In October of 2022, the SEC adopted rule and form amendments that require mutual funds and exchange-traded funds that are registered on Form N-1A to prepare and transmit concise and visually engaging annual and semi-annual reports designed to highlight information that is particularly important for retail shareholders to assess and monitor their fund investments. These new requirements apply to all fund shareholder reports and are effective as of July 24, 2024.

The Division of Investment Management’s Disclosure Review and Accounting Office is responsible for reviewing fund disclosures. As part of their monitoring of tailored shareholder report implementation, the staff has observed several recurring issues, and, on November 7, 2024, issued Account and Disclosure Information (ADI) 2024-14 to remind funds of certain requirements and to highlight common issues with these new requirements.

The SEC Staff had the following observations:

Expense Information (A fund must include a simplified expense presentation in its annual and semi-annual shareholder report in a specified format.)

– Several funds appear to have annualized the expenses in dollars paid on a $10,000 investment in their semi-annual shareholder report. The semi-annual report should reflect the dollar cost over the period and should therefore not be annualized. The expenses as a percent of an investor’s investment in the fund, on the other hand, must be on an annualized basis. (Instruction2(c) to Item 27A(c) of Form N-1A)

– Several funds appear to have calculated the expenses in dollars paid on a $10,000 investment by multiplying the “Costs paid as a percentage of your investment” by $10,000. This is not correct. Funds must multiply the figure in the “Cost paid as a percentage of your investment” column by the average account value over the period based on an investment of $10,000 at the beginning of the period. (Instruction 2(a) to Item27A(c) of Form N-1A)

– Several funds appear to present expenses in dollars paid on a $10,000 investment (during the reporting period) to the nearest cent, when the figure must be rounded to the nearest dollar. (Instruction 1(a) to Item27A(c) of Form N-1A)

– Funds might consider noting in their semi-annual reports that costs paid as a percentage of a $10,000 investment is an annualized figure.

Management’s Discussion of Fund Performance (A fund (other than a money market fund) is required to include management’s discussion and fund performance in its annual shareholder reports and is permitted to include it in their semi-annual shareholder reports.)

– A fund must include a performance table presenting average annual total returns for the past 1-, 5-, and 10-year periods. This performance is based on the fund’s net asset value. Many ETFs also disclose their performance based on market value. This additional presentation is not permitted to be included in the shareholder reports. (Instruction 3 to Item 27A(a) and Instruction 5 to Item 27A(d)(2), of Form N-1A)

– A fund (other than a money market fund) is required to compare its performance to an appropriate broad-based securities market index both in its shareholder reports and in its prospectus. A “broad-based” index is defined as one that represents the overall applicable domestic or international equity or debt markets, as appropriate. (Instruction 6 to Item 27A(d)(2) and also Item 4(b)(2)(iii) of Form N-1A) Industry-focused indexes, indexes with characteristics such as “growth,” “value,” or “small- or mid-cap”, and other indexes that comprise only a subset of the overall applicable market, do not qualify as an appropriate broad-based securities market index, nor would commodity indexes. In addition to comparing its performance to an appropriate broad-based securities market index, a fund is also permitted to show a narrower index (or indexes) that reflect(s) the market segment(s) in which the fund invests. (Instruction 7 to Item27A(d)(2) of Form N-1A and TSR Adopting Release at text accompanying footnotes 230-233)

– A fund is required to include a statement to the effect that past performance is not a good predictor of the fund’s future performance. Many funds do not use text features to make the statement noticeable and prominent. (Item 27A(d)(2)(iii)(A) of Form N-1A)

Fund Statistics (Certain fund statistics must be included in a fund’s annual and semi-annual shareholder report.)

– Some funds include portfolio-level statistics, such as average maturity or average credit rating, under the heading “Graphical Representation of Holdings.” These holdings-based statistics should instead be disclosed under the heading “Fund Statistics.” (Item 27A(e) of Form N-1A)

Graphical Representation of Holdings (A fund must include in its annual and semi-annual shareholder reports one or more tables, charts, or graphs depicting the fund’s portfolio holdings by category, as of the end of the reporting period.)

