Optional Internet Availability of Investment Company Shareholder Reports

Federal RegisterJun 22, 2018

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 239, 240, 249, 270, and 274

[Release Nos. 33-10506; 34-83380; IC-33115; File No. S7-08-15]

RIN 3235-AL42

Optional Internet Availability of Investment Company Shareholder Reports

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting new rule 30e-3 under the Investment Company Act of 1940. Subject to conditions, new rule 30e-3 will provide certain registered investment companies with an optional method to satisfy their obligations to transmit shareholder reports by making such reports and other materials accessible at a website address specified in a notice to investors. We are also adopting amendments to rule 498 under the Securities Act of 1933 and our fund registration forms to require that during a certain transition period funds that choose to implement the new delivery method for shareholder reports provide prominent disclosures in prospectuses and certain other shareholder documents that will notify investors of the upcoming change in transmission format for a period of two years. New rule 30e-3 and the amendments to rule 498 and our registration forms address the fact that some investors may wish to receive shareholder reports in paper. As such, the new rule incorporates a set of protections so that investors who prefer to receive reports in paper will continue to receive them in that format. These protections include, among others, a minimum length phase-in period that ends no earlier than December 31, 2020 and notice requirements that must be implemented and followed beginning January 1, 2019, or the date shares are first publicly offered, if a registered investment company would want to use new rule 30e-3 as of January 1, 2021. The rule requires that a paper notice be sent to an investor each time a current shareholder report is accessible online. The notice must include instructions for how an investor can elect—at any time—to receive all future reports in paper, or request to receive particular reports in paper on an

ad hoc

basis. We are also adopting related amendments to certain other rules and forms. This optional method is intended to modernize the manner in which periodic information is made available to investors, which we believe will improve investors' experience while reducing expenses associated with printing and mailing shareholder reports that are borne by investment companies and ultimately their investors.

DATES:

This rule is effective January 1, 2019, except:

• Amendatory Instructions 5 and 25 to 17 CFR 230.498 and Form N-CSR (referenced in 17 CFR 249.331 and 274.128), which are effective January 1, 2021; and

• Amendatory Instructions 6, 13, 16, 18, 20, 22, and 24 to 17 CFR 230.498, 17 CFR 270.30e-3, Form N-1A (referenced in 17 CFR 239.15A and 274.11A), Form N-2 (referenced in 17 CFR 239.14 and 274.11a-1), Form N-3 (referenced in 17 CFR 239.17a and 274.11b), Form N-4 (referenced in 17 CFR 239.17b and 274.11c), and Form N-6 (referenced in 17 CFR 239.17c and 274.11d), which are effective January 1, 2022.

FOR FURTHER INFORMATION CONTACT:

J. Matthew DeLesDernier and John Lee, Senior Counsels; or Michael C. Pawluk, Senior Special Counsel, at (202) 551-6792, Investment Company Regulation Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

The Securities and Exchange Commission (the “Commission”) is adopting: New rule 30e-3

under the Investment Company Act of 1940 (“Investment Company Act”);

amendments to Forms N-1A,

N-2,

N-3,

N-4,

and N-6

under the Investment Company Act and the Securities Act of 1933 (“Securities Act”);

amendments to Form N-CSR

under the Investment Company Act and the Securities Exchange Act of 1934 (“Exchange Act”);

amendments to rule 498

under the Securities Act; amendments to rule 14a-16

under the Exchange Act; and amendments to Section 800 of 17 CFR part 200.

17 CFR 270.30e-3.

15 U.S.C. 80a-1

et seq.

Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act are to Title 17, Part 270 of the Code of Federal Regulations [17 CFR part 270].

17 CFR 239.15A and 17 CFR 274.11A.

17 CFR 239.14 and 17 CFR 274.11a-1.

17 CFR 239.17a and 17 CFR 274.11b.

17 CFR 239.17b and 17 CFR 274.11c.

17 CFR 239.17c and 17 CFR 274.11d.

15 U.S.C. 77a

et seq.

17 CFR 249.331 and 17 CFR 274.128.

15 U.S.C. 78a

et seq.

17 CFR 230.498.

17 CFR 240.14a-16.

17 CFR 200.800.

Table of Contents

I. Introduction

A. Public Comment

B. Overview of Final Rule and Transmission Framework Generally

C. Other Actions

II. Discussion

A. General Comments Regarding Rule 30e-3

1. Increased Internet Usage

2. Use of “Implied Consent”

3. Cost Savings

4. Regulatory Consistency

5. Environmental Benefits

6. Reliability and Security Concerns

7. Investor Advisory Committee

B. Adoption of Rule 30e-3 and Related Amendments

1. Overview

2. Conditions of Rule 30e-3

3. Related Amendments

C. The Role of Certain Financial Intermediaries

1. Distribution of Notices to Beneficial Owners

2. Beneficial Owner Elections for Paper Reports

3. Website Availability of Materials

D. Extension of Similar Delivery Framework to Other Documents

E. Effective Dates

1. Rule 30e-3

2. Disclosure Amendments

3. Other Amendments

4. Communications With Investors During the Extended Transition Period

III. Economic Analysis

A. Introduction

B. Economic Baseline and Affected Parties

C. Benefits

1. Cost Savings

2. Increased Access to and Review of Portfolio Information and Shareholder Reports

D. Costs

1. Compliance Costs

2. Other Costs

E. Alternatives

IV. Paperwork Reduction Act

A. Availability of Shareholder Report and Other Materials

B. Proposed Initial Statement

C. Notice

D. Delivery Upon Request

E. Impact on Information Collections for Rules 30e-1 and 30e-2

F. Related Disclosure Amendments

G. Form N-CSR

V. Final Regulatory Flexibility Analysis

A. Need for and Objectives of the Rule, Rule Amendments and Form Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VI. Statutory Authority

I. Introduction

Today we are adopting rule 30e-3 under the Investment Company Act,

a rule that provides registered management companies and any separate series thereof and certain registered unit investment trusts (“UITs”)

with an optional method to satisfy requirements to transmit shareholder reports by posting those reports online if they meet certain conditions.

In order to rely on the rule, funds will be required to make their reports and other required materials publicly accessible, free of charge, at a website address specified in a notice to shareholders,

and meet certain other conditions specified in the rule. In recognition of the fact that some investors may wish to receive their shareholder reports in paper, the rule incorporates a set of protections designed to preserve the ability of these investors to do so. Thus, the rule accommodates the preferences of all investors regarding their preferred means of communication—whether they wish to receive reports in paper or electronically, or simply to be notified that the reports are available online. To that end, we are also adopting an extended transition period with staged effective dates, and the earliest that a fund could rely on the rule to satisfy shareholder report transmittal requirements is January 1, 2021.

Rule 30e-3 was proposed in May 2015 as part of the Commission's broader Investment Company Reporting Modernization proposal.

See

Investment Company Reporting Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 2015)] (“Proposing Release”). As part of the proposal, we also proposed new forms (Form N-CEN and Form N-PORT), amendments to Regulation S-X, and other amendments to modernize the reporting and disclosure of information by registered investment companies. In October 2016, the Commission adopted final rules related to the proposal, with the exception of rule 30e-3.

See

Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (“Reporting Modernization Adopting Release”).

Unless the context otherwise requires, for ease of reference, throughout this release “fund” or “funds,” individually or collectively, refers to registered management companies (and any separate series thereof) and UITs.

The final rule applies to reports required by rule 30e-1 (reports of registered management companies) and reports required by rule 30e-2 (reports to shareholders of registered UITs, substantially all of the assets of which consist of securities issued by a management company).

See

rule 30e-3(a); rule 30e-1(a); rule 30e-2(a).

Interests in securities issued by insurance company separate accounts organized as UITs are typically referred to as accumulation units, not shares. For convenience, however, in this release owners of interests in securities issued by UITs, whether the issuer is a separate account or otherwise, are referred to as shareholders, and accumulation units are referred to as shares.

This new option is intended to modernize the manner in which funds deliver periodic information to investors. We believe it will improve investors' ability to access and use this information (for example, by providing investors with access to at least a full year of complete portfolio holdings information in one location), while reducing expenses associated with printing and mailing that are borne by funds, and ultimately, by their investors. The rule draws on the Commission's experience of more than twenty years with use of the internet as a medium to provide documents and other information to investors.

The rule also draws on the Commission's investor testing efforts and other empirical research concerning investors' preferences about methods of delivery for required disclosure documents and use of the internet for financial and other purposes generally.

See, e.g.,

Use of Electronic Media for Delivery Purposes, Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (“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)] (“1996 Release”) (providing Commission views on electronic delivery of required information by broker-dealers, transfer agents, and investment advisers); Use of Electronic Media, Investment Company Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (“2000 Release”) (providing updated interpretive guidance on the use of electronic media to deliver documents on matters such as telephonic and global consent, issuer liability for website content, and legal principles that should be considered in conducting online offerings).

See also

Securities Offering Reform, Securities Act Release No. 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform”) (adopting rule 172 under the Securities Act providing an “access equals delivery” framework under which issuers and intermediaries can satisfy their final prospectus delivery obligations); Shareholder Choice Regarding Proxy Materials, Investment Company Act Release No. 27911 (July 26, 2007) [72 FR 42222 (Aug. 1, 2007)] (“Shareholder Choice Regarding Proxy Materials Release”) (adopting rule amendments requiring issuers to post their proxy materials on a specified website and provide shareholders with a notice of internet availability of the materials); 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 4546 (Jan. 26, 2009)] (“Summary Prospectus Release”) (permitting the use of a summary prospectus by registered open-end management investment companies); Interactive Data for Mutual Fund Risk/Return Summary, Investment Company Act Release No. 28617 (Feb. 11, 2009) [74 FR 7748 (Feb. 19, 2009)] (“XBRL Release”) (requiring open-end funds to provide the risk/return section of their prospectus in interactive data format using eXtensible Business Reporting Language (“XBRL”)); Amendments to Rules Requiring Internet Availability of Proxy Materials, Securities Act Release No. 9073 (Feb. 22, 2010) [75 FR 9073 (Feb. 26, 2010)] (“Internet Availability of Proxy Materials Release”) (providing additional flexibility regarding the format of the notice of internet availability of proxy materials); Reporting Modernization Adopting Release,

supra

note 14; Inline XBRL Filing of Tagged Data, Securities Act Release No. 10323 (Mar. 1, 2017) [82 FR 14282 (Mar. 17, 2017)] (“Inline XBRL Release”) (proposing the use of the Inline XBRL format for the submission of operating company financial statement information and mutual fund risk/return summaries); Exhibit Hyperlinks and HTML Format, Securities Act Release No. 10322 (Mar. 1, 2017) [82 FR 14130 (Mar. 17, 2017)] (“Exhibit Hyperlinks and HTML Format Release”) (requiring exhibit hyperlinks and filings in HTML format); FAST Act Modernization and Simplification of Regulation S-K, Securities Act Release No. 10425 (Oct. 11, 2017) [82 FR 50988 (Nov. 2, 2017)] (“FAST Act Regulation S-K Release”) (proposing amendments to modernize and simplify certain disclosure requirements in Regulation S-K, and related rules and forms).

For example, in 2011, the Commission engaged a consultant to conduct investor testing regarding shareholder reports. The consultant's report concerning that testing (“Investor Testing of Mutual Fund Shareholder Reports”) is in the comment file for this rule (

available at www.sec.gov/comments/s7-08-15/s70815.shtml

). Separately, Commission staff prepared a study of investor financial literacy pursuant to Section 917 of the Dodd-Frank Act. Materials relating to this study, including the staff's report, are available at

http://www.investor.gov/publications-research-studies/sec-research.

In addition, in 2007, the Commission engaged a consultant to conduct focus group interviews and a telephone survey concerning investors' views and opinions about various disclosure documents filed by companies, including mutual funds. The consultant's report concerning the focus group testing and related transcripts are in the comment file for this rule (

available at www.sec.gov/comments/s7-08-15/s70815.shtml

). The consultant's report concerning the telephone survey is available at

http://www.sec.gov/pdf/disclosuredocs.pdf

We continue to search for better ways of providing investors with the disclosure that they need to evaluate funds in which they are considering investing or currently hold shares. As part of these general efforts, we are also issuing a Request for Comment directed at investors regarding ways in which fund disclosure, including shareholder reports, may be improved.

We are also issuing a second Request for Comment on the processing fees charged by intermediaries for distributing fund shareholder reports and other materials to investors.

Fund Retail Investor Experience and Disclosure Request for Comment, Investment Company Act Release No. 33113 (June 5, 2018) (“Disclosure Request for Comment”). Comments are requested by October 31, 2018;

see infra

Section I.C.

Request for Comments on the Processing Fees Charged by Intermediaries for Distributing Materials Other Than Proxy Materials to Fund Investors, Investment Company Act Release No. 33114 (June 5, 2018) (“Processing Fee Request for Comment”). Comments are requested by October 31, 2018;

see infra

Section I.C.

A. Public Comment

We received over 1,000 comments on the Proposing Release, the vast majority of which specifically commented on

proposed rule 30e-3.

While some commenters provided comments on specific aspects of the proposal, most focused on whether the Commission should adopt the rule at all. Commenters supporting the proposed rule cited benefits including those related to website transmission generally, the proposed rule's consistency with internet usage trends, savings to funds and ultimately investors from the reduction in printing and mailing costs, and environmental benefits. In many cases, these commenters recommended modifications to the proposed rule to increase cost savings and other benefits under the rule and to provide clarity regarding how the rule would operate in certain contexts.

See infra

Section II.A. The comment letters on the Proposing Release (File No. S7-08-15) are available

at https://www.sec.gov/comments/s7-08-15/s70815.shtml.

See infra

Sections II.B.2 (application to UITs with transmission obligations under rule 30e-2), II.C (shares held through certain financial intermediaries).

Commenters opposed to the proposed rule focused on concerns such as the impact on certain demographic groups that may have limited access to the internet, the proposed rule's use of implied consent, the extent to which cost savings under the proposed rule would not be as great as anticipated by the Commission, and the adverse impact on certain third parties such as the paper industry and mail carriers.

B. Overview of Final Rule and Transmission Framework Generally

After consideration of the comments we received, we are adopting rule 30e-3 with several modifications designed to respond to investor protection concerns, provide additional flexibility and clarity in the operation of this transmission regime, and further increase cost savings for investors. Some key elements of the new transmission framework under rule 30e-3 include:

•

Use of Rule is Optional.

