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Statement on Investment Company Disclosure

June 6, 2018

I am grateful to Chairman Clayton and to the exceptional Staff in the Division of Investment Management for their hard work on this package. As always, I appreciate Division Director Dalia Blass and her colleagues’ engagement throughout this process.

Unfortunately, I cannot join the majority in voting to finalize Rule 30e-3. The Commission today reverses the default rule for delivery of information to mutual fund investors, a choice contrary to everything we know about how individual investors and funds actually behave. And by not requiring that summary information about performance and fees be provided in the notice investors will receive, the decision raises the risk that funds with weak performance or high expenses will actively select a less transparent delivery method—to the detriment of their investors.

I am encouraged by the Commission’s call for comment on ways to modernize information delivery. Technology in this area is moving at breathtaking speed, and may soon allow funds to reach shareholders—and to track what investors care most about—in a previously unimaginable way. But we usually get those insights first and regulate later, not the other way around—and this rule shows why that’s the better way to make policy. For these reasons, I respectfully dissent.

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The Rule allows funds to post shareholder reports online so long as they mail investors a notice that the report is available—and let investors request delivery of the report by mail. To understand why this rule is likely to leave investors in the dark, it may be helpful to begin with what we know about investor behavior.

Because American investors are busy building their families, their careers, and their lives, we cannot expect them to take new steps to access reports which they otherwise receive automatically today.[1] By contrast, because the fund’s management is very focused on what they have to tell investors, we can expect them to invest time and money on these disclosures.[2] The key question for us today is: given the relative resources and incentives of individual investors and fund management, who should bear the burden of making sure that investors receive information in the manner they prefer? Put another way: how should investors receive information if they choose to focus on their families and jobs rather than on electing a method for receiving shareholder reports?

Decades of research make clear that the default—the rule that governs if the investor does nothing—should make it easier, not harder, for investors to access information. That’s why the rule we initially proposed provided that, if an investor receiving printed shareholder reports did not affirmatively opt to receive electronic delivery, that investor would continue to receive that information in print.[3] Fund management thus had strong incentives to encourage investors to accept electronic delivery. And they often succeeded: about 60% of street investors now receive their reports by email.[4] But it is my understanding that far fewer investors who hold their investments directly with investment companies receive their reports by email. I am particularly concerned about the effects of today’s decision on these “direct held” investors, many of whom will be switched to the new regime despite research from FINRA showing that 49% of the investors they surveyed prefer receiving these reports by mail.[5]

Today, the majority reverses our default rule, switching the burden from fund management to individual investors. If investors do nothing by overlooking an unattractive and unengaging notice—if their busy lives lead them to the rather sensible decision to prioritize other matters above the delivery of shareholder reports—they will soon receive only a notice by mail. And direct-held investors might be given even less effective notice if all they see is a sentence in an account statement sent directly from an investment company.[6] Either way, the burden is now on the investor to find the information they need online. I cannot agree with the majority that this burden should be borne by ordinary American investors—rather than requiring, as our proposal did, investment company management to convince investors that it makes sense for them to receive this information a different way.

One response to my concern might be simply to assert that investors never read paper disclosures mailed to them, so reducing the number of shareholder reports sent in the mail is an unalloyed good. While I understand the appeal of the intuition that investors throw out everything they get in the mail—I get a lot of mail, too—we should make policy on the basis of evidence, not intuition. And the fact is that survey results show that more than half of fund investors review some or all of the shareholder reports mailed to them.[7] After today, these investors will have to affirmatively opt to continue to get this information—and, if they don’t, they will no longer receive the reports they now read.

Despite my reservations about this rule, I remain hopeful about the future in this area. The reason is that the best way to make sure that investors learn what they need to know about funds is to harness the power of technology to give shareholders compelling and clear notices, whether by mail or electronically, that give them information they actually want. That’s why I’m delighted that Rule 30e-3 so explicitly encourages funds to consider new ways of presenting information to investors.[8] And I urge commenters to respond to our call for information on retail investors’ experience with these disclosures—and how technology can help improve that experience.[9]

I am puzzled, though, that we are requesting those insights after, not before, we are adopting a final rule. We ordinarily request information from market participants first and regulate later, and the many questions raised by the rule show why that is the better course: we can only hope that the final rule we’ve adopted today will not carry the unintended consequence of impeding innovation in this area. Still, the Commission’s request for information today suggests that the rule we’ve adopted is merely a first step toward making sure investors get the information they need about the funds they own. If technology offers a way to develop notices, whether sent by mail or email, that give investors clear information that they care about, we should do all we can to encourage that work.

I look forward to hearing from commenters who can help us improve investors’ experience. And I hope that our request for comment will soon allow the Commission to pursue a more comprehensive, thoughtful approach to delivering that information in the way investors, rather than investment company managers, prefer.


[1] That’s true even if we don’t assume that individuals occasionally behave contrary to their own interests. See, e.g., Lucan Ayre Bebchuk & Steven Shavell, Information and the Scope of Liability for Breach of Contract: The Rule of Hadley v. Baxendale, 7 J. L. Econ. & Org. 284 (1991); Richard A. Posner, Economic Analysis of Law 127-28 (6th ed. 2003). The case for information-favoring default rules becomes even clearer when one takes account of what we know about the biases individuals tend to face when making decisions. Daniel Kahneman & Amos Tversky, Choices, Values, and Frames, 39 Am. Psych. 341 (1984); Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale Univ. Press 2008).

[2] For an exceptionally helpful explanation for why this fact counsels in favor of shareholder-friendly default rules in the corporate context, see Lucian A. Bebchuk & Scott Hirst, Private Ordering and the Proxy Access Debate, 65 Bus. Law. 329 (2010).

[3] See Securities and Exchange Commission, Proposing Release, Investment Company Reporting Modernization, Release Nos. 33-9776, 34-75002 (May 20, 2015).

[4] See Broadridge, Inc., Letter to Brent J. Fields, Sec’y, U.S. Securities and Exchange Commission (August 11, 2015), at 6. Financial intermediaries also use technology to encourage beneficial owners of mutual funds and ETFs to opt into delivery by email.

[5] See Securities and Exchange Commission, Adopting Release, Optional Internet Availability of Investment Company Shareholder Reports, Release No. 33-10506 (June 5, 2018), at 17 n. 44.

[6] Rule 30e-3 at least mitigates this issue for beneficial owners because, as a technical matter, the rule encourages the use of a pin number. Id. at 50 n. 161.

[7] See Broadridge Letter, supra note 4, at 9; see also id. at 10 & fig. 1 (reporting the results of an investor survey indicating that 68% of investors prefer the current ways that funds deliver reports, and that 74% of those investors in that group were between 65 and 88 years old).

[8] Adopting Release, supra note 5, at 59 (“We are persuaded that permitting additional flexibility regarding the content of the Notice is appropriate, and may result in funds crafting Notices that convey to investors certain key content from the shareholder report.”).

[9] See Securities and Exchange Commission, Request for Comment on Fund Retail Investor Experience and Disclosure, Release No. 33-10503 (June 5, 2018).

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