– Some funds disclose holdings as a percentage but do not specify if the percentage is based on net asset value, total investments, or total or net exposure. Funds should disclose the basis for their presentation. (See Item 27A(f) of FormN-1A)

– Some funds categorize their holdings based on credit quality but do not provide the special disclosures required for this type or presentation. If a fund depicts portfolio holdings according to the credit quality, it should include a brief description of how the credit quality of the holdings were determined, and if credit ratings assigned by a credit rating agency are used, the funds should concisely explain how they were identified and selected. (Item27A(f) of Form N-1A)

– Significant flexibility is given to funds to select how to categorize their holdings. Funds might consider selecting categories that are most helpful for investors to assess and monitor their fund investments.

Material Changes (A fund’s annual shareholder report must include a brief description of certain material changes that have occurred since the beginning of the reporting period.)

– If there have been certain material changes, the cover page (or beginning) of the shareholder report must prominently state that the report describes material fund changes. (Items 27A(b)(5) and 27A(g)of Form N-1A) Some funds disclose material fund changes while omitting the required cover page disclosure. Other funds include the cover page disclosure but do not include any disclosures about material fund changes.

Availability of Additional Information Online (A fund’s annual and semi-annual shareholder reports must include a statement that informs investors about certain additional information that is available on the fund’s website.)

– Some funds have included broken links in their shareholder reports.

– A fund is required to provide a link to the additional information on its website (or a QR code, or other means of facilitating access to such information). The link must be specific enough to lead investors directly to the particular information, rather than to the home page or a section of the fund’s website. (Instruction 9 to Item 27A(a) and Instructions 1-2 to Item 27A(i) of Form N-1A) The staff observed that some funds do not comply with this requirement because they do not include a link specific enough to lead investors directly to a specific item or alternatively to a central site with prominent links to the referenced information. For some funds, the staff was unable to find all of the required information on the specified website.

– A fund is required to make the disclosures required by Items 7-11 of Form N-CSR available on a website. While the relevant rules and forms do not prescribe what this information must be called when it is referenced on a fund website, funds might consider referring to this information by a term that is descriptive, e.g., “Annual Financial Statements and Additional Information.”

Inline XBRL Data Tagging (Funds are required to tag the information in their shareholder reports using Inline XBRL structured data language.)

– A fund (other than a money market fund) is required to compare its performance to one or more appropriate broad-based securities market indexes. A fund may also compare its performance to additional indexes. Some funds are tagging all their indexes as broad-based indexes instead of tagging their additional indexes with the separate tag intended for additional indexes.

Additional Issues

– Some funds include extraneous and sometimes lengthy disclosures such as disclaimers or risk disclosures that are not required or permitted by Item 27A of Form N-1A. A fund is permitted to add information to the shareholder report that is necessary to make the required disclosure items not misleading and the Commission stated that disclosure in response to this provision generally should be brief. (Instruction 3 to Item 27A(a) of Form N-1A and TSR Adopting Release at text accompanying footnote 120)

– Funds are required to present the information in shareholder reports in the same order as is required under Item 27A of Form N-1A (cover page or beginning of annual or semi-annual shareholder report, fund expenses, management’s discussion of fund performance, etc.) (Instructions 1 and 2 to Item 27A(a) of Form N-1A)

– Funds may omit disclosures that may be inapplicable (such as material fund changes and changes in and disagreements with accountants). (Instruction 7 to Item 27A(a) of Form N-1A)

 

 ADI 2024-14 Tailored Shareholder Report Common Issues can be accessed at
https://www.sec.gov/about/divisions-offices/division-investment-management/accounting-disclosure-information/adi-2024-14-tailored-shareholder- report-common-issues

(The Division of Investment Management’s Disclosure Review and Accounting Office expects to update this page from time to time to include additional information.)

The SEC staff has also published frequently asked questions on shareholder reports that are available at: https://www.sec.gov/investment/tailored-shareholder-reports-faqs