Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; fee information in investment company advertisements

A Small Entity Compliance Guide¹

Introduction

On October 26, 2022, the Securities and Exchange Commission (the “Commission”) adopted rule and form amendments that require mutual funds and exchange-traded funds that are registered on Form N-1A (“ETFs,” and together with mutual funds “open-end funds” or “funds”) to prepare and transmit streamlined annual and semi-annual shareholder reports that highlight key information to investors and that are tagged using Inline XBRL structured data language.

In connection with these amendments, certain information that was previously disclosed in fund shareholder reports will instead be made available online, delivered free of charge upon request, and filed on a semi-annual basis on Form N-CSR.

The Commission also adopted amendments to rule 30e-3 under the Investment Company Act to require open-end funds to provide annual and semi-annual shareholder reports directly to investors, either in paper or (if the shareholder has so selected) electronically.

Finally, the Commission adopted amendments to the advertising rules for registered investment companies and business development companies (“BDCs”) to promote more transparent and balanced statements about investment costs.

Who is affected by the amendments?

The new rule and form amendments for streamlined shareholder reports, website disclosure requirements, the associated amendments to Form N-CSR, and the amendments to rule 30e-3 apply to all open-end funds.

The amendments to the Commission’s investment company advertising rules apply to advertisements of mutual funds, ETFs, registered closed-end funds, and BDCs that include fee and expense figures or representations about a fund’s fees and expenses.

What specific changes were made?

1. Streamlined Shareholder Reports

Overview and Scope

The new tailored shareholder report will be much shorter and more concise than current shareholder reports and will highlight information that the Commission believes is particularly important for retail investors to assess and monitor their fund investments on an ongoing basis.

The final rules add new Item 27A to Form N-1A, which specifies the design and content of funds’ annual and semi-annual reports. The scope of the new shareholder report requirements will, in general, limit the information that a fund may include in the shareholder report to that information that is required or permitted in new Item 27A.

Annual and semi-annual shareholder reports will have to be prepared separately for each series and share class of a fund, and shareholders will only receive shareholder report disclosure for the specific series and share class that the shareholder is invested in.

Cover Page

A fund will have to provide the following information on the cover page of the annual and semi-annual shareholder report:

• The name of the fund and the class to which the report relates;
• The exchange ticker symbol of the fund’s shares, or the ticker symbol of the class;
• If the fund is an ETF, the principal U.S. market(s) on which the fund’s shares are traded;
• A statement identifying the document as an annual (or semi-annual) shareholder report;
• A legend stating where an investor is able to find additional information about the fund; and
• A statement that the report describes material fund changes if applicable.

Expense Information

A fund must include a simplified expense presentation in its annual and semi-annual shareholder report in the following format:

[Fund or Class Name]	Costs of a $10,000 investment	Costs paid as a percentage of a $10,000 investment
	$	%

Management’s Discussion of Fund Performance (MDFP)

The following MDFP disclosure is required in a fund’s annual shareholder report, and is optional in the semi-annual shareholder report.

(a) Narrative MDFP Disclosure

A fund must include a brief narrative discussion of the key factors that materially affected the fund’s performance during the most recent reporting period, including the relevant market conditions and the investment strategies and techniques used by the fund’s investment adviser. Funds are directed to use graphics or text features to present the key factors, as appropriate.

(b) Performance Line Graph

The required MDFP disclosure also includes a performance line graph that shows the performance of a $10,000 investment in the fund and in an appropriate broad-based securities market index over a 10-year period. A “broad-based” index is now defined as one that represents the overall applicable domestic or international equity or debt markets, as appropriate. The amended definition of broad-based index will also affect performance presentations in fund prospectuses. A fund will continue to have the option to compare its performance to other indexes, including more narrowly based indexes that reflect the market sectors in which the fund invests.

(c) Performance Table

A fund must include a performance table presenting average annual total returns for the past 1-, 5-, and 10-year periods. The table must include: (1) the average annual total returns of an appropriate broad-based securities market index; and (2) the fund’s average annual total returns with and without sales charges.

Fund Statistics

Certain fund statistics must be included in a fund’s annual and semi-annual shareholder report, including the fund’s: (1) net assets, (2) total number of portfolio holdings, (3) for funds other than money market funds, portfolio turnover rate, and (4) the total advisory fees paid by the fund during the reporting period. A fund is also permitted to disclose any additional statistic(s) so long as it is reasonably related to the fund’s investment strategy and one that the fund believes would help shareholders better understand the fund’s activities and operations during the reporting period.

Graphical Representation of Holdings

A fund must include in its annual and semi-annual shareholder reports one or more tables, charts, or graphs depicting the fund’s portfolio holdings by category, as of the end of the reporting period. A fund is permitted to show its holdings based on the percentage of (1) net asset value, (2) total investments, or (3) total exposure attributable to each category.

Material Fund Changes

A fund’s annual report must include a brief description of material changes since the beginning of the reporting period with respect to any of the following items:

• The fund’s name;
• The fund’s investment objectives or goals;
• The fund’s annual operating expenses, shareholder fees, or maximum account fee, including the termination or introduction of an expense reimbursement or fee waiver arrangement;
• The fund’s principal investment strategies;
• The principal risks of investing in the fund; and
• The fund’s investment adviser(s), including sub-adviser(s).

