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Troutman Pepper | SEC Proposes to Improve the Retail Investor Experience Through Modernized Fund Shareholder Reports and Disclosures

In a substantial August 5, 2020, release, the U.S. Securities and Exchange Commission proposed changes to the existing disclosure framework for mutual funds and ETFs, that, if adopted, would represent a comprehensive refinement to the current framework. The proposal follows the SEC’s 2018 release seeking industry comments on the current disclosure framework, which received comment from notable industry participants and retail investors who were invited to submit a short “feedback flier” questionnaire. Improvement of the Main Street or retail investor experience, including the design, delivery, and content of disclosure, has been a priority for the SEC and its Division of Investment Management under current Chairman Jay Clayton.

Shareholder Reports:

  • Under the proposal, shareholder reports would be designed to highlight, among other information, fund expenses, performance information, including a concise management discussion of fund performance, illustrations of holdings, and certain material fund changes.
  • The proposal seeks changes to the format and presentation of shareholder reports to present information in a consistent order. It encourages open-end funds to use graphic or text features in the reports, such as tables, bullet points, and question-and-answer formats. In addition, it provides flexibility for open-end funds to produce electronic versions of their shareholder reports with interactive features.
  • Certain information currently included in an open-end fund shareholder reports and of less relevance to retail investors, such as a schedule of investments, would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the SEC on Form N-CSR.
  • The proposal includes a hypothetical, new streamlined shareholder report, including a comparison to an existing shareholder report. The Proposal also included a new “feedback flier” to solicit feedback on the proposed changes.

Prospectus:

  • The proposal would create Rule 498B, under which investors would continue to receive a fund prospectus in connection with an initial investment in an open-end fund, but funds would discontinue the practice of delivering annual prospectus updates to shareholders.
  • Instead of annual prospectus updates, open-end funds would provide relevant information through the new shareholder report format (including a summary in the annual report of material changes to the fund over the prior year) and by providing timely notifications regarding material fund changes as they occur. Current versions of the fund’s prospectus would remain available online and would be delivered to shareholders upon request in paper or electronically, consistent with the shareholder’s delivery preference.
  • Open-end fund prospectus disclosure related to fund fees (the presentation of which also would be updated in shareholder reports) and risks would be amended to help improve investor comprehension. Specifically, the current fee table in the summary section of a fund’s prospectus would be replaced with a simplified “fee summary,” and the existing fee table would be moved to another section of the statutory prospectus. The proposal also would modify the current prospectus fee table requirements by refining the scope of funds that must disclose acquired fund fees and expenses (AFFE), permitting funds that invest 10 percent or less of their total assets in acquired funds to omit the AFFE line item in the fee table, and instead disclose the amount of the fund’s AFFE in a footnote to the fee table and fee summary.
  • Prospectus risk disclosure would be modified by streamlining it in the prospectus to focus on essential information, and clarify current form requirements that emphasize the disclosure of “principal” risks.

Rule 30e-3:

  • In tandem with the SEC’s 2018 request for comment, the SEC adopted Rule 30e-3 under the Investment Company Act of 1940, which allowed for funds to use a “notice and access” method for the delivery of shareholder reports. Rule 30e-3 is available for use by funds commencing January 1, 2021.
  • The proposal would amend the scope of Rule 30e-3 to exclude open-end funds. By sending tailored annual and semi-annual reports under the Proposal, funds would satisfy shareholder report transmission requirements more directly than they would via the current Rule 30e-3 notices.

Advertising Rule Amendments:

  • The proposal also would amend specific investment company advertising rules to standardize certain fee- and expense-related information (and to be consistent with prospectus requirements).

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will begin following publication and remain open for 60 days after publication in the Federal Register.

The SEC’s proposal and form amendments are available at: https://www.sec.gov/rules/proposed/2020/33-10814.pdf. A copy of the SEC’s Hypothetical Streamlined Shareholder Report is available at: https://www.sec.gov/files/final_2020_im_annual-shareholder report.pdf.

AUTHORS:

  • Kyle F. Whiteman, Associate | kyle.whiteman[at]troutman.com
  • Terrance James Reilly, Counsel | terrance.reilly[at]troutman.com
  • John P. Falco, Partner | john.falco[at]troutman.com
  • John M. Ford, Partner | john.ford[at]troutman.com

Compliments of Troutman Pepper – a member of the EACCNY.