We note that this new method of transmission is optional—funds that wish to transmit shareholder reports in paper or pursuant to the Commission's existing electronic delivery guidance

will continue to be able to satisfy their regulatory obligations by those methods.

See

1995 Release,

supra

note 18; 1996 Release,

supra

note 18; 2000 Release,

supra

note 18.

•

Use of Rule With Respect to Investors Who Have Opted Into Electronic Delivery.

The rule will not require changes to existing methods of delivering shareholder reports electronically. The rule does not supercede or modify the Commission's existing guidance regarding electronic delivery of fund shareholder reports. Funds and intermediaries may continue to rely on the Commission's guidance to electronically transmit reports to investors who have elected to receive reports electronically.

For example, a fund or intermediary will not be required to send those investors, electronically or otherwise, a notice required by the rule. Some investors who receive shareholder reports pursuant to rule 30e-3 may in the future elect delivery under the Commission's electronic delivery guidance. The final rule requires funds to include in notices instructions regarding how an investor can elect to receive shareholder reports or other documents by electronic delivery if the fund offers electronic delivery.

See

rule 30e-3(c)(1)(v)(C).

•

Preservation of Preference for Paper Reports.

Recognizing that some investors may wish to receive their shareholder reports in paper, the final rule—as did the proposed rule—incorporates a set of protections designed to preserve the ability of investors to receive paper reports on a per report or ongoing basis if that is their preferred means of communication.

See infra

Sections II.B.2.c, II.B.2.d.

•

Website Availability of Reports and Other Information.

As proposed, the shareholder report and other required materials must be made publicly accessible and free of charge at a website address specified in a notice to investors.

See infra

Section II.B.2.a.

•

Notice.

Substantially as proposed, investors must be provided with a paper notice of the website availability of the shareholder report (“Notice”) that contains instructions by which investors will be able to request a paper or email copy. The final rule allows funds greater flexibility than the proposal in the design of the Notice by permitting it to contain additional information including, for example, content from the shareholder report that the fund considers helpful to investors, instructions on how investors can elect electronic delivery of reports and other materials, and pictures, logos, or similar design elements so long as the design is not misleading and the information is clear.

See infra

Section II.B.2.b; note 191 (reminding funds of their obligations with respect to the antifraud provisions of the federal securities laws).

•

New Extended Transition Period.

To inform investors in advance of the change of transmission method, and to accommodate systems and operations changes by funds, intermediaries and service providers necessary to implement the new optional transmission regime, we are adopting an extended transition period.

This extended transition period replaces the proposed requirement to send an “Initial Statement” 60 days in advance of reliance on the rule with respect to an investor.

See infra

Sections II.B.2.d, II.B.2.f, II.E.

•

Filing of Notice.

We have modified the proposal by adopting amendments to Form N-CSR to require the filing of Notices that incorporate disclosures from the shareholder report.

This requirement should help further inform Commission regulatory efforts with respect to how the content of shareholder reports can be improved and should help our monitoring for compliance with the rule.

See infra

Section II.B.2.b.v.

•

Guidance Regarding Financial Intermediaries.

We are also providing guidance, as requested by commenters, to clarify the operation of the rule in the context of financial intermediaries such as broker-dealers.

See infra

Section II.C.

C. Other Actions

We are committed to continuously improving the content and delivery of information to investors, including through efforts that encourage the use of technology to provide investors with the tools they need to evaluate their investments, and reducing costs and other regulatory burdens where appropriate. To that end, today we are taking two related actions intended to further these goals.

First, we approved amendments to rules of the New York Stock Exchange (“NYSE”) regarding processing fees paid to financial intermediaries for the delivery of shareholder reports and Notices under “notice and access” rules such as rule 30e-3 to investors holding shares through certain financial intermediaries.

The NYSE rule

amendments state that “notice and access” processing fees, which previously applied only to proxy distributions where an issuer elects to utilize notice and access for a proxy distribution,

may also apply to transmission of shareholder reports under rule 30e-3 to beneficial owners who purchase their fund shares through broker-dealer intermediaries.

The amendments clarify, however, that the “notice and access” fee will not be charged for any account with respect to which a fund pays a “preference management” fee in connection with a distribution of shareholder reports.

In addition, the NYSE rule amendments clarify that, for purposes of determining the amount of notice and access fees to be charged, the number of accounts should be computed by aggregating shares of any class of stock of the issuer eligible to receive the same distribution.

See

Exchange Act Release Nos. 83378 (June 5, 2018) (Order Affirming Action by Delegated Authority Approving SR-NYSE-2016-55 and Discontinuing Stay); 79370 (Nov. 21, 2016) [81 FR 85655 (Nov. 28, 2016)] (Stay Order); 79355 (Nov. 18, 2016) [81 FR 85291 (Nov. 25, 2016)] (Approval Order) (“NYSE Approval Order”); 78589 (Aug. 16, 2016) [81 FR 56717 (Aug. 22, 2016)] (Notice). NYSE rule 451 outlines three types of processing fees discussed by commenters in connection with the proposal: (i) The “interim report” fee (a processing unit fee of $0.15 per account, whether a report is delivered in paper, or delivery is “suppressed” because the report is delivered electronically or not delivered because of “householding” or other reasons); (ii) the “preference management” fee (a $0.10 fee assessed for each suppressed account—

e.g.,

accounts receiving shareholder reports by email or householded accounts); and (iii) a “notice and access” fee (an incremental fee charged at declining marginal levels based on the number of all financial intermediary accounts through which fund securities are beneficially owned; there are five marginal fee tiers (in $0.05 increments) per account beginning with the $0.25 per account tier and decreasing to $0.05 per account tier).

See

NYSE rule 451.90.3-451.90.5;

see also

NYSE rules 465 and 451.10 (noting applicability of fees under NYSE

rule 451 to distribution of interim and annual reports).

See

rule 14a-16 under the Exchange Act which permits issuers, that comply with the requirements of the rule, to distribute proxy material electronically through the “notice and access” method. 17 CFR 240.14a-16.

See

NYSE rule 451.90(5). The Commission notes that the NYSE rule states that the “notice and access fees” in NYSE rule 451.90(5) apply to the “distribution of investment company shareholder reports pursuant to any `notice and access' rules adopted by the [Commission].” We believe that rule 30e-3 qualifies as such a rule.

Id.

Second, today we also are issuing two releases requesting comment on issues related to shareholder reports. In the first release, we are requesting comment on enhancing fund disclosures to improve the investor experience and to help investors make more informed investment decisions.

This release requests feedback directly from fund investors on the delivery, design and content of fund disclosure.

See

Disclosure Request for Comment,

supra

note 20.

In the second release, we are requesting comment on the processing fees charged by intermediaries for distributing fund shareholder reports and other materials to investors.

For example, we are requesting comment on the current processing fee structure, including the application of various processing fees and rates thereof under the NYSE rules, transparency of these fees, practices related to the payment of these fees and remittances received by financial intermediaries for delivery of fund documents (including shareholder reports), and the appropriateness of these fees in cases where intermediaries are separately paid shareholder servicing fees from fund assets.

See

Processing Fee Request for Comment,

supra

note 21.

II. Discussion

A. General Comments Regarding Rule 30e-3

Most commenters on the proposal focused on whether we should adopt rule 30e-3 and particularly its optional method of satisfying requirements to transmit shareholder reports by making them available on websites. We discuss below general comments received on the proposal, as well as why we have determined to adopt the rule. Specific comments on the particular provisions of the rule as proposed are discussed in more detail in Sections II.B.2-II.E below.

1. Increased Internet Usage

Commenters supporting the rule cited the benefits of allowing transmission of shareholder reports by making them accessible on websites, including improving the overall accessibility of the information

and expanding the possibilities for innovative visual displays and layered disclosure.

Commenters pointed to trends towards increasing internet usage, with some commenters highlighting that 94% of households owning mutual funds had some form of internet access in 2014, up from 68% in 2000.

Commenters also noted that internet usage has increased among previously underserved demographic groups.

See, e.g.,

Comment Letter of Capital Research and Management Company (Aug. 11, 2015) (“Capital Research Comment Letter I”); Comment Letter of Capital Research and Management Company (May 7, 2018) (“Capital Research Comment Letter II”); Comment Letter of Simpson Thacher & Bartlett LLP (Aug. 11, 2015) (“Simpson Thacher Comment Letter”); Comment Letter of Interactive Data Pricing and Reference Data LLC (Aug. 10, 2015) (“Interactive Data Comment Letter”); Comment Letter of Investment Company Institute (Aug. 12, 2015) (“ICI Comment Letter I”) (noting many investors now prefer enhanced availability of information on the internet).

See

Comment Letter of Investment Company Institute (July 8, 2016) (“ICI Comment Letter II”) (“Paper reports are unable to help investors navigate layered information or access more detailed information. The internet offers the ultimate a la carte menu: Those who want more extensive information can get it; those who do not can access or be provided the essential information they need, in a form they are likely to use.”);

see also

Recommendation of the Investor Advisory Committee Regarding Promotion of Electronic Delivery and Development of a Summary Disclosure Document for Delivery of Investment Company Shareholder Reports (Dec. 7, 2017) (“Investment Advisory Committee Recommendation”); Comment Letter of the Consumer Action and National Consumers League to Anne Sheehan, Chairman of the Investor Advisory Committee (Dec. 1, 2017),

available at https://www.sec.gov/comments/265-28/26528-2748128-161587.pdf.

See, e.g.,

Comment Letter of the Committee of Annuity Insurers (Aug. 11, 2015) (“CAI Comment Letter I”); Capital Research Comment Letter I; ICI Comment Letter I.

See, e.g.,

ICI Comment Letter I (noting widespread use of the internet among various age groups, education levels and income levels and highlighting a 2014 ICI study that “found the following with respect to internet access in mutual fund owning households: (1) Head of household age 65 or older, 86% have access; (2) education level of high school diploma or less, 84% have access; and (3) household income of less than $50,000, 84% have access”); ICI Comment Letter II (highlighting a 2015 survey showing that 85% of all Americans had access to the internet); CAI Comment Letter I (stating that “very widespread internet access holds true even for those demographic groups that may generally be assumed to have relatively less internet access than most”).

A number of commenters stated that website disclosure is consistent with many investors' preferences.

One commenter stated that shareholder use of the internet to conduct fund transactions had increased sharply since 2005, with 89% of the transactions processed by its fund family for direct shareholders made through electronic means in 2014.

Similarly, another commenter stated that “with increased ease of access, investors also increasingly prefer enhanced availability of financial information on the internet.”

This commenter provided survey results from 2013 finding that 82% of U.S. households owning mutual funds used the internet

for financial purposes.

Several commenters also believed that the rule as proposed included appropriate protections for investors preferring paper by preserving the option for fund investors to continue receiving paper reports.

See, e.g.,

Capital Research Comment Letter I; Comment Letter of CFA Institute (Aug. 10, 2015) (“CFA Institute Comment Letter”) (“We support this proposal to modernize the system for providing reports and believe most investors will view this as positively.”); ICI Comment Letter II (stating “the Commission's proposal aligns much more effectively with shareholder preferences for information access than the current outdated system”).

See

Comment Letter of T. Rowe Price Associates, Inc. (Aug. 21, 2015) (“T. Rowe Price Comment Letter I”) (comparing this with data from 2005 when 65% of transactions processed with direct shareholders were made through electronic means); Comment Letter of T. Rowe Price Associates, Inc. (Apr. 17, 2018) (“T. Rowe Price Comment Letter II”) (noting that in 2017, 87% of their interactions “with personal and workplace investors took place digitally via mobile applications or the Web”).

See also

FINRA Investor Education Foundation, Investors in the United States 2016 (Dec. 2016),

available at http://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf

(“FINRA 2016 Investors Study”). While the FINRA 2016 Investors Study does not distinguish fund shareholder reports from other disclosure materials regarding investments (nor does it specify what disclosure materials are contemplated in this survey

e.g.,

shareholder reports, summary prospectuses, statutory prospectuses, account statements, etc.), it presents general investor survey data regarding investor disclosure preferences: 49% of respondents prefer paper documents physically mailed, 27% of respondents prefer electronic documents by email, 14% prefer in-person meetings with a broker/adviser, and 6% prefer that documents are accessed on the internet (not via email).

See

ICI Comment Letter I.

See id.

See, e.g.,

CFA Institute Comment Letter (“We believe the proposed conditions for using this option are appropriate to accommodate those investors wishing to receive paper reports.”); Comment Letter of State Street Corporation (Aug. 11, 2015) (“State Street Comment Letter”) (“We believe there are adequate safeguards in Rule 30e-3 which would allow shareholders who desire a hardcopy to still receive one.”); Comment Letter of Jonathan F. Zeschin, Independent Trustee and Board Chair of Matthews Asia Funds (Sept. 27, 2016) (“[T]hose few shareholders who prefer to receive written reports in the mail can still do so, and the proposed rule includes appropriate notices and other safeguards for those shareholders.”); Comment Letter of Independent Directors Council (May 10, 2016) (“IDC Comment Letter”) (“It is important to bear in mind that the proposed rule includes appropriate safeguards for those shareholders who may still prefer to receive written reports in the mail.”); Comment Letter of Fidelity Equity and High Income Funds (Apr. 24, 2017) (“Fidelity Comment Letter II”) (“Accordingly, investors ultimately would retain the ability to determine the manner in which they receive their shareholder reports and those who desire paper delivery would be appropriately protected.”).

A number of commenters in opposition to the proposed rule, however, suggested that the rule could have adverse effects on investors.

Specifically, several commenters argued that internet access and use among Americans was not universal.

Some commenters provided data showing that approximately 25-30% of Americans do not have a computer with broadband internet access in their homes.

Some commenters noted that particular demographic groups may be less likely to use the internet.

Some commenters drew on the results of studies we noted in the Proposing Release, which indicate that, in 2013, 41% of seniors 65 and older do not use the internet and that, in 2014, 34% of seniors 65 and older own mutual funds.

Some commenters suggested that some people are less likely to use the internet specifically for financial purposes, to research funds, or to receive shareholder reports and other disclosure.

