On August 5, 2020, the SEC unanimously proposed rule and form amendments intended to modernize the disclosure framework for mutual funds and ETFs (the "Proposals"). This Alert summarizes the key provisions of the Proposals.

Executive Summary

The Proposals, if adopted, would modify the disclosure framework for funds registered on Form N-1A (mutual funds and ETFs) to follow a "layered" approach to fund disclosure that highlights key information for retail investors.

  • For existing shareholders, the Proposals would make streamlined (3-4 page) annual and semi-annual shareholder reports the primary source of fund disclosure.1 Certain information now required in a fund's shareholder reports, such as the fund's financial statements, would no longer appear in these reports. Instead, this information would be made available online and delivered free of charge upon request, and filed with the SEC on a semi-annual basis on Form N-CSR.
  • Funds would no longer be required to deliver an updated prospectus to existing shareholders who purchase additional shares. Instead, funds would rely on their shareholder reports to keep shareholders informed, along with (i) timely notification to shareholders of any material changes to the fund through prospectus supplements and (ii) the availability of the fund's prospectus online and on request.
  • The Proposals would also amend the advertising rules for funds (including closed-end funds and business development companies ("BDCs").


  1. The Proposals would preclude funds and ETFs from relying on Rule 30e-3. Many fund sponsors have been working on compliance with Rule 30e-3 since its adoption in 2018 so that their funds, beginning in 2021, could meet their shareholder report delivery requirements by making the reports accessible at a website address specified in a written notice mailed to shareholders. The Proposals would render this work, and the notices many mutual funds and ETFs have been including in their prospectuses, summary prospectuses and shareholder reports for more than a year, moot.
  2. The Proposals would amend mutual fund and ETF prospectus disclosure requirements regarding fees, expenses and principal risks.
    • The Proposals would not require a fund's acquired fund fees and expenses ("AFFE") to be presented as a line item in the prospectus fee table, unless more than 10% of the fund's total assets were invested in acquired funds for the prior fiscal year.
    • A summary prospectus would be required to describe the fund's principal risks in order of importance, with the most significant risks appearing first. Although the staff of the SEC has inquired about the ordering of principal risks in connection with its review of disclosures, this would represent the first requirement to present risks in order of importance. Many fund complexes have been reluctant to order principal risks by significance because of the possibility that such an ordering is difficult in practice and might be criticized with the benefit of hindsight. The Proposals expressly state, however, that a fund may use any reasonable means of determining the significance of risks.
    • The Proposals would also introduce a standard for determining whether a risk is a principal risk - whether the risk would place more than 10% of the fund's assets at risk or is reasonably likely to do so in the future.
  3. Following the occurrence of a material change with respect to certain specified topics, the Proposals would require a fund to deliver a prospectus supplement to all existing shareholders within three days of filing the supplement with the SEC, including existing shareholders that are not purchasing additional shares. Presently, a fund is not required to mail prospectus supplements to shareholders until they make an additional purchase. If the material change occurs shortly before a fund transmits a shareholder report, and the fund is unable to disclose the material change in its shareholder report, the delivery of the prospectus supplement to non-purchasing shareholders who have not consented to electronic delivery would involve additional expense.

The Proposals are summarized in detail below.

I. Proposed Rule 498B and Annual Prospectus Updates

For new investors, the Proposals would not change the requirement that a fund precede or accompany the sale of its shares with a prospectus.

The Proposals include proposed Rule 498B under the Securities Act, which would permit a fund to satisfy its prospectus delivery obligations to existing investors under Section 5(b)(2) of the Securities Act by complying with the conditions of the proposed Rule.2 Rule 498B and its conditions are described in detail below.

Website Availability of Certain Fund Documents. To rely on Rule 498B, a fund would be required to make accessible, free of charge, at the website address identified on the cover page of the fund's streamlined annual and semi-annual reports, the fund's current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports (the "Required Online Fund Documents"). The required materials are identical to the materials accessible online for funds currently relying on Rule 498 (the summary prospectus rule).

Notice of Material Changes. Rule 498B would require a fund to give existing shareholders notice of a material change with respect to certain topics specified in Rule 498B. The particular topics are the same types of material changes the Proposals require in the proposed streamlined annual report. See "Material Fund Changes" in Section II below. If one of the specified material changes occurs, the fund presumably will file a prospectus supplement (or even a post-effective amendment or "PEA") with the SEC. For new investors, the supplemented or amended prospectus would, as always, be required to precede or accompany the sale of shares. For existing shareholders, Rule 498B would require notice of the material change to be provided within three business days of (i) the filing date of the prospectus supplement filing or (ii) the effective date of the PEA, by first-class mail or other means designed to ensure equally prompt receipt. If a shareholder has not specified a delivery preference, Rule 498B would require that the notice be provided in paper. However, notices of material changes could be delivered electronically to shareholders who elect electronic delivery.

Delivery Upon Request of Certain Fund Documents. Rule 498B would require a fund (or a financial intermediary through which shares of the fund may be purchased or sold) to deliver, in a manner consistent with the requestor's delivery preference, a copy of any requested Required Online Fund Documents. If a paper copy is requested, the fund or intermediary must send requested paper documents within three business days of the request.

II. Changes to Annual Reports

The Proposals would (i) add new Item 27A to Form N-1A to specify the design and content of funds' annual and semiannual reports and (ii) remove the portions of existing Item 27 of Form N-1A concerning annual and semi-annual reports. The Proposals limit the length and complexity of fund shareholder reports and the SEC stated that "funds generally would be able to reduce the length of their annual reports from more than 100 pages on average to a more concise presentation that is approximately 3 to 4 pages in length."

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1. First-time fund investors would continue to receive summary or statutory fund prospectuses.

2. In general, an "existing shareholder" is a shareholder to whom a summary prospectus or statutory prospectus has been previously sent or given in order to satisfy any obligation under Section 5(b)(2) of the Securities Act to have a statutory prospectus precede or accompany the carrying or delivery of fund shares and that has continuously held fund shares. The definition is slightly different with respect to money market fund shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.