United States: SEC Approves E-Delivery Of Shareholder Reports, Requests Comments On Other Areas

Last Updated: June 14 2018
Article by John J. O'Brien and Lauren A. Engel

The US Securities and Exchange Commission recently adopted Rule 30e-3 under the Investment Company Act of 1940, which will provide registered funds with a "notice and access" option for delivering shareholder reports. Although the new delivery structure will not be entirely paperless, it promises to substantially reduce printing and mailing expenses for the registered fund industry beginning on January 1, 2021.

Originally proposed more than three years ago as part of a package of reporting modernization initiatives,1 Rule 30e-3 provides an optional "notice and access" method for the delivery of shareholder reports,2 pursuant to which reports may be made available solely on a free, public website, provided that shareholders receive a hard copy notice that directs them to the website. The notice also must inform shareholders that they are entitled to continue to receive hard copies of shareholder reports if they take certain prescribed steps. All registered funds (including exchange-traded funds that are registered investment companies) and most registered unit investment trusts will be able to rely on Rule 30e-3.3

The rule is not mandatory, so funds can choose to continue transmitting hard copies of shareholder reports or to electronically deliver reports to those shareholders who have consented to electronic delivery, pursuant to the Securities and Exchange Commission's (SEC's) prior guidance in this area.4

Notice Requirements

Rule 30e-3 sets forth certain content and format requirements for the notice that must be sent to shareholders each time a shareholder report is posted to the website.5

The notice must prominently state that an important report to shareholders has been made available online and also is available in hard copy upon request, and that the report includes important information about the fund such as its portfolio holdings and financial statements. The notice also must provide the website address where the report and other information is posted. The website listed may be a homepage that houses multiple reports or reports for multiple funds. However, investors must be able to go from the website listed in the notice to a report with a single mouse click. Many fund sponsors already have websites that will meet the rule's requirements with little or no modification. It should be noted that providing the address of the SEC EDGAR page where a fund's shareholder report is listed will not be sufficient.

The notice also must include a toll-free phone number where shareholders can contact the fund or its intermediaries. Further, the notice must describe how shareholders can request a paper or email copy of a report, free of charge, and explain that the shareholder can elect to receive paper copies of reports at any time in the future (including instructions for how to make such changes, such as by contacting the fund or its intermediaries). Fund families set up for electronic delivery of shareholder reports (e.g., by email) also must include instructions on how shareholders can "opt in" for electronic delivery of shareholder reports or other fund communications.

Website Requirements

Websites must have posted the two most recent shareholder reports as well as a complete list of portfolio holdings for each of a fund's last four fiscal quarters. There is no current requirement to disclose to investors the portfolio holdings for the first and third fiscal quarters, only the requirement to file Form N-Q with the SEC.6 Funds relying on Rule 30e-3 will be required to post Form N-Q reports, or equivalent information, on the website indicated in the notice. And all materials on the website must be posted in a format that is convenient for online reading and printing and which allows shareholders to permanently retain electronic copies. In other words, materials cannot be uploaded in a "locked" fashion that would prohibit printing or downloading.

Supplementary Material and Timing of Delivery

Funds will be permitted to leverage the required mailing of the hard copy notice by including certain other documents (e.g., summary or statutory prospectuses, statements of additional information, or proxy notices) in the same envelope. Account statements and report notices for other funds also will be permitted to be mailed together with the hard copy notice—which will be particularly helpful to intermediaries that may offer their customers access to a number of different fund families given that a single consolidated mailing could deliver the customer's account statement and all applicable shareholder report notices.

The Adopting Release also notes that a combined mailing might increase the likelihood that a shareholder becomes aware of a notice if the accompanying document is something that the shareholder is likely to read. As drafted, Rule 30e-3 does not expressly permit a prospectus supplement ("sticker") to be mailed together with the notice, but given the ability to mail a summary prospectus or an entire statutory prospectus with a notice, it seems reasonable that a fund could include stickers together with notices, however, this is an area where additional SEC guidance would be useful. Similarly, for funds relying on exemptive relief to operate in a manager-of-managers model where delivery of an information statement describing new sub-advisers is a condition of the relief, the rule would not expressly permit a notice to be accompanied with an information statement—another area that would benefit from additional SEC guidance.

Under Rule 30e-3, a fund must provide shareholders with the notice within 70 days after the close of the time period covered by the report that is the subject of the notice. The 2015 proposal set forth a 60-day delivery period, which was expanded to 70 to allow funds to include other information in the mailing (e.g., account statements) as well as to permit notices to include additional information about the funds from the shareholder report, such as graphical representations of holdings, lists of the fund's top holdings, and performance information. The longer time period may encourage certain funds to prepare client-friendly notices that serve a secondary marketing or client relations purpose. When a fund family takes advantage of the ability to include shareholder report information with the notice itself, the rule requires that the notice be filed with the SEC as part of the fund's Form N-CSR report. However, when notices are more formulaic and stick to the bare minimum regulatory requirements, they will not have to be filed with the SEC. The SEC cautioned in its Adopting Release that any extra information provided in the notice cannot be misleading and would be subject to the anti-fraud provisions of the federal securities laws.

