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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 230, 232, 239, 249, 270, and 274
[Release Nos. 33-11125; 34-96158; IC-34731; File No. S7-09-20]
RIN 3235-AM52
Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds;
Fee Information in Investment Company Advertisements
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting rule
and form amendments that require open-end management investment companies to transmit
concise and visually engaging annual and semi-annual reports to shareholders that highlight
key information that is particularly important for retail investors to assess and monitor their
fund investments. Certain information that may be more relevant to financial professionals
and investors who desire more in-depth information will no longer appear in funds’
shareholder reports but will be available online, delivered free of charge upon request, and
filed on a semi-annual basis on Form N-CSR. The amendments exclude open-end
management investment companies from the scope of the current rule that generally permits
registered investment companies to satisfy shareholder report transmission requirements by
making these reports and other materials available online and providing a notice of that
availability. The amendments also require that funds tag their reports to shareholders using the
Inline eXtensible Business Reporting Language (“Inline XBRL”) structured data language to
provide machine-readable data that retail investors and other market participants may use to
more efficiently access and evaluate investments. Finally, the Commission is adopting
amendments to the advertising rules for registered investment companies and business
development companies to promote more transparent and balanced statements about
investment costs.
DATES: Effective Date: This rule is effective January 24, 2023. Compliance Date: The
applicable compliance dates are discussion in section II.J.
FOR FURTHER INFORMATION CONTACT: Mykaila DeLesDernier, Pamela K.
Ellis, Senior Counsels; Zeena Abdul-Rahman, Branch Chief; Amanda Hollander Wagner,
Senior Special Counsel; or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792,
Investment Company Regulation Office; Alex Bradford, Assistant Chief Accountant; Michael
Kosoff, Senior Special Counsel, at (202) 551-6921, Disclosure Review and Accounting
Office; Division of Investment Management; U.S. Securities and Exchange Commission, 100
F Street NE, Washington, DC 20549-1090.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
the following rules and forms:
Commission Reference
Section 800
Rule 156
CFR Citation
[17 CFR]
§§ 200.1 through
200.800
§ 200.800
§ 230.156
Rule 433
Rule 482
Rule 405
§ 230.433
§ 230.482
§ 232.405
Organization; Conduct and Ethics;
And Information and Requests
Securities Act of 1933 (“Securities
Act”)1
Regulation S-T2
1
15 U.S.C. 77a et seq.
2
17 CFR 232.10 through 232.903
2
Securities Act and Investment
Company Act of 1940
(“Investment Company Act,” or
the “Act””)3
Securities Exchange Act of 1934
(“Exchange Act”)4 and Investment
Company Act
Investment Company Act
3
15 U.S.C. 80a et seq.
4
15 U.S.C. 78a et seq.
Form N-1A
§§ 239.15A and
274.11A
Form N-CSR
§§ 249.331 and 274.128
Rule 30a-2
Rule 30e-1
Rule 30e-3
Rule 31a-2
Rule 34b-1
§ 270.30a-2
§ 270.30e-1
§ 270.30e-3
§ 270.31a-2
§ 270.34b-1
3
TABLE OF CONTENTS
I.
II.
Introduction and Background .............................................................................................6
A. Regulatory Context, and Developments and Analysis Informing Final Rules ......10
1. Fund Shareholder Reports—Regulatory Context..............................................10
2. Developments Supporting Layered Disclosure Approach to Fund Shareholder
Reports...............................................................................................................12
3. Evidence of Investor Preferences Regarding Fund Disclosure .........................15
4. Investment Company Advertisements, and Developments Affecting Fund
Marketing Practices ...........................................................................................20
B. Overview of the Final Rules ..................................................................................24
1. Final Rules’ Principal Elements ........................................................................24
2. Other Aspects of Proposal .................................................................................26
DISCUSSION ..................................................................................................................31
A. Annual Reports ......................................................................................................31
1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments 35
2. Contents of the Annual Report ..........................................................................51
3. Format and Presentation of Annual Report .....................................................111
4. Electronic Annual Reports ..............................................................................114
B. Semi-Annual Report ............................................................................................118
1. Scope and Contents of the Semi-Annual Report .............................................120
2. Format and Presentation of Semi-Annual Report ...........................................126
3. Electronic Semi-Annual Reports Instructions and Requirements ...................127
C. Form N-CSR and Website Availability Requirements ........................................127
1. New Form N-CSR Filing Requirements .........................................................131
2. Website Availability Requirements .................................................................144
3. Delivery Upon Request Requirements ............................................................152
D. Disclosure Items Removed from Shareholder Report and Not Filed on Form NCSR ......................................................................................................................154
E. Transmission of Shareholder Reports ..................................................................159
1. Amendments Narrowing Scope of Rule 30e-3................................................159
2. Alternative Transmission Methods for Shareholder Reports and Other
Regulatory Materials .......................................................................................168
3. Alternatives for Satisfying Transmission Requirements for Semi-Annual
Reports.............................................................................................................170
F. Prospectuses and SAIs Transmitted Under Rule 30e-1(d) ..................................172
G. Investment Company Advertising Rule Amendments ........................................173
1. Requirements for Standardized Fee and Expense Figures ..............................173
2. Materially Misleading Statements About Fees and Expenses in Investment
Company Sales Literature ...............................................................................185
3. Additional Suggested Amendments to Investment Company Advertising
Rules ................................................................................................................188
H. Inline XBRL Data Tagging..................................................................................189
I. Technical and Conforming Amendments ............................................................195
4
J. Compliance Date ..................................................................................................196
III. Other Matters ..................................................................................................................198
IV. Economic Analysis .........................................................................................................198
A. Introduction ..........................................................................................................198
B. Economic Baseline and Affected Parties .............................................................201
1. Descriptive Industry Statistics .........................................................................201
2. Fund Shareholder Reports ...............................................................................203
3. Transmission of Shareholder Reports .............................................................206
4. Investor Use of Fund Disclosure .....................................................................210
5. Fund Advertisements .......................................................................................211
C. Benefits and Costs ...............................................................................................212
1. Broad Economic Considerations .....................................................................214
2. New Approach for Funds’ Shareholder Reports .............................................225
3. Advertising Rule Amendments .......................................................................256
D. Effects on Efficiency, Competition, and Capital Formation................................262
E. Reasonable Alternatives ......................................................................................270
1. More or Less Frequent Disclosure ..................................................................270
2. More or Less Information in Shareholder Reports ..........................................272
3. Retaining Rule 30e-3 Flexibility or Implementing Access Equals Delivery for
Open-End Funds Registered on Form N-1A ...................................................273
4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds ......275
5. Amending Shareholder Report Requirements to Include Variable Insurance
Contracts or Registered Closed-End Funds.....................................................276
6. Requiring All Form N-CSR Disclosures to be Tagged in Inline XBRL .........277
V. Paperwork Reduction Act Analysis ...............................................................................278
A. Introduction ..........................................................................................................278
B. New Shareholder Report Requirements under Rule 30e-1 ..................................280
C. Form N-CSR ........................................................................................................282
D. Rule 482 ...............................................................................................................284
E. Rule 34b-1............................................................................................................286
F. Rule 433 ...............................................................................................................289
G. Rule 30e-3 ............................................................................................................292
H. Investment Company Interactive Data.................................................................293
VI. Final Regulatory Flexibility Act Analysis ......................................................................294
A. Need for and Objectives of the Rule and Form Amendments .............................295
B. Significant Issues Raised by Public Comments ...................................................296
C. Small Entities Subject to the Rule .......................................................................297
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements ......297
1. Annual and Semi-Annual Reports ...................................................................298
2. New Form N-CSR and Website Availability Requirements ...........................299
3. Amendments to Scope of Rule 30e-3 ..............................................................300
4. Investment Company Advertising Rules .........................................................300
5. Inline XBRL Data Tagging .............................................................................301
E. Agency Action to Minimize Effect on Small Entities .........................................302
VII. Statutory Authority .........................................................................................................305
VIII. TEXT OF PROPOSED RULES AND FORM AMENDMENTS .................................306
5
I.
INTRODUCTION AND BACKGROUND
The Commission is adopting rule and form amendments that are designed to require
mutual funds and exchange-traded funds (“ETFs”) to transmit concise and visually engaging
annual and semi-annual reports to shareholders.5 The updated approach to funds’ shareholder
reports will highlight key information that is particularly important for retail investors to
assess and monitor their fund investments.6 Other, more detailed information that currently
appears in funds’ shareholder reports will be made available on a website that the shareholder
report specifies, filed with the Commission on EDGAR, and delivered to investors free of
charge in paper or electronically upon request. These final rules are designed to modernize
funds’ shareholder reports so these reports will better serve the needs of fund investors—
particularly retail investors.7 The final rules will require a disclosure approach that emphasizes
clearly and concisely the information that is particularly useful to a retail audience, will
encourage disclosure techniques that promote effective communication, and will continue to
make available information that historically has appeared in shareholder reports but that may
be more relevant to financial professional and other investors who desire more in-depth
information.
5
For purposes of this release, the term “fund” generally refers to an open-end management investment
company registered on Form N-1A or a series thereof, unless otherwise specified. Mutual funds and
most ETFs are open-end management investment companies registered on Form N-1A. An open-end
management investment company is an investment company, other than a unit investment trust or faceamount certificate company, that offers for sale or has outstanding any redeemable security of which it
is the issuer. See sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a5(a)(1)].
6
This release refers to funds’ annual and semi-annual shareholder reports as “annual reports” and “semiannual reports” respectively, and collectively as “shareholder reports.”
7
“EDGAR” is the Commission’s Electronic Data, Gathering, Analysis, and Retrieval system.
6
This approach is designed to alleviate concerns that fund retail investors currently may
receive, and find difficult to use, shareholder reports that are lengthy, complex, and not wellsuited to their needs.8 Investors’ inability to understand or use shareholder report disclosure
efficiently may impede their ability to monitor their investments and lead to investors
maintaining investments in funds that may not be aligned with their investment goals. The
final rules’ approach for shareholder reports is a continuation of the Commission’s initiatives
designed to promote clear and concise disclosure for fund investors.9 It responds to the
preferences investors have expressed, over the years and in response to the proposed rules.10
This approach also builds on a similar “layered” disclosure approach that most funds use to
provide prospectus information tailored to investors’ informational needs.11
In August 2020, the Commission proposed rule and form amendments that would
require a layered disclosure framework for funds’ shareholder reports that is substantially
similar to the framework we are adopting under the final rules.12 The Commission also
proposed to address the means by which shareholder reports are transmitted to fund investors.
8
See 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, Investment Company Act Release No. 33963 (Aug. 5, 2020) [85
FR 70716 (Nov. 5, 2020)] (“Proposing Release”) at nn.30 and 32, and accompanying text.
9
See, e.g., Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End
Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74
FR 4545 (Jan. 26, 2009)] (“2009 Summary Prospectus Adopting Release”); Investment Company
Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870
(Nov. 18, 2016)] (“Investment Company Reporting Modernization Final Rules”); Form CRS
Relationship Summary; Amendments to Form ADV, Investment Advisers Act Release No. 5247 (June
5, 2019) [84 FR 33492 (July 12, 2019)]; Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts, Investment Company Act Release No.
33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)] (“Variable Contract Summary Prospectus
Adopting Release”).
10
See, e.g., 2009 Summary Prospectus Adopting Release, supra footnote 9; see also infra section I.A.3.
11
See infra section I.A.2.
12
See Proposing Release, supra footnote 8.
7
To ensure that all fund investors would experience the anticipated benefits of the proposed
new tailored disclosure framework, the Commission proposed to amend the scope of rule 30e3—the rule that currently permits investment companies to use a “notice and access” approach
to transmitting shareholder reports—to exclude open-end funds. Instead, funds would have to
provide the reports directly to shareholders. In addition to addressing shareholder report
contents and transmission, the Commission also proposed amendments to the Commission’s
investment company advertising rules that were designed to promote more transparent and
balanced statements about investment costs. The proposal also included a proposed new
alternative approach to satisfy prospectus delivery requirements for existing fund investors
(proposed new rule 498B) and proposed amendments to funds’ prospectus fee and risk
disclosure requirements.
The Commission received comment letters on the proposal from a variety of
commenters, including funds and investment advisers, law firms, other fund service providers,
investor advocacy groups, professional and trade associations, and interested individuals.13
Many commenters supported the proposed use of layered disclosure in funds’ shareholder
reports.14 Some recommended enhancements and alternatives to certain areas of the proposed
shareholder reports, with respect to their content as well as scope.15 While many commenters
expressed concern regarding the proposed amendments to rule 30e-3, others supported the
13
The comment letters on the Proposing Release (File No. S7-09-20) are available at
https://www.sec.gov/comments/s7-09-20/s70920.htm.
14
See, e.g., Comment Letter of Mutual Fund Directors Forum (Jan. 4, 2021) (“Mutual Fund Directors
Forum Comment Letter”); Comment Letter of SIFMA (Dec. 22, 2020) (“SIFMA Comment Letter”).
15
Comments on particular aspects of the proposed rules’ scope, as well as the proposed shareholder report
contents, are discussed in detail in sections II.A-B below.
8
Commission’s proposed approach.16 Comments on proposed rule 498B were mixed, with
some commenters expressly supporting the proposal, some supporting it with modifications,
and others directly opposing it.17 Comments on the proposed prospectus fee and risk
disclosure amendments were similarly mixed.18 Finally, while a number of the commenters
that addressed the proposed advertising rule amendments supported them, some stated that the
proposed amendments were not necessary in light of Financial Industry Regulatory Authority
(“FINRA”) rules addressing fee and expense information in retail communications or
suggested that the Commission modify the scope of the proposed amendments.19
After considering the comments on the proposal and as discussed in more detail
below, we are adopting rule and form amendments that would effectuate the proposed layered
disclosure approach for funds’ shareholder reports, with modifications to the proposed
reports’ contents and scope in response to comments and to enhance disclosure effectiveness.
We are also adopting—with targeted clarifying changes, but otherwise substantially as
proposed—the proposed amendments to exclude open-end funds from the scope of rule 30e-3,
as well as the proposed amendments to the investment company advertising rules. As
discussed more fully below, we are not adopting proposed rule 498B or the proposed
amendments to funds’ prospectus fee and risk disclosure requirements.
16
See infra section II.E.1.
17
See infra footnotes 68-72 and accompanying text.
18
See infra footnotes 76-79 and 83-84 and accompanying text.
19
See infra sections II.G.1-2; footnote 534 (providing FINRA rule 2210’s definitions of retail
communications and correspondence).
9
A.
Regulatory Context, and Developments and Analysis Informing Final
Rules
1.
Fund Shareholder Reports—Regulatory Context
Fund shareholders receive shareholder reports on a semi-annual basis.20 These reports
include detailed information about a fund’s operations over a given half- or full-year period.
The Investment Company Act, as well as Commission rules, prescribe the content
requirements for funds’ shareholder reports.21 Shareholder report contents include, among
other items: information about fund expenses and performance, portfolio holdings, funds’
financial statements and financial highlights (which are audited in annual reports),
information about a fund’s board of directors and management, results of shareholder votes,
and instructions on how to access additional information, including information regarding the
fund’s proxy voting record, code of ethics, and quarterly portfolio holdings.22 Certain of this
information, including fund performance information, is required to appear only in annual
reports. Some funds also supplement this with information that is not required by Commission
rules or forms, such as a president’s letter and general market commentary.23
20
See section 30(e) of the Investment Company Act [15 U.S.C. 80a-29(e)]; current and amended rule 30e1 under the Investment Company Act [17 CFR 270.30e-1]. A fund or an intermediary may transmit the
shareholder report to an investor. Most fund investors hold their fund investments as beneficial owners
through accounts with intermediaries. As a result, intermediaries commonly assume responsibility for
distributing fund shareholder reports to beneficial owners. See Optional Internet Availability of
Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (June 5, 2018)
[83 FR 29158 (June 22, 2018)] (“Rule 30e-3 Adopting Release”), at paragraph accompanying n.274.
