On August 5, 2020, the Securities and Exchange Commission (the "Commission") issued a proposed rule and form amendments (the "proposal") meant to overhaul the existing disclosure framework for mutual funds and exchange-traded funds. This proposal was issued to create a new layered disclosure approach designed to highlight retail investors' key information.[1]
With that goal in mind, the proposal seeks to employ this new disclosure approach primarily by amending the disclosure requirements for funds' annual and semi-annual shareholder reports to highlight certain information that the Commission believes to be particularly important for retail investors. The Commission thinks these requirements will allow retail investors to make informed investment decisions, including, but not limited to, fund expenses, performance, and composition of portfolio holdings. Each fund in a series or fund family would be required to issue separate and distinct shareholder reports in a concise presentation approximately 3 to 4 pages in length. These tailored shareholder reports would serve as the principal disclosure vehicle that existing shareholders would receive semi-annually, in addition to notices of certain material changes, if any, as they occur during the year.
Information currently included in funds’ annual and semi-annual shareholder reports that the Commission believes to be less relevant to retail investors, for example, the schedule of investments and other financial statement elements, would still be required to be filed with the Commission on Form N-CSR on a semi-annual basis and made available online and upon request. The modified shareholder reports would contain a legend of additional information available and means of accessing that information.
The proposal also contemplates changes to the frequency by which investors receive fund prospectus updates and specific changes to the content of funds’ prospectuses. Under the proposal, only new investors would automatically receive a fund prospectus upon their initial investment in a fund. Subsequently, annual prospectus updates for existing shareholders would only be made available online and upon request. Instead, the new layered disclosure approach would rely on the modified shareholder reports to keep investors informed about their fund investments and allow them to make informed trading decisions.
Regarding the content of funds’ prospectuses, the proposal lays out two complex disclosure areas in need of improvement; a fund’s fees and expenses and its principal risks of investing. The current fee table in the summary section of the statutory prospectus would be replaced with a ‘fee summary’ that would include fewer data points and allow certain funds to include their acquired fund fees and expenses in a footnote. The full fee table would then be moved out of the summary section of the statutory prospectus. Various terminology within the table would be updated to be more easily understood by investors.
The proposed amendments related to a fund’s principal risks of investing include precluding a fund from disclosing non-principal risks in the prospectus, limiting the length of disclosure, and ordering the risks in order of importance with the most significant risks appearing first. The Commission believes these changes will help investors more readily understand a fund’s fees and risks.
Overall, the proposal includes one new rule and amendments to rules under the Securities Act of 1933 and amendments to numerous rules and forms under the Securities Act and Investment Company Act of 1940, the Securities Act of 1934, and the Exchange Act and Investment Company Act. The Commission is seeking comments [2] on all aspects of the proposal, including reasonable alternatives within sixty days. The proposed timeline for effectiveness is eighteen months following the Final Rule release.
Foreside’s Treasurer team participates in various industry and regulatory groups and discussions hosted by Independent Audit Firms, Fund Administrators, Fund Legal Counsel, and Fund Reporting vendors. Our broad reach allows us to develop a sense of overall industry trends and operational considerations relating to shareholder reporting. As the regulatory demand for funds continues to expand, we hope to be part of your solution.
[1] “Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements.”
[2] Submit comments with File Number S7-09-20 by: Form available on the SEC’s website, e-mail rule-comments@sec.gov, the Federal Rulemaking Portal or mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.