The new framework would provide an alternative approach to keeping investors informed about their ongoing fund investments. Currently investors receive both prospectus updates and shareholder reports, which today can be lengthy and complex. Under the proposal, existing investors would receive a streamlined shareholder report. This would provide investors with timely and concise information to effectively assess and monitor their fund investments while reducing the volume of material.

Also, the proposal would amend prospectus disclosure requirements to provide greater clarity and more consistent information regarding fees, expenses, and principal risks. To further improve fee and expense information, the proposal would change investment company advertising rules to promote more transparency concerning investment costs. The proposed advertising rule amendments would affect all registered investment companies and business development companies.

Shareholder Reports Tailored to the Needs of Retail Shareholders

The amendments affecting open-end funds’ shareholder reports are designed to highlight information that is particularly important for retail shareholders to assess and monitor their fund investments. This information would include, among other things, fund expenses, performance, illustrations of holdings, and material fund changes. The proposal also encourages fund managers to use graphic or text features, such as tables, bullet lists, and question-and-answer formats, to promote effective communication. Increased flexibility will permit open-end funds to make electronic versions of their shareholder reports more user-friendly and interactive. These proposed changes are based on feedback from investors and the SEC’s experience with fund disclosure.

Availability of Additional Information on Form N-CSR and Online

An open-end fund’s annual and semi-annual reports may contain information that is less relevant to retail shareholders and of more interest to financial professionals and those investors who desire more in-depth information. Under the proposal, such information would become available online or delivered free of charge upon request. In addition, it must be filed on a semi-annual basis with the SEC on Form N-CSR. This information would include the schedule of investments and other financial statement elements, for example.

Tailoring Required Disclosures to Needs of New and Ongoing Fund Investors

Open-end fund shareholders generally receive an updated annual prospectus each year. As proposed, new rule 498B would offer an alternative approach to keeping investors informed about their fund investment and any fund updates that occur year over year. Under this proposed rule, new investors will receive a fund prospectus with their initial investment in an open-end fund, as they currently do. However, funds would not deliver annual prospectus updates to shareholders thereafter. Funds would instead help shareholders stay informed through the streamlined 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. Consistent with the shareholder’s delivery preferences, current versions of the fund’s prospectus would be delivered upon request in paper or electronically. These prospectuses will also be available online.

Amendments to Scope of Rule 30e-3 to Exclude Open-Ends Funds

Beginning as early as January 1, 2021, funds may begin relying on rule 30e-3 under the existing framework. Rule 30e-3 permits funds to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports’ online availability, instead of directly providing the reports to shareholders. Investors who prefer to receive the full reports in paper may choose that option free of charge and at any time.

This proposal would alter the scope of rule 30e-3 to exclude open-end funds. The proposal would not affect the availability of rule 30e-3 for other registered management companies (such as registered closed-end funds) or registered unit investment trusts. Such a change would ensure that all open-end fund shareholders would experience the anticipated benefits of the proposal’s modified disclosure framework, which is designed to provide a more effective means for investors to access and use fund information while continuing to recognize investor delivery preferences and reducing expenses associated with printing and mailing.

Improvements to Prospectus Disclosure of Fund Fees and Risks

The new amendment would also change open-end fund prospectus disclosure to help investors understand fund fees and risks more easily. Investors have identified these topics as areas that are critically important in assessing a prospective fund investment. Often, though, they can be complex and confusing.

Layered disclosure principles tailors disclosures of these topics to different types of investors’ informational needs. The proposal would:

• replace the existing fee table in the summary section of the statutory prospectus with a simplified fee summary
• move the existing fee table to the statutory prospectus for use by investors seeking additional details about fund fees
• replace certain terms in the current fee table with terms that may be clearer to investors

In addition, the amendments propose to refine current requirements for funds to disclose the “acquired fund fees and expenses” associated with investments in other funds. Specifically, the proposal would allow open-end funds that make limited investments in other funds to disclose the fees and expenses associated with those investments (“acquired fund fees and expenses”) in a footnote to the fee table and fee summary instead of a fee table line item. The proposal would also improve open-end fund prospectus risk disclosure by making it clearer and more specifically tailored by: 1) promoting the disclosure of a fund’s principal risks (rather than additional and often overwhelming disclosures about non-principal risks), and 2) tailoring principal risk disclosure by specifying how principal risks can be assessed.

Fee and Expense Information in Investment Company Advertisements

Presentations of investment company fees and expenses in advertisements and sales literature must be consistent with relevant prospectus fee table presentations and kept reasonably current. The proposed amendments also address representations of fund fees and expenses that could be materially misleading. The changes would affect all registered investment company and business development company advertisements.

The public comment period for these amendments will begin following publication on SEC.gov and remain open for 60 days after publication in the Federal Register. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the proposed rules’ reference number in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. In all cases, be sure to reference File Number S7-09-20. The SEC has also approved for use two short-form feedback fliers to gather information from shareholders and funds, respectively.

Sources:

SEC Proposes to Improve the Retail Investor Experience through Modernized Fund Shareholder Reports and Disclosures (www.sec.gov)

Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements (www.sec.gov)

Hypothetical Streamlined Shareholder Report (www.sec.gov)

Tailored Shareholder Reports (www.sec.gov)