(Article from Registered Funds Regulatory Update, January 2023)
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On October 26, 2022, the SEC adopted amendments to Rules 482, 156, and 433 under the Securities Act and Rule 34b-1 under the 1940 Act, which address investment company fee and expense presentations in advertisements. The final rule amendments affect all registered investment company and BDC advertisements that include fee and expense figures and require that presentations of investment company fees and expenses in advertisements and sales literature be consistent with relevant prospectus fee table presentations and be reasonably current.
More specifically, the amendments to Rule 482 will require all fee or expense figures in advertisements to be presented in a standardized manner and in adherence with certain prominence and timeliness requirements. Advertisements providing fee and expense figures must include: (i) the maximum amount of any sales load or any other nonrecurring fee; (ii) gross total annual expenses, computed in a manner that is consistent with relevant prospectus requirements; and (iii) if a fund has a fee waiver or expense reimbursement arrangement in effect, the termination date of any such arrangement. Under the amendments, advertisements may include other figures related to an investment company’s fees and expenses; however, the required fee and expense figures will have to be presented at least as prominently as any other figure. Fee and expense information contained in an advertisement must be as of the date of the fund’s most recent prospectus or, if the fund no longer has an effective registration statement, as of the date of its most recent annual shareholder report. A fund may provide more current information if available.
Instead of relying on Rule 482, BDCs and registered closed-end funds may continue to use free writing prospectuses in accordance with Rule 433 and certain other SEC rules for advertising purposes. Rule 433 was amended to incorporate the prominence and timeliness requirements of Rule 482 related to the presentation of fee and expense figures.
The SEC amended Rule 156 to state that “representations about the fees or expenses associated with an investment in an investment company could be misleading because of statements or omissions made involving a material fact, including situations where portrayals of the fees and expenses associated with an investment in the fund omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading.” The SEC explained that representing a particular investment company as a “zero expense” or “no expense” fund, without mentioning other costs an investor may incur when investing in that fund, may be misleading under amended Rule 156. However, consistent with current Rule 156, an analysis of whether a representation is materially misleading will depend on the context in which it is made.
The SEC imposed an 18-month transition period for funds to come into compliance with the new amendments.
Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, SEC Release No. IC-34731 (Oct. 26, 2022), available at: https://www.sec.gov/rules/final/2022/33-11125.pdf.