The Securities and Exchange Commission moved forward August 5 with proposing modifications to the mutual fund and exchange-traded fund (ETF) disclosure framework. The Commission is also proposing changes to investment company advertising rules for registered investment companies and business development companies.
The SEC notes that the proposal is a central component of its investor experience initiative and comes in response to feedback received regarding a 2018 request for comment on retail investors’ experience with fund disclosure.
“Today’s proposal would establish a new disclosure framework for mutual funds and ETFs that modernizes the shareholder reports provided to existing investors and the prospectuses provided to new investors, including by highlighting disclosures that investors find most important as they make their investment decisions,” SEC Chairman Jay Clayton noted in his opening statement.
According to a summary, the 645-page proposal would:
- require streamlined open-end funds’ shareholder reports that would include, among other things, fund expenses, performance, illustrations of holdings and material fund changes;
- revise the content of these items to better align disclosures with developments in the markets and investor expectations;
- encourage funds to use graphic or text features—such as tables, bullet lists and question-and-answer formats—to promote effective communication; and
- promote a layered and comprehensive disclosure framework by continuing to make available online certain information that is currently required in shareholder reports but may be less relevant to retail shareholders generally.
Instead of receiving both prospectus updates and shareholder reports, existing investors would receive the streamlined shareholder report. Information currently required in shareholder reports that is not included in the streamlined report would be available online, delivered free of charge upon request and filed on a semi-annual basis with the Commission on Form N-CSR.
New investors would receive a fund prospectus in connection with their initial investment in an open-end fund, as they currently do, but funds would not deliver annual prospectus updates to shareholders thereafter. Instead, funds would keep shareholders informed through the shareholder report (including a summary in the annual report of material changes over the prior year), as well as timely notifications of material fund changes as they occur. Current versions of the fund’s prospectus would remain available online and would be delivered upon request in paper or electronically.
“To be clear—and let me emphasize this—under the proposal, the amounts and types of fund information available to investors would remain largely unchanged, but investors would receive, in a more useful way, the information that they have told us they most need,” Clayton further noted.
To help illustrate the proposed improvements, the Commission also posted on its website a summary graphic showing the differences between the existing framework and the proposed improvements.
The SEC also proposed amendments to open-end fund prospectus disclosure requirements to “provide greater clarity and more consistent information about fees, expenses and principal risks.” Among other things, the proposal calls for replacing the current fee table in the summary section of the statutory prospectus with a “fee summary.”
In addition, the Commission is proposing to permit funds that make limited investments in other funds to disclose Acquired Fund Fees and Expenses (AFFE) in a footnote to the fee table and fee summary, instead of reflecting AFFE as a line item in the fee table and fee summary.
Advertising Rules
In seeking to improve fee- and expense-related information more broadly, the SEC’s proposal would also amend investment company advertising rules. The proposed amendments would affect all registered investment company and business development company advertisements.
Here, the proposal would require that presentations of investment company fees and expenses in advertisements and sales literature are consistent with relevant prospectus fee table presentations and are reasonably current. Also addressed in the proposal are representations of fund fees and expenses that could be materially misleading.
Comments on the proposals will be due within 60 days after publication in the Federal Register.
