SEC Adopts Amendments to Modernize Fund Shareholder Reports and Fee Information in Investment Company Advertisements

SEC Release No. 33-11125 Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements

The Securities and Exchange Commission has adopted rule and form amendments to require mutual funds and exchange-traded funds to transmit streamlined and visually engaging shareholder reports and to promote transparent and balanced presentations of fees and expenses in investment company advertisements. These shareholder reports are in addition to the currently required annual and semi-annual reports filed with Form N-CSR and N-CSRS. Generally, the requirement is to mail these new tailored reports to shareholders. Highlights include:

Shareholder Reports Tailored to the Needs of Retail Shareholders
The SEC has adopted rule and form amendments to require open-end funds (mutual funds and exchange-traded funds) that are registered on Form N-1A to transmit to shareholders streamlined and visually engaging annual and semi-annual reports that highlight information that is particularly important for retail shareholders to assess and monitor their fund investments. New Item 27A to Form N-1A lists certain items that are either required or permitted to be included in a fund’s annual and semi-annual reports. Notably, the amendments will prevent open-end funds from preparing a single shareholder report for multiple series and will require that they prepare and transmit to shareholders a report that covers only the specific class of fund in which a shareholder is invested. The final rule amendments will also require open-end funds to tag the information in their shareholder reports using Inline XBRL structured data language.

The transmittal of these streamlined shareholder reports that highlight key information to investors is a new content requirement coinciding with the exclusion of open-end funds from the scope of rule 30e-3 (noted below). Accordingly, under Item 27A Form N-1A requirements, shareholder reports will be required to include the following:

– Certain required disclosures on the cover page (or at the beginning) of the report;
– A simplified expense example;
– Management’s discussion of fund performance (“MDFP”) (required in annual reports only; permitted in semi-annual reports);
– Certain “fund statistics;”
– Graphical representation of the fund’s holdings;
– A discussion of material fund changes (required in annual reports only; permitted in semi-annual reports);
– A discussion of changes in, or disagreements with, the fund’s accountant; and
– A statement of the availability of additional information about the fund.

In regard to the simplified expense example, the amendments will require that annual and semi-annual reports include a table showing the expenses associated with a hypothetical $10,000 investment in the fund during the preceding reporting period both: (1) as a percent of a shareholder’s investment in the fund (i.e., expense ratio); and (2) as a dollar amount. Item 27A specifies the format of the expense example and also includes instructions providing guidance on calculation.

For Fund Statistics, funds will be required to disclose the following statistics in their annual and semi-annual reports:
– Net assets;
– Total number of portfolio holdings;
– Portfolio turnover rate (not required for money market funds);
– Total advisory fees paid by the fund during the reporting period (required in annual reports only); and
– Any additional statistics that the fund believes would help shareholders better understand the fund’s activities and operations during the period.

Both the audited financials (N-CSR Item 7) and tailored shareholder reports (N-CSR Item 1) will appear in Form N-CSR, and accordingly, auditors should consider their responsibilities over additional material included in filings with audited financial statements pursuant to PCAOB AS 2710 Other Information in Documents Containing Audited Financial Statements. The auditor should read the other information and consider whether such information, or the manner of its presentation, is consistent with information, or the manner of its presentation, appearing in the financial statements.

Availability of Additional Information on Form N-CSR and Online
The new rules will require that funds make available online certain information that may be more relevant to investors and financial professionals who desire more in-depth information. This information also must be delivered free of charge upon request and filed on a semi-annual basis on Form N-CSR. The amendments move certain information from shareholder reports to Form N-CSR, in particular:

Financial Statements. Funds will file their complete financial statements on Form N-CSR but retain the graphical representation of holdings in shareholder reports. The Commission will allow funds to combine financial statements for multiple series or trusts in a portfolio for the Form N-CSR filing.
Financial Highlights. Funds will file their financial highlights information on Form N-CSR but retain certain elements of the information in shareholder reports, including: a fund’s expense ratio, certain information about a fund’s annual total returns, and a fund’s net assets and portfolio turnover rate.
Other items such as Remuneration Paid to Fund Directors, Officers, and Certain Affiliates; Changes In and Disagreements with Fund Accountants (retain in shareholder reports only in summary form); Matters Submitted to Fund Shareholders for a Vote; Statement Regarding the Basis for the Board’s Approval of the Investment Advisory Contract; and Complete Portfolio Holdings as of the Close of the Fund’s Most Recent First and Third Fiscal Quarters will now be moved to Form N-CSR.

The amendments remove information that currently appears in fund shareholder reports about a fund’s directors and officers and the operation and effectiveness of a fund’s liquidity risk management program as the Commission found such information either duplicative or did not meaningfully augment disclosures.

Amendments to the Scope of Rule 30e-3 to Exclude Open-End Funds
Notably, the SEC’s amendments will now exclude open-end funds from the scope of rule 30e-3, which generally permits certain registered investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of that availability. This change is intended to help ensure that all open-end fund investors directly receive the new tailored annual and semi-annual shareholder reports, either in paper or, if the shareholder has so elected, electronically. The final rule amendments will not affect the availability of rule 30e-3 for closed-end funds and management companies that offer variable annuity contracts.

Fee and Expense Information in Investment Company Advertisements
The amendments require that presentations of investment company fees and expenses in sales literature and advertisements be consistent with prospectus fee table presentations and be reasonably prominent and current. These amendments affect all registered investment company and business development company (BDC) advertisements that include fee and expense figures. Furthermore, the rule amendments address representations of fees and expenses that could be materially misleading.

Effective Dates
The amendments are effective as of January 24, 2023. The rule amendments that address representations of fees and expenses that could be materially misleading will apply on the effective date.

The Commission is providing an 18-month transition period after the effective date of the amendments to allow mutual funds and exchange-traded funds with adequate time to adjust their shareholder report and transmission practices as well as to comply with the final amendments to the advertising rules. Accordingly, funds must comply with these amendments by July 24, 2024.