See, e.g.,

Comment Letter of Sen. Susan M. Collins, Sen. Angus S. King, Jr., and Rep. Bruce Poliquin (Aug. 10, 2016) (“Collins, King and Poliquin Comment Letter”) (“Our concern, is that the safeguards in the proposed rule will not adequately ensure that those who rely on paper delivery will continue to have access to this important information.”); Comment Letter of David T. Herrod (Aug. 1, 2015) (“I feel an electronic default option would be detrimental to me as well as thousands of other investors.”); Comment Letter of Thomas G. Umenhofer (July 20, 2015) (“Not all Mutual Fund participants have access to computers or the internet, but do have access to the USPS. By implementing Rule 30e-3, you will be disadvantaging many mutual fund participants.”).

See, e.g.,

Comment Letter of Zane Hollenberger (July 27, 2015) (contending that internet access was not universal and would serve as a “poor replacement” for timely receipt of personal financial information through the mail); Comment Letter of John R. Dyce, President of the Ohio State Association of Letter Carriers (July 28, 2015) (“Significant portions of this country's population lack access to electronic services.”); Comment Letter of National Rural Letter Carriers' Association (Aug. 5, 2015) (“National Rural Letter Carriers' Comment Letter”) (“[T]he proposed rule would disadvantage the elderly, those with disabilities, and racial and ethnic minorities as these groups are far less likely than other Americans to have regular access to the internet.”).

See, e.g.,

Comment Letter of American Forest and Paper Association (Aug. 7, 2015) (“American Forest and Paper Comment Letter”); Comment Letter of Forest Resources Association Inc. (Aug 10, 2015) (“Forest Resources Comment Letter”); Comment Letter of Consumer Action and National Consumers League (Apr. 12, 2016) (“Consumer Action and Consumers League Comment Letter”).

See also

Comment Letter of Broadridge Financial Solutions, Inc. (Aug. 11, 2015) (“Broadridge Comment Letter I”) (noting that “growth in internet usage is driven in part by a greater penetration of mobile devices whose use to access regulatory reports on the internet would add costs to investors”).

See, e.g.,

American Forest and Paper Comment Letter; Comment Letter of Best Cutting Die Company (Aug. 6, 2015) (“Many `seniors' are not computer literate, and may not even own, or have access to a computer.”); Comment Letter of Consumer Action (Jan. 8, 2016) (“Consumer Action Comment Letter”) (stating that seniors and minorities would be disadvantaged by the proposal given statistics showing these groups may be less likely to have access to the internet); National Rural Letter Carriers' Comment Letter (“internet access in some rural parts of the country remains limited and many of our customers must rely on the mail for their investment reports.”).

See

Proposing Release,

supra

note 14, at 33627;

see, e.g.,

American Forest and Paper Comment Letter; Comment Letter of Eric Skogseth, EVP of Bay State Envelope (July 16, 2015); Comment Letter of Lydia J. Morgan, CEO of Morgan Printers, Inc. (June 12, 2015).

But see

ICI Comment Letter I (discussing the results of a 2014 ICI survey showing that, among Americans 65 or older, those who own mutual funds are more likely to have internet access).

See, e.g.,

Broadridge Comment Letter I.

2. Use of “Implied Consent”

A number of commenters addressed the use of “implied consent” to allow for website transmission of shareholder reports. One commenter pointed to behavioral research that suggested implied consent is a “weak” reflection of actual willingness and that the introduction of new processes (

e.g.,

website transmission) may block “psychologically effective access” to shareholder reports.

Another commenter stated that implied consent is inadequate because the proposed method for obtaining implied consent “does not justify the conclusion that implied consent is gained for investors” and that most investors preferred paper communications.

Some commenters noted that certain federal agencies do not permit implied consent for electronic delivery of certain materials.

Commenters also pointed to a 2013 survey that asked if the government or firms in the private sector should force consumers to shift from paper to electronic content in which 73% of respondents said it is wrong to expect anyone to go online to interact with government agencies.

Some commenters opposed to the implied consent provisions in proposed rule 30e-3 suggested that the proposed Initial Statement (from which consent would be inferred under the proposed rule)

could be inadvertently discarded or missed by investors.

See id.

See

American Forest and Paper Comment Letter.

See, e.g.,

American Forest and Paper Comment Letter (stating that the Internal Revenue Service does not allow financial organizations to use implied consent to enroll investors in electronic delivery of tax documents); Comment Letter of Domtar (Aug. 3, 2015) (“The SEC should follow other federal agencies in requiring recipients to take an affirmative action for e-delivery of important investment documents.”). With respect to electronic delivery (where documents or website links thereto are emailed directly to an investor's individual email address), the Commission also does not permit implied consent.

See

1995 Release,

supra

note 18;

cf.

Comment Letter of L.A. Schnase (July 2, 2015) (“Schnase Comment Letter”) (supporting the proposal, but expressing concern about the “piecemeal approach” the Commission is taking to the regulatory scheme governing electronic deliveries).

See, e.g.,

American Forest and Paper Comment Letter; Consumer Action Comment Letter. The proposed rule, however, would not have required electronic transmission of shareholder reports, and investors would not have been required to go online to interact with the Commission or any other government agency.

See

proposed rule 30e-3(c).

See

Collins, King and Poliquin Comment Letter; Comment Letter of Karen Hibdon (July 31, 2015).

We also received a number of comments stating that website transmission of shareholder reports should not be the default transmission option.

Others expressed concerns with having to use personal printers to print shareholder reports,

and one commenter expressed concern that funds would eventually charge investors for paper shareholder reports.

See, e.g.,

Comment Letter of Barry Daniels (June 12, 2015); Comment Letter of Larry Hensley, Process Engineer, Glatfelter (Aug. 3, 2015); Comment Letter of Craig Timm (Aug. 10, 2015).

See, e.g.,

Comment Letter of Bob Broadbear (July 20, 2015); Comment Letter of Marina Joyce (June 12, 2015); Comment Letter of Forest2Market (Aug. 7, 2015).

See

Comment Letter of Robert C. Tugwell (Aug. 10, 2015).

On the other hand, we received several comments stating that the proposed rule better aligns with investor preferences for access to financial information,

and recommending that

we broaden the use of implied consent in certain ways.

One of these commenters noted that the proposal, which would allow investors to “opt into” paper delivery, would allow funds to more readily accommodate the preferences of all investors.

Several commenters also noted that this approach was consistent with prior Commission efforts to improve accessibility of information for the benefit of investors.

See, e.g.,

ICI Comment Letter II (“[F]ewer than half of mutual fund shareholders still review some printed materials for information about their fund

investments, and over two-thirds of these individuals likewise access online materials to gather information on their fund investments.”).

See, e.g.,

Comment Letter of Allianz Life Insurance of North America (Aug, 11, 2015) (“Allianz Comment Letter”) (recommending that the Commission expand proposed rule 30e-3 to allow broader electronic delivery of certain documents, including prospectuses, using implied consent); ICI Comment Letter I (recommending that the Commission permit investors' implied consent to cover all series and funds in a fund complex and all funds held through a single financial intermediary).

See

ICI Comment Letter I.

See, e.g., id.; see also

Comment Letter of The Dreyfus Corporation (Aug. 11, 2015) (“Dreyfus Comment Letter”).

3. Cost Savings

Many commenters supporting the proposed rule stated that the rule would result in reduced printing and mailing costs for funds (and ultimately fund investors).

Several commenters provided estimates of costs relating to potential cost savings under rule 30e-3.

One commenter indicated that its fund group spends approximately $3.8 million annually to print and mail shareholder reports to direct fund investors, and estimated that the proposed rule would result in savings of up to 50% of that amount.

Another commenter estimated annual industry costs for print and mail delivery of shareholder reports at $344 million and suggested that, if the proposed rule was adopted, it had the potential to save fund shareholders on a net basis an estimated $140 million within the first three years and $89 million per year after the first year.

See, e.g.,

Comment Letter of BlackRock, Inc. (Aug. 11, 2015) (“BlackRock Comment Letter”); Comment Letter of the Center for Capital Markets Competitiveness (Sept. 6, 2016) (“CCMC Comment Letter”); Comment Letter of Confluence Technologies, Inc. (Aug. 11, 2015) (“Confluence Comment Letter”); ICI Comment Letter I; ICI Comment Letter II; IDC Comment Letter; Comment Letter of Mutual Fund Directors Forum (Aug. 11, 2016); Schnase Comment Letter; Comment Letter of the Securities Industry and Financial Markets Association (Aug. 11, 2015) (“SIFMA Comment Letter”); Comment Letter of the Asset Management Group of the Securities Industry and Financial Markets Association (Aug. 11, 2015) (“SIFMA AMG Comment Letter”); Simpson Thacher Comment Letter; T. Rowe Price Comment Letter I; T. Rowe Price Comment Letter II; Comment Letter of Vanguard (Aug. 11, 2015) (“Vanguard Comment Letter”); Capital Research Comment Letter II.

Another commenter cited a third party's estimate of $320 million in savings from the Commission's e-proxy initiative in 2014.

See

Confluence Comment Letter (citing estimates published by Broadridge in Analysis of Distribution and Voting Trends Fiscal Year Ended June 30, 2014). The commenter further stated that “[b]y changing the default, Rule 30e-3 will result in a greater percentage of electronic delivery, which in turn will lower fund expenses, lower fund expense ratios, and generate higher returns, a benefit to all investors, both those comfortable with electronic delivery and those who require continued physical delivery.”

See

T. Rowe Price Comment Letter I.

See

ICI Comment Letter I (stating further that if the Commission adopted the commenter's suggested changes to the rule, potential net savings could instead total $465 million within the initial three-year timeframe). In a subsequent comment letter, the commenter revised its estimates to account for another commenter's interpretation of how NYSE processing fees would be applied to a rule 30e-3 framework.

See

Comment Letter of Investment Company Institute (Mar. 14, 2016) (“ICI Comment Letter III”) (stating that based on this interpretation, the net savings would be less than the ICI Comment Letter I projections; and estimating that even if ICI's recommended “postcard” modification were incorporated in the final rule, there would be a net cost of $84 million in the initial year and a subsequent net savings of $83 million per each subsequent year).

One commenter claimed that the cost savings realized from proposed rule 30e-3 would likely not be passed on to investors and would not have a noticeable impact on investor costs even if it were passed on to investors.

Another commenter suggested that the cost savings would benefit a relatively small number of mutual funds and be less significant than in the notice and access approach used in the proxy statement context, which the commenter compared to the proposed rule.

This commenter stated that the proposed rule would result in greater processing fees for fund shares held through certain intermediaries. This commenter also suggested that cost savings could be better realized through the continued growth of electronic delivery under the Commission's existing guidance, which the commenter suggests is already common and projected to reach 59% of all transmissions of shareholder reports in 2018.

The commenter estimated that fund companies currently expend $354 million for printing and mailing of shareholder reports and projected printing and mailing costs of $382 million in 2018 under the existing requirements.

The commenter estimated that aggregate net savings under the proposed rule would be about $18 million, or $0.02 per report, in 2018.

See

Comment Letter of Consumer Federation of America (July 29, 2015).

See

Broadridge Comment Letter I (contending that, based on its interpretation of New York Stock Exchange regulated rates, approximately 5% of fund report distribution jobs that Broadridge processes would result in a savings of $10,000 or more). We believe that in light of the NYSE Approval Order regarding processing fees paid to financial intermediaries for the delivery of shareholder reports and other documents to investors holding shares through certain financial intermediaries, the facts supporting the assumptions underlying this commenter's analysis have changed.

See supra

note 32.

See

Broadridge Comment Letter I; Comment Letter of Broadridge Financial Solutions, Inc. (Jan. 13, 2016) (“Broadridge Comment Letter II”). This commenter subsequently submitted presentation materials in connection with a meeting with Division of Investment Management staff, which included survey data in support of their projections.

See

Memorandum from the Division of Investment Management re: Meeting with Broadridge (Sept. 27, 2017) (including attachments thereto containing the survey data presented) (“Broadridge Meeting Memo I”); Memorandum from the Division of Investment Management re: Meeting with Broadridge (Apr. 13, 2018) (“Broadridge Meeting Memo II”)

See

Broadridge Comment Letter I; Broadridge Comment Letter II.

Broadridge Comment Letter I.

Finally, several commenters highlighted that the potential cost savings for funds and investors resulting from the proposed rule may depend in part on the application of the NYSE processing fees that funds pay to financial intermediaries.

As noted earlier, today we approved amendments to NYSE rules regarding processing fees paid to financial intermediaries that would clarify the application of certain fees under the rule 30e-3 framework.

See, e.g.,

ICI Comment Letter II; Broadridge Comment Letter I.

See supra

Section I.C.

4. Regulatory Consistency

Some commenters also supported the proposed rule as consistent with other regulatory frameworks adopted by the Commission and other regulatory bodies that encourage website availability as a means to satisfy disclosure obligations.

For example, one commenter stated that the proposed rule was consistent with prior Commission efforts to modernize the manner in which information is provided to investors and to improve accessibility by taking advantage of technology for the benefit of investors.

Others asserted that the notice and access model under the proposed rule was similar to the model adopted by another federal agency in 2014 for certain financial institutions to satisfy privacy

notice transmission requirements.

In addition, one commenter highlighted regulatory regimes in foreign jurisdictions that permit a transmission framework for shareholder reports similar to that under the proposed rule.

But see supra

note 56 and accompanying text (noting some commenters that stated that certain federal agencies do not permit implied consent for electronic delivery of certain materials).

See, e.g.,

ICI Comment Letter I.

But see

Schnase Comment Letter (supporting the proposal, but arguing that the Commission should go further and “allow funds to use the web to satisfy their delivery obligations for prospectuses, [statements of additional information] and other investor documents in addition to shareholder reports . . . .”).

See, e.g.,

CAI Commenter Letter; ICI Comment Letter I. Referring to a rule adopted by the Bureau of Consumer Financial Protection (commonly known as the Consumer Financial Protection Bureau and referenced herein as the “Bureau”). The rule that the Bureau adopted in 2014 permitted financial institutions to post the required privacy notice online if they met certain conditions, including the financial institution notifying consumers by mail on an annual basis about the availability of the notice.

See

Amendment to the Annual Privacy Notice Requirement Under Gramm-Leach-Bliley Act (Regulation P), Bureau of Consumer Financial Protection (Oct. 20, 2014),

available at http://files.consumerfinance.gov/f/201410_cfpb_final-rule_annual-privacy-notice.pdf.

