Tailored Shareholder Reports Frequently Asked Questions
Jan. 17, 2024
The staff of the Division of Investment Management has prepared the following responses to questions related to the adoption of rule and form amendments in October 2022 to require mutual funds and exchange-traded funds (together, “funds”) to transmit concise and visually engaging annual and semi-annual reports to shareholders (collectively, “shareholder reports”) under the Investment Company Act of 1940 (the “Act”) and to promote transparent and balanced presentations of fees and expenses in investment company advertisements.
The staff may update this information from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not rules, regulations, or statements of the Commission, and the Commission has neither approved nor disapproved these FAQs or the answers to these FAQs. The FAQs, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.
If you have questions about the application of these rules, please contact the Division of Investment Management Chief Counsel’s Office at 202-551-6825 or IMOCC@sec.gov.
Appropriate Broad-Based Securities Market Index
The final rules require a fund to show its performance against an “appropriate broad-based securities market index,” which is defined as “the overall applicable domestic or international equity or debt markets, as appropriate.” As the Commission stated in the Adopting Release, the definition of “appropriate broad-based securities market index” is designed to ensure that the index is one that reasonably represents the applicable market, to provide investors with information on how the fund’s performance relates to the performance of the overall market.
Q. Would a fixed-income or equity index that pertains to a group of countries (such as Europe or Asia), a group of countries excluding a specific country or countries (such as Asia excluding Japan), or a group of markets with shared characteristics (such as emerging markets or developed markets) qualify as an appropriate broad-based securities market index?
A. As the Commission stated in the Adopting Release, for a fund that invests primarily in the equity securities of a non-U.S. country, an index representing the overall equity market of the non-U.S. country would qualify as an appropriate broad-based securities market index. Consistent with this guidance, the staff believes that an index that pertains to the equity or fixed income market of a group of countries, a group of countries excluding a specific country or countries, or a group of countries with shared characteristics such as emerging markets or developed markets, could qualify as an appropriate broad-based securities market index provided that the index represents the overall applicable international equity or debt market relative to the fund’s investments.
Q. May a fund that invests primarily in tax-exempt municipal securities, including a fund that invests primarily in the municipal securities of a single state, use an index that reflects the national municipal securities market as its appropriate broad-based securities market index?
A. Yes. Municipal securities present unique circumstances. In the Adopting Release, the Commission provided examples of indexes that would not qualify as appropriate broad-based securities market indexes, including the example of a fund that invests primarily in the equity securities of healthcare companies presenting its performance against a benchmark consisting of only healthcare companies (i.e., a subset of the overall U.S. equity market). The Commission also stated that it does not believe that indexes that include characteristics such as “growth,” “value,” “ESG,” or “small- or mid-cap” represent the overall market. In the staff’s view, these examples can be distinguished from an index representing the national municipal securities market.
In the staff’s view, because income from municipal bonds is generally free from federal income tax (and, in some cases, free from state and local income tax), tax-exempt municipal bonds are distinct from other types of fixed income securities. On account of this distinction, the national municipal securities market may be understood as a standalone overall market as opposed to a subset of the fixed income market more broadly. An index representing the national municipal securities market therefore would, in the staff’s view, represent the overall market for these securities.
Form N-CSR and Website Availability Requirements
Q. As the Commission recognized in the Adopting Release, some funds do not prepare separate financial statements (Item 7(a) of Form N-CSR as amended) for each series of a trust. In the Adopting Release, the Commission stated that a fund would be permitted to prepare and file combined financial statements that include multiple series or portfolios in a trust to satisfy Item 7 of amended Form N-CSR provided such financial statement presentation is consistent with Regulation S-X. Therefore, responses to individual Form N-CSR items could include responses with respect to multiple series or portfolios in a trust.
In addition to this filing method, it could be operationally efficient for a single fund, multiple series of a trust, or an entire trust to prepare its Form N-CSR filing by combining responses to multiple items of the form. Would this be permissible, and under what circumstances would it be permissible? For example, if a trust has three series (Fund A, B, or C), could the trust, among other things, prepare Form N-CSR information in the following manner:
- Fund A (Items 7-11); Fund B (Items 7-11); Fund C (Items 7-11), all under Item 7.
- Item 7 (Fund A, B, C); Item 8 (Fund A, B, C); Item 9 (Fund A, B, C); Item 10 (Fund A, B, C); Item 11 (Fund A, B, C), all under Item 7?
