SEC also adopted related amendments to the fund advertising rules. Effective January 24, 2023, the Final Rules reflect the SEC’s ongoing effort to require funds to provide clear and concise disclosures to shareholders, particularly retail shareholders. Notably, a fund must prepare and deliver shareholder reports that are specific to each share class of a single fund. Such reports are expected to be as short as three or four pages. Expanding on the SEC’s approach to layered disclosures, the Final Rules also require that more detailed information must be available online or by request. The new streamlined and tailored reports are intended to help retail investors monitor their fund holdings more easily.
The Final Rules also exclude funds registered on Form N-1A from Rule 30e-3, meaning that all reports must be mailed to shareholders, unless the shareholders have consented to e-delivery, in a sharp departure from recent rulemaking.
As noted above, the Final Rules will become effective on January 24, 2023, and the compliance date is
July 24, 2024.
The Final Rules amend Item 27 of Form N-1A and fundamentally change the structure and presentation of fund shareholder reports. The SEC emphasized that the new reports should be “concise and visually engaging,” utilizing tables and graphical representations of certain fund characteristics such as fees, performance, and holdings. Under the new structure, the SEC expects each shareholder report to be as few as three pages. This is to be achieved by shifting many of the disclosures that are currently included in shareholder reports onto Form N-CSR and limiting each report to a single share class of a single fund.
Under the Final Rules, shareholder reports will generally have the following structure:
As noted above, much of the information currently included in shareholder reports will be moved to Form N-CSR, and investors can access this more in-depth information using the SEC’s website or by request if they so choose. Below are the items currently included in shareholder reports that will transition to Form N-CSR:
Additionally, the statement regarding a fund’s liquidity risk management program will no longer be required to be provided in the report or on Form N-CSR.
In a disappointment to the open-end fund industry, the Final Rules exclude mutual funds and ETFs from Rule 30e-3 and rescind Rule 30e-1(d). Currently, Rule 30e-3 permits mutual funds and ETFs to satisfy shareholder report delivery obligations by posting their reports online and notifying shareholders of their availability online (i.e., access equals delivery). Rule 30e-1(d) currently permits mutual funds and ETFs to send a prospectus or statement of additional information in place of a shareholder report as long as all of the required information is included. Together, but particularly in Rule 30e-3, these delivery rules provided significant cost savings and logistical ease for mutual funds and ETFs with little impact on disclosures available to investors. Under the Final Rules, however, mutual funds and ETFs will be required to mail shareholder reports to investors on a single share class and single fund basis unless a shareholder affirmatively consents to e-delivery. In the release, the SEC argued that for any shareholders who have not opted into e-delivery, funds are still required to mail a notice of report availability. Since the new shareholder reports are intended to be very short, the SEC believes the mailing costs under the Final Rules would be low.
The Final Rules also adopt amendments to the rules governing investment company advertisements (including closed-end funds and BDCs) that include fee and expense information. The amendments are similar in nature to the new Marketing Rule under the Investment Advisers Act of 1940 (Rule 206(4)-1) and will require advertisements that include fee and expense data to include both gross and net fees with equal prominence and clear explanations of any waivers, limitations, or caps. The amendments are intended to standardize how fees and expenses are presented across essentially all fund documents, from sales literature to prospectuses.
While the compliance date for the new Final Rules is not until July 2024, the operational changes to how shareholder reports are drafted and delivered will be dramatic for many open-end fund managers. In particular, advisers that manage a suite of mutual funds should be considering the ease or difficulty involved in adjusting to creating and reviewing, in most cases, many more reports than it currently produces. Advisers should be prepared for the coordinated efforts across multiple service providers (for example, financial printers) that will be required to implement the new report structures and filings on Form N-CSR.
Practices