In December 2015, Congress amended the Gramm-Leach-Bliley Act (“GLBA”) as part of the Fixing America's Surface Transportation Act. These amendments to the GLBA provide an exception under which financial institutions that meet certain conditions are not required to provide annual privacy notices to customers. Because the Bureau determined that the alternative delivery method was no longer necessary in light of this new statutory exception, the Bureau proposed in June 2016 to remove the alternative delivery method from its regulations implementing the GLBA.

See

Amendment to the Annual Privacy Notice Requirement Under the Gramm-Leach-Bliley Act (Regulation P), Bureau of Consumer Financial Protection (June 29, 2016),

available at http://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/amendment-annual-privacy-notice-requirement-under-gramm-leach-bliley-act-regulation-p/.

See

ICI Comment Letter II. This commenter suggested that the proposed rule was consistent with a global movement toward online financial disclosure and cited three foreign regimes as examples of this movement. These examples include: (1) The European Union, where funds are permitted to post shareholder reports on a website, with paper annual or semi-annual reports available by mail on request; (2) Canada, where funds send a negative consent letter to shareholders on an annual basis and shareholders may request a copy of the shareholder report by mail if desired; and (3) Australia, where funds can make shareholder reports available on a website, as long as in the first year of doing so they notify shareholders, explain how to access the website, and provide the option to request a mailed copy of the report.

5. Environmental Benefits

Some commenters highlighted the environmental benefits associated with the reduction of paper reports under the rule, including fewer trees needed to make paper and a reduction in landfill waste.

Some of these commenters also stated that the proposed rule is consistent with certain national and international initiatives regarding environmental issues, including The American Business Act on Climate Pledge

and The Paris Agreement

to combat climate change.

Some commenters suggested, however, that environmental benefits of the proposed rule are overstated, citing environment-friendly initiatives previously undertaken by the paper industry.

See, e.g.,

Comment Letter of Environmental Paper Network (Oct. 4, 2016) (proposed rule would reduce landfill waste and resources associated with processing, printing, and transportation, which ultimately would reduce greenhouse gas emissions, water consumption and pollution, air pollution, wood and energy use, and solid waste); ICI Comment Letter II (estimating that the proposed rule would save approximately 2 million trees each year); Comment Letter of the Committee of Annuity Insurers (July 22, 2016) (“CAI Comment Letter II”) (noting that several members of the Committee indicated that they each send approximately 1 billion pages per year to contract owners in connection with their regulatory obligation to delivery annual and semi-annual reports to contract owners).

See

ICI Comment Letter II (citing the American Business Act on Climate Pledge).

See id.

(citing the United Nations Framework Convention on Climate Change, the Paris Agreement).

See, e.g.,

ICI Comment Letter II; BlackRock Comment Letter.

See, e.g.,

Comment Letter of Doug Delaney (Aug. 7, 2015); Comment Letter of Mark A. Heyde (Aug. 7, 2015); Comment Letter of Shane Johnson (June 12, 2015). Many other commenters argued that the proposed rule would harm the paper industry and postal workers.

See, e.g.,

Comment Letter of Kathy Watters (July 20, 2015); Comment Letter of James Sandstrom (Aug. 7, 2015) (“Sandstrom Comment Letter”); Comment Letter of PDF Print Communications Inc. (Aug. 10, 2015).

6. Reliability and Security Concerns

A number of commenters also expressed a preference for transmission of paper shareholder reports because of the reliability and security of information delivered by the U.S. Postal Service.

We note that, under the rule as proposed and final rule 30e-3, paper Notices would be mailed to investors, and those investors who prefer to have their shareholder reports mailed to them will continue to be able to receive them in that manner by making a request to permanently receive all future reports in paper, or by requesting individual reports in paper whenever they desire.

See, e.g.,

Comment Letter of Richard Griffin (July 28, 2015); Comment Letter of Tom Jones (July 28, 2015); Comment Letter of Michael J. Flynn (Aug. 4, 2015).

We also received a number of comments expressing cybersecurity concerns related to the proposed rule. The vast majority of these comments, however, did not appear to fully appreciate the method of transmission proposed under the rule (

e.g.,

paper notice of the website availability of the reports rather than electronic delivery of the reports by email or other means) or the information that would be made available (

e.g.,

shareholder reports rather than account statements that may have personal information).

See, e.g.,

Comment Letter of Kenneth J. Janulewicz (July 27, 2015); Comment Letter of Mary Wells (Aug. 17, 2015); Comment Letter of Jacquelyn Mangold (July 29, 2015).

We are sensitive to these issues and acknowledge the importance of protecting the security of personal information. However, we do not believe that this new method of transmission would meaningfully increase the cybersecurity risks, such as identity thefts or “phishing” attacks, noted by these commenters. Rule 30e-3, as proposed and adopted, does not present email “phishing” attack concerns because investors will not receive email communications as a result of the rule. Rather, shareholder reports would be posted on a public website, and investors would be provided with a paper notice regarding their availability. The final rule does not require that a Notice contain any personally identifiable information. If a fund were to choose to include this information in a Notice, the fund should take measures to protect this information just as funds do today regarding other mailings, like account statements, that may contain sensitive information.

See, e.g.,

Regulation S-P [17 CFR 248.30] (requiring written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information); Privacy of Consumer Financial Information (Regulation S-P), Exchange Act Release No. 42974 (June 22, 2000) [65 FR 40334 (June 29, 2000)] (adopting Regulation S-P); Disposal of Consumer Report Information, Exchange Act Release No. 50781 (Dec. 2, 2004) [69 FR 71322 (Dec. 8, 2004)] (adopting requirements for proper disposal of consumer report information and records).

7. Investor Advisory Committee

In December 2017, the Investor Advisory Committee

issued a recommendation regarding the promotion of electronic delivery and the development of a summary disclosure document for the delivery of fund reports.

The recommendation provided, among other things, that the Commission explore: (i) Methods to encourage a transition to electronic delivery that respect investor preferences and that increase the likelihood that investors will see and read important disclosure documents; and (ii) development of a summary, layered disclosure document for annual

shareholder reports that incorporates key information from the report along with prominent notice regarding how to obtain a copy of the full report, and would be designed to be delivered either by mail or by email (depending on the investors' delivery preferences). The Committee also recommended that the Commission seek comment on the appropriate content and format of such a disclosure document and engage in investor testing or encourage testing by industry members.

Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 39 to the Securities Exchange Act of 1934, which establishes the Investor Advisory Committee. The Committee advises and consults with the Commission on regulatory priorities, issues, and initiatives and submits findings and recommendations to the Commission. 15 U.S.C. 78pp(a). The Commission reviews the findings and recommendations of the Committee and issues a public statement assessing the finding or recommendation and disclosing the action, if any, the Commission intends to take with respect to the finding or recommendation. 15 U.S.C. 78pp(g).

See

Investment Advisory Committee Recommendation,

supra

note 40.

B. Adoption of Rule 30e-3 and Related Amendments

1. Overview

After consideration of the comments discussed above, we are adopting rule 30e-3 with several modifications designed to address preservation of investor preferences, cost, and administrability of the rule. Rule 30e-3 is intended to modernize the manner in which shareholder reports and other information are made available to investors and reduce expenses associated with printing and mailing that are currently borne by funds, and ultimately, fund investors.

If any provision of this rule, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or the application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

Reliance on the rule is optional. Funds are permitted to satisfy their delivery obligations by mailing shareholder reports in paper, delivering reports pursuant to the Commission's electronic delivery guidance, providing notice and website accessibility pursuant to rule 30e-3, or any combination of the foregoing, so long as the conditions of the applicable transmission methods are met. We believe that a fund is in the best position to choose whether or not to implement the rule after considering the costs and benefits of the rule, including consideration of the needs and preferences of the fund's particular investors.

As discussed below, the final rule has been modified from the proposal to provide increased flexibility for funds to implement the rule according to their particular circumstances and the preferences of their investors. For example, these modifications permit funds to include in the Notice additional information from shareholder reports that they may deem helpful when notifying investors of the availability of reports.

We understand that internet access and use is not uniformly distributed geographically.

See infra

note 97. In considering whether use of the rule is appropriate, we encourage each fund, in consultation with its intermediaries, to consider the prevalence of internet access and use across its investor base.

The rule is consistent with our prior initiatives to harness the benefits of the internet and other new technologies for investors,

and is consistent with similar initiatives of other regulators (both domestic and foreign).

Furthermore, as we discussed in the Proposing Release, investor testing and internet usage trends have highlighted the evolution of investor preferences about electronic delivery of information, and shown that many investors would prefer enhanced availability of fund information on the internet.

Given both current levels and trends in increasing internet access and use—in particular with the significant increase in the use of the internet as a tool for disseminating financial information among all age groups—we believe that it is appropriate to permit the internet availability of shareholder reports to satisfy transmission obligations, subject to certain conditions including protections for investors who continue to prefer reports in paper form.

See supra

note 18.

See supra

notes 78-81 and accompanying text.

But see supra

note 56 and accompanying text (noting that some commenters stated that certain federal agencies do not permit implied consent for electronic delivery of certain materials);

supra note

80 (noting that because of provisions in the Fixing America's Surface Transportation Act that amended the GLBA to provide an exception under which financial institutions that meet certain conditions are not required to provide annual privacy notices to customers, the Bureau determined that the alternative delivery method for the annual privacy notice requirement was no longer necessary in light of this new statutory exception).

For example, investor testing sponsored by the Commission and conducted in 2011 (“2011 Investor Testing”) suggested that an investor looking for a fund's annual report is most likely to seek it out on the fund's website, rather than request it by mail or phone or by retrieving it from the Commission's Electronic Data, Gathering, Analysis, and Retrieval System (“EDGAR”). Proposing Release,

supra

note 14, at 33626-27. Many investors indicated that they would prefer that fund information be made available in both electronic and paper versions, with a plurality of respondents preferring electronic transmission by email with the option to easily request a paper copy of a particular report, though a significant minority indicated that they would still prefer to receive a paper copy through the mail.

Id.

at 33627.

According to the most recent U.S. census data, approximately 77.2% of U.S. households had some form of internet access in their home in 2015 and 86.8% have a computer (

e.g.,

desktop, laptop, tablet or smartphone).

See

Camille Ryan & Jamie M. Lewis, Computer and internet Usage in the United States: 2015 (Sept. 2017),

available at https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf; see also

Sarah Holden, Daniel Schrass & Michael Bogdan, Ownership of Mutual Funds, Shareholder Sentiment, and Use of the internet, 2017 (Oct. 2017),

available at https://www.ici.org/pdf/per23-07.pdf

(“[i]n mid-2017, 95 percent of households owning mutual funds had internet access, up from about two-thirds in 2000” and “86 percent of mutual fund-owning households with a household head aged 65 or older had internet access in mid-2017”); Andrew Perrin & Maeve Duggan, Americans' internet Access: 2000-2015 (June 2015),

available at http://assets.pewresearch.org/wp-content/uploads/sites/14/2015/06/2015-06-26_internet-usage-across-demographics-discover_FINAL.pdf

(finding in 2015, 84 percent of all U.S. adults use the internet).

But see

Broadridge Meeting Memo I (citing studies on investor delivery preference for shareholder reports and mandatory disclosures regarding investments, which depending on the particular study, found 43% to 55% of investors preferred paper delivery).

Understanding that an investor's experience when accessing a shareholder report may differ between a mobile device and a laptop, we request comment about investor experiences and preferences for fund disclosures on mobile devices in the Disclosure Request for Comment.

See supra

note 20.

Since the 2011 Investor Testing, third-party studies and surveys indicate access to and use of the internet has continued to increase rapidly, including among demographic groups that have previously been less likely to use the internet.

See, e.g., supra

notes 41-42 and accompanying text;

see also

Pew Research Center,

Who's Not Online and Why,

at 2 (Sept. 25, 2013),

available at http://pewinternet.org/Reports/2013/Non-internet-users.aspx

. The Pew Research Center study, conducted in 2013, found that only 15% of American adults ages 18 and older do not use the internet or email—falling from 26% in 2011, when the Commission's investor testing was conducted, and from 36% a decade before in 2001.

See

Pew Research Center,

Older Adults and Technology Use,

at 1 (Apr. 3, 2014),

available at http://www.pewinternet.org/2014/04/03/older-adults-and-technology-use/

. These researchers also found that in 2016, 67% of adults over the age of 64 used the internet, a 55% increase since 2000.

See

Pew Research Center,

Tech Adoption Climbs Among Older Adults,

at 2 (May 17, 2017),

available at http://assets.pewresearch.org/wp-content/uploads/sites/14/2017/05/16170850/PI_2017.05.17_Older-Americans-Tech_FINAL.pdf; see also

Investment Company Institute, 2017 Investment Company Fact Book,

available at https://www.ici.org/pdf/2017_factbook.pdf

(“2017 ICI Fact Book”) at 129 (stating that 92% of U.S. households owning mutual funds had internet access in mid-2016).

These trends have also extended to use of the internet for financial purposes. For example, a recent survey by the Investment Company Institute found that in 2017, 95% of U.S. households owning mutual funds had internet access (up from about two-thirds in 2000), with widespread use of the internet among various age groups, education levels and income levels, including access by 86% of mutual fund owning households headed by someone age 65 or older.

See

Ownership of Mutual Funds, Shareholder Sentiment, and Use of the internet,

supra

note 96, at 18.

We recognize that it is critical for investors to continue to receive disclosure through means that are convenient and accessible for them.

We believe that the final rule's conditions include appropriate protections for those who lack internet access or who simply prefer paper reports. Investors who lack internet access or prefer paper reports will be

able to continue to receive them by mail:

Proposing Release,

supra

note 14, at 33627. In the Proposing Release, we noted concerns that some investors who prefer to receive shareholder reports in paper and some demographic groups of investors that may be less likely to use the internet might not fully understand the actions they would need to take under the proposed rule to continue to receive their reports in paper.

See id.

• First, the final rule provides that investors who prefer to receive reports in paper may continue to do so, either by making a one-time request to receive all future reports in paper, or by requesting individual reports in paper whenever they desire.

• Second, as outlined below in Sections II.B.2.f and II.E, we are adopting an extended transition period with staged effective dates. During the extended transition period, the earliest that Notices may be transmitted to investors in lieu of paper reports is January 1, 2021. In general, funds will be required to provide two years of notice to shareholders before relying on the rule. Therefore, funds that begin providing notice at the start of 2019 will complete the two-year notice period, and may begin relying on the rule, on January 1, 2021. In addition, funds that are newly offered during the period of January 1, 2019 through December 31, 2020 may rely on the rule starting January 1, 2021, if they provide notice to shareholders starting with their first public offering. Funds that are newly offered on January 1, 2021 and thereafter would not be subject to the condition and could therefore rely on the rule immediately without providing any advance notice through required statements. All other funds may not rely on the rule until they have completed a full two year notice period or until January 1, 2022, whichever comes first.