In the Adopting Release, the Commission did not address Form N-CSR preparation and submission practices that involve combining responses to multiple items of the form. The Adopting Release does, however, discuss the presentation of Form N-CSR information online to satisfy the requirements of the rule 30e-1(b) under the Act. The Adopting Release states that funds will have the option to satisfy the website availability requirement for the information that the fund will newly have to file on Form N-CSR by posting its most recent Form N-CSR report in its entirety on the website the shareholder report specifies. Consistent with the Adopting Release, the online presentation may be grouped by type of materials (that is, the different content items required to be made available online such as fund financial statements) and/or by series so long as this information meets certain presentation requirements, including that the grouped information:
- Is presented in a format designed to communicate the information effectively;
- Clearly distinguishes the different types of materials and/or each series, as applicable; and
- Provides a means of easily locating the relevant information, including, for example, a table of contents that includes hyperlinks to the specified materials and series.
When funds submit combined Form N-CSR filings that include multiple series, the Adopting Release states that information contained in these Form N-CSR filings will also need to meet these presentation requirements. Therefore, the staff believes that a combined response to multiple Form N-CSR items (for example, covering Items 7-11) would generally be appropriate if this combined response satisfies the three requirements for grouped information in the context of website availability obligations.
Q. Rule 30e-1 under the Act provides that, to satisfy its obligations under section 30(e) of the Act, a fund must make certain materials publicly accessible, free of charge, at the website address specified at the beginning of its shareholder report. When this requirement applies to a variable annuity or variable life insurance company issuer (collectively, “variable contract issuer”), where should required materials for funds that are investment options underlying the variable contract (“underlying funds”) be made available? That is, should the required underlying fund materials appear on the variable contract issuer’s website or the fund’s website?
A. In the staff’s view, the materials could appear either on the variable contract issuer’s website or the fund’s website. Neither rule 30e-1 nor Form N-1A includes express requirements regarding the entity that must host the required fund materials. The staff recognizes that as a practical matter, if multiple variable contract issuers (for example, Issuer A, Issuer B, and Issuer C) permit contract value to be allocated to the same underlying fund, it may be more efficient for the required fund materials to appear on the underlying fund’s website as opposed to the variable contract issuers' websites. For example, if the fund materials were to appear on the websites of Issuers A, B, and C, this would effectively require the beginning of the underlying fund’s shareholder report to list multiple websites instead of only listing the underlying fund’s website. And multiple websites (the websites of Issuers A, B, and C) would be required to host materials for the same underlying fund.
Q. May a fund that is registered under the Act, but that offers and sells its securities without registration in reliance on rule 506 of Regulation D under the Securities Act of 1933 and/or section 4(a)(2) of the Securities Act of 1933, post the Form N-CSR information required under amended rule 30e-1 without violating the prohibition on general solicitation and advertising in rule 502(c) of Regulation D?
A. Yes. Compliance with the requirement to post Form N-CSR information online under amended rule 30e-1 would not be viewed by the staff as a violation of rule 502(c) of Regulation D, so long as the fund posts only the information required by the rule and does not use its website to offer or sell securities or in a manner that is deemed to be general solicitation or advertising for offers or sales of its securities.
Binding Individual Shareholder Reports of Multiple Funds
Q. Where an investor has invested in multiple funds (or in multiple share classes of funds), or a variable contract investor has allocated contract value to multiple underlying funds, may the individual shareholder reports of each of these funds (or, as applicable, share classes) be bound, stapled, or stitched together for transmission to the investor?
A. Yes. Under the circumstances described in this question, in the staff’s view, this practice would be consistent with Instruction 4 to Item 27A(a) of Form N-1A, and also would be consistent with the Commission’s discussion of multi-series shareholder reports in the Adopting Release. Instruction 4 provides that a fund must prepare a separate shareholder report for each series of a fund, and if a series has multiple classes, to prepare a separate shareholder report for each class within the series
In the staff’s view, this practice does not raise the same concerns about multi-series shareholder reports that the Commission discussed in the Adopting Release. The Commission’s concerns address circumstances where: (1) one shareholder report addresses multiple funds and/or share classes; and/or (2) an investor receives information about multiple funds, but the investor is not actually invested in all of these funds. These concerns do not address circumstances where an investor is actually invested in (or in the case of a variable contract, has allocated contract value to) multiple funds whose individual shareholder reports are bound, stapled, or stitched together.
A fund generally should consider including a table of contents to any bound, stapled, or stitched shareholder reports for investors’ ease of use.
