On October 26, 2022, the Securities and Exchange Commission (the “SEC”) adopted final rule and form amendments (the “Rules”) updating the annual and semi-annual shareholder reports (collectively, “Reports”) that mutual funds, exchange-traded funds, and other open-end management investment companies (collectively, “Funds”) deliver to clients.[i] In an effort to make Reports more digestible for retail investors, the Rules aim to make Reports more concise and visually engaging than those currently provided to shareholders.[ii]
A highlight of some of the key elements of the Rules are described below:
- Tailored and Concise Reports: Under the Rules, Reports must be concise, visually engaging, and highlight information the SEC has determined to be particularly relevant to retail shareholders. Specifically, Reports must highlight fund expenses, performance, and portfolio holdings. The Rules generally allow a fund to include in its Reports only the information specifically permitted or required by the Rules. There are certain limited exceptions, including allowance for disclosure of additional information needed to ensure that required disclosures are not misleading. The Rules also prohibit the practice of incorporation by reference for Reports. The Rules allow additional information to be included in the same transmission as the Reports, so long as the Report is given greater prominence than any other materials included in the same transmission, except for certain specified disclosure materials (i.e., the “greater prominence” requirement does not apply to summary or statutory prospectuses, notices of online availability of proxy materials, and other Reports).
- Simplified Disclosures: The Rules require a simplified expense presentation in the annual report and make amendments to the current management’s discussion of fund performance requirements to make the disclosure more concise.[iii]
- Broad-Based Index Definition: The Rules also amend the definition of an appropriate broad-based securities market index to require all Funds to compare their performance to a benchmark that represents the overall applicable domestic or international equity or debt markets, as appropriate, for purposes of both fund annual reports and prospectuses. Narrower indices that reflect the particular market sectors in which a Fund invests are permitted, and encouraged, to be included as additional, secondary benchmarks.
- Fund and Class Specific: The Rules will require Funds to prepare separate Reports not only for each Fund, but also for each Fund class. The Rules provide that shareholders should only receive the report covering the class in which the shareholder is invested. The class-specific requirement is a notable change from the proposed rule and a change made despite apprehension from some Commissioners.[iv]
- More Information Available: While Reports to be provided under the Rules will contain less information than what is currently provided to shareholders in annual and semi-annual reports, the more comprehensive information that is currently provided will continue to be filed on Form N-CSR, made available online, and required to be delivered to shareholders upon request. [v] The Rules will also provide additional flexibility for funds to add additional tools and features to the electronic versions of the Reports.
- Delivery of Shareholder Reports: The Rules will prevent Funds from relying on Rule 30e-3, which was recently adopted and has allowed Funds to satisfy shareholder report delivery requirements by posting the reports online and notifying shareholders of their availability.[vi] Under the Rules, Funds must once again deliver the actual Reports to each individual shareholder,[vii] but may deliver Reports electronically to shareholders who have opted for electronic delivery.[viii]
- Compliance Date: Funds have 18 months after the Rules’ effective date to come into compliance with the requirements. [ix]
If you have any questions about the Rules or about the regulation of registered investment companies, investment advisers, and broker-dealers generally, please feel free to contact us.
By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton
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[i] See SEC, Final Rule, Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, available at https://www.sec.gov/rules/final/2022/33-11125.pdf, (hereafter, the “Final Rules”); SEC Press Release, SEC Adopts Amendments to Modernize Fund Shareholder Reports and Promote Transparent Fee- and Expense-Related Information in Fund Advertisements, https://www.sec.gov/news/press-release/2022-193, (hereinafter, the “Press Release”)
[ii] See Press Release.
[iii] See SEC, Fact Sheet, Shareholder Reports for Mutual Funds and ETFs; Fee Information in Investment Company Advertisements, available at https://www.sec.gov/files/33-11125-fact-sheet.pdf, hereinafter (the “Fact Sheet”).
[iv] See Statement by Commissioner Peirce, One Good Step, More to Go: Statement on Final Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, available at https://www.sec.gov/news/statement/peirce-statement-shareholder-reports-102622; Final Rules at 40.
[v] Final Rules at 24, 129. Specifically, financial statements; financial highlights; results of shareholder votes; remuneration paid to directors, officers, and others; the stamen regarding the board’s approval of investment advisor agreements; and others will be moved from Reports to Form N-CSR. See Final Rules at 34.
[vi] See Fact Sheet.
[vii] See Fact Sheet.
[viii] See Fact Sheet.
[ix] See Press Release.
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