Although we are eliminating the Initial Statement requirement, we nonetheless believe that it is important that investors receive sufficient notice of the change in transmission method and sufficient opportunity to express their delivery preference. Therefore, the extended transition period is designed to ensure that investors receive disclosures during the extended transition period and to provide funds electing to make use of this optional method and financial intermediaries time to educate investors of the coming change through disclosures on prospectuses and certain other fund documents and through other means. It will also provide funds and financial intermediaries with time to implement any necessary operations and systems changes. Finally, the Commission staff will also use this extended transition period to engage in educational and investor outreach efforts.

We believe these protections will mitigate the various concerns raised by commenters regarding this new optional method for funds to satisfy requirements to transmit shareholder reports.

For example, the additional disclosures on shareholder documents about the forthcoming internet availability of reports, as well as other educational efforts undertaken by funds, financial intermediaries, and Commission staff should decrease the possibility that an investor will be unaware of the change in transmission method and will result in many investors receiving considerably more notice of the change in transmission than they would have under the proposed rule. An investor in a mutual fund, for example, that seeks to begin relying on the rule before January 1, 2022 would be notified about six times compared to the proposal, which did not have an extended transition period and would have required only that one Initial Statement be sent 60 days in advance of a change in transmission method.

100

We believe that the required disclosures, which must be made using plain English principles, also mitigate concerns that some investors might not fully understand what they need to do to continue to receive paper reports. To the extent an investor does not prefer or is unable to access shareholder reports via the internet, he or she can request paper copies of shareholder reports, either on a permanent or

ad hoc

basis.

See supra

notes 54-62 and accompanying text.

100

See infra

Section II.B.2.d. During the extended transition period, an investor in a mutual fund, for example, that seeks to begin relying on the rule before January 1, 2022 would receive approximately six notices of the upcoming change over a two-year period because each year, investors will receive notice on the summary prospectus or statutory prospectus, as well as the semi-annual and annual report to shareholders.

2. Conditions of Rule 30e-3

New rule 30e-3 provides that a registered management company (and any separate series thereof) or UIT may satisfy its obligation to transmit a report required by rule 30e-1 or rule 30e-2, respectively, if certain conditions set forth in the rule are satisfied.

101

These conditions generally relate to: (a) Availability of the report and other materials; (b) notice to investors of the website availability of the report; and (c) delivery of paper copies of materials upon request. Rule 30e-3 also requires transmission of paper reports to investors electing a delivery preference to receive them in that format.

102

Finally, rule 30e-3 will also include a temporary condition relating to form amendments applicable during an extended transition period.

103

The specific provisions of the rule are discussed in more detail in the sections that follow.

101

Rule 30e-3(a). The rule could also be used to satisfy any obligation to transmit an amendment to a report required by rule 30e-1 or 30e-2 by satisfying the same conditions. An amendment to a shareholder report could also be transmitted through other permitted means, such as in paper through the mail.

102

Rule 30e-3(f).

103

Rule 30e-3(j);

see infra

Sections II.B.2.f, II.E.

These conditions are generally consistent with similar conditions in other rules adopted by the Commission, including its rules regarding the use of a summary prospectus and internet availability of proxy materials.

104

For example, funds offering electronic delivery typically send investors an email notifying them of the online availability of the report or other information, along with a link to the website address where the document is available.

105

Similarly, the Notice required under rule 30e-3 may satisfy shareholder report transmission obligations in part by containing a link to where the document may be accessed on the internet.

104

See

rule 498 under the Securities Act (permitting the use of a summary prospectus) [17 CFR 230.498]; rule 14a-16 under the Exchange Act (internet availability of proxy materials) [17 CFR 240.14a-16].

105

See

1995 Release,

supra

note 18. Under rule 498, the requirement to send an electronic copy of a document by email may be satisfied by sending a direct link to the document on the internet; provided that a current version of the document is directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent and the email explains both how long the link will remain useable and that, if the recipient desires to retain a copy of the document, he or she should access and save the document.

See

rule 498(f)(1) under the Securities Act [17 CFR 230.498(f)(1)].

Rule 30e-3 provides funds an optional means of satisfying shareholder report transmission obligations under rule 30e-1 and rule 30e-2.

106

Some commenters recommended, however, that the rule be clarified as to its application to UITs, as UITs and not the underlying funds held by such UITs are the entities with transmission obligations under rule 30e-2.

107

In response to this recommendation, the final rule clarifies, by use of terminology and otherwise, that the operative conditions of rule 30e-3 extend to a UIT seeking to meet its transmission obligations under rule 30e-2.

108

106

Rule 30e-3(a).

107

See, e.g.,

CAI Comment Letter I; ICI Comment Letter II.

108

For example, in a change from the proposal, the rule uses the defined term “Company” to refer collectively to the entities with obligations under rules 30e-1 and 30e-2.

See

rule 30e-3(h)(1) (defining “Company” to mean a Fund required to transmit a report to shareholders pursuant to rule 30e-1 or a UIT required to transmit a report to shareholders pursuant to rule 30e-2). For purposes of the rule, “Fund” is defined to mean a registered management company and any separate series of the management company.

See

rule 30e-3(h)(2).

a. Availability of Shareholder Report and Other Materials

We are adopting generally as proposed, except as indicated below, certain requirements relating to the availability of the shareholder report and other materials for funds relying on rule 30e-3. Specifically, in order to satisfy transmission obligations under rule 30e-1 or rule 30e-2, the current report to shareholders must be publicly accessible, free of charge, at a specified website address.

109

In a change from the proposal, the final rule requires that the report must be accessible from the date the fund transmits the report as required by rule 30e-1 or 30e-2, at least until the date the fund next transmits a shareholder report required by rule 30e-1 or rule 30e-2.

110

This requirement is intended to provide investors with the opportunity for ongoing access to the shareholder report until, at a minimum, the date that the next report is transmitted.

111

109

Rule 30e-3(b)(1).

110

Id.

Rules 30e-1 and 30e-2 require that a report be transmitted within 60 days after the close of the period covered by the report.

See

rule 30e-1(c); rule 30e-2(a). Under the proposal, (1) the report would have been required to be accessible on the website from the date the report was transmitted to investors, and (2) the Notice relating to the report would have been required to be transmitted within 60 days of the close of the related reporting period.

See

proposed rule 30e-3(b), (d). As discussed below, we have modified the final rule to permit the Notice to be delivered up to 70 days after the close of the reporting period. However, we believe the report should nonetheless be available at the same time that reports are transmitted to investors, either in paper or electronically, in order that reports covering a complete year are available on the website at all times.

111

See

1995 Release,

supra

note 18 (noting that to satisfy access requirements under the Commission's electronic delivery guidance, “as is the case with a paper document, a recipient should have the opportunity to retain the information or have ongoing access equivalent to personal retention”).

Funds are not currently required to send first- and third-quarter portfolio holdings information to investors or make that information accessible on their websites. To provide investors with convenient access to the most recent four quarters of portfolio holdings, the rule requires that, in addition to posting the most current shareholder report, the following fund documents must also be posted at the specified website: (1) Any report with respect to the fund for the prior reporting period that was transmitted to shareholders of record pursuant to rule 30e-1 or rule 30e-2, if any;

112

(2) the fund's complete portfolio holdings as of the close of the period covered by the current or prior report if the report includes a summary schedule of investments;

113

and (3) for funds other than money market funds and small business investment companies (“SBICs”),

114

the complete portfolio holdings as of the close of the fund's most recent first and third fiscal quarters, if any, after the date on which its registration statement became effective, within 60 days after the close of that period.

115

Money market funds and SBICs are expressly excluded from the rule's posting requirement provisions for fiscal quarter-specific portfolio holdings schedules because money market funds are required currently to post certain portfolio holdings and other information on their websites pursuant to rule 2a-7,

116

and because SBICs are not required to file reports on Form N-Q today and are not required to file reports on Form N-PORT.

117

112

Rule 30e-3(b)(1)(ii). If a fund is transmitting a report for its first operational semi-annual period, the fund could rely on rule 30e-3 to transmit that report, despite not having made a prior report publicly accessible, provided that it meets the other required conditions.

113

Rule 30e-3(b)(1)(iii). In a change from the proposal, this provision provides that a fund's complete portfolio holdings for its most recent second and fourth fiscal quarters must be posted at the specified website if a report required to be posted at the specified website (

i.e.,

a current report to be transmitted pursuant to rule 30e-3 or the report for the prior fiscal period) includes a summary schedule of investments.

114

SBICs are unique investment companies that operate differently and are subject to a different regulatory regime than other management companies. They are “privately owned and managed investment funds, licensed and regulated by the Small Business Administration (“SBA”), that use their own capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses.”

See

SBA, SBIC Program Overview,

available at https://www.sba.gov/content/sbic-program-overview

115

Rule 30e-3(b)(1)(iv). Under this requirement, the portfolio holdings as of the fiscal quarter following the period of the report will be required to be posted at the specified website when available. For example, a fund with a December 31 fiscal year end wishing to rely on rule 30e-3 to transmit its annual report to shareholders will also be required to ensure that its complete portfolio holdings for the first quarter of the next year is made similarly available within 60 days after the end of the first quarter.

116

See

rule 2a-7(h)(10).

117

See

rule 30b1-9;

See also

Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)] (delaying rescission of Form N-Q and certain other effective dates for final rules and other amendments adopted as part of the Reporting Modernization Adopting Release).

The fund's prior shareholder report and portfolio holdings information for its first and third fiscal quarters are required to be publicly accessible in the same manner and for the same time period as the current shareholder report.

118

We are adopting this requirement to provide investors with easy access to a full year of complete portfolio holdings information in one location (

i.e.,

the website on which the report transmitted under the rule is made accessible), rather than requiring investors to access the fund's reports on Form N-PORT (or Form N-Q) for those periods separately.

118

Rule 30e-3(b)(1).

To conform the format and content of the portfolio holdings schedules for the first and third quarters to those schedules presented in the fund's shareholder reports for the second and fourth quarters, the rule requires the schedules for the first and third quarters to be presented in accordance with the schedules set forth in §§ 210.12-12 through 12-14 of Regulation S-X, which need not be audited.

119

Rule 30e-3(b)(1)(iii)-(iv); 17 CFR 210.12-12 through 12-14. These materials are required to be filed as exhibits to Form N-PORT, regardless of whether the fund intends to rely on the rule to satisfy its shareholder report transmission obligations.

See

Part F of Form N-PORT [referenced in 17 CFR 274.150].

In a change from the proposal, the final rule requires that if a report required to be posted includes a summary schedule of investments,

120

the fund's complete portfolio holdings as of the close of the period covered by the report must also be posted at the specified website.

121

In the Proposing Release, we stated that for funds relying on the proposed rule, use of the summary schedule may be unnecessary,

122

and in particular, may be potentially confusing or cumbersome to investors seeking to access the fund's complete portfolio holdings.

123

For

these reasons, we proposed amendments to our registration forms that would have restricted funds relying on proposed rule 30e-3 from providing a summary schedule in their shareholder reports in lieu of a complete schedule.

124

We requested comment, however, as to whether the final rule should restrict funds relying on the proposed rule from using a summary schedule.

120

In lieu of providing a complete schedule of portfolio investments as part of the financial statements included in its shareholder report, a fund may provide a summary schedule of portfolio investments.

See, e.g.,

Instruction 1 to Item 27(b)(1) of Form N-1A. Pursuant to rule 12-12B of Regulation S-X, the summary schedule generally must list separately the 50 largest issuers and any other issuer the value of which exceeded one percent of the net asset value of the fund at the close of the period.

See

rule 12-12B, n.3 of Regulation S-X [17 CFR 210.12-12B].

121

Rule 30e-3(b)(1)(iii). Similarly to the other quarterly portfolio holdings required to be posted to the website, the portfolio holdings for the second and fourth quarters must be presented in accordance with rules 12-12 through 12-14 of Regulation S-X, but need not be audited.

122

We noted, for example, that a fund currently using the summary schedule as a means to reduce fund printing and mailing costs may decide instead to include a complete portfolio schedule in the shareholder report due to more limited cost savings if the report is posted on its website in reliance on the proposed rule. Proposing Release,

supra

note 14, at 33631.

123

We noted, for example, that under the proposed rule, an investor that wishes to view the complete portfolio holdings would first receive a notice of the availability of the report, then take the

step to access the report on the fund's website, only to have to take a subsequent step to request or otherwise access the complete schedule. Proposing Release,

supra

note 14, at 33631. Currently, for funds using the summary schedule of investments, unless voluntarily posted on the fund's website, the fund's complete portfolio holdings are only available by telephonic request, or by accessing the fund's report on Form N-CSR for that period on the Commission's EDGAR system.

See, e.g.,

Instruction 1 to Item 27(b) of Form N-1A; Item 6(a) of Form N-CSR.

124

See

proposed amendments to Item 27(b) of Form N-1A; Item 24, Instruction 7 of Form N-2; Item 28(a), Instruction 7(i) of Form N-3.

One commenter recommended that funds retain the ability to use the summary schedule of investments if they rely on the proposed rule.

125

This commenter noted that it understood the Commission's concern that investors may have to take additional steps to access the complete portfolio schedule, but believed the policy rationale supporting allowing the summary schedule remained the same as when the Commission first implemented the summary schedule.

126

125

See

ICI Comment Letter I.

126

See id.

The Commission adopted rules permitting the use of a summary schedule of investments in 2004.

See

Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, Investment Company Act Release No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)]. In that release, the Commission stated that the summary schedule was “designed to streamline shareholder reports and help investors to focus on a fund's principal holdings, and thereby better evaluate the fund's risk profile and investment strategy.”

Id.

at 11248.

We continue to be concerned that use of a summary schedule of investments with rule 30e-3 would be potentially confusing or cumbersome for investors seeking access to the complete portfolio schedule. At the same time, we acknowledge that a fund may choose to use a summary schedule for cost considerations or otherwise, and we continue to believe that the summary schedule can help investors focus on a fund's principal holdings and thereby better evaluate the fund's risk profile and investment strategy. The restriction contained in proposed rule 30e-3 effectively would have required a fund using the summary schedule to create and distribute two separate reports to shareholders (

i.e.,

one containing the summary schedule for investors receiving the report in paper, and another containing a complete schedule of portfolio investments for purposes of rule 30e-3).

