On October 26, 2022, the SEC unanimously adopted a release (the "Release") containing rule and form amendments to require open-end funds to transmit "concise and visually engaging annual and semi-annual reports to shareholders" that highlight key information deemed "particularly important for retail investors to assess and monitor their fund investments." Other information, including financial statements, will no longer appear in funds' shareholder reports but, instead, must be available online, delivered free of charge upon request and filed on a semi-annual basis on Form NCSR.
In particular, the Release amendments:
- Require that open-end fund shareholders receive annual prospectus updates, as well as new "streamlined" shareholder reports;
- Prohibit open-end funds from relying on existing Rule 30e-3 to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of that availability;
- Require open-end funds to prepare and transmit shareholder reports that include only a single share class of a single fund in which the shareholder is invested, even where the fund offers multiple share classes or where the fund is a series of a multi-series investment company.
Separately, the Release amends the advertising rules for all registered investment companies, including closed-end funds and business development companies, to require that a presentation of an investment company's fees and expenses in advertisements and sales literature must be "consistent with the relevant prospectus fee-table presentations and be reasonably current."
This Alert summarizes the Release in detail below, including notable departures from the August 2020 proposing release (the "proposing release").1
Compliance Date
The Release's rule and form amendments are effective 60 days after the publication of the Release in the Federal Register. The compliance date is 18 months following the effective date (i.e., roughly, May 2024).
Shareholder Reports
I. Registrants Subject to Amendments and Scope of Shareholder Report Disclosure
The streamlined shareholder report requirements apply only to Form N-1A registrants, and do not apply to other investment companies such as closed-end funds, unit investment trusts or open-end managed investment companies not registered on Form N-1A (e.g., issuers of variable annuity contracts registered on Form N-3).
Series (Fund) Scope. Currently, Form N-1A registrants may prepare a single shareholder report that covers multiple series. Because the length and complexity of multi-series shareholder reports are inconsistent with the SEC's goal of creating streamlined shareholder reports, the Release amends Form N-1A to require funds to prepare separate shareholder reports (including both annual and semi-annual reports) for each series. Thus, a fund shareholder will receive a shareholder report covering each individual fund in which the shareholder is invested.
Class Scope. In a change from the proposing release, the Release will require that a fund prepare and transmit to a shareholder a shareholder report that includes only the single class of a multiple-class fund in which the shareholder invested. The SEC's rationale is that this requirement will "reduce the complexity of disclosure" as well as "provide more tailored information that is specific to a shareholder's investment in the fund."
In recognition of the fact that shareholders and other market participants may benefit from information about the other share classes offered by a multi-class fund, the Release requires website posting of fund documents to enable these persons to obtain information about other share classes more easily. Further, the Release requires funds to tag shareholder report content in a structured, machine-readable data language, thereby making shareholder report disclosure, including class-specific disclosure, easily accessible for aggregation, comparison, filtering and related analysis.
Scope of Content of Streamlined Shareholder Report Generally. The Release generally permits a fund to include in its annual and semi-annual shareholder reports only the information specifically permitted or required by new Item 27A of amended Form N-1A. In addition, the Release adopts three provisions in the instructions to amended Form N-1A concerning the content of a fund's shareholder report:
- " If a fund's particular circumstances cause the required disclosures to be misleading, a fund is permitted to add information to the report that is necessary to make the required disclosure items not misleading. The Release notes that disclosure in response to this provision generally should be brief;
- If a required disclosure is inapplicable, a fund may omit the disclosure, and a fund similarly may modify a required legend or narrative information if the modified language contains information comparable to what is otherwise required; and
- A fund may not incorporate by reference any information into its shareholder reports.
Separately, amended Form N-1A permits funds to provide additional information to shareholders in the same transmission as the shareholder report, provided the shareholder report is given "greater prominence" than any other materials included within the same transmission, except for certain specified disclosure material.2 The excepted disclosure materials include summary prospectuses, statutory prospectuses, notices of the online availability of proxy materials, and other shareholder reports.
II. Specific Content Requirements Applicable to Streamlined Shareholder Reports
The contents of the new "streamlined" shareholder reports for open-end funds are specified in amended Form N-1A. The Release adds new Item 27A to Form N-1A and deletes the provisions in Item 27 of current Form N-1A that relate to annual and semi-annual reports. The following table summarizes the information that funds must include in their annual reports, as well as references to the corresponding item number of both amended and current Form N-1A. The instructions to Item 27A provide that the information in shareholder reports must be presented in the order specified in Item 27A.
Shareholder Report Contents
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Footnotes
1. The proposing release is described in Ropes & Gray's August 14, 2020 Alert.
2. Footnote 132 of the Release states that the SEC "would consider a fund to satisfy the 'greater prominence' requirement if, for example, the shareholder report is on top of a group of paper documents that are provided together or, in the case of an electronic transmission, the email or other message includes a direct link to the report or provides the report in full in the body of the message."
