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(Article from Registered Funds Regulatory Update, January 2025)

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The SEC’s Division of Investment Management recently published guidance, in the form of an Accounting and Disclosure Information, highlighting common issues and suggesting certain practices to ensure a smooth transition with respect to various annual and semi-annual shareholder report requirements, which became effective as of July 24, 2024. As a general note, the Staff reiterated the importance of reviewing shareholder reports and associated disclosures on an ongoing basis to ensure compliance. More broadly, the below reflects a summary of particular staff reminders and suggestions.

1. Fund Expense Information (Item 27A(c) of Form N-1A): A fund must include a simplified expense presentation in annual and semi-annual shareholder reports, which must track a specified format. The Staff highlighted the following points:
   1. Expense Information Generally. (i) Semi-Annual reports should reflect the dollar cost related to a $10,000 investment during the period that the semi-annual report covers. The cost should not be annualized. (ii) In contrast, when expressing expenses as a percent of an investor’s investment in the fund, such costs must be on an annualized basis.
   2. Computation and Rounding. (i) For purposes of calculating expenses in dollars paid on a $10,000 investment, funds must multiply the figure disclosed in the “Cost paid as a percentage of your investment” column by the average account value over the period reflected, based on an investment of $10,000 at the beginning of the period in question. The Staff clarified in particular that multiplying “costs paid as a percentage of your investment” by $10,000, “is not correct.” (ii) Expenses in dollars paid on a $10,000 investment during the applicable period must be rounded to the nearest dollar, not to the nearest cent.
2. Management’s Discussion of Fund Performance (Item 27A(d) of Form N-1A): A fund (other than a money market fund) must include MDFP in its annual shareholder reports and may include MDFP in its semi-annual shareholder reports. The Staff highlighted the below points:
   1. The required performance table presenting average annual total returns for the past 1-, 5-, and 10-year periods must be based on the fund’s net asset value. Do not also include performance based on market value in shareholder reports.
   2. A fund (other than MMFs) must compare its performance to an appropriate “broad-based” securities market index, defined as an index representing the overall applicable domestic or international equity or debt markets, as appropriate, in its shareholder reports and prospectus. The Staff clarified that “broad-based” indexes do not include industry-focused indexes, indexes with characteristics such as “growth,” “value,” or “small- or mid-camp,” indexes that comprise only a subset of the overall applicable market, or commodity indexes. However, while a fund must compare its performance to at least one qualifying “broad-based” index, the Staff also noted that a narrower index (or indexes) that reflect(s) the market segment(s) in which the fund invests may be included in addition to the “broad-based” index comparison.
   3. Funds should include noticeable and prominent disclosure (i.e., by use of text features) that past performance is not a good predictor of the fund’s future performance.
3. Fund Statistics (Item 27A(e) of Form N-1A): Funds are permitted to include additional disclosure, such as portfolio-level statistics, in addition to fund-level statistics if the fund believes such additional disclosure would help shareholders better understand its activities and operations during the applicable reporting period. The Staff clarified that portfolio-level statistics, such as average maturity or average credit rating, should be disclosed under the heading “Fund Statistics,” not under the heading “Graphical Representation of Holdings.”
4. Graphical Representation of Holdings (Item 27A(f) of Form N-1A): Funds must include in annual and semi-annual shareholder reports one or more tables, charts, or graphs reflecting its portfolio holdings by category as of the end of the applicable reporting period and are permitted to show its holdings based on percentage of (i) NAV; (ii) total investments; (iii) total exposure, or (iv) net exposure attributable to each category. The Staff highlighted the below points:
   1. When disclosing holdings as a percentage, disclose the basis for the percentage (net asset value, total investments, or total or net exposures). If disclosing holdings based on credit quality, be mindful that there are special disclosures required for this type or presentation, including (i) a brief description of how the credit quality of the holdings were determined, and (ii) if credit ratings assigned by a credit rating agency are used, a concise explanation of how they were identified and selected.
   2. In particular, the Staff noted that when selecting how to categorize holdings, funds should select categories most helpful for investors to assess and monitor their fund investments.
5. Material Fund Changes (Item 27A(g) of Form N-1A): If certain material changes have occurred since the beginning of the applicable reporting period, annual shareholder reports must include a brief description of such material changes. The Staff clarified that:
   1. If there have been material fund changes since the beginning of the reporting period, the annual report should (i) include a prominent statement on the cover page (or beginning) of the report that the report describes material fund changes, and (ii) disclose in the body of the report the material fund changes.
   2. If there have been no material fund changes since the beginning of the reporting period, the annual report does not need to include (i) or (ii) above.
6. Availability of Additional Information Online (Item 27A(i) of Form N-1A): Annual and semi-annual shareholder reports must include a statement that informs investors about additional information that is available on the fund’s website and, pursuant to Rule 30e-1 under the 1940 Act, a fund is required to make disclosures required by Items 7-11 of Form N-CSR and its complete portfolio holdings as of the end of the fund’s most recent first and third fiscal quarters publicly accessible, free of charge, at the website address included at the beginning of the shareholder report. The Staff highlighted the below points:
   1. Double check links to ensure that there are no broken links in the report.
   2. Any links to additional information on the fund’s website must be specific enough to lead investors directly to the particular information; however, a link to a central site including prominent links to the particular information can satisfy this requirement. In contrast, a link to a home page or a section of the fund’s website other than on which the particular information is posted does not comply with the requirement.
   3. When making disclosures required by Items 7-11 of Form N-CSR available online pursuant to Rule 30e-1, funds should consider labelling the information with a term that is “more descriptive of the collective information” required by Items 7-11. In particular, the Staff noted that some funds refer to these disclosures as “Annual Financial Statements and Additional Information,” which the staff implies is more descriptive as compared to more abridged references used, such as “[semi-]annual reports,” “N-CSR,” or “Financial Statements.”
7. Inline XBRL Data Tagging: Information in annual and semi-annual shareholder reports must be tagged using Inline XBRL structured data language in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual and this requirement extends to performance information used to satisfy a fund’s (other than a MMFs) performance comparison requirements, discussed briefly above. The Staff clarified that to comply with XBRL data tagging requirements, funds should tag broad-based indexes as broad-based indexes, and any additional indexes used should be tagged as an additional index (and should not be tagged as a broad-based index).
8. Additional Issues. Finally, the Staff provided the following additional information and guidance.
   1. The contents of shareholder reports are restricted to information that is required or permitted under Item 27A of Form N-1A. Any additional disclosure included should be necessary to make required disclosure items (pursuant to Item 27A of Form N-1A) not misleading and should generally be brief. Generally avoid extraneous, lengthy disclosures (such as disclaimers or risk disclosures).
   2. Funds must present information in shareholder reports in the same order as is required under Item 27A of Form N-1A.
   3. Funds may omit disclosures that are inapplicable, such as, for example, material fund changes and changes in and disagreements with accountants.

ADI 2024-14: Tailored Shareholder Report Common Issues (Nov. 8, 2024), available at: https://www.sec.gov/about/divisions-offices/division-investment-management/accounting-disclosure-information/adi-2024-14-tailored-shareholder-report-common-issues.