Effective Date and Advance Disclosure Requirements

Although the rule is effective as of January 1, 2019, funds will not be able to rely on it before January 1, 2021. Between those dates, funds will be required to prominently disclose to shareholders the change in delivery method through the fund's prospectus, summary prospectus, and annual and semiannual reports.

For funds that begin to offer shares between January 1, 2019 and December 31, 2020, the fund must provide the prominent disclosure in all applicable documents from the initial offering through December 31, 2020, but may begin to use the "notice and access" method as of January 1, 2021, even though the shareholder disclosure period will have been less than two years. Similarly, funds that launch after January 1, 2021 will not be required to have an advance period of disclosure prior to relying on the rule to deliver notices.

View our Rule 30e-3 Compliance Checklist.

Requests for Comment on Additional Areas

Two additional SEC releases request public comment on enhancing fund disclosure to improve the investor experience and the framework for processing fees that intermediaries charge to funds for forwarding certain materials to investors. Responses to these releases requesting public comment are due by October 31, 2018.

Enhancing Fund Disclosure to Improve Investor Experience

The SEC is seeking public input on how disclosures could be enhanced in ways that would improve an investor's experience and help investors make more informed decisions.7 The SEC is focusing on individual investors with this outreach to learn how investors use disclosure and how the delivery, design, and content of disclosures can be improved to help investors make investment decisions. The request examines the methods of technology preferable to investors for the purposes of delivering fund disclosure and also includes a "Feedback Flier" that contains more than 100 questions on which the SEC seeks input, including such topics as electronic delivery, the length of risk disclosure, the ability to use technology to pull disclosure together from multiple funds held by a single investor, the terminology of Rule 12b-1 fees, and the use of "soft dollars."

Intermediary Processing Fees for Forwarding Fund Materials to Investors

The SEC's second release requests comment on the processing fees charged under New York Stock Exchange or other self-regulatory organization rules by intermediaries for the forwarding of fund materials (including shareholder reports and prospectuses) to end investors. Among other issues, the SEC is interested in the assessment of processing fees, transparency of the fees, remittances received by financial intermediaries for delivery of fund documents, whether the structure and level of processing fees should be set by a different entity, and the appropriateness of the fees charged. Shareholder servicing arrangements continue to be an area of particular interest to the SEC and its staff, following the "distribution in guise" initiative, the issuance of prior public comment releases on transfer agent regulation,8 and staff guidance on distribution arrangements.9

Resource for Funds: Rule 30e-3 Compliance Checklist

Funds choosing to rely on the rule's "notice and access" method to deliver shareholder reports will have to meet certain conditions, which we have outlined in our Rule 30e-3 Compliance Checklist.

View our Rule 30e-3 Compliance Checklist.

Footnotes

1 See Investment Company Reporting Modernization, Investment Company Act Rel. No. 31,610 (May 20, 2015). See also our prior LawFlash about the 2015 proposals. The various proposals—with the exception of Rule 30e-3—were adopted by the SEC in October 2016.

2 See Optional Internet Availability of Investment Company Shareholder Reports, Investment Company Act Rel. No. 33,115 (June 5, 2018) (hereinafter, Adopting Release).

3 Specifically, the rule applies to all registered funds that are required to provide shareholder reports under Rule 30e-1 under the Investment Company Act of 1940 and all registered unit investment trusts that are required to provide shareholder reports under Rule 30e-2.

4 See Adopting Release at footnote 18 for a full list of the SEC's prior guidance on electronic delivery.

5 It is worth pointing out that managers to registered funds that are also commodity pools, and therefore subject to regulation under Commodity Futures Trading Commission (CFTC) rules, currently are required to deliver an annual report to investors pursuant to CFTC Rule 4.22(c). Although CFTC Rule 4.12(c)(3) provides relief from the requirement that operators of such commodity pools deliver account statements to shareholders, that relief does not extend to delivery of annual reports. Accordingly, in the absence of corresponding relief or other guidance from the CFTC, managers to registered funds that are also commodity pools may still be required to deliver hard copies of annual reports to those shareholders who have not consented to electronic delivery, notwithstanding Rule 30e-3. In addition, the "notice and access" method of Rule 30e-3 is conceptually similar to Rule 14a-16 under the Securities and Exchange Act of 1934, which provides for a "notice and access" method for the delivery of proxy statements.

<6 Effective May 1, 2020, Form N-Q will be rescinded and replaced by Form N-PORT.

7 See Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Rel. No. 33,113 (June 5, 2018).

8 See Transfer Agent Regulations, Exchange Act Rel. No. 76,743 (Dec. 22, 2015).

9 See IM Guidance Update No. 2016-01 (Jan. 2016).

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions