(Article from Registered Funds Regulatory Update, January 2023)
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On October 26, 2022, the SEC adopted amendments to the mutual fund and ETF disclosure framework for shareholder reporting with the goal of streamlining disclosure and better customizing disclosure to retail investor needs. The rule amendments apply only to open-end funds registered on Form N-1A. According to the SEC, the new form items are designed to make the reports more user-friendly and interactive and highlight important information for retail shareholders as they assess and monitor their fund investments.
New Structure and Delivery Requirements. The new shareholder report structure seeks to extend the SEC’s “layered approach” to disclosure by tailoring the disclosure to the informational needs of the investor. New Item 27A of Form N-1A only contains what the SEC believes to be the most important information, similar in concept to a summary prospectus. Much of the information that is currently included in a shareholder report will now only be available on the fund’s website and Form N-CSR. In addition, the SEC is encouraging funds to use, as appropriate, a question-and-answer format, charts, graphs, tables, bullet lists, and other graphics or text features. Under the final rule, a shareholder report may not incorporate information by reference and must include instructions on how to access additional information about the fund if desired.
The amended shareholder report structure also requires that a report only contain information for one fund and one specific class of that fund, which is a significant departure from current practice. The new shareholder report can direct shareholders to the fund’s website to access information showing multiple share classes.
In a departure from Rule 30e-3 under the 1940 Act, which allows funds to provide notice and access to shareholder reports on the fund’s website rather than directly mailing the full report to each shareholder, the final rule requires a fund to mail the new summary shareholder report to each shareholder. While managers commented on the additional costs to mail shareholder reports, the SEC stated that the new summary format would cut mailing costs and improve the likelihood that shareholders have access to material information related to their investments.
New Content Requirements
The final rule limits the scope of shareholder reports, allowing only information that new Item 27A specifically permits or requires. Thus, reports may no longer include a president’s letter, market commentary, or portfolio manager commentary, and the management discussion of fund performance, or “MDFP,” should be limited to a short summary of key facts. In addition, other items formerly included in the shareholder report, such as financial highlights and financial statements, portfolio holdings, matters submitted to shareholder vote, Section 15(c) contract approval disclosure, and director and officer compensation, will instead be included on the fund’s website and Form N-CSR.
The tailored report must include a description of any material fund changes, including a discussion of whether the change affects the management of the fund, its risk profile, or whether a shareholder would choose to invest in the fund. The SEC stated that it does not consider portfolio manager changes material unless the fund considers it a material change (e.g., if the portfolio manager is well known in the industry and prominently advertised). On the other hand, fee changes generally are material, as are material disagreements with a fund accountant that trigger Regulation S-K Item 304(a). The report can instruct shareholders that additional information is available on the fund’s website, but it must facilitate access to that material by means of a hyperlink, QR code, or similar method.
Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, SEC Release No. IC-34731 (October 26, 2022), available at: https://www.sec.gov/rules/final/2022/33-11125.pdf.