SEC Proposes to Improve the Retail Investor Experience through Modernized Fund Shareholder Reports and Disclosures

On August 5, the SEC proposed modifying the disclosure framework for mutual funds and exchange-traded funds (funds) registered on Form N-1A. The proposed modifications, which derive from the SEC’s investor experience initiative, would create a new layered disclosure regime that attempts to simplify disclosure and scale down the level of detail currently furnished to shareholders. The principal elements of the proposal follow.

  1. Shareholder Reports. Under the proposal, after a fund delivers prospectuses to shareholders following an initial investment in the fund, in lieu of the current detailed annual and semi-annual reports, the fund would deliver paper or electronic versions of a “concise and visually engaging annual and semi-annual report.” The proposal would require that such reports highlight information the SEC deems to be particularly important for retail shareholders, such as fund expenses, performance, illustrations of holdings and material fund changes.
  2. Updating Required Disclosure. The proposal would eliminate the requirement that funds deliver annual prospectus updates to shareholders. Instead, funds would use the reports described above to keep shareholders informed of updates and material changes over the prior year. The current versions of fund prospectuses would be made available online and delivered free of charge upon request. Timely notifications of material fund changes would still be required.
  3. Current Annual and Semi-Annual Reports. As explained above, the proposed annual and semi-annual reports would highlight only certain information deemed important by the SEC. The proposal would still require that other information that funds currently include in annual and semi-annual reports be made available online and delivered free of charge upon request.
  4. Fund Fees and Risks Disclosure. The proposal amends the content of fund prospectuses as they relate to fees and risks. Generally, the proposal would simplify the presentation of fees and improve risk disclosure by making it clearer and more specifically tailored to a fund.
  5. Rule 30e-3. The proposal would amend the scope of Rule 30e-3 to exclude open-end funds from relying on the Rule to satisfy shareholder report transmission requirements by making such reports available online and notifying shareholders of the reports’ availability online. This change is consistent with the stated goal of providing only certain tailored information to shareholders.

The proposed modifications would amend the SEC’s advertising rules that are generally applicable to all investment companies, including mutual funds, exchange-traded funds, registered closed-end funds and business development companies. The proposal would require consistency between fees and expenses identified in advertisements and those identified in the fee table presentation in the fund’s prospectus. Additionally, the proposal would require that the fees and expenses in advertisements be reasonably current and would address presentations that could potentially be materially misleading.

The public may comment on the proposed amendments until 60 days after publication in the Federal Register.