21
See section 30(e) of the Investment Company Act; see also current and amended rule 30e-1; Item 27 of
current Form N-1A and Item 27A of amended Form N-1A (addressing the contents of open-end fund
shareholder reports).
22
See Proposing Release, supra footnote 8, at nn.14-17 and accompanying text.
23
See, e.g., id. at n.18 and accompanying text.
10
Many mutual funds and ETFs are organized as single registrants with several series
(sometimes referred to as portfolios).24 From an investor’s perspective, investing in a series
provides the same general experience as investing in a fund that is not organized in this way—
each series has its own investment objectives, policies, and restrictions, and the Federal
securities laws and Commission rules often treat each series as a separate fund.25 Series of a
registrant are often marketed separately, without reference to other series or to the registrant’s
name.
In addition, a single fund or series can have multiple share classes.26 Share classes
typically differ based on fee structure, with each class having a different sales load and
distribution and/or service fee. Currently, fund registrants may prepare a single shareholder
report that covers multiple series, as well as multiple share classes of each series.
Fund shareholders currently receive shareholder reports in paper or electronically,
depending on their preferences.27 We understand that shareholders electing electronic delivery
24
See sections 18(f)(1) and (2) of the Investment Company Act [15 U.S.C. 80a-18(f)(1) AND (2)]; 17
CFR 270.18f-2 (rule 18f-2 under the Investment Company Act).
25
See, e.g., 17 CFR 270.22c-2(c)(2); 17 CFR 270.22e-4(a)(5); General Instruction A to Form N-1A
(defining “fund” to mean a registrant or a separate series of the registrant).
26
See 17 CFR 270.18f-3 (rule 18f-3 under the Investment Company Act).
27
See Proposing Release, supra footnote 8, at nn.21-22 and accompanying text; see also Use of Electronic
Media for Delivery Purposes, Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR
53458 (Oct. 13, 1995)] (“Electronic Media 1995 Release”) (providing Commission views on the use of
electronic media to deliver information to investors, with a focus on electronic delivery of prospectuses,
annual reports, and proxy solicitation materials); Use of Electronic Media by Broker-Dealers, Transfer
Agents, and Investment Advisers for Delivery of Information, Investment Company Act Release No.
21945 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (“Electronic Media 1996 Release”); Use of
Electronic Media, Investment Company Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4,
2000)] (“Electronic Media 2000 Release”).
11
of fund disclosure materials typically receive an email that contains a link to where the
materials are available online.
For those shareholders who have not elected to receive shareholder reports
electronically, funds currently may rely on rule 30e-3 to satisfy shareholder report
transmission requirements. If a fund chooses to rely on this rule, a shareholder does not
receive paper shareholder reports directly, but instead receives paper notices that a
shareholder report is available at an identified website address.28 Nonetheless, funds relying
on rule 30e-3 are required to deliver a paper copy of a shareholder report to any person
requesting such a copy, and a fund may no longer rely on rule 30e-3 with respect to any
shareholder who has notified the fund (or relevant financial intermediary) that the shareholder
wishes to receive paper copies of shareholder reports.
The costs of delivering prospectuses and shareholder reports, including printing and
mailing costs and processing fees, are generally fund expenses borne by shareholders.
2.
Developments Supporting Layered Disclosure Approach to Fund
Shareholder Reports.
The Commission’s proposed layered disclosure approach to funds’ shareholder reports
builds on decades of experience with layered fund disclosure, as well as the confluence of two
other disclosure-related developments that we believe support further reliance on the use of
28
See current rule 30e-3 [17 CFR 270.30e-3]; Rule 30e-3 Adopting Release, supra footnote 20.
12
layered disclosure—the growing length and complexity of shareholder reports over time, and
the internet’s increasingly important role in maximizing investor access to information.
The Commission’s rules permitting the use of summary prospectuses both recognize
investors’ preferences for concise and engaging disclosure of key information and ensure that
additional information that may be of interest to some investors is available through a layered
approach to disclosure.29 These rules generally permit funds to provide summary prospectuses
to investors that include “streamlined and user-friendly information that is key to an
investment decision,” with more-detailed information that may be of interest to some
investors available online.30 We believe that these initiatives have benefitted investors, and we
estimate that approximately 92% of funds use summary prospectuses.31 The Commission has
not previously taken comprehensive steps to create a layered disclosure framework for funds’
shareholder reports.32
Funds’ shareholder reports generally have become longer and more complex over the
years. This trend has several sources. The Commission’s rules have required funds to include
29
See supra footnotes 10-11 and accompanying text; see also Variable Contract Summary Prospectus
Adopting Release, supra footnote 9.
30
See 2009 Summary Prospectus Adopting Release, supra footnote 9, at section I. The vast majority of
funds provide: (1) a summary prospectus to investors in connection with their initial investment
decision; and (2) more-detailed information that may be of interest to some investors, which is available
online in the form of the “statutory prospectus” and Statement of Additional Information (“SAI”).
31
See Proposing Release, supra footnote 8, at n.81 and accompanying text. We estimate that as of
December 31, 2021, approximately 92% of mutual funds and ETFs use a summary prospectus. This
estimate is based on data on the number of mutual funds and ETFs that filed a summary prospectus in
2021 in EDGAR (10,876) and the staff’s estimate of the total number open-end funds, including ETFs,
registered on Form N-1A (11,840).
32
See Proposing Release, supra footnote 8, at n.83 and accompanying text (noting that the Commission
has, however, adopted rules that permit streamlined disclosure of portfolio holdings in funds’
shareholder reports).
13
additional information over the past several decades, and funds commonly voluntarily provide
additional information beyond that which is required, including information about general
economic conditions, fund performance, and services provided to shareholders.33 The ability
to include multiple series, and multiple share classes of each series, in a single report also
increases these reports’ length and complexity. Based on staff analysis, the average annual
report is approximately 134 pages long, and the average semi-annual report is 116 pages
long.34 The length can vary substantially, however. Staff has observed annual reports ranging
in length from 16 pages to more than 1,000 pages. Most reports that are between 22 and 45
pages long tend to cover a single series.35
These trends have been accompanied by internet technology that has continued to
evolve, investors’ increased access to the internet, and the Commission continuing to
recognize the role of the internet in providing disclosure materials and other information to
investors.36 For example, in 2021, approximately 95% of households owning mutual funds
had internet access, while only 68% of these households had internet access in 2000.37 Further
advances in technology, including increasing use of mobile devices to access information, can
make it even easier for funds and intermediaries to communicate with investors and to provide
interactive or customizable information. We understand that funds continue to explore
33
See id. at nn.84-86 and accompanying text.
34
These figures are based on a 2020 staff review that included a sample of reports from large, mid-sized,
and small funds that were available on fund websites.
35
See id.
36
See Proposing Release, supra footnote 8, at nn.75-78 and accompanying text.
37
See Investment Company Institute, 2022 Investment Company Fact Book: A Review of Trends and
Activities in the Investment Company Industry (2022) (“2022 ICI Fact Book”), available at
https://www.ici.org/system/files/2022-05/2022_factbook.pdf, at Figure 7.16.
14
additional ways to use technology to communicate with investors.38 Against this backdrop, the
Commission has recognized that modernizing the manner in which funds and others make
information available to investors allows them to leverage the benefits of technology and
reduce fund costs while considering the needs and preferences of investors.39 Continued
improvements in presenting information electronically, as well as investors’ continually
growing comfort with the internet and electronic media as a means of accessing fund
information, have been integral in making the use of layered disclosure in the summary
prospectus context a success, and we believe these factors will similarly make layered
disclosure an effective tool in the context of funds’ shareholder reports.
3.
Evidence of Investor Preferences Regarding Fund Disclosure
The Proposing Release discussed evidence that was available to the Commission at the
time of the proposal showing that investors generally prefer concise, layered disclosure. The
proposal considered feedback that the Commission received in response to a June 2018
request for comment seeking feedback on retail investors’ experience with fund disclosure
and on ways to improve fund disclosure (the “Fund Investor Experience RFC”).40 In the
proposal, the Commission stated that the Fund Investor Experience RFC commenters’ overall
38
See, e.g., infra footnotes 356-358 and accompanying paragraph.
39
See Proposing Release, supra footnote 8, at n.79 and accompanying text.
40
See Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company
Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11, 2018)] (“Investor Experience RFC”).
The comment letters on the Investor Experience RFC (File No. S7-12-18) are available at
https://www.sec.gov/comments/s7-12-18/s71218.htm. This feedback generally showed that retail
investors prefer concise, layered disclosure and feel overwhelmed by the volume of information they
currently receive, with some individual investors specifically addressing and supporting a more concise,
summary shareholder report. See Proposing Release, supra footnote 8, at nn.28-30 and accompanying
text.
15
preference for summary disclosure is generally consistent with other information the
Commission has received—through investor testing conducted prior to the proposal, surveys,
and other information-gathering—that similarly indicates that investors strongly prefer
concise, layered disclosure.41 The Commission also discussed feedback from investors
responding to the Fund Investor Experience RFC, as well as investors participating in certain
past quantitative and qualitative investor testing initiatives on the Commission’s behalf,
expressing preferences for the inclusion of more tables, charts, and graphs in fund disclosure
and supporting the conclusion that investors view funds’ existing shareholder reports as too
lengthy and complicated.42
Feedback on investors’ preferences that the Commission received in response to the
Proposing Release was consistent with the Commission’s understanding of investors’
preferences that the Proposing Release described, with the vast majority of individuals who
commented on the proposal expressing support for the length, format, and content of the
proposed streamlined annual report.43 Industry commenters expressed support for the
proposed layered disclosure approach.44 Industry commenters similarly supported the use of
41
See id. at n.31 and accompanying text.
42
See id. at n.32-37 and accompanying text.
43
See infra footnotes 47-51 and accompanying text.
44
See, e.g., Comment Letter of CFA Institute (Dec. 30, 2020) (“CFA Institute Comment Letter”);
Comment Letter of Fidelity (Jan. 4, 2021) (“Fidelity Comment Letter”); Mutual Fund Directors Forum
Comment Letter.
16
streamlined shareholder documents and reducing the length and complexity of information
shareholders receive, ultimately leading to an improved overall investor experience.45
Comments from individual investors similarly suggested that the proposed shareholder
report approach was in line with their preferences in terms of the length of material and
content areas that investors find to be useful to monitor fund investments. To help market
participants understand the proposed shareholder report, the Commission published a
hypothetical annual report to illustrate what a more concise, tailored shareholder report could
look like, as well as a feedback flier that investors could use to provide their views on the
hypothetical report.46 The Commission received feedback flier responses from individual
investors as well as academics. Of the respondents who answered the feedback flier question,
“Overall, would the sample shareholder report be useful in monitoring your fund
investments?” the vast majority responded positively.47 The vast majority of respondents who
answered a question in the feedback flier about the length of the hypothetical report responded
that the length was “about right.”
One comment letter also included data that this commenter had compiled about
individual investors’ preferences as expressed in response to the hypothetical report and
45
See SIFMA Comment Letter; see also Comment Letter of Teachers Insurance and Annuity Association
of America (Jan. 4, 2021) (“TIAA Comment Letter”); Comment Letter of FS Investments (Jan. 4, 2021)
(“FS Investments Comment Letter”).
46
See Proposing Release, supra footnote 8, Appendix A (“Hypothetical Streamlined Shareholder Report”)
available at https://www.sec.gov/files/final_2020_im_annual-shareholder%20report.pdf and Appendix
B (“Shareholder Report Feedback Flier”), available at https://www.sec.gov/rules/proposed/2020/imshareholder-report-ff.html.
47
Commenters also expressed views about the relative usefulness of the different proposed content areas
as illustrated in the hypothetical report, and these comments are described in more detail in section
II.A.2 infra.
17
feedback flier that the Commission published.48 This commenter engaged a market research
firm to provide the feedback flier to 2,000+ mutual fund and/or ETF investors and to collate
responses from these investors. The commenter reported that, based on this analysis, 91% of
respondents said that the hypothetical streamlined annual and semi-annual reports would be
useful in monitoring their fund investments.49 This analysis found that 78% of respondents
said that the length was “about right,” with 16% saying that the length was “too long” and 6%
saying that the length was “too short.”
In addition to feedback flier responses, the Commission also received traditional
comment letters from individuals, who similarly expressed broad support for the proposed
approach to fund shareholder reports. One remarked that the hypothetical report was “much
better than what we have now.”50 Several likewise stated that they supported the proposed
streamlined shareholder report, with one commenting, “I think it contains the relevant
information and would be more useful to investors than the current annual report.”51 One
48
Comment Letter of Broadridge Financial Solutions, Inc. (Jan. 4, 2021) (“Broadridge Comment Letter”).
49
The Broadridge Comment Letter stated, “Half of the participants were randomly assigned to view the
SEC’s hypothetical streamlined annual shareholder report, and the other half viewed a streamlined
semi-annual report.” The Commission only published a hypothetical streamlined annual report and did
not also publish a hypothetical semi-annual report. The hypothetical semi-annual report prototype that
Broadridge included in its comment letter appears to have been created by Broadridge, based on the
hypothetical annual report that the Commission published.
50
Comment Letter of James J. Angel (Jan. 6, 2021) (“Angel Comment Letter”).
51
Comment Letter of Lisa Barker (Jan. 3, 2021) (“Barker Comment Letter”); see also Comment Letter of
Ryan O’Malley (Dec. 29, 2021) (“O’Malley Comment Letter”) (“I generally like the idea of a brief
shareholder report.”); Comment Letter of Tom Riker (June 2, 2021) (“Riker Comment Letter”) (“I
support the streamlined shareholder report proposal.”); see also Comment Letter of Mo Abdullah (Oct.
7, 2022) (“Abdullah Comment Letter”) (“The proposed shareholder report seems like the right mix of
information.”).
18
individual, however, expressed that “more should be done to push transparency, plain English
and brevity of disclosure.”52
The Commission also received feedback on individuals’ preferences and views
through qualitative investor interviews and a study on performance benchmarks that the
Commission’s Office of the Investor Advocate (“OIAD”) designed (the “OIAD Benchmark
Study”).53 The qualitative interviews aimed to generate hypotheses about certain content areas
in a fund shareholder report that may cause confusion and lead to impediments to investor
understanding of key information. These interviews focused in particular on investors’
understanding of fund performance disclosure, as displayed in connection with broad-based
and narrow performance benchmark indexes. The objective of the qualitative interviews was
to provide background for a more extensive quantitative experimental study. In addition,
OIAD recommended additional research devoted to certain other issues that arose during the
qualitative interviews, including exploring ways of explaining share classes to investors, to
the extent that share classes are a necessary component of fund disclosures.54
Following the qualitative interviews, OIAD conducted a study on the impact of fund
performance benchmarks on investor decision-making. This research examined market data,
and the results of a large behavioral experiment sampling a general population, to understand
how fund companies employ benchmarks and how individuals respond to the presentation of
benchmarks. The OIAD Benchmark Study, which is discussed in more detail below, analyzes
52
Comment Letter of David Marlboro (Dec. 20, 2020) (“Marlboro Comment Letter”).
53
See Alycia Chin, Jonathan Cook, Jay Dhar, Steven Nash, and Brian Scholl, How Do Consumers
Understand Investment Quality? The Role of Performance Benchmarks, Office of the Investor Advocate
Working Paper 2022-01 (“Chin, et al.”), available at https://www.sec.gov/files/performancebenchmarks-2022-01.pdf.
54
See id. at Appendix B; see also discussion on fund share classes as section II.A.1.b infra.
19
individuals’ responses to benchmarks, including how individuals respond to benchmarks that
outperform and underperform the fund, and examines whether there is a differential impact in
performance graphs’ use of broad versus narrow benchmarks on a fund’s attractiveness.
Each of these avenues offering evidence of investor preferences and behaviors in
response to fund disclosure has provided important context and support for the final rules’
approach to fund shareholder reports. Staff will evaluate investor preferences and behaviors as
they evolve in the future, including through mechanisms such as investor testing and investor
surveys where appropriate, taking into account relevant developments in connection with fund
practices, investors’ preferences, the fund industry, and financial markets in connection with
any future regulatory initiatives.
4.
Investment Company Advertisements, and Developments Affecting
Fund Marketing Practices
Many registered investment companies and business development companies
(“BDCs”) prepare advertising materials, which can include materials in newspapers,
magazines, radio, television, direct mail advertisements, fact sheets, newsletters, and on
various web-based platforms. These advertising materials are subject to certain requirements
under Commission rules. The primary Commission rules addressing investment company
advertising include rules 482 and 433 under the Securities Act, rule 34b-1 under the
Investment Company Act, and rule 156 under the Securities Act (the term “investment
company advertising rules” in this release refers to this set of rules).
20
Rule 482 establishes certain content, legend, and filing requirements for investment
company advertisements.55 Many of the rule’s content requirements focus on advertisements
that include performance data of certain types of funds, including mutual funds, ETFs,
insurance company separate accounts registered as unit investment trusts (“UITs”) , and
money market funds.56
Rule 34b-1 applies to supplemental sales literature (i.e., sales literature that is preceded
or accompanied by a prospectus) by any registered open-end company, UIT, or registered
face-amount certificate company. Rule 34b-1 includes many of the same requirements as rule
482, including the same performance-related requirements.57
Rule 156 states that whether or not a particular description, representation, illustration,
or other statement involving a material fact is misleading depends on evaluation of the context
in which it is made. The rule discusses several pertinent factors that should be weighed in
considering whether a particular statement involving a material fact is or might be misleading
in investment company sales literature, including rule 482 advertisements and supplemental
sales literature.58 Rule 156 applies to sales literature used by any person to offer to sell or
55
Investment company advertisements typically are prospectuses for purposes of the Securities Act. Rule
482 provides a framework in which investment company advertisements are deemed to be “omitting
prospectuses” that may include information the substance of which is not included in a fund’s statutory
or summary prospectus. See Proposing Release, supra footnote 8, at n.653-654 and accompanying text.
Instead of relying on rule 482, registered closed-end funds and BDCs may use free writing prospectuses
in accordance with rule 433 and certain other Commission rules for advertising purposes. See id. at
nn.656-676 and accompanying text.
56
See id. at nn.655-666.
57
See id. at nn.659-661 and accompanying text. The Commission adopted rule 34b-1 to help prevent
performance claims in supplemental sales literature from being misleading and to promote
comparability and uniformity among supplemental sales literature and rule 482 advertisements.
58
See id. at n.662-663 and accompanying text.
21
induce the sale of securities of any investment company, including registered investment
companies and BDCs.
Separately, rules issued by FINRA regulating members’ communications with the
public provide an important source of advertising requirements and guidance for investment
companies, as underwriters and/or distributors of investment company shares are commonly
FINRA members.59 FINRA rule 2210, “Communications with the Public,” includes both
general and specific standards for communications with the public.60
In recent years, investment companies increasingly have been marketing themselves
on the basis of cost in an effort to attract investors. For instance, we have observed some
funds calling themselves “no-expense” or “zero-expense” funds, or emphasizing their low
expense ratios, despite the fact that investors may incur other investment costs.61 Comments
that the Commission received on the Proposing Release similarly recognized “the trend for
some funds to market their investment products based on claims of low or no fees.”62
59
FINRA is a self-regulatory organization composed of brokers and dealers registered under the Exchange
Act.
60
Non-money market fund open-end funds’ retail communications and correspondence (as defined in
FINRA rule 2210, see infra footnote 515) that include performance information also must include fee
and expense information that includes: (1) the fund’s maximum sales charge; and (2) the total annual
fund operating expense ratio, gross of any fee waivers or expense reimbursements (i.e., ongoing annual
fees). These funds’ standardized performance information, sales charge, and total annual fund operating
expense ratio also must be set forth prominently. FINRA rule 2210(d)(5). In addition, FINRA rule 2210
applies to the retail communications of BDCs. See FINRA Rule 2210 Interpretative Guidance at C.1,
available at https://www.finra.org/rules-guidance/guidance/faqs/advertising-regulation#b2 (responding,
in part, that firms must file with FINRA retail communications concerning BDCs that are registered
under the Securities Act).
61
A fund’s expense ratio is the figure in its prospectus fee table that represents the fund’s total annual
operating expenses, expressed as a percent of the fund’s average net assets. See also Proposing Release,
supra footnote 8, at section II.H.1.c (discussing costs that the expense ratio does not reflect).
62
See CFA Institute Comment Letter; see also Comment Letter of the Consumer Federation of America
(Jan. 4, 2021) (“Consumer Federation of America II Comment Letter”) (discussing concerns that
accompany funds being “increasingly marketed on the basis of costs”).
22
Investors may incur certain costs and fees that, despite providing revenue to the fund’s adviser
and its affiliates (or other parties), are not direct costs of investing in a fund and so are not
reflected in a fund’s expense ratio, and therefore may be less transparent or clear to certain
investors.63 Additionally, a fund may appear to be a “zero expense” fund because its adviser is
waiving fees or reimbursing expenses for a period of time, but the fund will incur fees and
expenses once that arrangement expires. In these and other cases, we are concerned that,
absent appropriate explanations or limitations, investors may believe incorrectly that there are
no expenses associated with investing in the fund.
While investment company advertising rules currently place limits on how a fund may
present its performance to promote comparability and prevent potentially misleading
advertisements, these rules generally do not prescribe the presentations of fees and expenses
in advertisements to address similar concerns about comparability or potentially misleading
information.64 Addressing fee comparability in fund advertisements is critical both in light of
63
For example, an investor may incur intermediary costs, such as wrap fees that an investor pays to the
sponsor of a wrap fee program (which may be the fund’s adviser or its affiliates) for investment advice,
brokerage services, administrative expenses, or other fees and expenses. See SEC Division of
Examinations, Observations from Examinations of Investment Advisers Managing Client Accounts
That Participate in Wrap Fee Programs (July 21, 2021), available at https://www.sec.gov/files/wrapfee-programs-risk-alert_0.pdf. All staff statements represent the views of the staff. They are not a rule,
regulation, or statement of the Commission. The Commission has neither approved nor disapproved
their content. These staff statements, 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. As
another example, investment company advertisements that advertise low investment costs, based solely
on a fund’s prospectus fee table, might not reflect or recognize other categories of costs that may be
supplementing a traditional management fee and/or may affect the returns an investor experiences (e.g.,
intermediary costs). See Proposing Release, supra footnote 8, at paragraph accompanying n.685.
64
Commission rules require a fund to disclose maximum sales loads in some advertisements, and FINRA
rules also limit how a fund advertisement may describe investment costs in some respects, but these
limitations currently apply only to a subset of fund advertisements. See Proposing Release, supra
footnote 8, at section II.H.2.
23
current trends in fund marketing and because of the significant long-term effects that fund fees
and expenses can have on investment returns.
B.
Overview of the Final Rules
1.
Final Rules’ Principal Elements
The final rules consist of the following principal elements:
Shareholder Reports Tailored to the Needs of Retail Shareholders: Under the new
framework, shareholders will receive concise and visually engaging annual and semiannual reports designed to highlight information that we believe is particularly important
for retail shareholders to assess and monitor their fund investments on an ongoing basis.
This information will include—among other things—fund expenses, performance, and
portfolio holdings. Funds will have the flexibility to make electronic versions of their
shareholder reports more user-friendly and interactive. In addition, funds will be required
to tag the information in their shareholder reports using Inline XBRL structured data
language.
Availability of Additional Information on Form N-CSR and Online: Information
that may be more relevant to financial professionals and other investors who desire more
in-depth information will be made available online and delivered free of charge in paper or
electronically upon request. This information also will be filed on a semi-annual basis
with the Commission on Form N-CSR. This information includes, for example, the
schedule of investments and other financial statement elements. Shareholder reports will
contain cover page legends directing investors to websites containing this information.
Accessibility-related requirements that we are adopting will help ensure that investors can
easily reach and navigate the information that appears online.
24
Amendments to Scope of Rule 30e-3 to Exclude Funds Registered on Form N-1A:
To ensure that all fund investors will experience the anticipated benefits of the new
tailored shareholder reports, we are amending the scope of rule 30e-3 to exclude open-end
funds. This amendment ensures shareholders in open-end funds will directly receive the
new tailored annual and semi-annual reports, either in paper or (if the shareholder has so
elected) electronically.65 This change reflects the Commission’s continuing efforts to
improve the ways investors receive fund disclosure. We believe that this approach
represents a more effective means of improving investors’ ability to access and use fund
information, and of reducing expenses associated with printing and mailing, than
continuing to permit open-end funds to rely on rule 30e-3.
Fee and Expense Information in Investment Company Advertisements: Finally, we are
adopting amendments that are designed to respond to developments that we have observed in
investment company advertising. These amendments require that presentations of investment
company fees and expenses in advertisements and sales literature be consistent with relevant
prospectus fee table presentations and be reasonably current. These advertising rule
amendments affect all registered investment company and BDC advertisements that include
fee and expense figures, and where the investment company presents total annual expense
figures in their prospectuses. The amendments therefore are not limited to open-end fund
advertisements. The amendments also address representations of fees and expenses that could
be materially misleading.
65
See infra footnote 618 and accompanying text (discussing increase in e-delivery requests since the
beginning of the COVID-19 pandemic).
25
2.
Other Aspects of Proposal
After considering comments, we are not taking final action on several aspects of the
proposal at this time: (1) proposed new rule 498B, which would have provided a new
alternative approach to satisfy prospectus delivery requirements for existing fund investors;
and (2) proposed amendments to funds’ prospectus fee and risk disclosure.
Proposed Rule 498B
In lieu of providing annual prospectus updates to existing fund investors, proposed
rule 498B would have provided an alternative approach to keep these investors informed
about their fund investments and updates to their funds that occur year over year.66 Under this
proposed rule, new investors would have received a fund prospectus in connection with their
initial investment in a fund, as they currently do, but funds could have opted into an
alternative approach under which they would not deliver annual prospectus updates to
investors thereafter.67 The proposed layered disclosure framework would instead have relied
on the shareholder report and timely notifications to shareholders to keep investors informed
about their fund investments.
While some commenters generally supported proposed rule 498B, most commenters,
even those who supported the proposed rule, suggested fairly significant modifications.68 A
66
See Proposing Release, supra footnote 8, at section II.F.
67
See section 5(b)(2) of the Securities Act [15 U.S.C. 77e(b)(2)] (generally requiring that a fund or
financial intermediary deliver a prospectus to an investor in connection with a purchase of the fund’s
securities). Because section 5(b)(2) requires funds to deliver a prospectus to an investor purchasing
shares, including existing shareholders who purchase additional shares, funds generally provide annual
updates of prospectuses to all shareholders.
68
See, e.g., Comment Letter of T. Rowe Price Associates, Inc. (Jan. 5, 2021) (“T. Rowe Price Comment
Letter”); Comment Letter of Better Markets, Inc. (Jan. 4, 2021) (“Better Markets Comment Letter”)
(each commenter expressing support for adopting the rule as proposed); see also, e.g., Comment Letter
of the Investment Company Institute (Dec. 21, 2020) (“ICI Comment Letter”); Fidelity Comment
26
number of commenters directly opposed the proposed rule.69 Some of these commenters
expressed concern that existing investors would not continue to receive an updated prospectus
annually.70 Many other opposing commenters also expressed concern about the proposed
requirement to deliver notices of material fund changes.71 Other commenters suggested that
the proposed new approach to satisfying prospectus delivery obligations could increase the
possibility of shareholder litigation (for example, if failing to send a material change notice or
not correctly tracking existing investors could result in prospectus delivery obligations not
being satisfied).72
Improving the fund disclosure framework and investors’ experience with fund
disclosure continues to be an important priority for the Commission, as does the consideration
of how to best help investors make informed investment decisions and monitor their fund
investments. In light of the comments received, which we believe raise issues that merit
further consideration, we are not adopting rule 498B at this time.
Letter; Comment Letter of Tom and Mary (Aug. 12, 2020) (“Tom and Mary Comment Letter”) (each
commenter suggesting modifications to the proposed rule).
69
See, e.g., Comment Letter of Charles Schwab Investment Management, Inc. (Jan. 4, 2021) (“Charles
Schwab Comment Letter”); TIAA Comment Letter.
70
See, e.g., TIAA Comment Letter; Consumer Federation of America II Comment Letter; Broadridge
Comment Letter (discussing data this commenter compiled about individual investors’ preferences
showing that 88% of surveyed investors “prefer the status quo of annual prospectus delivery”).
71
See, e.g., Comment Letter of Dechert LLP (Jan. 4, 2021) (“Dechert Comment Letter”); ICI Comment
Letter; Comment Letter of Stradley Ronon Stevens & Young, LLP (Jan. 15, 2021) (“Stradley Ronon
Comment Letter”); Comment Letter of The Vanguard Group, Inc. (Dec. 22, 2020) (“Vanguard
Comment Letter”); SIFMA Comment Letter; Fidelity Comment Letter.
72
See, e.g., Dechert Comment Letter; Comment Letter of Sidley Austin LLP (Dec. 29, 2020) (“Sidley
Austin Comment Letter”); Comment Letter of the Center for Capital Markets Competitiveness (Jan. 4,
2021) (“Center for Capital Markets Competitiveness Comment Letter”).
27
Proposed Amendments to Funds’ Prospectus Fee Disclosure
The Commission proposed amendments to funds’ prospectus disclosure requirements
to provide greater clarity and more consistent information regarding fund fees and expenses.
The proposal would have replaced the existing fee table in the summary section of funds’
statutory prospectuses with a simplified fee summary, and the Commission also proposed to
simplify the fee example that currently appears in funds’ prospectuses.73 The full, existing fee
table would be moved to the statutory prospectus under the proposal, for use by investors
seeking additional details about fund fees.74 Finally, the proposal would have replaced certain
terms in the current fee table with terms that were designed to be easier to understand by most
investors.75
Comments on the proposed fee summary, simplified example, and proposed new fee
terminology were mixed. Some agreed that investors could benefit from simplified prospectus
fee disclosures and generally supported the proposed approach.76 Several commenters,
however, opposed the inclusion of the fee summary and noted that having multiple different
fee presentations could be confusing for investors and would be burdensome for funds.77 A
number of commenters opposed many of the proposed new terms, stating that they would not
73
See Proposing Release, supra footnote 8, at sections II.H.1.b-e.
74
See id. at sections II.H.1.b-c.
75
See id. at section II.H.1.f.
76
Comment Letter of Morningstar Inc. (Jan. 4, 2020) (“Morningstar Comment Letter”); Comment Letter
of Consumer Federation of America (Dec 15, 2020) (“Consumer Federation of America I Comment
Letter”).
77
See, e.g., SIFMA Comment Letter; Dechert Comment Letter; FS Investments Comment Letter.
28
further investor comprehension and could be more confusing than the current terms.78 Some
commenters also recommended that the Commission should verify the benefits of the
proposed approach through additional investor testing.79
The proposal also included a new approach to disclosing acquired fund fee and
expenses (“AFFE”).80 Currently, all registered investment companies that invest in other
“acquired funds,” including BDCs and private funds that would be investment companies but
for sections 3(c)(1) or 3(c)(7) of the Investment Company Act, disclose AFFE in their
prospectus fee tables.81 AFFE shows the investing fund’s pro rata share of the fees and
expenses of any underlying funds. Under the proposal, a fund that invests less than 10% of the
value of its total fund assets in other funds could disclose AFFE in a footnote to the fee table,
instead of including AFFE as a fee table line item (which is included as a component of the
fund’s bottom-line ongoing annual operating expenses). The proposed new approach to AFFE
disclosure was designed to maintain the benefits of transparent AFFE disclosure and to
provide more consistent disclosure of information related to indirect costs.82
Commenters expressed varying concerns about the proposed AFFE approach. A
number of commenters suggested that the proposed approach to AFFE disclosure would
78
See, e.g., ICI Comment Letter; SIFMA Comment Letter; CFA Institute Comment Letter; Charles
Schwab Comment Letter; Comment Letter of Dimensional Fund Advisors (Jan. 4, 2021) (“Dimensional
Comment Letter”).
79
See, e.g., Consumer Federation of America II Comment Letter; ICI Comment Letter; Dechert Comment
Letter.
80
See Proposing Release, supra footnote 8, at section II.H.1.g.
81
See id. at nn.604-605 and accompanying text.
82
See id. at nn.608-614, and accompanying and following paragraphs.
29
decrease transparency of funds’ AFFE.83 These commenters urged the Commission to retain
the current approach to provide investors full and clear information about funds’ fees and
expenses. Some members of the fund industry generally supported the changes, although
some requested that the proposal be significantly broadened, including suggestions to carve
BDCs out from the definition of “acquired fund” altogether.84
Helping investors more readily understand fund fees and expenses is an important
priority of the Commission. In light of the comments received, which we believe raise issues
that merit further consideration, we are not adopting the proposed changes at this time.
Proposed Amendments to Funds’ Prospectus Risk Disclosure
The Commission also proposed amendments to funds’ prospectus disclosure
requirements that were designed to help investors more readily understand funds’ principal
risks.85 These amendments would have added specificity to the existing requirement that
funds must disclose principal risks in their prospectuses. The proposed amendments clarified
that a “principal” risk is one that would place more than 10% of the fund’s assets at risk and is
83
See, e.g., Consumer Federation of America II Comment Letter; Barker Comment Letter; Morningstar
Comment Letter; Comment Letter of Tom Williams (Aug. 6, 2020) (“Williams Comment Letter”).
84
See, e.g., Comment Letter of the Small Business Investor Alliance (Dec. 4, 2020); Comment Letter of
the Coalition for Business Development (Jan. 4, 2021); ICI Comment Letter; see also, e.g., Final Report
on 2018 SEC Government-Business Forum on Small Business Capital Formation (June 2019), available
at https://www.sec.gov/info/smallbus/gbfor37.pdf (discussing, among other things, forum
recommendations on BDCs and AFFE. The SEC conducts the Government-Business Forum on Small
Business Capital Formation annually. The recommendations contained in this report are solely the
responsibility of Forum participants from outside the SEC, who were responsible for developing them.
The recommendations are not endorsed or modified by the SEC and do not necessarily reflect the views
of the SEC, its Commissioners or any of the SEC’s staff members.).
85
See Proposing Release, supra footnote 8, at section II.H.2.
30
reasonably likely to occur in the future. The proposal also would have required that funds’
description of risks be brief and organized in order of importance.
While some commenters supported the proposed approach, most generally opposed
it.86 Commenters expressed concern about the perceived difficulty and subjectivity of
determining which risks currently or in the future will place more than 10% of the fund’s
assets at risk, as well as ordering risk disclosure, and the potential of increased liability for
funds associated with this.87
Helping investors more readily understand funds’ principal risks is an important
priority of the Commission. In light of the comments received, which we believe raise issues
that merit further consideration, we are not adopting the proposed risk disclosure amendments
at this time.
II.
DISCUSSION
A.
Annual Reports
In order to effectuate the new streamlined shareholder reports for open-end funds, we
are adopting substantially as proposed new Item 27A to Form N-1A to specify the design and
86
See, e.g., Consumer Federation of America II Comment Letter; Comment Letter of NASAA (Jan. 4,
2021) (“NASAA Comment Letter”); Comment Letter of the Americans for Financial Reform Education
Fund (Jan. 4, 2021) (“AFREF Comment Letter”) (each expressing overall support for the changes);
contra ICI Comment Letter; Sidley Austin Comment Letter; Dechert Comment Letter; Comment Letter
of John Hancock (Jan. 4, 2021) (“John Hancock Comment Letter”) (each expressing general
opposition).
87
See, e.g., Sidley Austin Comment Letter; Comment Letter of Federated Hermes (Jan. 4, 2021)
(“Federated Hermes Comment Letter”).
31
content of funds’ annual and semi-annual reports. We also are removing, as proposed, the
provisions in Item 27 of current Form N-1A that relate to annual and semi-annual reports.88
The table below summarizes the contents that funds will include in their annual
reports—or, alternatively, that they will file on Form N-CSR—in comparison to current
shareholder report disclosure requirements.89 While the new content requirements for
shareholder reports that are transmitted in paper will generally be the same as the
requirements for reports that are transmitted electronically (and that appear online or are
accessible through mobile electronic devices), we are adopting, as proposed, instructions that
address electronic presentation and are designed to provide flexibility to enhance the usability
of reports that appear online or on mobile devices.90
TABLE 1: ANNUAL REPORT CONTENTS
Current
Annual
Shareholder
Report
Disclosure
(current Form
provision)
--
Expense example
(Form N-1A Item
27(d)(1))
Description of Amendments
New Rule and Discussed
Form
Below In
Provisions
Add new identifying information to the
beginning of the annual report
Item 27A(b)
of Form N1A
Section
II.A.2.II.A.2.a
Retain in annual report in a more
concise form
Item 27A(c)
of Form N1A
Section
II.A.2.II.A.2.b
88
The final rules generally require funds to reorganize the presentation of currently-required information.
To the extent that any of the amendments require funds to disclose new information other than is
required in section 30(e), such changes are appropriate in the public interest for the reasons discussed
more fully in sections II.A.2 and II.B.1.
89
This release separately discusses the content requirements for funds’ semi-annual reports. See infra
section II.B.
90
See infra section II.A.4
32
Management’s
discussion of
fund
performance
(“MDFP”)
(Form N-1A Item
27(b)(7))
Retain in annual report in a more
concise form
Item 27A(d)
of Form N1A
Section
II.A.2.II.A.2.c
--
Add new fund statistics section to the
annual report
Item 27A(e)
of Form N1A
Section
II.A.2.II.A.2.d
Graphical
representation of
holdings
(Form N-1A Item
27(d)(2))
Retain in annual report
Item 27A(f)
of Form N1A
Section
II.A.2.II.A.2.e
Add new material fund changes section
to the annual report
Item 27A(g)
of Form N1A
Section
II.A.2.II.A.2.f
Retain in annual report in summary
form
Item 27A(h)
of Form N1A
Section
II.A.2.II.A.2.g
The entirety of the currently-required
disclosure would move to Form N-CSR
and would need to be available online
and delivered (in paper or electronic
format) upon request
Item 8 of
Form N-CSR
Include a more general reference to the
availability of additional fund
information in the annual report
Item 27A(i)
of Form N1A
--
Changes in and
disagreements
with accountants
(Form N-1A Item
27(b)(4))
Statement
regarding the
availability of
quarterly
portfolio
schedule, proxy
voting policies
and procedures,
and proxy voting
record
(Form N-1A Item
27(d)(3) through
(5))
33
Section
II.C.2.II.C.1.c
Rule 30e1(b)(2) and
(b)(3)
Section
II.A.2.II.A.2.h
Add provision allowing funds to
optionally disclose in their annual
reports how shareholders may revoke
their consent to householding91
Item 27A(j)
of Form N1A
Section
II.A.2.II.A.2.i
Financial
statements,
including
schedule of
investments
(Form N-1A Item
27(b)(1))
Move to Form N-CSR
Item 7(a) of
Form N-CSR
Section
II.C.1.II.C.1.a
Financial
highlights
(Form N-1A Item
27(b)(2))
Retain certain data points, but generally
move to Form N-CSR
--
91
Would need to be available online and
delivered (in paper or electronic format)
upon request
Would need to be available online and
delivered (in paper or electronic format)
upon request
Results of any
shareholder votes
during the period
(Rule 30e-1(b))
Move to Form N-CSR
Remuneration
paid to directors,
officers, and
others
(Form N-1A Item
27(b)(3))
Move to Form N-CSR
Statement
regarding the
basis for the
board’s approval
of investment
advisory contract
Move to Form N-CSR
Rule 30e1(b)(2) and
(b)(3)
Item 7(b) of
Form N-CSR
Rule 30e1(b)(2) and
(b)(3)
Item 9 of
Form N-CSR
Would need to be available online and
delivered (in paper or electronic format)
upon request
Section
II.C.1.II.C.1.e
Rule 30e1(b)(2) and
(b)(3)
Item 11 of
Form N-CSR
Would need to be available online and
delivered (in paper or electronic format)
upon request
Section
II.C.1II.C.1.d
Rule 30e1(b)(2) and
(b)(3)
Item 10 of
Form N-CSR
Would need to be available online and
delivered (in paper or electronic format)
upon request
Section
II.C.1.C.1.b
Section
II.C.1.II.C.1.f
Rule 30e1(b)(2) and
(b)(3)
“Householding” permits funds to deliver a single copy of a prospectus, proxy materials, and a
shareholder report to investors who share the same address and meet certain other requirements in order
to avoid duplication of materials to investors who invest in funds through a variety of individual and
family accounts.
34
(Form N-1A Item
27(d)(6)(i))
Management
information and
statement
regarding
availability of
additional
information
about fund
directors
(Form N-1A Item
27(b)(5) and (6))
Remove from shareholder reports, but
information would remain available in a
fund’s SAI, which is available online or
delivered upon request
Section II.D
Statement
regarding
liquidity risk
management
program
(Form N-1A Item
27(d)(6)(ii))
Remove from shareholder reports
Section II.D
Rule 30e-3
disclosure, if
applicable
(Form N-1A Item
27(d)(7))
Remove from shareholder reports
Section II.E
Funds have
discretion to
provide other
information in
their shareholder
reports (e.g.,
president’s letter)
Disclosures in the annual report are
restricted to that which is required or
permitted under Item 27A of Form N1A (other materials may accompany the
transmission of the report, so long they
meet the prominence requirements for
materials that accompany the report)
Instructions 1
and 12 to
Item 27A(a)
of Form N1A
Section II.A.1.c
1.
Scope of Annual Report Disclosure, and Registrants Subject to
Amendments
a.
Series Scope
We are adopting, as proposed, the requirement that funds must prepare separate annual
reports for each series of a fund. As a result, under the final rules, a fund shareholder will
receive an annual report that addresses only the series in which that shareholder is invested.
35
Many mutual funds and ETFs are organized as single registrants with several series
(sometimes referred to as portfolios).92 Currently, fund registrants may prepare a single
shareholder report that covers multiple series. As the Commission stated in the Proposing
Release, we believe this approach contributes to the length and complexity of shareholder
reports.93 Because the length and complexity associated with multi-series shareholder reports
are inconsistent with our goal of creating concise shareholder report disclosure that
shareholders can more easily use to assess and monitor their ongoing fund investments, the
final rules will require fund registrants to prepare separate annual reports for each series of the
fund.94 We believe a shareholder is more likely to read a shareholder report targeted to that
shareholder’s fund as opposed to a multi-series report that may also cover a number of other
funds.
Most commenters supported this proposed requirement, stating that it would
significantly reduce the length of the report and make it easier for shareholders to navigate.95
92
See Proposing Release, supra footnote 8, at nn.108-110 and accompanying text (noting that each series
has its own investment objectives, policies and restrictions and that the Federal securities laws and
Commission rules often treat each series as a separate fund).
93
See Proposing Release, supra footnote 8, at text accompanying n.111 (providing examples of how the
current presentation of multiple series within a single shareholder report may confuse shareholders); see
also supra at text accompanying footnotes 8 and 29.
94
See Instruction 4 to Item 27A(a) of amended Form N-1A. As proposed, fund registrants could continue
to include multiple shareholder reports that cover different series in a single Form N-CSR report filed
on EDGAR under the final rules.
95
See, e.g., CFA Institute Comment Letter; Morningstar Comment Letter; NASAA Comment Letter;
Comment Letter of Prof. William A. Jacobson, Cornell Law School (Dec. 29, 2020) (“Cornell Law
School Comment Letter”); Barker Comment Letter; see also Comment Letter of Donnelley Financial
Solutions (Dec. 30, 2020) (“DFIN Comment Letter”) (supporting this requirement and stating that, if
the Commission were to allow certain series to be bundled into a single shareholder report, the
Commission should at a minimum require all information for each series appear together to eliminate
the need for a shareholder to navigate the entire report to review all the information on a single series).
36
Some commenters, however, urged the Commission to continue to allow fund complexes to
bundle the shareholder reports of certain types of funds together in one report, in selected
circumstances.96 For example, these commenters urged the Commission to allow funds with
similar investment strategies to be bundled in the same report, such as target date funds, target
risk funds, state tax exempt funds, and money market funds. These commenters argued that
shareholders would benefit from seeing other investment options that are available to them
within the complex. Additionally, some of these commenters stated that, because disclosures
related to funds with similar strategies and risk profiles likely would be similar, allowing these
funds to be bundled together in a single report would allow fund complexes to organize their
similarly-managed funds efficiently into a single report.97 Some commenters likewise argued
that fund complexes should have further flexibility to bundle series as they see fit to allow
them to organize their reports efficiently and reduce the costs associated with preparing
shareholder reports.98 Finally, some commenters urged the Commission to allow insurance
companies providing shareholder reports to holders of variable contracts to provide combined
reports for those series available as investment options for a particular variable contract.99
These commenters stated that this practice would be consistent with rule 498 under the
Securities Act and argued that contract holders would benefit from receiving a single
96
See, e.g., ICI Comment Letter; SIFMA Comment Letter; Fidelity Comment Letter; T. Rowe Price
Comment Letter; Vanguard Comment Letter; Comment Letter of Capital Research and Management
Company (Jan. 4, 2021) (“Capital Group Comment Letter”); John Hancock Comment Letter.
97
See, e.g., T. Rowe Price Comment Letter; SIFMA Comment Letter; John Hancock Comment Letter.
98
See, e.g., Vanguard Comment Letter; Capital Group Comment Letter; John Hancock Comment Letter.
99
See, e.g., ICI Comment Letter; SIFMA Comment Letter; Fidelity Comment Letter; John Hancock
Comment Letter.
37
document that contains information regarding all of the investment options available under the
variable contract.100
After considering these comments, we continue to believe a multi-series report is
inconsistent with our goal of creating concise shareholder report disclosure that shareholders
can more easily use to assess and monitor their ongoing fund investments. For example, if the
report were to include information about multiple series, a shareholder that is invested in one
series of the registrant would need to spend more time searching through the report to find
disclosure related to that shareholder’s investment. Additionally, even if there may be some
efficiencies gained for fund complexes in bundling the reports of funds with similar
investment strategies, we believe those benefits are not justified by the resulting inconsistency
in which some funds’ shareholder report content would be bundled together in a single report
while others would have individual shareholder reports.101
Furthermore, we believe that bundling funds with similar strategies could present an
increased risk of shareholder confusion. For instance, if two series included in the same
shareholder report were to have similar names, such as two tax-exempt funds or two target
date funds where only the target date in the name differs (e.g., “XYZ Target Retirement 2040
Fund” versus “XYZ Target Retirement 2045 Fund”), there could be a greater risk that a
100
See ICI Comment Letter (stating that, while rule 498 prohibits the bundling of summary prospectuses
for different funds together, it provides an exception from this prohibition for funds that are all available
as investment options for a particular variable contract); see also John Hancock Comment Letter (also
stating that insurance companies that offer funds as investment options sometimes request that certain
reports be combined rather than separated into multiple reports).
101
See, e.g. Morningstar Comment Letter (also stating that the costs associated with creating separate
shareholder reports for each fund would not be significant because fund complexes would simply be
required to divide what is currently reported in one document into several smaller documents); see also
infra section IV.C.2.
38
shareholder would mistakenly review information that does not relate to that person’s
investment.102 Because the shareholder report is designed to assist existing shareholders in
monitoring their investments on an ongoing basis, rather than serving as a mechanism for
funds to provide shareholders information about other products, we disagree with commenters
who suggested that bundling funds with similar strategies together in a single report, such as
target date funds, would be useful to investors.103
Furthermore, we have similar concerns about commenters’ suggestions to permit
bundling shareholder reports of those funds that are available as investment options
underlying variable contracts, although this is permitted for summary prospectuses. In the
context of reports to existing shareholders who use these reports to monitor their investments
on an ongoing basis (as opposed to prospective investors making an initial investment
decision and who are a key audience for summary prospectuses), we see little benefit to such
contract holders from allowing insurance companies to bundle together all the underlying
series, many of which the shareholders are not invested in.104 Contract holders seeking to shift
their investments to other available investment options may consult the contract’s annual
prospectus update, or for variable contract registrants that use a summary prospectus, the
102
See Morningstar Comment Letter.
103
See DFIN Comment Letter (noting that the cost of requiring only one series to be included in a
shareholder report is mitigated by the cost savings derived from the proposal’s exclusion of financial
statements from the shareholder report); see also infra section IV.C.2.
104
See Variable Contract Summary Prospectus Adopting Release, supra footnote 9 at n. 16 (noting that
investment options offered by variable annuity contracts can be numerous, with some contracts offering
more than 250 investment options).
39
appendix of investment options/portfolio companies that an updating summary prospectus is
required to include.105
b.
Class Scope
To reduce the complexity of disclosure as well as to provide more tailored information
that is specific to a shareholder’s investment in the fund, the final rules, in a change from the
from the proposal, will require that a fund prepare and transmit to the shareholder a
shareholder report that covers the single class of a multiple-class fund in which the
shareholder invested.106 We requested comment on whether a shareholder report should be
limited to a single class. After considering the comments received in response to this request,
among other factors, we believe that this requirement will make it easier for shareholders to
navigate the shareholder report disclosure and understand how it applies to their own interests
in the fund, as shareholders only will receive reports applicable to their share class.107
Although different share classes of a fund represent interests in the same investment portfolio,
and certain shareholder report disclosure will be the same for all classes, the final rules
105
See Item 18 of Form N-3 [17 CFR 239.17a and 274.11b]; Item 17 of Form N-4 [17 CFR 239.17b and
274.11c]; Item 18 of Form N-6 [17 CFR 239.17c and 274.11d].
106
See Instruction 4 to Item 27A(a) of amended Form N-1A. To effectuate the requirement to prepare
separate shareholder reports for each share class, we are also adopting changes to: proposed Item
27A(b)(1) and (b)(2) (to identify on the cover page the class and exchange ticker symbol of the class to
which the shareholder report relates); proposed Item 27A(c), Instruction 1.(e) (to delete the requirement
that a fund provide a separate line in the expense table for each class); proposed Item 27A(d),
Instruction 13 (to clarify the requirements for management’s discussion of fund performance in the
context of multiple class funds); and proposed Item 27A(e) (to add an instruction providing that if a
fund includes a statistic that is calculated based on the fund’s performance or fees, the fund must show
the statistic for the class of the fund to which the report relates, and to clarify that a fund may include
performance-based statistics only if the relevant class has at least one year of performance). See infra
section II.A.2.
107
See Proposing Release, supra footnote 7, at section II.B.1.
40
recognize that there is significant disclosure that varies among share classes, such as expenses
and performance data.
Commenters’ support for the proposal to include all of a fund’s share classes in a
single shareholder report was mixed. Certain commenters generally supported the proposed
approach and stated that shareholders monitoring their investments may benefit from seeing
other cheaper classes that may be available.108 One of those commenters, nevertheless,
suggested that it would be beneficial if a fund were to provide a brief description of share
class availability and investor eligibility requirements for each share class.109 Other
commenters, however, suggested that including all share classes in the tailored shareholder
report could result in lengthy and complex disclosure, particularly with the class-specific
information regarding fees and performance data that would be required under the proposal.110
One commenter suggested that the Commission require that a fund show class-specific
information, such as information regarding expenses and performance data, for only the
“primary” share class.111 Another commenter observed that some funds have many classes,
many of which that are not available to most investors, and suggested that the Commission
limit the number of classes a fund may show in the annual report.112
After considering the statements of support as well as the concerns raised by
commenters, we have determined to require that a shareholder report cover a single class of a
108
See, e.g., CFA Institute Comment Letter; ICI Comment Letter; Morningstar Comment Letter.
109
See Morningstar Comment Letter.
110
See Capital Group Comment Letter; see also Tom and Mary Comment Letter.
111
See Capital Group Comment Letter.
112
See Tom and Mary Comment Letter.
41
multiple-class fund. We agree with commenters that including all share classes of a multiple
class fund could result in lengthy and complex disclosure, particularly when a fund has a large
number of share classes.113 The length and complexity that would result by including all
classes of multiple class fund would make it more difficult for a shareholder to identify
information, such as fees and performance, that may differ based on the share class in which
the shareholder invested. Further, such lengthy and complex shareholder reports would be
inconsistent with our goal of creating concise shareholder report disclosure so shareholders
can more easily use the reports to assess and monitor their ongoing fund investments.
Instead of this approach, we considered adopting the approach a commenter suggested,
in which all share classes could be included in a shareholder report if the fund were to provide
additional disclosure about share class availability and eligibility to assist with a shareholder’s
understanding of share classes.114 However, this approach would not address the concern that
the inclusion of information about multiple share classes could result in lengthy and complex
shareholder report disclosure that would run counter to our goal of creating concise
shareholder report disclosure.115 Further, we believe that investors may benefit from having
class-specific shareholder reports, as it may be difficult for some investors to identify or recall
the share class in which they had invested. Including additional information about share class
eligibility would not necessarily help to address these concerns. In addition, providing
113
According to staff review of filings received by the Commission on Form N-CEN [17 CFR 274.101]
through March 14, 2022, the largest number of share classes reported by multiple class fund was 23
share classes.
114
See Morningstar Comment Letter.
115
See Proposing Release, supra footnote 8, at 19; see also Comment Letter of Frank Dalton (Jan. 3, 2021)
(“Frank Dalton Comment Letter”) (suggesting that there be one report per fund).
42
concise, plain-English disclosure about share class eligibility could be particularly
challenging. Based on staff experience, including multiple share classes in a shareholder
report may make it more difficult for some retail shareholders to efficiently review
information relevant to their share classes, even those with specialized knowledge about
investing in funds.116
We recognize, however, that shareholders and other market participants could benefit
from information about the other share classes offered by a multiple class fund. To assist with
shareholders’ and other market participants’ analysis of those share classes, our final rules
will require website posting of fund documents that will enable these parties to obtain
information about those other share classes easily.117 Further, in a change from the proposal,
we are adopting requirements for funds to tag the shareholder report contents in a structured,
machine-readable data language, which will make shareholder report disclosure, including
class-specific disclosure, more readily available and easily accessible for aggregation,
comparison, filtering, and other analysis.118 Accordingly, we believe it is appropriate to limit a
shareholder report to one class of a multiple class fund so shareholders can more easily use
the reports to assess and monitor their ongoing fund investments.
116
See, e.g., Updated Investor Bulletin: Mutual Fund Classes, SEC Office of Investor Education and
Advocacy (updated Feb. 24, 2021) available at https://www.investor.gov/introductioninvesting/general-resources/news-alerts/alerts-bulletins/investor-bulletins-61 (addressing common
questions about fund share classes). See also supra footnote 54 and accompanying text (describing
recommendations for future research exploring ways of explaining share classes to investors).
117
See amended rule 30e-1; see also infra section II.C.2 regarding the posting of information that funds
will file as Items 7-11 of amended Form N-CSR, such as fund financial statements and information
about changes in and disagreements with accountants.
118
See infra section II.H.
43
c.
Scope of Content
As proposed, the final rules will generally allow a fund to include in its annual report
only the information that Item 27A of Form N-1A specifically permits or requires.119 We also
are adopting, as proposed, three additional provisions related to the content of a fund’s annual
report. First, if a fund’s particular circumstances may cause the required disclosures to be
misleading, the final rules will allow a fund to add information to the report that is necessary
to make the required disclosure items not misleading.120 Disclosure in response to this
provision generally should be brief. Second, as proposed, if a required disclosure is
inapplicable, the final rules will permit the fund to omit the disclosure, and a fund similarly
may modify a required legend or narrative information if the modified language contains
comparable information to what is otherwise required.121 Finally, as proposed, the final rules
will not permit a fund to incorporate by reference any information into its annual report.122
119
See Instruction 3 to Item 27A(a) of amended Form N-1A; see also Proposing Release, supra footnote 8,
at n.115 (noting that funds would have flexibility with respect to the use of online tools to assist
shareholders in understanding the contents of an annual report that appears online or otherwise is
provided electronically).
120
See Instruction 2 to Item 27A of amended Form N-1A (permitting a fund to include disclosure that is
required under 17 CFR 270.8b-20 (rule 8b-20 under the Investment Company Act)); rule 8b-20 under
the Investment Company Act (providing, “[i]n addition to the information expressly required to be
included in a registration statement or report, there shall be added such further information, if any, as
may be necessary to make the required statements, in the light of the circumstances under which they
are made, not misleading”); see also Proposing Release, supra footnote 8, at paragraph accompanying
n.117 (discussing, for example, that if a fund changed its investment policies or structure during or since
the period shown, the expense, performance, or holdings information that a fund must include in its
annual report may require additional disclosure to render those presentations not misleading).
121
See Instruction 7 to Item 27A(a) of amended Form N-1A; see also Proposing Release, supra footnote 8,
at n.119 (discussing that a goal of this instruction was to promote better-tailored disclosure).
122
See Instruction 5 to Item 27A(a) of amended Form N-1A; see also Proposing Release, supra footnote 8,
at n.120.
44
That is, a fund could not refer to information that is located in other disclosure documents in
order to satisfy the content requirements for an annual report.
Commenters generally supported the proposed requirement to limit the information
included in the shareholder report, and they agreed that this limitation would help focus
shareholder reports on the most salient issues to shareholders.123 One commenter expressly
supported the proposal to allow funds to omit information from the required items that is
inapplicable to the fund, and to modify required legends or narratives so long as the
modification contains comparable information to what is required.124 To provide funds with
additional flexibility, one commenter suggested allowing funds to include supplemental
information reasonably related to the required content or including an “unrestricted” section of
the report where funds can provide discretionary content.125
Comments on the proposed prohibition on incorporation by reference in the
shareholder report were mixed. Some commenters supported the proposed prohibition, for
example noting it would make it easier for shareholders to understand the report without
consulting additional sources.126 By contrast, others opposed this prohibition based on
123
See, e.g., ICI Comment Letter; Consumer Federation of America II Comment Letter; Morningstar
Comment Letter; NASAA Comment Letter.
124
See ICI Comment Letter. But see Morningstar Comment Letter and Consumer Federation of America II
Comment Letter (expressing concern that allowing funds to modify legends may lead to obscuring
important information and stressing the importance of maintaining consistency where possible in
section headers so that investors can more readily consume reports since they may receive multiple
reports).
125
See Sidley Austin Comment Letter.
126
See, e.g., ICI Comment Letter; Morningstar Comment Letter; Consumer Federation of America II
Comment Letter; NASAA Comment Letter.
45
concerns that it may lead in increased litigation risk.127 Commenters sought reassurance that
information that will now be submitted online on Form N-CSR will still be considered part of
the “total mix of information” assessed by courts in instances of shareholder litigation.128 The
final rules are not intended to change courts’ assessment of the total mix of information.
We continue to believe that allowing only the required or permitted information to
appear in a fund’s annual report will promote consistency of information presented to
shareholders and allow retail shareholders to focus on information particularly helpful in
monitoring their investment in a fund.129 As discussed above, the final rules provide funds
with some flexibility to tailor the required information to their unique characteristics.130
Additionally, in the limited circumstances in which it may be appropriate for a fund to provide
less or more information than what Item 27A requires or permits, the final rules allow the
fund to omit information that is inapplicable to the fund and/or add additional information to
make the required disclosure items not misleading. We believe that expanding the shareholder
report to include supplemental information, for example in an “unrestricted” section of the
report, could lead to significant increases in the length of the document and would be
127
See, e.g., Capital Group Comment Letter; Stradley Ronon Comment Letter; Vanguard Comment Letter;
Dechert Comment Letter.
128
See, e.g., ICI Comment Letter; Dechert Comment Letter,
129
See Proposing Release, supra footnote 8, at text following n.116 (noting that this approach would also
encourage more impartial information by preventing funds from adding information commonly used in
marketing materials).
130
See id. at n.116 (noting that many of the instructions to each requirement in the shareholder report
provide some flexibility so that a fund can tailor its presentation of information to match how the fund
invests. For instance, a fund has the ability to select the categories that are reasonably designed to depict
clearly the types of a fund’s investments when preparing its graphical representation of holdings).
46
inconsistent with our goal of focusing the report on the most salient information for
shareholders.
Although the final rules will only permit the inclusion of certain information in the
annual report and prohibit incorporation by reference, funds will be required to refer
shareholders to the availability of certain additional website information near the end of the
report.131 The final rules, however, will—as proposed— permit funds to provide additional
information to shareholders in the same transmission as the shareholder report, so long as the
shareholder report is given greater prominence than any other materials included in the same
transmission, except for certain specified disclosure materials.132 The disclosure materials that
are exceptions to this “greater prominence” requirement include summary prospectuses,
statutory prospectuses, notices of the online availability of proxy materials, and other
shareholder reports. Therefore, we believe that the final rules appropriately balance providing
funds with the flexibility to provide shareholders with information relevant to the fund’s
unique characteristics, while maintaining a concise shareholder report that highlights the most
relevant information for shareholders and promotes comparability across funds.
Some commenters suggested adding content areas to the shareholder report, which
they suggested would be useful for investors in monitoring their investments.133 First, two
131
See Item 27A(i) of amended Form N-1A.
132
See Instruction 12 to Item 27A(a) of amended Form N-1A; see also Proposing Release, supra footnote
8, at text accompanying n.125 (explaining that the Commission would consider a fund to satisfy the
“greater prominence” requirement if, for example, the shareholder report is on top of a group of paper
documents that are provided together or, in the case of an electronic transmission, the email or other
message includes a direct link to the report or provides the report in full in the body of the message).
133
See, e.g., ICI Comment Letter; Federated Hermes Comment Letter; Comment Letter of the Independent
Trustees of the Morningstar Funds Trust (Oct. 20, 2020) (“Morningstar Trustees Comment Letter”);
CFA Institute Comment Letter; Morningstar Comment Letter.
47
commenters requested that funds be allowed to continue to include information related to the
tax character of distributions in the shareholder report to comply with certain IRS
requirements.134 These commenters asserted that, absent relief from the IRS, funds would
have to make a separate mailing to shareholders disclosing this tax-related information.135
Several commenters also suggested that funds should be required to provide additional riskrelated information.136 Finally, one commenter suggested that funds should be required to
disclose how much the fund manager invests in the fund.137
After considering commenter suggestions, we do not believe it is necessary to permit
or require any additional content areas in the shareholder report under the final rules. First, we
believe that this disclosure, unlike the other required content areas of the streamlined
shareholder report, would not as directly contribute to retail investors’ understanding of the
fund’s operations and performance over the relevant performance period, and would add
length and complexity to the shareholder report. Additionally, we do not believe it is
necessary to permit funds to describe the tax character of distributions in the shareholder
report, because a fund could distill such tax-related disclosure in a manner that would meet
134
ICI Comment Letter; Federated Hermes Comment Letter.
135
ICI Comment Letter (explaining that the Internal Revenue Code requires regulated investment
companies, including funds, to report the tax character of certain distributions paid in written statements
delivered to shareholders. Although this requirement is satisfied through delivery of the Form 1099DIV, certain shareholders do not receive this form. Therefore, funds frequently choose to include this
disclosure in the shareholder report as a means of ensuring compliance with the reporting requirement).
136
Morningstar Comment Letter; Morningstar Trustees Comment Letter (urging the Commission to
shorten liquidity risk discussion and require additional discussion of other risks if relevant, such as
derivatives risks and concentration risk); Angel Comment Letter (suggesting that a fund be required to
disclose its historical standard deviation of returns compared to its benchmark’s standard deviation of
returns as a uniform quantitative risk measure).
137
Morningstar Comment Letter.
48
the final rules’ requirements for a fund statistic, or if a fund determines that such information
is relevant to the MDFP, the fund could consider including the relevant disclosure in the fund
statistics or MDFP sections of the shareholder report under the final rules.138 Also, as the final
rules do not alter the requirements for delivering annual prospectus updates, which include
information about the fund’s principal risks, we do not believe it is also necessary to require
funds to include additional risk-related information in their shareholder reports.139 Similarly,
we do not believe it is necessary to require funds to include information regarding how much
the fund manager invests in the fund in the shareholder report because such information is
already disclosed in the fund’s SAI and may be available on fund websites, and we believe
that this disclosure would not be particularly salient to retail investors monitoring their
investments.140
d.
Scope With Respect to Other Registrants
As proposed, the final annual report disclosure rules will apply only to shareholder
reports for investment companies registered on Form N-1A.141 The amendments do not extend
to other investment companies such as closed-end funds, UITs, or open-end managed
138
See infra section II.A.2.c.i (discussing the narrative MDFP disclosure requirements) and text
accompanying infra footnote 263 (discussing the requirements for the disclosing additional fund
statistics).
139
See supra footnote 67.
140
See Item 20(c) of current and amended Form N-1A; see also rule 498(e) (requirements to make certain
materials—including a fund’s SAI—available on a website, for funds that use summary prospectuses in
reliance on rule 498).
141
These funds represent the vast majority of investment company assets under management. See infra
section IV.B.1.
49
investment companies not registered on Form N-1A (i.e., issuers of variable annuity contracts
registered on Form N-3).
Several commenters suggested that the Commission should reevaluate consistency of
disclosure across all different fund types (e.g., closed-end funds and UITs, as well as openend funds) because the shareholders across fund types have similar informational needs and
would likely all benefit from a similar layered approach to disclosure.142
We agree that disclosure consistency, and continuing to consider consistency in
informational needs among shareholders in different types of investment companies, are
important policy matters, and topics that the Commission and staff will continue to evaluate.
In the past several years, the Commission adopted changes to the disclosure framework for
closed-end funds and variable contracts tailored to these investment companies’
characteristics.143 Before considering any additional or different disclosure amendments for
closed-end funds and variable contracts, we believe it is necessary to understand funds’ and
investors’ experience with these new disclosure frameworks for closed-end funds and variable
contracts and assess their impact.
Some commenters also suggested that funds offered exclusively to other funds or
offered only to institutional investors be exempt from the obligation to prepare shareholder
reports.144 These commenters argued that, because the shareholder report is oriented towards
retail shareholders, there is little benefit in requiring funds that are sold exclusively to these
142
Tom and Mary Comment Letter; Dechert Comment Letter; CFA Institute Comment Letter; Comment
Letter from Donald (Attorney) (Oct. 12, 2020) (“Donald Comment Letter”).
143
See Variable Contract Summary Prospectus Adopting Release, supra footnote 9; Securities Offering
Reform for Closed-End Investment Companies, Investment Company Act Release No. 33836 (Apr. 8,
2020) [85 FR 33290 (June 1, 2020)] (“Closed-End Fund Offering Reform Adopting Release”).
144
ICI Comment Letter; Fidelity Comment Letter; T. Rowe Price Comment Letter.
50
investors to prepare, transmit, and file these reports. These commenters suggested that such
funds instead could rely on the financial statements and other Form N-CSR requirements filed
with the Commission to keep institutional investors informed about their fund investments.
We do not believe that such an exemption is necessary or appropriate. Currently
registered funds offered exclusively to other funds, or only to institutional investors, transmit
complete annual and semi-annual reports to their shareholders. Under the final rules, these
funds will now be required to provide shareholders with a significantly shorter document.
While shareholder reports under the final rules include content that is designed to be
particularly salient to retail investors, these reports include core fund information that all
investors can use to monitor fund investments, and that supplements information that
investors could glean from a fund’s financial statements. Additionally, to the extent a fund
limits its investor base to institutional investors and is able to qualify for the exclusions from
the investment company definition in sections 3(c)(1) or 3(c)(7) of the Investment Company
Act, the fund can operate as a private fund under those exclusions and will not be subject to
the shareholder report requirements of section 30 of the Act.
2.
Contents of the Annual Report
The following table outlines the information the final rule will generally require funds
to include in their annual reports.
TABLE 2: OUTLINE OF ANNUAL REPORT
Cover
Page or
Description
Item of Amended
Form N-1A
Item of Current
Form N-1A
Containing
Similar
Requirements
Fund/Class Name
Item 27A(b)
--
Ticker Symbol
Item 27A(b)
--
51
Beginning
of Report
Content
*
Principal U.S. Market(s) for
ETFs
Item 27A(b)
--
Statement Identifying as
“Annual Shareholder Report”
Item 27A(b)
--
Legend
Item 27A(b)
--
Statement on Material Fund
Changes in the Report
Item 27A(b)
Expense Example
Item 27A(c)
Item 27(d)(1)
Management’s Discussion of
Fund Performance
Item 27A(d)
Item 27(b)(7)
Fund Statistics
Item 27A(e)
--
Graphical Representation of
Holdings
Item 27A(f)
Item 27(d)(2)
Material Fund Changes
Item 27A(g)
--
Changes in and Disagreements
with Accountants
Item 27A(h)
Item 27(b)(4)
Availability of Additional
Information
Item 27A(i)
Item 27(d)(3)
through (5)
Householding Disclosure
(optional)
Item 27A(j)
--*
Rule 30e-1(f)(3) currently requires a fund to explain, at least once a year, how shareholders may revoke
their consent to householding. This explanation is not currently required in funds’ shareholder reports.
As proposed, we are not requiring it in the annual report.
As proposed, the annual report will not be subject to page or word limits under the
final rules. Commenters agreed with this approach and one commenter stated that adopting a
page limit may have the unintended effect of producing dense, visually unappealing
disclosures when funds try to squeeze necessary information into a limited space.145 Another
145
Consumer Federation of America II Comment Letter.
52
commenter said that the Commission’s proposed approach would provide funds with the
flexibility to provide explanatory or qualifying information to the extent they believe it is
necessary or appropriate.146 We believe that the proposed restrictions on the contents of these
reports would naturally limit their length, which would support our goal of concise, readable
disclosure without the need for further restrictions on page length or word count.147
a.
Cover Page or Beginning of the Report
The final amendments to Form N-1A will require a fund to provide the following
information on the cover page or at the beginning of the annual report:148
As proposed, the name of the fund and the class to which the annual report relates;149
As proposed, the exchange ticker symbol of the fund’s shares, or the ticker symbol of
the class adjacent to the class name;
As proposed, if the fund is an ETF, the principal U.S. market(s) on which the fund’s
shares are traded;
As proposed, a statement identifying the document as an “annual shareholder report;”
Substantially as proposed, the following legend: “This annual shareholder report
contains important information about [the Fund] for the period of [beginning date] to
146
NASAA Comment Letter.
147
See, e.g., infra at text following footnote 271 (stating that, in the fund statistics section of the
shareholder report, funds have the flexibility to include additional statistics that the fund believes would
help shareholders better understand the fund’s activities and operation during the reporting period, but
cautioning that funds should carefully consider the inclusion of any statistic that requires extensive
narrative explanation).
148
See Item 27A(b) of amended Form N-1A.
149
In a change from the proposal, the final rules will require that a shareholder report cover a single class
of a multiple-class fund. See Instruction 4 to Item 27A(a) of amended Form N-1A; see also supra
footnote 106 and accompanying text.
53
[end date]. You can find additional information about the Fund at [Fund website
address]. You can also request this information by contacting us at [toll-free telephone
number and, as applicable, email address].”150; and
In addition to the proposed cover page elements, we are also adopting a requirement
that if the shareholder report describes material fund changes, a fund will have to
include the following prominent statement, or a similar clear and understandable
statement, in bold-face type: “This report describes changes to the Fund that occurred
during the reporting period.”151
Commenters generally supported the proposed cover page information, and some
recommended certain enhancements.152 One commenter suggested that the Commission
require funds to include a brief description of investor eligibility requirements for each share
class so that shareholders understand if there is an opportunity to move to a more appropriate
class.153 Another commenter requested that funds disclose their investment objectives on the
cover page.154 One commenter also requested that material fund changes should be disclosed
on the cover page.155 Finally, one commenter suggested that the Commission should adopt an
150
In a change from the proposal, the legend under the final rules does not contain the phrase “[as well as
certain changes to the Fund].” This phrase is duplicative of the requirement under the final rules to
include a separate legend highlighting that a shareholder report describes material fund changes, if
applicable. See Item 27A(b)(4) of amended Form N-1A.
151
See Item 27A(b) of amended Form N-1A. The reference to the “beginning” of an annual report is
designed to address circumstances in which there is not a physical page that would precede the report,
for example, when the report appears online or on a mobile device. See infra section II.A.4.
152
See, e.g., ICI Comment Letter; Capital Group Comment Letter.
153
Morningstar Comment Letter.
154
Capital Group Comment Letter.
155
Comment Letter of Dominic Rosa (Sept. 16, 2020) (“Dominic Rosa Comment Letter”).
54
instruction to the required legend, similar to a current instruction in Form N-1A related to
prospectuses, to provide flexibility for underlying funds used as investment options for
variable contracts to modify the legend in a manner that is consistent with their structure.156
As discussed above, the final rules will require that a shareholder report cover a single
class of a multiple-class fund.157 Therefore, we do not believe it is necessary to include
additional information regarding share class eligibility. Similarly, because shareholders will
continue to receive annual prospectus updates under the final rules, we do not believe it is
necessary to require or permit funds to include a fund’s investment objective (which also
appears in the prospectus) in the shareholder report. We believe that adding the fund’s
investment objective would be duplicative and, in light of this, unnecessarily increase the
length of the shareholder report.
The final rules also will not require a fund to describe material changes on the cover
page of the shareholder report. Because the shareholder report will be a relatively short
document, we anticipate investors would see this information within a few pages following
the cover page or beginning of the report. However, we agree with commenters that it may be
useful for shareholders to be alerted to material changes that occurred during the reporting
period. Therefore, in a change from the proposal, if a shareholder report includes a discussion
of material fund changes, the final rules will require the cover page of the report to include a
156
See ICI Comment Letter (noting that the term “us,” as used in the phrase “contacting us” in the required
legend, could be read to refer to the fund. However, for funds that serve as investment options for
variable contracts, shareholder reports are delivered to contract holders. The record holders of
underlying funds are the insurance company separate accounts, and underlying funds have no visibility
or access to contract holders); see also General Instruction C.3.(d) of current Form N-1A.
157
See Instruction 4 of Item 27A(b) of amended Form N-1A.
55
prominent statement, in bold-face type, explaining that the report describes certain changes to
the fund that occurred during the reporting period.158
Finally, we do not believe it is necessary to adopt an instruction to the required legend
specifically allowing funds that serve as the underlying investment options for variable
contracts to modify the legend in a manner that is consistent their structure. As discussed
above, Instruction 7 to Item 27A already allows funds to modify a required legend or narrative
information so long as the modified language contains comparable information.159 A more
specific instruction for funds that serve as the underlying investment options for variable
contracts is unnecessary.
b.
Fund Expenses
The final rules will require a simplified expense presentation in the annual report,
modified from the proposed presentation to take into account concerns raised by commenters.
Under the final rules, a fund will be required to provide a table showing the expenses
associated with a hypothetical $10,000 investment in the fund during the preceding reporting
period in two formats: (1) as a percent of a shareholder’s investment in the fund (i.e., expense
ratio), and (2) as a dollar amount. In a change from the proposal, the expense presentation
under the final rules will not require the table also to include information about the fund’s
total return during the period.160 Additionally, the final rules do not include the proposed
158
Item 27A(b) of amended Form N-1A.
159
See supra text accompanying footnote 121.
160
See Proposing Release, supra footnote 8, at n.142. The proposed expense presentation would have
required a fund to show a beginning account value of $10,000, costs paid during the period, the fund’s
total return during the period before costs were paid, and the ending account value based on the fund’s
net asset value return. See id. at nn.154-155 and accompanying text. Under the proposal, ETFs were
required to include the ending value of the account based on market value return. See id. at n.159 and
accompanying text.
56
requirement for a fund to include an explanation, in a footnote to the expense example, that
expense information does not reflect shareholder transaction costs associated with purchasing
or selling fund shares.
Simplified Expense Table
The final rules include a simplified expense table that will replace the current expense
example in the shareholder report, which consists of two different tables, along with the
currently-required narrative preamble.161 Commenters generally supported simplifying the
expense presentation in the shareholder report and eliminating the narrative preamble to the
table.162 In addition, the expense table under the final rules is more simplified than the
proposed presentation and is designed to provide shareholders with a basis for comparing the
level of current period expenses of different funds (as percentages are comparable), as well as
to permit shareholders to estimate the costs, in dollars, that they incurred over the reporting
161
See Proposing Release, supra footnote 8, at text accompanying nn.145-146 (explaining that the current
expense presentation requires funds present two tables: the first showing the actual cost in dollars for a
$1,000 investment in the fund over the prior six-month period based on the actual return of the fund,
and the second showing the cost in dollars for a $1,000 investment in the fund over the prior six-month
period based on a hypothetical 5% annual return); see id. at n.162 and accompanying text (discussing
the currently-required narrative preamble).
162
See, e.g., ICI Comment Letter; AFREF Comment Letter; NASAA Comment Letter; CFA Institute
Comment Letter; Abdullah Comment Letter. But see Consumer Federation of America II Comment
Letter (suggesting that the Commission conduct investor testing to determine if investors would prefer
the current presentation).
57
period. The expense presentation will appear as follows, and the individual aspects of the
example are described in more detail below.
What were the Fund costs for the last [year/six months]?
(based on a hypothetical $10,000 investment)
[Fund or Class
Name]
Costs of a $10,000
investment
$
Costs paid as a percentage of a $10,000
investment
%
As proposed, the final rules require a fund to provide the expenses associated with a
hypothetical $10,000 investment in the fund during the preceding reporting period. Currently,
funds are required to show expenses associated with a $1,000 investment. The Commission
proposed an increased dollar value in order to present a more realistic investment amount for
an individual shareholder today.163 Commenters supported the higher $10,000 assumed
investment amount.164 One commenter, however, stated that funds with a higher minimum
investment should be required to show that higher investment amount in the expense
presentation.165 As this would undermine comparing different funds, we are not requiring
funds with higher minimum investment amounts to show that higher amount.
In addition to the cost in dollars of a $10,000 investment and the expense ratio, the
proposed expense table also would have required a fund to show returns information, which
was designed to facilitate shareholders’ understanding of how costs and performance affect
their ending account values. Some commenters, including retail investors, requested that the
163
See Proposing Release, supra footnote 8, at n.151 and accompanying text.
164
See, e.g., Consumer Federation of America II Comment Letter; Morningstar Comment Letter.
165
ICI Comment Letter.
58
expense example exclude returns information, and provide only costs.166 These commenters
stated that presenting returns information in the expense table might be confusing for
shareholders and repetitive of the performance information that appears later in the document.
Additionally, one commenter supported an approach that includes returns information in the
expense table, but stressed the importance of highlighting the costs paid in dollars and
expense ratio tables through text features, such as bold-face type, to emphasize the importance
of those two data points.167 After considering commenters’ concerns, the presentation of fund
expenses under the final rules will not include fund returns information because we agree that
presenting returns information in the expense example is duplicative of the returns
information that is presented in the MDFP section of the report and could add unnecessary
complexity and confusion to the expense presentation. For example, because a fund’s reported
return would relate to the fund’s fiscal year, including return information could result in
different funds presenting substantially different returns based primarily on whether a given
fund’s fiscal year included a time period with aberrant market performance. We also believe
that the simplified presentation—presenting just the costs in dollars and the expense ratio—
would help to focus investors on this key information.168
166
See, e.g., Comment Letter of Sandra Degan (Aug. 25, 2020) (“Sandra Degan Comment Letter”);
Comment Letter of Ubiquity (Sept. 14, 2020) (“Ubiquity Comment Letter”); Williams Comment Letter;
Tom and Mary Comment Letter; Barker Comment Letter. Additionally, two commenters objected to the
ETF-specific requirement to show the ending account value based on both NAV and market value
return, and stated that ETFs should only be required to show NAV. See Ubiquity Comment Letter, Tom
and Mary Comment Letter.
167
CFA Institute Comment Letter.
168
Because the final rules will not include fund return information in the expense example, the expense
table will not include the proposed “ending value of the account” column and related instructions,
including the proposed instructions requiring the presentation of expense information as a mathematical
expression and the requirement to give more prominence to the “cost paid” and “cost paid as a
percentage of your investment’ columns than the other columns in the table. Similarly, commenter
59
Additional Aspects of the Shareholder Report’s Presentation of Expenses
Some commenters suggested additional modifications to the proposed expense
presentation. First, we proposed an expense table title: “What were your Fund costs for the
period? (based on a hypothetical $10,000 investment).” Additionally, under the proposal, the
column in the table that would include the fund’s expense ratio was entitled “costs paid as a
percentage of your investment.” One commenter requested we modify these two headers to
remove the references to “your” because an investor might reasonably interpret these uses of
the possessive pronoun as actually reflecting that investor’s own personal experience.169 We
agree, that the use of the term “your” in the header to the table and the title of the expense
ratio column could confuse investors, and we have changed these two headers to clarify that
the expenses presented in the table are a reflection of a hypothetical $10,000 investment.
Additionally, the final rules will replace the proposed header reference to “the period”
with a more specific reference to either “the past year” or “the past six months,” depending on
whether the report is an annual or semi-annual report. We believe this more specific heading
reference to the relevant period will help shareholders better appreciate that the figures in the
semi-annual report expense table reflect a shorter period than the annual report (and thus these
figures will likely be smaller than the parallel figures in the annual report).
The proposal also would have included a new footnote to the expense presentation that
would have required a fund to include a footnote briefly explaining, in plain English, that the
concerns regarding the disclosure related to ETF-specific requirement to show the ending account value
based on both NAV and market value return are moot.
169
NASAA Comment Letter.
60
expense information does not reflect shareholder transaction costs associated with purchasing
or selling fund shares.170 This was designed to inform investors that there may be additional
costs not reflected in the expense example, if applicable. Some retail investors stated that the
proposed footnote is of limited value and recommended streamlining it.171 After considering
commenter concerns, we agree this footnote would provide limited information to investors,
particularly since it would not have included quantitative information regarding these costs,
and these costs may vary based on distribution channel, making it difficult to present this
information concisely in the footnote or otherwise. By merely alerting investors to the
possibility of additional costs, the proposed footnote could make the table less readable
without providing investors information they could use effectively in evaluating the expense
presentation. We therefore are not adopting that proposed footnote.
We are adopting, as proposed, an instruction that will direct funds to calculate “Costs
of a $10,000 investment” by multiplying the figure in the “Cost paid as a percentage of a
$10,000 investment” column by the average account value over the period based on an
investment of $10,000 at the beginning of the period.172 The figure in the “Cost paid as a
170
The proposal would have also required a fund to include a footnote to the proposed returns information
that would be included in the expense presentation, describing other costs that are included in the fund’s
total return if material to the fund. Because the final rules’ expense presentation does not include
returns-related information, we are not adopting this footnote requirement. See Proposing Release,
supra footnote 7, at n.164.
171
Williams Comment Letter; Tom and Mary Comment Letter.
172
See Instruction 2(a) to Item 27A(c) of amended Form N-1A. As proposed, the computation instructions
will also require funds to assume reinvestment of all dividends and distributions. See Instruction 2(b) to
Item 27A(c) of amended Form N-1A.
61
percentage of your investment” column, in turn, will be the fund’s expense ratio as it appears
in the fund’s most recent audited financial statements or financial highlights.173
Additionally, as proposed, we are retaining three current instructions that we believe
continue to provide important information to shareholders.174 First, if a fund incurred any
“extraordinary expenses” during the reporting period, the fund may briefly describe, in a
footnote to the expense table, what the actual expenses would have been if these extraordinary
expenses were not incurred.175 The Commission received no comments on this instruction.
Second, if a fund is a feeder fund, the fund must reflect the aggregate expenses of the feeder
fund and the master fund in the expense table and include a footnote stating that the expense
table reflects the expenses of both the feeder and master funds.176 One commenter supported
continuing to permit funds to report aggregated fees with the related footnote, and noted that
allowing reporting in this manner allows investors to more easily understand the total
expenses they are paying.177 No commenters opposed the instruction. Finally, if a fund’s
shareholder report covers a period of time that is less than a full reporting period, the fund
173
See Instruction 2(c) to Item 27A(c) of amended Form N-1A. In the semi-annual report, the fund’s
expense ratio will be calculated in the manner required by Instruction 4(b) to Item 13(a) of current and
amended Form N-1A, using the expenses for the fund’s most recent fiscal half-year. Id.
174
See Proposing Release, supra footnote 7, at paragraph following n.171.
175
See Instruction 1(d) to Item 27A(c) of amended Form N-1A (defining “extraordinary expenses” as
“expenses that are distinguished by their unusual nature and by the infrequency of their occurrence.
Unusual nature means the expense has a high degree of abnormality and is clearly unrelated to, or only
incidentally related to, the ordinary and typical activities of the Fund, taking into account the
environment in which the Fund operates. Infrequency of occurrence means the expense is not
reasonably expected to recur in the foreseeable future, taking into consideration the environment in
which the Fund operates. The environment of a Fund includes such factors as the characteristics of the
industry or industries in which it operates, the geographical location of its operations, and the nature and
extent of government regulation”).
176
See Instruction 1(b) to Item 27A(c) of amended Form N-1A.
177
Morningstar Comment Letter.
62
must include a footnote to the table noting this and explaining that expenses for a full
reporting period would be higher than the figures shown.178 We received no comments on this
instruction.179
Feedback on Including Additional or Different Information About Fund Costs
Some commenters also responded to the Commission’s request for comment on
differences in the expense presentations in the annual report and prospectus.180 These
presentations currently differ in that the shareholder report expense example is derived from a
fund’s audited financial statements and therefore reflects actual historical expenses that a
shareholder incurred over the past year (i.e., backwards-looking expenses). The prospectus fee
table and expense example, on the other hand, reflect hypothetical future expenses (i.e.,
forward-looking expenses).181 Some commenters argued that the expense presentations of the
prospectus and annual report should be aligned.182 Similarly, one commenter suggested that
the shareholder report expense example should disclose the prospectus expense ratio and
178
See Instruction 1(c) to Item 27A(c) of amended Form N-1A. This would generally apply to newlyformed funds that are required to file an annual or semi-annual report for a period shorter than the
reporting period.
179
While the proposal included an instruction that would have required a separate expense table, or a
separate line item in the expense table, for each class of as multiple-class fund, this instruction is moot
in light of the final rules’ requirement that a shareholder report cover only a single class of a multipleclass fund. See Instruction 4 to Item 27A(a) of amended Form N-1A; see also footnote 106 and
accompanying text; see also Proposing Release, supra footnote 7, at n.174 and accompanying text.
180
See Proposing Release, supra footnote 8, at text following n.600; see also, e.g., Dominic Rosa
Comment Letter; Barker Comment Letter; Tom and Mary Comment Letter; Capital Group Comment
Letter; Morningstar Comment Letter.
181
Currently, the prospectus fee table also reflects sales loads that an investor would pay and AFFE,
whereas the shareholder report expense presentation does not, because these elements are not reflected
in the fund’s financial statements. See Proposing Release, supra footnote 8, at n.148 and accompanying
text.
182
Dominic Rosa Comment Letter; Barker Comment Letter; Tom and Mary Comment Letter; Capital
Group Comment Letter.
63
explain any differences in a footnote.183 Furthermore, some commenters suggested that the
expense presentation in the shareholder report should include additional transaction costs,
beyond commissions, including costs paid from fund assets for investment research and
payments made to affiliated securities lending agents.184 Conversely, one commenter urged
the Commission to exclude interest expenses and dividends paid on short sales from the
current expense ratio, on the basis that these adjustments would make expense information
more comparable across funds.185 Finally, other commenters also argued that the Commission
should require funds to disclose—on fund websites or in the prospectus, as a complement to
shareholder report disclosure—best execution policies reflecting “efforts to ensure that fund
transaction costs, including commission dollars generated by the fund,” directly benefit
shareholders.186
Because the prospectus and shareholder report differ in the time periods that they
reflect (i.e., the prospectus is “forward looking” while the shareholder report is “backward
looking”), aligning the expense presentations in these documents presents significant
challenges. Additionally, we believe that it would be confusing to investors to be given two
expense ratios in the shareholder report (one backwards-looking, derived from the audited
financial statements, and the other from the forward-looking prospectus). Furthermore,
183
Morningstar Comment Letter.
184
Dimensional Comment Letter; AFREF Comment Letter.
185
See Morningstar Comment Letter (arguing that removing interest and dividend expenses from the
expense ratio gives investors a better sense for what a fund company is charging them for the cost of
running the fund and allows funds with different types of investments to present their expenses in a
comparable way. Morningstar has adjusted its methodology for calculating fund expense ratios in their
data to exclude interest and dividend expenses).
186
Comment Letter of Healthy Markets Association (Nov. 6, 2020) (“Healthy Markets Association
Comment Letter”); see also CFA Institute Comment Letter.
64
because the shareholder report is designed to provide shareholders with a summary of the key
information provided in the fund’s audited financial statements, we continue to believe that
the types of costs reflected in the shareholder report expense example should be derived from
those that are included in the fund’s audited financial statements. As discussed above,
however, helping investors more readily understand fund fees and expenses is an important
priority of the Commission and we believe that the general topic of fund fee disclosure
effectiveness, in light of comments received, merits further consideration.187
c.
Management’s Discussion of Fund Performance
Substantially as proposed, the final rules will largely maintain the current requirements
for the MDFP section of the annual report, with several targeted changes.188 In particular, we
are adopting amendments to the current MDFP requirements to make the disclosure more
concise. Additionally, the final rules include additional performance-related information that
is available in fund prospectuses, including certain performance information and comparative
information showing the average annual total returns of one or more relevant benchmarks,
modified from the proposal to take into account the final rule’s requirement for the
shareholder report to cover a single class of a multiple-class fund. We also are amending, as
proposed, the definition of an appropriate broad-based securities market index to require that
187
See supra text following footnote 84.
188
See Proposing Release, supra footnote 7, at text following n.176 (explaining that the current MDFP
disclosure generally includes: a narrative discussion of the factors that materially affected the fund’s
performance; a performance line graph; a table showing the fund’s average annual total returns; a
discussion of the effect of any policy or practice of maintaining a specified level of distributions to
shareholders on the fund’s investment strategies and per share net asset value, as well as the extent to
which the fund’s distribution policy resulted in distributions of capital; and for ETFs that do not provide
certain premium or discount information on their websites, a table showing the number of days the fund
shares traded at a premium or discount to net asset value).
65
all funds compare their performance to the overall applicable securities market, for purposes
of both fund annual reports and prospectuses.
i.
Narrative MDFP Disclosure
As proposed, the final rules retain the current requirement for funds’ annual reports to
include a narrative discussion of factors that materially affected a fund’s performance during
the most recent fiscal year, with minor modifications from the current requirements to
encourage concise disclosure.189 In particular, the final rules amend the current requirement to
specify the disclosure must “briefly summarize” the “key” factors that materially affected the
fund’s performance during the last fiscal year, including the relevant market conditions and
the investment strategies and techniques used by the fund’s investment adviser. As proposed,
the final rules instruct funds not to include lengthy, generic, or overly broad discussions of
these factors.190 The instruction, as proposed, also directs funds to use graphics or text
features—such as bullet lists or tables—to present the key factors, as appropriate. Finally, as
proposed, the final rules will not allow funds to include any additional information—such as a
fund president’s letter to shareholders, interviews with portfolio managers, general market
commentary, and other similar information—in the shareholder report.191
Commenters supported the proposed amendments to the narrative MDFP section and
stated that the proposed approach appropriately maintains a fund’s flexibility in presenting
189
See Item 27A(d)(1) of amended Form N-1A.
190
See Instruction 1 to Item 27A(d)(1) of amended Form N-1A.
191
See supra text accompanying footnote 131. Additional information could, however, accompany the
shareholder report provided that it meets the prominence requirements for materials that accompany the
report. See Instruction 12 to Item 27A(a) of amended Form N-1A.
66
information that is most salient to investors, while requiring such information to be presented
in a visually engaging and accessible format.192 In addition, survey data submitted by a
commenter indicated that retail investors, and older investors in particular, expressed that the
new presentation would help them better understand fund performance.193
We are adopting the narrative MDFP section as proposed because we continue to
believe providing shareholders with a more streamlined and visually engaging presentation of
the key factors affecting fund performance will allow shareholders to focus on the most
salient fund information.194 Our approach balances the need for funds to have flexibility in
determining what information is salient given a fund’s unique strategy and risk profile, while
encouraging funds to present that information in a manner that is most effective for
shareholders. Therefore, we do not believe it is necessary to further limit the narrative MDFP
disclosure.
ii.
