In today’s world, the ability to obtain clear, relevant and timely information is crucial to making informed decisions. This week, the Securities and Exchange Commission (SEC) continued its push to modernize shareholder reporting for mutual funds and exchange-traded funds (ETFs), also known as open-end funds, by adopting rules proposed over two years ago. These amendments will now require the use of visually engaging and concise financial and performance dashboards and improved reporting tailored towards retail investors. A summary of the SEC’s final rule amendments follows below.

Why Tailor Towards Retail Investors?

Unlike financially well-versed institutional investors, typical retail investors are everyday investors buying and selling securities, mutual funds or ETFs through traditional or online brokerage accounts. They usually do not have the time nor sufficient background to understand all of the complex information captured in voluminous annual and semi-annual shareholder reports or fund prospectuses. If asked, most retail investors would welcome fund sponsor provided dashboards that include concise financial and performance information needed to make timely and effective investment decisions (i.e., whether to buy, hold or sell a fund investment). 

Based on recent SEC staff analysis, the average annual and semi-annual report lengths are well over 100 pages each, which makes it burdensome for everyday investors to read through and understand.

What Is Required?

While audited annual and unaudited semi-annual reports for open-end funds filed via Form N-CSR would still be prepared and available, the SEC rules would also require fund sponsors to:

• Provide concise and visually engaging annual and semi-annual reports to shareholders that highlight key information particularly useful to retail investors, such as fund expenses, performance and portfolio holdings, in a format that is consistent across funds.
• Streamline and exclude certain in-depth information more relevant to financial professionals and institutional investors from funds’ shareholder reports, and provide online or deliver free of charge upon request.
  • This includes, for example, a fund’s schedule of investments and other financial statement elements.
• Prepare separate annual reports for each series of a fund for mutual funds and ETFs with several series.
  • The SEC noted that multi-series reports were inconsistent with its goal of creating concise shareholder report disclosure providing easy access and monitoring.
• Prepare and transmit to the shareholder a separate shareholder report for each class of a multi-class fund.
  • However, financial highlights which present all fund classes, will be filed in their entirety on Form N-CSR as currently required. Except for certain data points, funds will not be required to include financial highlights information in their annual or semi-annual reports.
• Present a simplified expense table presentation in the annual report using a hypothetical $10,000 investment (rather than a $1,000 investment and two different tables as currently required). 
• Move certain aspects of the annual report to the Form N-CSR, including but not limited to the financial statements (and the schedule of investments), certain data points of the fund’s financial highlights, shareholder vote results and remuneration paid to directors.
  • Graphical representations of holdings in the annual and semi-annual reports will be retained.
• Tag shareholder reports using ‘Inline XBRL’ structured, machine-readable data language to provide easily accessible and interactive explanations and data linkage to retail investors and other market participants.
  • This allows users to view, access and explore contextual information of underlying data. For example, users can click on individual tagged data points in the filing to find more information about the data, such as citations and hyperlinks to definitions or relevant accounting guidance.
• Provide the new tailored shareholder reports directly (either electronically or paper, if elected) to shareholders, rather than only through a notice that they are available to access online.
  • Open-end funds that register on Form N-1A are now excluded from the scope of Rule 30e-3, which generally allowed certain registered investment companies to satisfy shareholder communications by making reports and other materials available online.
• Present investment company fees and expenses in advertisements and sales literature consistently with relevant prospectus fee table presentations and be reasonably current.

“Shareholder reports are amongst the most important documents that fund investors receive. Today’s final rules will require fund companies to share a concise set of materials that get to the heart of the matter. Further, today’s final rules are designed to promote transparent and balanced presentations of fees and expenses in investment company advertisements.”  — Gary Gensler, SEC Chairman

What Is Not Changing from the Initial Proposal?

Although many amendments from the initial proposal two years ago were adopted, there are several items that will not be changing, including: 

• The proposed rule providing an alternative approach to keep investors informed via the shareholder report and timely notifications rather than the annual fund prospectus update. Under the proposed rule, only new investors would have received a fund prospectus with their initial investment and not thereafter.
• The proposed amendment to replace the existing fee table in the summary section of the fund prospectus with a simplified fee summary, while continuing to maintain the existing full fee table within the prospectus to be used by certain investors seeking additional details. 
• The proposal of a new approach to disclose acquired fund fee and expenses (“AFFE”) for certain registered investment companies that invest in other funds (including private funds and business development companies). Under the initial proposal, a fund that invests less than 10% of the value of its total fund assets in other funds could disclose AFFE in a footnote to the fee table, instead of including AFFE as a fee table line item.

Benefits and Costs

Although the SEC is unable to quantify certain economic effects and costs at this time, there are expected benefits to the implementation of the new rules, such as:

• Shareholder readership may increase with more tailored and concise information.
• Shareholder time and effort spent on monitoring fund investments and making decisions may decrease.

Our Take

As the world continues to move towards increased automation and modernization, these amendments will help everyday investors make quicker and more informed decisions with information they can understand. With the launch of easily accessible trading platforms and the increased entry of retail investors, the need for simplicity, clarity and transparency has never been greater. We welcome the SEC’s new rule amendments to promote clear and concise information to benefit the everyday investor.

These amendments will become effective 60 days after publication in the Federal Register. The SEC is also providing an 18-month transition period after the effective date of the amendments to allow mutual funds and exchange-traded funds adequate time to adjust their shareholder report and transmission practices.

>> See a hypothetical example of a streamlined report from the initial proposal.

Contact Syed Farooq at sfarooq@cohencpa.com or a member of your service team to discuss this topic further. 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.