A fund may also include other fund changes that may be helpful for investors to understand the fund’s operations and/or performance over the reporting period. Disclosure of fund changes is optional in the fund’s semi-annual shareholder report.

Changes in and Disagreements with Accountants

A fund’s annual and semi-annual report must include a concise discussion of certain disagreements with accountants.

Availability of Additional Information

A fund’s annual and semi-annual shareholder reports must include a statement that informs investors about certain additional information that is available on the fund’s website. This statement must include plain English references to, as applicable, the fund’s prospectus, financial information, holdings and proxy voting information. If the shareholder report appears on a fund’s website or otherwise is provided electronically, the fund must also provide a means of accessing this information online, such as a hyperlink or QR code.

Format and Presentation of Shareholder Reports

Shareholder reports must be drafted using legible, plain-English, investor-friendly principles. The information presented in the report must appear in the same order as required under new Item 27A of Form N-1A. Funds are encouraged to use, as appropriate, question-and-answer format, charts, graphs, tables, bullet lists, and other graphics or text features to respond to the required disclosures.

Electronic Reports

Fund shareholders may access their shareholders reports online, rather than (or in addition to) reviewing the reports in paper format. The final rules include instructions designed to clarify requirements for electronic reports and to promote the use of interactive, user-friendly electronic design features. These include: (1) ordering and presentation requirements for electronic reports; (2) instructions providing additional flexibility for funds to add online tools to electronic reports; and (3) required links or other means for investors to immediately access information referenced in electronic reports.

Inline XBRL Data Tagging

A fund must tag the shareholder report contents in a structured, machine-readable data language. Specifically, a fund must tag the disclosures in Inline eXtensible Business Reporting Language (“Inline XBRL”) in accordance with rule 405 of Regulation S-T and the EDGAR Filer Manual.

2. Availability of Additional Information on Form N-CSR and Online

Certain information that a fund currently discloses in its shareholder reports will instead be made available on the fund’s website and filed on Form N-CSR on a semi-annual basis. This information includes:

• The fund’s financial statements;
• The fund’s financial highlights;
• Remuneration paid to directors, officers and others;
• Changes in and disagreements with accountants (additional detail supplementing the high-level information that will appear in the fund’s shareholder reports);
• Matters submitted to fund shareholders for a vote;
• Statements regarding the basis for the board’s approval of investment advisory contracts; and
• Complete portfolio holdings as of the close of the fund’s most recent first and third fiscal quarters (required to appear online, but not required to be filed on Form N-CSR under the final rules).

A fund must deliver this information to investors in a paper or electronic format upon request, free of charge. 

The website address where the required information appears must be specified on the cover page or beginning of the shareholder report and must lead investors directly to the particular information. The online materials must be presented in an easily readable format, and persons accessing this information must be able to permanently retain an electronic version of the materials. A fund may satisfy these website availability requirements by posting its most recent Form N-CSR online.

Two items that were previously required to be included in a fund’s shareholder report have been removed from the shareholder report and will not be required to be filed on Form N-CSR: (1) the management information and statement regarding availability of additional information about fund directors and (2) the statement regarding the fund’s liquidity risk management program.

3. Amendments to the Scope of Rule 30e-3 to Exclude Open-End Funds

Funds that are registered on Form N-1A may no longer rely on rule 30e-3 to satisfy their shareholder report transmission obligations. Funds must provide investors with their shareholder reports directly, either in paper or (if the investor has so elected) electronically.

4. Fee and Expense Information in Investment Company Advertisements

Under the final rules the Commission adopted, investment company advertisements that include fee and expense figures must include: (1) the maximum amount of any sales load, or any other nonrecurring fee; and (2) the total annual expenses without any fee waiver or expense reimbursement arrangement based on the methods of computation for a prospectus that the fund’s Investment Company Act or Securities Act registration statement form prescribes for those figures.

The final rules also address representations of fund fees and expenses that could be materially misleading. Representations about fees or expenses associated with an investment in a fund could be misleading because of statements or omissions made involving a material fact, including situations where portrayals of the fees and expenses associated with an investment in the fund omit explanations, qualifications, limitations or other statements necessary or appropriate to make the portrayals not misleading.

Effective and compliance dates

The rule will be effective January 24, 2023. The Commission has set an 18-month transition period after the effective date to allow funds time to adjust their shareholder report disclosures, shareholder report tagging requirements, and transmission practices to the new rules.

Funds will also have 18-months after the effective period to comply with the advertising rule amendments. Amendments to the final rule addressing representations of fees and expenses that could be materially misleading, however, does not have a transition period and are effective on January 24, 2023.

Other resources

The adopting release can be found on the Commission’s website at https://www.sec.gov/rules/final/2022/33-11125.pdf.

Contacting the Commission

The Commission’s Division of Investment Management is happy to assist small entities with questions regarding streamlined shareholder reports, shareholder report delivery under rule 30e-3, or the advertising rules. You may submit a question by email to IMOCC@sec.gov. Additionally, you may contact the Division of Investment Management’s Office of Chief Counsel at (202) 551-6825.

---

¹This guide was prepared by the staff of the Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules and form amendments adopted by the Commission, but is not a substitute for any rule or form itself. Only the rule or form itself can provide complete and definitive information regarding its requirements.