Performance Line Graph and Guidance on Use of
Market Indexes in Performance Disclosure
Substantially as proposed, the final rules will retain the requirements for the
performance line graph currently included in annual reports, with certain amendments
designed to improve the current presentation and to reflect that a shareholder report will cover
a single class of a multiple-class fund.195 The shareholder report must include a performance
line graph that shows the performance of a $10,000 investment in the fund and in an
192
See, e.g., Consumer Federation of America II Comment Letter; ICI Comment Letter; Fidelity Comment
Letter.
193
Broadridge Comment Letter.
194
See Proposing Release, supra footnote 7, at text following n.180.
195
See Item 27A(d)(2) of amended Form N-1A and related instructions.
67
appropriate broad-based securities market index over a 10-year period.196 In addition, a fund
has the option to compare its performance to other indexes, including more narrowly based
indexes that reflect the market sectors in which the fund invests. We continue to believe the
line graph presentation helps shareholders understand how the fund has performed over a 10year time horizon compared to an appropriate broad-based securities market index and other
relevant indexes, as applicable.197
We are adopting the instructions related to the line graph largely as proposed, with
some conforming changes to reflect other aspects of the final rules. First, in a change from the
proposal, the final rules include an instruction that requires a fund to present performance
information for the class covered in the shareholder report. Second, as proposed, the final
rules remove the current instruction that allows the line graph to cover periods longer than the
past 10 fiscal years. Third, as proposed, the final rules include an instruction that defines a
“broad-based” index as one that represents the overall applicable domestic or international
equity or debt markets, as appropriate.198 And as proposed, the instructions under the final
rules will continue to permit a fund to include narrower indexes that reflect the market
196
An “appropriate broad-based securities market index” is administered by an organization that is not an
affiliated person of the fund, its investment adviser, or principal underwriter, unless the index is widely
recognized and used. See Instruction 6 to Item 27A(d)(2) of amended Form N-1A.
197
See Proposing Release, supra footnote 7, at nn.191-193 and accompanying text.
198
The amendments to the definition of an appropriate broad-based securities market index would affect
performance presentations in fund prospectuses, as well as fund annual reports.
68
segments in which the fund invests in its performance presentation, along with the required
appropriate broad-based securities market index.199
Commenters generally supported the retention of the performance line graph as well as
the prohibition on showing more than 10 years of performance.200 Some commenters
requested enhancements to the line graph. For example, one commenter suggested the line
graph should include percentage values along with dollar amounts to facilitate comparisons.201
Additionally, one commenter suggested allowing funds to add labels at each significant point
in the line graph to enhance comprehension of risk and improve the user experience.202 Two
commenters suggested funds should be required to include a bar chart of returns, similar to
what is currently included in the prospectus, along with the line graph.203
We continue to believe, as discussed more fully in the Proposing Release, that limiting
the performance line graph to 10 years is important to avoid unrealistic investor performancerelated expectations and allow investors to easily identify volatility.204 We also believe adding
199
See Instruction 7 to Item 27A(d)(2) of amended Form N-1A. This release sometimes refers to the
appropriate broad-based securities market index as the “primary index”, and any narrower index(es) as
“secondary index(es).”
200
See, e.g., Consumer Federation of America II Comment Letter; Cornell Law School Comment Letter;
Morningstar Comment Letter; Morningstar Trustees Comment Letter; CFA Institute Comment Letter.
But see ICI Comment Letter (objecting to the prohibition showing performance beyond 10 years).
201
Cornell Law School Comment Letter.
202
Morningstar Comment Letter.
203
Morningstar Trustees Comment Letter; CFA Institute Comment Letter.
204
See Proposing Release, supra footnote 7, at text following n.196 (discussing, for example, that for funds
that have been in existence for a long period of time (e.g., 40 years), a line graph that shows the
performance of a $10,000 investment at the outset of the fund may not be particularly relevant for the
average shareholder, who likely has not been invested in the fund for such an extended period of time).
69
labels at significant points on the line graph may clutter the presentation and hinder an
investor’s ability to understand the information provided.
Further, we continue to believe the line graph is more useful for investors in the
shareholder report than a bar chart. Like a bar chart, a line graph helps illustrate the variability
of a fund’s returns (e.g., whether the fund’s returns have been volatile or relatively consistent
from year to year). But given the other benefits of the line graph—particularly that it presents
performance in dollar terms that may be easier for some shareholders to assess—the final
rules we are adopting maintain the line graph presentation.205 Moreover, the line graph
presentation may help investors understand the general benefits of long-term investments
(e.g., compound interest).
Comments on Broad-Based Securities Market Index
Commenter reactions to the proposed definition of an appropriate broad-based
securities market index were mixed. Some commenters supported the retention of the
requirement to present performance relative to a broad-based index, as well as the proposed
definition.206 One commenter stated that the requirement to compare performance to the
overall applicable securities markets would be useful to investors, as it makes the information
more comparable across funds, and should “also help prevent funds from selecting for
comparison a narrow index designed to make their own performance look artificially
205
This complements the percentage-based presentation in the average annual total returns table. See
Proposing Release, supra footnote 8, at n.193.
206
See, e.g., Comment Letter of Index Industry Association (Jan. 4, 2021) (“Index Industry Association
Comment Letter”); Consumer Federation of America II Comment Letter; NASAA Comment Letter;
Tom and Mary Comment Letter; Ubiquity Comment Letter.
70
strong.”207 Another, supporting the proposed requirement, stated that the requirement would
“ensure that investors have a simple, readily-accessible window into the performance of a
specific investment fund against the broader performance of the securities markets.”208 Some
commenters asked for additional guidance. For example, one commenter suggested that the
definition incorporate more specific criteria regarding index methodology.209 Another
commenter requested the Commission to provide additional clarity on indexes that would
satisfy the proposed definition, such as country-specific indexes, ESG indexes, and indexes of
particular capitalizations.210 Further, another commenter suggested that the Commission
publish a list of permissible indexes.211
In contrast, many industry commenters objected to the proposed definition.212 These
commenters argued that, for some fund strategies like multi-asset funds and alternative
strategy funds, a comparison to an index representing the entire market would be less useful
and could be misleading to investors because these fund strategies are not designed to invest
in, nor provide the performance associated with, any particular overall market. Commenters
also questioned the default requirement to include a broad-based index in a fund’s
207
See Consumer Federation of America II Comment Letter; see also Index Industry Association Comment
Letter (comparing fund performance against a broad-based market index in fund reporting materials
“promotes transparency and helps shareholders evaluate their goals”); see also Abdullah Comment
Letter (stating that it is problematic that funds include narrow indexes as their broad-based index).
208
See NASAA Comment Letter.
209
Id.
210
Tom and Mary Comment Letter.
211
Ubiquity Comment Letter.
212
See, e.g., ICI Comment Letter (suggests changing index definition to “appropriate index”); SIFMA
Comment Letter; Morningstar Comment Letter; Fidelity Comment Letter; Capital Group Comment
Letter; John Hancock Comment Letter; TIAA Comment Letter; Comment Letter of IHS Markit (Jan. 4,
2021) (“IHS Markit Comment Letter”).
71
performance line graph. Although the proposal allows funds to show a secondary index that is
more tailored to the fund’s strategy, commenters argued including any broad-based market
index would be confusing to investors in certain circumstances.213 For example, one
commenter argued that investor confusion could result if the Commission were to require an
index fund that seeks to track a narrow index as a principal investment strategy to compare
itself to a different, broad-based index.214 Furthermore, some commenters argued the
proposed broad-based index requirement would impose additional licensing fees on funds.215
Similarly, one commenter argued retaining the current “widely recognized and used” standard
for using an affiliated index as a fund’s primary index disadvantages smaller funds, whose
affiliated indexes would be less likely to meet this standard and for which the expense of
licensing a “widely recognized and used” index may be more significant.216
Some commenters suggested alternatives designed to alleviate investor confusion
concerns and to enhance benchmark indexes’ informational value. For example, some
commenters urged the Commission to consider requiring labeling the primary index as a
213
Id.
214
Supplemental Comment Letter of the Investment Company Institute (Oct. 10, 2022) (“ICI Comment
Letter on the OIAD Benchmark Study”). But see Abdullah Comment Letter (“Since 40% of fund assets
are index funds, it would be interesting to see whether the performance [of] an index that lines up quite
closely with an index fund is useful to investors. I hypothesize that such a presentation provides no
benefit to an investor and so should not be permitted as the sole benchmark.”).
215
ICI Comment Letter; SIFMA Comment Letter; Vanguard Comment Letter; Dimensional Comment
Letter; Fidelity Comment Letter; T. Rowe Price Comment Letter; see also infra paragraph
accompanying footnotes 751-752 (discussing potential effects of the final rules’ changes to the term
“appropriate broad-based securities market index” on the costs that funds bear, including additional
costs to funds in the form of index-licensing fees, and stating that the amount of these costs will depend,
among other things, on market competition among index providers). But see Index Industry Association
Comment Letter (stating fees charged by broad-based index providers are small and costs to funds
would be minimal).
216
ICI Comment Letter.
72
“general market index” (or similar) to clarify how an investor should use the information it
presents.217 Other commenters suggested the primary index should be one that is specifically
tailored to the fund’s strategy and the secondary index should be one that represents the
overall market.218 Some of these commenters also suggested that funds be permitted to
provide additional information about more narrowly tailored indexes, such as the index’s
underlying components and their weights,219 and an explanation of why the fund believes that
the chosen index is an appropriate indicator of the fund’s performance.220
After considering comments and the findings of the OIAD Benchmark Study, we are
adopting the proposed definition of “appropriate broad-based securities market index” and
retaining the current requirement that a fund must include such an index in its performance
line graph. We continue to believe all funds should compare their performance to the overall
market and that including a broad-based index in performance disclosure gives investors
readily-accessible contextual information about market performance.221 While performance
disclosure that includes an index based on a narrow segment of the market may be useful for
comparison purposes, this does not substitute for the inclusion of an index that provides
information about the performance of the fund against the broader market. For example, if the
Commission were to permit an index fund that seeks to track a narrow index as a principal
217
Fidelity Comment Letter; CFA Institute Comment Letter.
218
Morningstar Comment Letter; Federated Hermes Comment Letter; John Hancock Comment Letter; IHS
Markit Comment Letter; T. Rowe Price Comment Letter.
219
T. Rowe Price Comment Letter.
220
IHS Markit Comment Letter.
221
See supra footnotes 206-208 and accompanying text.
73
investment strategy to show only the performance of the narrow index it seeks to track, and
the performance of the fund and the index were very similar (as they would be to the extent
that the fund tracks the index closely), such a performance presentation would show the extent
to which the fund tracks the index but would be less helpful to investors to provide broader
performance context.222 As another example, the inclusion of a broad-based index helps an
investor in a sector-specific fund determine not only how the fund’s performance relates to
that of its peers, but how the fund’s performance relates to the performance relative to the
market as a whole. Therefore, investors in such funds would benefit from additional
contextual information regarding the performance of the overall market.223
The final rules’ approach is supported in part by the findings of the OIAD Benchmark
Study, which observed that benchmarks can help contextualize a fund’s performance
information for investors, and that some investors use this information to make investment
decisions.224 The study also found that investors of varying levels of sophistication report
preferring performance disclosure that includes both broad and narrow benchmarks.225
222
See supra footnote 214.
223
See, e.g., CFA Institute Comment Letter (“Even if a fund outperforms its benchmark, that may be slight
consolation if the strategy itself performs poorly against the market. Therefore, the investor should also
compare a fund’s returns against the market as a whole.”).
224
See OIAD Benchmark Study, supra footnote 53; see also ICI Comment Letter on the OIAD Benchmark
Study (noting the importance of performance benchmarks to investors).
225
OIAD Benchmark Study, supra footnote 53 at “Figure 9. Preferences for benchmarks.” In the sections
of the OIAD Benchmark Study that analyze benchmarks that currently exist in the mutual fund industry,
the study identified funds’ broad-based benchmarks first by identifying data from the Morningstar
Direct open-end fund database that capture “primary” and “secondary” indexes, and then by
reclassifying these indexes as broad and narrow benchmarks based on the correlation of each index with
the S&P 500 Index. Commenters objected to the use of the S&P 500 Index in the study’s methodology,
arguing that the Commission should not “define or insinuate that a broad-based index must or should
have certain correlation to the S&P 500 Index.” See Abdullah Comment Letter; see also ICI Comment
Letter on the OIAD Benchmark Study (stating that “de facto SEC endorsement of certain indexes would
74
Furthermore, while commenters suggested that narrower benchmarks could provide more
useful comparative information, the OIAD Benchmark Study concluded that investors’
decision-making was generally driven by the positioning of the fund’s performance relative to
the benchmark presented (i.e., whether the fund underperformed or outperformed the
benchmark), irrespective of whether the benchmark presented is narrow or broad.226
Therefore, as we continue to believe a comparison to the overall market is important
contextual information for investors, the evidence that the study provided does not, in our
view, support changing the proposed approach or adopting an alternative requirement (for
example, requiring the inclusion of an “appropriate” benchmark as opposed to an “appropriate
broad-based” benchmark). In addition, the study showed that investors find a fund
significantly less attractive when a performance graph shows the fund’s performance
accompanied by a single benchmark that outperforms the fund. Therefore, to the extent that it
could be easier for a fund to find a narrow benchmark that underperforms the fund than a
broad benchmark, we do not see a reason to discontinue the current requirement to include a
create market distortions and likely increase fund licensing costs”). The OIAD Benchmark Study,
including its methodology and findings, does not reflect findings or conclusions by the Commission as
to what constitutes a broad-based index under the final rules. See infra text accompanying footnotes
230-233 (providing general guidance and examples of the indexes that would qualify as broad-based
indexes under the rule).
226
See OIAD Benchmark Study, supra footnote 53; see also ICI Comment Letter on the OIAD Benchmark
Study (stating that “the underlying results do not find evidence that survey participants believed that the
broad benchmark is a better reference point than the narrow benchmark”). A different academic study
also examines fund performance benchmarks, but with a focus on funds’ behavior with respect to the
performance benchmarks that they select, how benchmark changes affect the appearance of funds’
benchmark-adjusted performance, as well as fund flows that result from changes in performance
benchmarks. See Kevin Mullally and Andrea Rossi, Moving the Goalposts? Mutual Fund Benchmark
Changes and Performance Manipulation (June 24, 2022), available at Mullally, Kevin and Rossi,
Andrea, Moving the Goalposts? Mutual Fund Benchmark Changes and Performance Manipulation
(June 24, 2022) available at https://ssrn.com/abstract=4145883.
75
broad benchmark, as the requirement to include only a narrower benchmark could lead to
gaming behavior. Two commenters specifically addressed the OIAD Benchmark Study and
raised concerns regarding the methodology used by the study and the impact such
methodology had on the study’s conclusions.227 However, the elements of the OIAD
Benchmark Study that support the approach under the final rules are not impacted by the
methodology concerns that commenters raised.228
We recognize that there is a broad diversity of investment strategies that funds
employ, and that certain funds, such as multi-asset and alternative strategy funds, do not
invest within a single overall market or attempt to provide returns that are related to the
returns of any single overall market. However, comparing the performance of these types of
funds against an overall market index will provide shareholders with valuable information
regarding how their inv
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