Electronically Provided Shareholder Reports
Q. Where a variable contract issuer delivers an electronic annual or semi-annual shareholder report (collectively, “shareholder reports”) of a fund that is available as an investment option underlying the variable contract (an “underlying fund”) to a fund shareholder who has opted into electronic delivery of fund documents, must the shareholder report comply with the hyperlinking requirements under Instruction 9 to Item 27A(a) of Form N-1A? Would a variable contract issuer’s obligations under rule 30e-2 under the Act be satisfied if the underlying fund shareholder report it delivers includes a stale or inaccurate hyperlink?
A. Yes. The provisions regarding facilitating access – including hyperlinking – in Instruction 9 to Item 27A(a) of Form N-1A are applicable to any shareholder report that is posted on a website or otherwise provided electronically. To the extent that the website address in the hyperlink becomes stale or is otherwise inaccurate, rule 30e-1 under the Act includes a safe harbor providing that a fund shall have satisfied its obligations to transmit shareholder reports even if it did not meet the posting requirements of the rule for a temporary period of time. As stated in the Adopting Release, in order to rely on this safe harbor, a fund will have to have reasonable procedures in place to help ensure that the required materials appear online in the manner required by the rule, and must take prompt action to correct noncompliance with the rule’s website availability requirements.
Q. If an underlying fund has elected to include any of the online tools described in Instruction 8 to Item 27A(a) of Form N-1A in an electronically provided shareholder report, must the variable contract issuer deliver a version of the shareholder report that includes these optional online tools?
A. No. A variable contract issuer’s obligations under rule 30e-2 under the Act do not require the transmission of a shareholder report that includes the optional content that the underlying fund elects to include under Item 27A to Form N-1A. Rules 30e-2 and 30e-1, together, require the transmission of reports containing the information required to be included in such reports by the company’s registration statement form under the Act.
Q. For investors who have elected to receive their shareholder reports through electronic delivery, are there approaches to using electronic media to transmit the shareholder report—in addition to sending an email that includes the body of the full tailored shareholder report—that are consistent with the requirements of Instruction 4 to Item 27A(a) of Form N-1A for a fund to deliver directly to an investor their fund and share-class specific shareholder report? Specifically, could a fund deliver an email, or otherwise electronically transmit a notification to investors, that includes direct links to the shareholder report(s) of the fund(s) and share class(es) that the investor owns? Could a fund deliver an email, or otherwise electronically transmit a notification to investors, that specifies the investor’s fund(s) and share-class(es) and includes a link directing the investor to a website landing page that includes direct links that are limited to the shareholder report(s) for the fund(s) and share class(es) that the investor owns?
A. Yes, each of the approaches described above would be consistent with the requirements of Instruction 4 to Item 27(a) of Form N-1A for a fund to deliver directly to an investor their fund and share-class specific shareholder report.
Compliance Date and Inline XBRL Issues
Q. The Adopting Release states that all shareholder reports for funds registered on Form N-1A must comply with the new amendments if they are transmitted to shareholders on or after the compliance date of July 24, 2024. If a fund’s shareholder report is transmitted to shareholders prior to the compliance date, but the Form N-CSR is filed with the Commission after the compliance date, would the Form N-CSR have to include the new tailored shareholder report in the filing?
A. No. Item 1 of Form N-CSR requires funds to include a copy of the annual report that was transmitted to shareholders pursuant to rule 30e-1. Therefore, consistent with this requirement, funds should include the report that was actually transmitted to shareholders, regardless of whether Form N-CSR is filed before or after the compliance date.
Q. On what date will tailored shareholder reports be required to be tagged using the OEF taxonomy? Would any tailored shareholder report that will be filed on Form N-CSR on or after the compliance date of July 24, 2024 be required to be tagged using Inline XBRL?
A. The contents of shareholder reports included in Form N-CSR that are transmitted to shareholders on or after July 24, 2024 must be tagged using Inline XBRL.
Q. When an issuer submits an amended Form N-CSR (N-CSR/A), and the originally filed Form N-CSR included multiple tailored shareholder reports in response to Item 1 of the form, but the issuer is amending only one tailored shareholder report, may the issuer only re-tag and re-file the one amended tailored shareholder report in response to Item 1 of Form N-CSR/A?
A. In these circumstances, it would be reasonable in the staff’s view for the Form N-CSR/A filing to include a complete version of the amended tailored shareholder report, with all elements of that shareholder report (not only those elements that have been amended) tagged in Inline XBRL.