The SEC adopted rule amendments to improve open-end mutual fund and ETF shareholder reports. Covered funds will have to provide “concise and visually engaging” annual and semi-annual reports and make more in-depth information available upon request. Other amendments facilitate user-friendly presentations and require the use of XBRL data tagging. The amendments aim to increase the usefulness of fund reports, which can run to hundreds of pages and be difficult to navigate (Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, Release No. 33-11125, October 26, 2022).
The SEC also adopted amendments to require consistency in the presentation of investment company fees and expenses, and to address representations of fees and expenses that could be materially misleading.
“I am pleased to support these final rules because they will help investors better understand fund disclosures and help ensure that the information investors receive in investment company advertisements is transparent and balanced,” said Chair Gary Gensler.
The Commission adopted the amendments by a 5-0 vote. The amendments will become effective 60 days after publication in the Federal Register, followed by an 18-month transition period.
Fund shareholder reports. According to Gensler, shareholder documents are among the most important documents fund investors receive, but retail investors often have to sift through over 100 pages of information.
“Today’s final rules will require fund companies to share a concise set of materials that get to the heart of the matter,” said Gensler.
As described in a fact sheet, the new shareholder requirements apply specifically to “open-end funds,” which are mutual funds and ETFs registered on Form N-1A. The amendments require covered funds to:
- Transmit to shareholders “concise and visually engaging” annual and semi-annual reports that highlight key information, such as fund expenses, performance, and portfolio holdings;
- Provide additional in-depth information available online and available for delivery free of charge to investors on request;
- Tag information using the Inline XBRL structured data format.
The amendments exclude open-end funds from Rule 30e-3, which allows certain registered investment companies to make reports and other materials available online and provide a notice of the reports’ online availability, instead of directly providing the reports to shareholders. Under the new rules, open-end fund shareholders will directly receive the new reports, either in paper or electronically, if the shareholder so elects. The amendments will not affect the availability of Rule 30e-3 for closed-end funds and management companies that offer variable annuity contracts.
Commissioners Hester Peirce and Jaime Lizárraga also voted to approve the amendments. Peirce noted concerns relating to the presentation of share class information, elimination of e-delivery as the default option, comparison to indices, and elimination of a provision that would have allowed funds to omit certain information relating to Acquired Funds Fees and Expenses.
Information on fees and expenses. The release also made final rule amendments relating to funds’ presentation of fees and expenses. These amendments apply to all registered investment company and business development company advertisements that include fee and expense figures.
As Crenshaw explained, the amendments require that the presentation of investment company fees and expenses in advertisements and sales literature be standardized, consistent with the relevant prospectus fee table, and be reasonably current. The rule also addresses funds that hold themselves out as being “no-expense” or “zero-expense” funds, but conceal other pertinent information about potentially hidden costs or expenses that may be incurred in the future.
“Misleading expense presentations are anathema to transparent markets and can lead investors to make financial decisions that are against their interests, and I hope that today’s rule will help remedy these deficiencies,” said Crenshaw.
The Release is No. 33-11125.