To avoid the related administrative cost and other burdens associated with such a scenario, and at the same time help to provide investors with easy access to the complete portfolio schedule, the final rule requires, in a change from the proposal, that if a report required to be posted at the specified website (

i.e.,

a current report to be transmitted pursuant to rule 30e-3 or the report for the prior fiscal period) includes a summary schedule of investments, the fund's complete portfolio holdings as of the close of the period covered by the report must also be posted at the specified website.

127

This will provide investors with a year of complete portfolio schedules on the specified website, regardless of whether the fund chooses to utilize a summary schedule of investments in its reports.

127

Rule 30e-3(b)(1)(iii).

Like the schedule of investments required to be included with shareholder reports (and filed as part of reports on Form N-CSR), quarterly schedules of portfolio holdings currently required to be reported on Form N-Q, and monthly schedules of portfolio holdings that will be required to be reported on Form N-PORT,

128

the portfolio holdings schedules specified by the rule are required to be presented in accordance with schedules set forth under Regulation S-X.

129

Accordingly, we anticipate that most funds have established procedures in place to update and monitor the website posting of similar types of portfolio schedule disclosures. These requirements are also intended to provide disclosures that are easily understood and familiar to investors, because these disclosures will contain similar information and be presented in a similar manner as those currently included in shareholder reports.

128

See supra

note 117 and accompanying text. The information reported on Form N-PORT for the third month of each fund's fiscal quarter will be made publicly available 60 days after the end of the fund's fiscal quarter. The Commission does not intend to make public the information reported on Form N-PORT for the first and second months of each fund's fiscal quarter that is identifiable to any particular fund or adviser; however, the Commission may use information reported on Form N-PORT in its regulatory programs, including examinations, investigations, and enforcement actions. Form N-Q will be rescinded May 1, 2020. Larger fund groups will begin submitting reports on Form N-PORT by April 30, 2019, and smaller fund groups by April 30, 2020.

See

Reporting Modernization Adopting Release,

supra

note 14; Investment Company Reporting Modernization, Investment Company Act Release No. 32936,

supra

note 117.

129

See

Items 1 and 6 of Form N-CSR; Item 1 of Form N-Q; Part F of Form N-PORT.

As proposed, the final rule also requires compliance with certain conditions designed to ensure the accessibility of shareholder reports and other required materials.

130

First, the website address at which the shareholder reports and other required portfolio information are made accessible may not be the address of the Commission's electronic filing system.

131

Second, the materials required to be posted on the website must be presented in a format or formats convenient for both reading online and printing on paper, and persons accessing the materials must be able to permanently retain (free of charge) an electronic copy of the materials in this format.

132

These conditions are designed to ensure that shareholder reports and other information posted on a website pursuant to the rule are user-friendly and allow investors the same ease of reference and retention abilities they would have with paper copies of the information.

130

These requirements are largely similar to the accessibility requirements of rule 498 under the Securities Act, which allows funds to use a summary prospectus, and rule 14a-16 under the Exchange Act, which requires issuers and other soliciting persons to furnish proxy materials by posting these materials on a public website and notifying shareholders of the availability of these materials and how to access them.

See

rule 14a-16 under the Exchange Act [17 CFR 240.14a-16].

131

Rule 30e-3(b)(2). The Commission's electronic filing system for fund documents is EDGAR. Rule 498 under the Securities Act sets forth a similar requirement.

See

17 CFR 230.498(b)(1)(v)(A).

132

Rule 30e-3(b)(3)-(4).

The rule includes a safe harbor provision that would allow a fund to continue relying on the rule even if it did not satisfy the posting condition of the rule for a temporary period of time.

133

In order to rely on this safe harbor, a fund must have reasonable procedures in place to ensure that the required materials are posted on the specified website in the manner required by the rule and take prompt action to correct noncompliance with these posting requirements.

134

The rule requires prompt action as soon as

practicable following the earlier of the time at which the fund knows or reasonably should have known that the required documents are not available in the manner prescribed by the posting requirements of the rule. We are adopting this safe harbor because, as we explained in the Proposing Release, there may be times when, due to events beyond a fund's control, such as system outages or other technological issues, natural disasters, acts of terrorism, pandemic illnesses, or other circumstances, a fund may be temporarily not in compliance with the posting requirements of the rule.

135

133

See

rule 30e-3(b)(5). The rule provides that the conditions in paragraphs (b)(1) through (b)(4) of the rule (

i.e.,

the posting requirements) shall be deemed to be met, notwithstanding the fact that the materials required by paragraph (b)(1) of the rule are not available for a period of time in the manner required by the posting requirements, so long as certain conditions are met.

See id.

Four commenters supported the safe harbor provision of the proposed rule.

See

BlackRock Comment Letter; ICI Comment Letter I, Comment Letter of OppenheimerFunds (Aug. 11, 2015) (“OppenheimerFunds Comment Letter”); State Street Comment Letter. Moreover, we did not receive any comment letters objecting to the safe harbor provision.

134

See

rule 30e-3(b)(5)(i) and (ii).

135

Compare

rule 498(e)(4) under the Securities Act (providing a similar safe harbor under the summary prospectus rule for the same reasons) [17 CFR 230.498(e)(4)], with rule 30e-3(b)(5). Providing for this safe harbor by rule may obviate the need to provide exemptive relief by order from the rule's conditions under catastrophic circumstances, as from time to time we have done.

See, e.g.,

Exchange Act Release No. 81760 (Sept. 28, 2017) [82 FR 46335 (Oct. 4, 2017)] (exemptive relief for individuals and entities affected by Hurricanes Harvey, Irma, or Maria); Securities Act Release No. 10416 (Sept. 27, 2017) [82 FR 45722 (Oct. 2, 2017)] (Regulation Crowdfunding and Regulation A relief and assistance for individuals and entities affected by Hurricanes Harvey, Irma, or Maria).

One commenter recommended that the final rule clarify that the materials required to be posted could be posted on a third-party website or landing page, similar to what is allowed under the current process for notice and access for proxy materials.

136

The rule as proposed, and as adopted today, does not require that the website be maintained by any particular party. Instead, the rule requires that the required materials be posted at the website specified in the Notice.

137

Similar flexibility regarding the website on which required materials must be posted exists in our current rules relating to the use of a summary prospectus.

138

136

See

SIFMA Comment Letter.

137

See

rule 30e-3(b)(1).

138

See

rule 498(e)(1) under the Securities Act (requiring in the case of the summary prospectus, that the required documents be available at the website specified on the cover page or beginning of the summary prospectus) [17 CFR 230.498(e)(1)].

b. Notice

Rule 30e-3 requires funds relying on the rule with respect to an investor to send a paper Notice notifying the investor of the availability of the report.

139

The requirements for a Notice largely mirror the notice requirements under the Commission's rules mandating the posting of proxy materials online.

140

We are adopting the Notice requirement generally as proposed, but with certain modifications in response to issues raised by commenters. In particular, the final rule permits the Notice to include additional content beyond what would have been permitted under the proposed rule.

139

See

rule 30e-3(c). As discussed above, funds relying on the rule to satisfy delivery obligations with respect to investors who currently receive paper shareholder reports would not have to rely on rule 30e-3 with respect to those shareholders who have elected to receive reports electronically.

See supra

note 18 and accompanying text.

140

See

rule 14a-16 under the Exchange Act [17 CFR 240.14a-16].

While most commenters focused on technical aspects of the Notice, one commenter encouraged the Commission to consider eliminating the Notice requirement altogether, which the commenter believed would lead to additional cost savings and environmental benefits.

141

Another commenter recommended that the Notice be sent annually, rather than semi-annually, and that the final rule permit the Notice to be sent to investors 90 days after the fiscal year end rather than 60 days as proposed.

142

A third commenter recommended requiring that the Notice be sent by email.

143

Finally, another commenter recommended that the rule allow investors to elect to receive notices by email.

144

141

See

BlackRock Comment Letter.

142

See

OppenheimerFunds Comment Letter.

143

See

State Street Comment Letter.

144

See

Simpson Thacher Comment Letter.

We continue to believe that it is important for all investors to receive the Notice, as it will contemporaneously alert them to the availability of a shareholder report online and will provide them with information on how to obtain a paper copy of the report. Therefore, we are adopting as proposed the Notice requirements as to format (

i.e.,

the Notice must be paper).

145

We are requiring the Notice to be in paper because, even though an investor may have provided an email address (

e.g.,

as part of opening an account), there may be instances where that investor provided his or her email address for certain limited purposes without necessarily opting to receive shareholder reports or notices of reports through email.

145

Rule 30e-3(c).

In a change from the proposal, the final rule extends from 60 days to 70 days the period of time in which the Notice must be sent to investors after the close of the period covered by the related report.

146

We proposed a 60-day period because, as we explained in the Proposing Release, that is the period currently required for transmission of reports, whether in paper or electronically.

147

After consideration of the comments we received, including comments recommending that we permit the Notice to accompany other important account materials,

148

we believe a 70-day period will accommodate such changes to the Notice in the final rule and achieve additional cost savings and operational efficiencies.

146

Id.

147

See

Proposing Release,

supra

note 14; rules 30e-1(c), 30e-2(a).

148

See, e.g.,

Comment Letter of Charles Schwab Investment Management, Inc. (Aug. 12, 2015) (“Schwab Comment Letter”); Dreyfus Comment Letter.

First, in a change from the proposal and as discussed below, we are permitting the Notice to accompany other materials, including a shareholder's account statement. Because shareholder reports are generally prepared at or shortly before the end of the 60 days following the close of the reporting period, and account statements (whether monthly, quarterly, or annual) are typically prepared and mailed within a few days after the close of the applicable month end, a Notice would generally not be able to accompany an account statement mailing if the Notice is sent out within 60 days following the close of the reporting period.

149

For example, pursuant to rule 30e-1, a fund would be required to transmit a report for a period ended March 31 by May 30. Permitting the fund 70 days to transmit a Notice would enable the fund, if it so chose, to combine it with the investor's May account statement mailing.

Second, as also discussed below, we are permitting the Notice to include content from the shareholder report, and also requiring any such Notices to be filed with the Commission as part of a fund's report on Form N-CSR. Extending the time period to 70 days permits funds additional time to prepare Notices after finalizing their related shareholder reports, and matches up with the 70-day filing period for reports on Form N-CSR.

150

Reports on Form N-CSR must be filed within 10 days after the shareholder report is sent to shareholders, and the shareholder report must be sent within 60 days after the close of the period covered by the report.

See

rule 30b2-1(a) [17 CFR 270.30b2-1(a)]; rule 30e-1(c).

i. Information That Must Be Included in the Notice

As under the proposal, the Notice must be in plain English so that investors can easily understand it.

151

The final rule also requires funds to include certain statements and information in the Notice, if applicable, and permits funds to include certain

additional information, generally as follows:

151

Rule 30e-3(c)(1), (d).

• As was proposed, the Notice must contain a prominent legend in bold-face type stating that an important report to shareholders is available online and in paper by request, and in a change from the proposal, the Notice may include information identifying the fund, its sponsor (including any investment adviser or sub-adviser to the fund), a variable annuity or variable life insurance contract or insurance company issuer thereof, or a financial intermediary through which shares of the fund are held;

152

Rule 30e-3(c)(1)(i). We have modified this requirement to provide more flexibility to funds in recognition of the fact that investors can acquire interests in funds through a variety of distribution channels.

• as was generally proposed (but with certain modifications), the Notice must state that the report contains important information about the fund, including as proposed its portfolio holdings and, in a change from the proposal, its financial statements;

153

Rule 30e-3(c)(1)(ii).

• in a change from the proposal, the Notice may include a brief listing of other types of information contained in the report;

154

Id.

• as was proposed, the Notice must state that the report is available on the internet or, upon request, by mail, and encourage shareholders to access and review the report;

155

Rule 30e-3(c)(1)(iii).

• as was proposed, the Notice must include the website address where the shareholder report and other required portfolio information is posted (

i.e.,

the “landing page” to those materials), but in a change from the proposal, the final rule eliminates the proposed requirement that the Notice include the website address for individual reports;

156

Rule 30e-3(c)(1)(iv). The website address must be specific enough to lead investors directly to the documents that are required to be posted online under the rule. The website address could be a central site with prominent links to each document, but could not be a home page or section of the website other than where the documents are posted. In addition to the website address, the Notice may contain any other equivalent method or means to access the documents.

See id.

• as was generally proposed (with certain modifications), the Notice must include a toll-free (or collect) telephone number to contact the fund or the shareholder's financial intermediary

157

and (A) provide instructions describing how a shareholder may request, at no charge, a paper or email copy of the shareholder report or other materials required to be made accessible online, and an indication that the shareholder will not receive a paper copy of the report unless requested,

158

(B) explain that the shareholder can at any time in the future elect to receive paper reports and provide instructions describing how a shareholder may make that election (

e.g.,

by contacting the fund or the shareholder's financial intermediary),

159

and (C) if applicable, include instructions describing how a shareholder can elect to receive shareholder reports or other documents and communications by electronic delivery;

160

157

Rule 30e-3(c)(1)(v).

158

Rule 30e-3(c)(1)(v)(A).

159

Rule 30e-3(c)(1)(v)(B).

160

Rule 30e-3(c)(1)(v)(C).

• in a change from the proposal, the Notice may include other methods by which a shareholder can contact the fund or the shareholder's financial intermediary (

e.g.,

by email or through a website) and may include information needed to identify the shareholder;

161

and

161

Rule 30e-3(c)(2). For example, this information could include a control number unique to that shareholder.

• in a change from the proposal, the Notice is not required to be accompanied by a reply card.

162

Although the final rule does not require a reply card as a method of communication, a fund could choose to use reply cards.

We requested comment on whether the proposed disclosures in the Notice, including the required statement that the report contains important information about the fund, were appropriate. One commenter suggested that the content of the Notice be enhanced to require disclosures relating to “important information, such as [f]und performance and portfolio manager insights,” noting that enhanced disclosures could encourage investors to access their shareholder reports.

163

We agree that such additional disclosures could encourage investors to access their reports, so we have modified and expanded the proposed required statement in the Notice that the report to shareholders contains important information about the fund, including its portfolio holdings, to add a reference to the fund's financial statements.

164

In addition, the final rule permits the statement to also include a brief listing of other types of information contained in the report. For example, the statement could also note that the report contains fund performance and portfolio manager insights as suggested by the commenter, or other types of information such as expense information.

165

163

See

Comment Letter of Fidelity Investments (Aug. 10, 2015) (“Fidelity Comment Letter I”);

see also

Investment Advisory Committee Recommendation; Broadridge Meeting Memo I.

164

Rule 30e-3(c)(1)(ii). Similar statements are required for other documents. For example, Form N-1A requires the back cover page of the statutory prospectus of an open-end fund to include a statement to the effect that the fund's annual report contains a discussion of the market conditions and investment strategies that significantly affected the fund's performance during its last fiscal year.

See

Item 1(b)(1) of Form N-1A.

165

Rule 30e-3(c)(1)(ii). As discussed below, the final rule separately permits the Notice to include content from the related shareholder report.

See infra

Section II.B.2.b.ii.

Some commenters recommended modifications to the proposed website address requirements. One commenter suggested that the rule not require the Notice to include a specific website address, which would allow the industry more flexibility in implementing the rule.

166

Another commenter suggested that the rule not require website addresses for individual reports.

167

That commenter stated that: (1) Such a requirement was too complex and costly to administer, as new reports are posted and old ones are taken down; (2) website addresses would be long and difficult to key in from the paper Notice; and (3) such requirement was inconsistent with our rules regarding the internet availability of proxy materials, which only requires a website address for a landing page and with which investors may already be familiar.

166

See

Fidelity Comment Letter I.

167

See

SIFMA Comment Letter I.

After consideration of these comments, we have determined to eliminate from the final rule the proposed requirement that the Notice include the website address for individual reports. We agree with those commenters suggesting that such a requirement could result in unnecessary administrative burdens, and believe that limiting the website link to the landing page, where the shareholder report and other required materials are available, meets our objective of directing investors to the shareholder report in an easily accessible manner. The address used must be specific enough to lead investors directly to the documents that are required to be accessible under the rule's conditions, but may be a central site with prominent links to each document. The website may not be the home page or section of the website other than on which the documents are posted.

168

Thus, an investor must be able to navigate from the landing page to each of the required documents with a single click or tap.

168

Rule 30e-3(c)(1)(iv).

To access their reports, investors will be required to key in the website address provided in the Notice. Some

investors could have difficulty accessing their reports if, for example, the address to the landing page is made up of a long string of unrelated or special characters. Short and intuitive website links to the landing page and other innovative solutions could mitigate this problem.

In a change from the proposal, the final rule also provides that the Notice may include, in addition to a website address, other equivalent methods or means to facilitate shareholder access to the shareholder report and other required materials.

169

Such methods or means could include, for example, inclusion of a Quick Response Code (QR code) or similar means to access the required website address or link.

170

169

Id.

170

A QR code is a two-dimensional barcode containing information that is machine-readable. For example, some smartphones could scan a QR code with information of a specific Uniform Resource Locator (“URL”) and then be directed to that website. Although the final rule eliminates the requirement that the Notice include the direct website address for the report itself, a fund, could, pursuant to this provision, choose to include a link that takes an investor directly to the report.

We proposed that the Notice not only be required to include a toll-free telephone number that an investor can use to notify the fund that he or she wishes to receive paper reports in the future, but also a reply form that is pre-addressed with postage-paid as an alternative means by which the investor can notify the fund of his or her preference.

171

Commenters generally opposed the reply card requirement, asserting that reply cards have a low response rate

172

that does not justify their cost.

173

Commenters urged that a toll-free telephone number would be an equally effective means for an investor to express his or her preference and would be more cost-effective than a reply card.

174

171

See

proposed rule 30e-3(d)(1)(vi). As proposed, the reply card would have been required to include the information that the fund would need to identify the investor.

172

See

ICI Comment Letter I (estimating return rates as low as 2%).

173

One commenter indicated that eliminating reply cards would reduce aggregate printing and mailing costs associated with rule 30e-3 from $127 million per mailing (of Notices or Initial Statements) to between $81 million (if funds elect to use postcards) and $118 million (if funds elect to use envelopes), which represents a reduction of 7% to 36%.

See

ICI Comment Letter I.

Another commenter indicated that including a reply form that is pre-addressed with postage paid would cost approximately $1,325,000 in the aggregate per year.

See

T. Rowe Price Comment Letter I.

Another commenter estimated cost savings from the elimination of reply cards to be approximately $10 million.

See

Broadridge Meeting Memo II.

174

See, e.g.,

Comment Letter of Dechert LLP (Aug. 12, 2015) (“Dechert Comment Letter”); ICI Comment Letter I; Comment Letter of Mediant Communications (Aug. 12, 2015) (“Mediant Comment Letter”); SIFMA Comment Letter; T. Rowe Price Comment Letter I; Capital Research Comment Letter I.

After considering the comments we received, we have determined not to require funds to include a reply card.

175

We have been persuaded by commenters that the low response rates experienced from this means of communication coupled with the expense associated with this method do not justify the inclusion of a reply card.

175

See

rule 30e-3(c)(1)(v).

However, the final rule permits the Notice to include additional means by which an investor can contact the fund or the investor's financial intermediary.

176

Because funds and financial intermediaries have extensive direct experience with the types of communication methods preferred by their investors, we believe that the rule should provide flexibility to permit additional methods of communication, and we encourage the inclusion of additional means besides the required toll-free (or collect) telephone number, such as email addresses, dedicated web pages, etc. To further facilitate the use of other means of communication, the final rule permits the Notice to include any information needed to identify the shareholder so that shareholders may express their shareholder report transmission preference with ease.

177

This information could include, for example, control numbers, account numbers, etc. As noted earlier, if a fund were to choose to include this information in a Notice, the fund should take appropriate measures to protect this information just as funds do today regarding other mailings, like account statements, that may contain sensitive information.

176

See

rule 30e-3(c)(2). In lieu of the reply card, some commenters suggested that the rule permit flexibility in how shareholders could express their delivery preference and/or require alternative means of shareholders expressing this preference, such as by email (

see, e.g.,

Dechert Comment Letter; State Street Comment Letter) or fax (

see, e.g.,

State Street Comment Letter).

See

Dechert Comment Letter; State Street Comment Letter; BlackRock Comment Letter; CAI Comment Letter I, ICI Comment Letter I; MFS Comment Letter; SIFMA Comment Letter.

177

See

rule 30e-3(c)(2).

In providing the required toll-free (or collect) telephone number and other means, we encourage the use of methods that allow shareholders to express their preference as conveniently as possible, such as by limiting the need for investors to speak with multiple representatives or navigate through multiple telephone menus or web pages, or otherwise minimizing the steps necessary to express a preference. To record investor preferences, a fund might, for example, provide an automated system, live representatives, a toll-free (or collect) telephone number that is dedicated solely for this purpose, or a prompt for investors when they access their shareholder account information online, such as through the use of a pop-up.

In light of the principle that effective rulemaking should not end with rule adoption, the staff will review, and report to the Commission on, the implementation of rule 30e-3 to evaluate whether funds are employing processes that effectively facilitate investor election of delivery preferences, including the ease through which investors may elect delivery preferences, taking into account, among other things, the continued development of delivery mechanisms and the evolving array of retail investor preferences. For example, the staff's review would include an evaluation of the number of investors who have elected paper delivery, whether such election is on an ad hoc basis or permanent basis, the means through which the election was made (telephone, online or otherwise), and the overall investor experience relating to the election of delivery preferences. The purpose of such review would be to better inform the Commission and the staff on whether funds are implementing processes that effectively facilitate investors making elections consistent with investors' preferences and on whether any further action should be taken to facilitate investor election of delivery preferences.

Some commenters recommended that the final rule permit the Notice to include disclosures informing investors how they can affirmatively consent to electronic delivery of shareholder reports and other documents.

178

After further consideration of these comments, we believe that the Notice should provide the recipient investor with information on how to obtain shareholder reports in the investor's preferred format (

i.e.,

in paper or by email via electronic delivery). Therefore, the final rule requires the Notice to include, if applicable, instructions describing how an investor can elect to receive shareholder reports or other documents or communications by electronic delivery.

179

178

See, e.g.,

ICI Comment Letter I; OppenheimerFunds Comment Letter; SIFMA Comment Letter.

179

See

rule 30e-3(c)(1)(v)(C). This provision would require, if applicable, instructions not only on how to elect electronic delivery of regulatory documents like a shareholder report, but on how to elect electronic delivery of other types of communications (

e.g.,

announcements, news

articles, and other “investor relations” communications).

Finally, in a change from the proposal, the final rule permits a Notice to include pictures, logos, or similar design elements so long as the design is not misleading and the information is clear.

180

A similar provision exists in the rules governing the content of the Notice of internet Availability of Proxy Materials.

181

While we did not receive any comments that suggested this modification to the proposal,

182

we believe that this provision promotes our general goal of highlighting the Notice for investors' attention by permitting the addition of content that alerts investors to the Notice itself, and by extension the shareholder report, without obscuring important information contained in the Notice.

180

See

rule 30e-3(c).

181

See

rule 14a-16(g)(3) under the Exchange Act [17 CFR 240.14a-16(g)(3)];

see also

rule 421(d)(3) under the Securities Act [17 CFR 230.421(d)(3)].

182

While not expressly recommending this modification to the proposal in its comment letters, one commenter designed a sample “enhanced notice” that included design elements such as pictures and logos that would be consistent with this modification.

See

Broadridge Meeting Memo I.

ii. Option To Include Content From Report in Notice

The Notice is designed to alert investors to the availability of a shareholder report online and to provide investors with information on how to obtain paper reports if that is their preference. As we noted in the Proposing Release, we believe it is important to limit the total information included in the Notice, in order to ensure that information regarding the availability of a shareholder report does not become obscured. Therefore, we proposed that the rule limit the information contained in the Notice to the information required by the rule, but requested comment on whether we should require that the Notice not contain any additional information other than that specified by the rule.

183

See

proposed rule 30e-3(d)(3).

In addition to the comments described above regarding types of additional information that should be permitted in the Notice (

e.g.,

instructions on how to elect electronic delivery of documents), we received comments recommending that the final rule should expand the legend in the Notice to include additional information about the fund.

184

One commenter recommended that the Notice should require in a standardized format certain additional content found in the report (for example, a fund's top ten holdings, performance line graph, total return performance, expense information, and/or portfolio composition).

185

Other commenters recommended that the Commission should explore the development of a document more akin to a “summary shareholder report” that incorporates layered disclosure principles.

186

184

See, e.g.,

Fidelity Comment Letter I (recommending that the legend be expanded to alert shareholders that the report contains information such as fund performance and holdings information and portfolio manager's insights).

185

See

Broadridge Meeting Memo I (recommending an “enhanced notice,” which this commenter suggests could be preceded by a Commission pilot to “accelerate benefits and be made available to any and all investment companies that wish to use [the enhanced notice]”); Broadridge Meeting Memo II.

186

See

Comment Letter of Consumer Action (Dec. 1, 2017);

see also

Investment Advisory Committee Recommendation (“[T]he [Investor Advisory Committee] recommends that the Commission explore development of a summary disclosure document for annual shareholder reports that incorporates key information from the report along with prominent notice regarding how to obtain a copy of the full report. The summary document should be designed to be delivered either by mail or by email, depending on the investors' delivery preferences. It should also incorporate a layered disclosure approach, including the ability of those getting the document electronically to click through to more detailed disclosure on a particular topic.”).

After consideration of these comments, we believe that permitting—but not requiring as a condition to use this optional method—the inclusion of certain additional information in the Notice is appropriate so long as it is limited to content from the shareholder report for which Notice is being given.

187

We have modified the final rule accordingly to permit registered management companies (but not UITs) to include content from the report in a Notice.

188

To avoid obscuring the information required to be in the Notice (

i.e.,

the required legends, website address, etc.), under the final rule, additional content from the shareholder report included in the Notice must be placed after the information specified by paragraph (c)(1) of the rule.

189

187

Similarly, in cases where shareholder reports are delivered electronically via email, we note that such emails would not be precluded from including content from the related report under the Commission's electronic delivery guidance.

See

1995 Release,

supra

note 18; 1996 Release,

supra

note 18; 2000 Release,

supra

note 18.

188

See

rule 30e-3(c)(3). UITs subject to rule 30e-2 are principally separate accounts offering variable annuities and variable life insurance policies that do not prepare or transmit shareholder reports for the separate accounts themselves. Rather, under rule 30e-2 they are required to transmit the shareholder reports of the underlying funds in which they invest, which may be numerous and in many cases are unaffiliated. Because of this two-tier structure, the final rule limits the provision permitting inclusion of additional content from shareholder reports to reports required by rule 30e-1.

189

Id.

We are persuaded that permitting additional flexibility regarding the content of the Notice is appropriate, and may result in funds crafting Notices that convey to investors certain key content from the shareholder report, while also encouraging investors to access the shareholder report for more detailed information.

190

Information contained in shareholder reports that we believe may be communicative and appropriate—albeit not required—for inclusion in the Notice could be, for example: One or more graphical representations of holdings; a list of the fund's top holdings (

e.g.,

top five or ten holdings); performance information; the type of fund; a brief statement of the fund's investment objectives and strategies; the expense ratio or an expense example; and the name and title of the fund's portfolio manager(s).

190

This approach draws from certain aspects of the Investor Advisory Committee Recommendation. For example, the Investor Advisory Committee recommended that “the Commission explore development of a summary disclosure document for annual shareholder reports that incorporates key information from the report along with prominent notice regarding how to obtain a copy of the full report.”

See

IAC Recommendation,

supra

note 40. While the final rule does not require a summary disclosure document, and does not mandate any particular content, it permits funds to add to the Notice content from the shareholder report and similarly requires that the Notice include a prominent legend regarding how to obtain a copy of the report.

Additionally, the Investor Advisory Committee recommended that “the Commission engage in investor testing of the proposed [summary document and layered] disclosure, or encourage testing by industry members, to ensure that the proposed approach delivers the expected benefits of reducing costs for funds and distributors without sacrificing disclosure quality.”

Id.

Consistent with the Investor Advisory Committee Recommendation, we note that the Fund Retail Investor Experience and Disclosure Request for Comment, as well as investor testing of disclosure alternatives, are two key initiatives the Commission is using to assess our current disclosure framework for funds and to consider possible changes to that framework.

See

Disclosure Request for Comment,

supra

note 20. Regarding this investor testing, the Commission's Office of the Investor Advocate (“OIAD”) is engaging in investor testing through its Policy Oriented Stakeholder and Investor Testing for Innovative and Effective Regulation (“POSITIER”) initiative.

See

Disclosure Request for Comment,

supra

note 20.

Providing funds the flexibility to include in the Notice certain information from the shareholder report is intended to allow them to identify and provide content they believe is particularly informative to their investors. Funds that decide to include additional information from the report in their Notices generally should consider the appropriateness of such information, the benefits to investors, and the cost impacts associated with adding information to the Notice. When including content from the report in a Notice, funds have obligations with respect to the antifraud provisions of the

federal securities laws.

191

In this regard, inclusion of only certain elements of performance information required to be included in reports raises certain considerations. If a fund chooses to include in the Notice performance information from the report, the content should include all information required with respect to the particular performance item in accordance with applicable presentation requirements.

192

191

See, e.g.,

Section 17(a) under the Securities Act [15 U.S.C. 77q]; Section 10(b) under the Exchange Act [15 U.S.C. 78j(b)] and rule 10b-5 thereunder [17 CFR 240.10b-5]; and Section 34(b) of the Investment Company Act [15 U.S.C. 80a-33(b)].

192

For example, a fund could include either the complete line graph or complete performance table required by the applicable form (

see, e.g.,

Item 27(b)(7)(ii) of Form N-1A requiring an open-end management company's report to include (A) a line graph, and (B) annual total returns table).

While the final rule does not prescribe a specific page limit, funds generally should limit optional content to a relatively brief amount to avoid detracting from the primary purpose of the Notice and to encourage investors to access the shareholder report itself. As discussed further below, we are requiring funds that choose to transmit Notices with additional information from the shareholder report to file such Notices as part of their reports on Form N-CSR.

193

As discussed above, we believe it is important that information regarding the availability of a shareholder report does not become obscured, and to address this concern, we are requiring that the information that is required to be in the Notice (

i.e.,

the required legends, website address, etc.) must be presented before any additional content from the shareholder report is included in the Notice to ensure that the required legends and website address are positioned prominently in the Notice.

193

See

Item 1(b) of Form N-CSR.

iii. Materials That May Be Combined With or Accompany the Notice

To further ensure that the information contained in the Notice would not be obscured, the rule as proposed would have prohibited the Notice from being incorporated into or combined with another document,

194

or sent along with other shareholder communications (with the exception of the fund's current summary prospectus, prospectus, statement of additional information, or Notice of internet Availability of Proxy Materials under rule 14a-16 under the Exchange Act).

195

We received a number of comments on this aspect of the proposed rule, with commenters requesting additional flexibility in what materials or documents could be combined with, or accompany, the Notice.

194

See

proposed rule 30e-3(d)(2).

195

See

proposed rule 30e-3(d)(4).

Some commenters recommended that the final rule permit the use of a single, consolidated Notice for funds within the same fund complex or for funds held in the same intermediary contract or account.

196

Commenters noted that such an approach would have the benefits of increasing the likelihood of investor review

197

and reductions in costs.

198

One commenter recommended that a consolidated Notice be permitted for funds from different fund complexes,

199

while another recommended that the final rule permit consolidated Notices for funds held through a variable insurance product.

200

196

See

CAI Comment Letter I; Fidelity Comment Letter I; ICI Comment Letter I; OppenheimerFunds Comment Letter; Schwab Comment Letter.

197

See

ICI Comment Letter I.

198

See

ICI Comment Letter I; OppenheimerFunds Comment Letter.

199

See

Fidelity Comment Letter I.

200

See

CAI Comment Letter I. This commenter also recommended that the consolidated Notice be permitted to specify either a single website or multiple websites at which required documents were available for different funds.

Some commenters recommended that the final rule permit the Notice to be incorporated into the summary prospectus and account statements, stating it would provide additional visibility due to investor interest in those documents.

201

A number of commenters recommended that other materials should be permitted to accompany the Notice, including account statements,

202

new account applications,

203

new account welcome kits,

204

notices from other funds with the same fiscal year end,

205

dividend checks,

206

transaction confirmations,

207

and in the case of variable insurance products, the variable annuity contract or life insurance policy and the related contract prospectuses or statements of additional information.

208

Commenters stated that investors would be more likely to read Notices bundled with other materials,

209

and that additional cost savings would result.

210

201

See, e.g.,

Capital Research Comment Letter I; State Street Comment Letter.

202

See.,e.g.,

Dreyfus Comment Letter; ICI Comment Letter I; Invesco Comment Letter; MFS Comment Letter; OppenheimerFunds Comment Letter; Schwab Comment Letter; T. Rowe Price Comment Letter I.

203

See, e.g.,

ICI Comment Letter I.

204

See, e.g.,

ICI Comment Letter I; Invesco Comment Letter; MFS Comment Letter; OppenheimerFunds Comment Letter; T. Rowe Price Comment Letter I.

205

See, e.g.,

Capital Research Comment Letter I; ICI Comment Letter I.

206

See, e.g.,

ICI Comment Letter I; Invesco Comment Letter; MFS Comment Letter; OppenheimerFunds Comment Letter; T. Rowe Price Comment Letter I.

207

See, e.g.,

T. Rowe Price Comment Letter I.

208

See, e.g.,

CAI Comment Letter I; ICI Comment Letter I.

209

See, e.g.,

ICI Comment Letter I; MFS Comment Letter; T. Rowe Price Comment Letter I.

210

See, e.g.,

Dreyfus Comment Letter; ICI Comment Letter I; T. Rowe Price CommentLetter I.

After consideration of the comments, we have modified the final rule to permit the use of consolidated Notices.

211

In addition to reduced costs, we believe that a single, consolidated Notice could be effective in alerting a shareholder to the online availability of shareholder reports for multiple funds. We note that if a consolidated Notice is used, a fund must draft the Notice to incorporate all elements required by the rule with respect to each report covered by the Notice. For example, if the website address for one report covered by the Notice does not include the materials required for one or more other funds covered by the Notice, then additional website addresses would be required so that all required materials for the funds covered by the Notice are made appropriately accessible. In such case, we believe it should be clear to investors which website address is associated with each report covered by the consolidated Notice.

211

See

rule 30e-3(c)(4).

We have also modified the final rule to permit the Notice to accompany additional materials beyond a current summary prospectus, statutory prospectus, statement of additional information, or Notice of internet Availability of Proxy Materials. As with consolidated Notices, we believe that permitting Notices to accompany other documents not only could result in additional cost savings (

i.e.,

reduced mailing expenses), but could be effective in alerting a shareholder to the Notice if the other documents are likely to be read by investors. Under the final rule, a Notice may accompany one or more Notices for other funds.

212

In the case of a fund that is available as an investment option in a variable annuity or variable life insurance contract, the

Notice may accompany the contract or the contract's statutory prospectus and statement of additional information.

213

We have also modified the final rule to permit the Notice to accompany the investor's account statement. Like consolidated Notices, we believe that permitting Notices to accompany account statements could result in additional cost savings. Moreover, we believe that an investor who is likely to read account statements would also be likely to become aware of the accompanying Notice and the content therein.

214

We believe that the Notice would not be unduly obscured if accompanied by these materials because it is accompanying materials personalized to the receiver,

215

but decline to permit the Notice to accompany other materials suggested by commenters.

212

See

rule 30e-3(c)(5)(i), (ii). Under the final rule, a Notice for a fund may accompany a summary prospectus, statutory prospectus or statement of additional information for other funds because (1) rule 498 under the Securities Act does not prohibit a summary prospectus for one fund from accompanying a summary prospectus, statutory prospectus or statement of additional information for another fund, and (2) the final rule permits the Notice for one fund to accompany a Notice for another fund, and for a Notice to incorporate or combine one or more other Notices.

See

rule 498 under the Securities Act [17 CFR 230.498]; rule 30e-3(c)(5)(i), (ii).

213

Rule 30e-3(c)(5)(iii). Thus, Notices for underlying funds offered under a contract may (either as individual Notices or as a consolidated Notice) accompany (1) the contract, (2) the contract's statutory prospectus and statement of additional information, and (3) summary prospectuses, statutory prospectuses, statements of additional information, and Notices of internet Availability of Proxy Materials for one or more underlying funds.

See also

rule 498(c) under the Securities Act (permitting, under certain conditions, a summary prospectus for a fund that is available as an investment option in a variable annuity or a variable life insurance contract to be bound together with the statutory prospectus for the contract and summary prospectuses and statutory prospectuses for other investment options available in the contract) [17 CFR 230.498(c)].

214

Rule 30e-3(c)(5)(iv).

215

See, e.g.,

rule 498(c) under the Securities Act [17 CFR 230.498(c)].

iv. Householding

Similar to the Commission's rules on householding prospectuses, shareholder reports, and proxy statements and information statements,

216

as proposed, final rule 30e-3 allows one Notice to be sent to shareholders who share an address so long as the conditions set forth in rule 30e-1(f), rule 30e-2(b), rule 14a-3(e) under the Exchange Act, or rule 14c-3(c) under the Exchange Act are satisfied.

217

We received no comments on this requirement, and are adopting the requirement as proposed.

216

See, e.g.,

rule 154 under the Securities Act (permitting householding of prospectuses) [17 CFR 230.154]; rules 30e-1(f) and 30e-2(b) (permitting householding of shareholder reports); rules 14a-3(e) and 14c-3(c) under the Exchange Act (permitting householding of annual reports to security holders, proxy statements and information statements, and Notices of internet Availability of Proxy Statements) [17 CFR 240.14a-3(e); 17 CFR 240.14c-3(c)].

See generally

Delivery of Disclosure Documents to Households, Investment Company Act Release No. 24123 (Nov. 4, 1999) [64 FR 62540 (Nov. 16, 1999)] (adopting householding rules with respect to prospectuses and shareholder reports); Delivery of Proxy Statements and Information Statements to Households, Investment Company Act Release No. 24715 (Oct. 27, 2000) [65 FR 65736 (Nov. 2, 2000)] (adopting householding rules with respect to proxy statements and information statements).

217

Rule 30e-3(c)(6).

v. Requirement To File Form of Notice

We proposed to require that a form of the Notice be filed with the Commission not later than 10 days after the Notice is sent to shareholders.

218

We anticipated that this filing would have occurred on a new EDGAR submission type that would have been created by the Commission, and stated our belief that the Notice filing requirement would have assisted us in overseeing compliance with the rule.

218

See

proposed rule 30e-3(d)(6).

Commenters generally opposed filing the Notice semi-annually as part of a separate filing. Some commenters recommended that the Notice be filed instead as an exhibit to Form N-CEN or Form N-CSR.

219

Commenters also recommended eliminating the filing requirement, and indicated that the Commission could ensure compliance in a less costly manner using its examination program.

220

219

See, e.g.,

Dechert Comment Letter; ICI Comment Letter I; T. Rowe Price Comment Letter I.

220

See, e.g.,

Dechert Comment Letter; Invesco Comment Letter; SIFMA AMG Comment Letter.

After further consideration of these comments, we have modified the final rule as follows. Notices that do not contain content from the report (as permitted by paragraph (c)(3)) would not be required to be filed with the Commission because we do not expect those Notices to change significantly from period to period.

221

We also believe that our staff can evaluate for compliance with the Notice provisions of the rule through the Commission's examination program.

221

We expect this to be the case given the nature of the information required in the Notice, along with the general restriction on including information other than that required by the rule.

On the other hand, Notices that contain content from the report as permitted by paragraph (c)(3) would be required to be filed with the Commission as part of the fund's report on Form N-CSR.

222

We believe it is appropriate for the Commission to review the disclosure in these Notices in conjunction with its overall review of shareholder reports and other disclosure filings. In requiring that they be filed with the Commission, the staff will be able to monitor for compliance with the rule, as well as for general industry trends in the use of these Notices as part of its ongoing disclosure review and other activities.

222

Item 1(b) of Form N-CSR (requiring the filing of a copy of each notice transmitted to stockholders in reliance on rule 30e-3 that contains disclosures specified by paragraph (c)(3) of that rule).

c. Delivery of Paper Copy Upon Request

As a condition to reliance on the rule, we proposed to require that the fund or UIT (or a financial intermediary through which shares of the fund or UIT may be purchased or sold) must send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of the most recent annual and semi-annual reports of the fund (or underlying fund in the case of a UIT), and portfolio holdings of the fund (or underlying fund in the case of a UIT) as of its most recent first and third fiscal quarters, to any person ad hoc requesting copies of any such documents within three business days after receiving a request for a paper copy.

223

This requirement is intended to allow investors to receive shareholder reports and portfolio information in paper, if they prefer, even if they are receiving Notices under the rule,

224

and we are adopting it generally as proposed. However, we have modified the final rule from the proposal to eliminate the reference in this provision to financial intermediaries given the guidance in this release regarding the operation of the rule in the context of financial intermediaries.

225

223

Proposed rule 30e-3(f). One commenter questioned fund firm practices regarding delivery of paper shareholder reports upon request.

See

Broadridge Comment Letter II. A second commenter disputed the premise and sampling methodology conducted by the first commenter, stating that fund firms have “specific, highly effective processes in place to handle requests under Rule 498.”

See

ICI Comment Letter III. The Commission is not aware of investors having systemic issues related to fund firm practices regarding delivery of paper shareholder reports upon request.

224

See, e.g.,

1995 Release,

supra

note 18 (stating `that “as a matter of policy, where a person has a right to receive a document under the federal securities laws and chooses to receive it electronically, that person should be provided with a paper version of the document if any consent to receive documents electronically were revoked or the person specifically requests a paper copy (regardless of whether any previously provided consent was revoked).”). A similar requirement is found in rule 498 under the Securities Act governing the use of a summary prospectus.

See

rule 498(f) [17 CFR 230.498(f)].

225

See

rule 30e-3(e), (i); proposed rule 30e-3(f);

infra

Section II.C. For clarity, the final paragraph (e) of rule 30e-3 operates independently of final paragraph (f) of rule 30e-3.

Compare

rule 30e-3(e) (requiring funds to deliver a paper report in response to a shareholder's ad hoc request) and rule 30e-3(f) (requiring funds to deliver paper reports to a shareholder, who has elected a shareholder preference to receive paper reports).