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

Federal RegisterNov 5, 2020

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-10814; 34-89478; IC-33963; File No. S7-09-20]

RIN 3235-AM52

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing rule and form amendments that would modernize the disclosure framework for open-end management investment companies. The disclosure framework would feature concise and visually engaging shareholder reports that would highlight key information that is particularly important for retail investors to assess and monitor their fund investments. Certain information that may be less relevant to retail investors—and of more interest to financial professionals and investors who desire more in-depth information—would no longer appear in funds' shareholder reports but would be available online, delivered free of charge upon request, and filed on a semi-annual basis on Form N-CSR. Funds' shareholder reports would serve as the central source of fund disclosure for existing shareholders. Thus, instead of delivering prospectus updates to existing shareholders each year, open-end funds would have an alternative way to keep shareholders informed. This framework would rely on the shareholder report (which would include a summary of material fund changes), along with timely notifications to shareholders about material fund changes as they occur and continued availability of the fund's prospectus. The Commission is also proposing amendments to open-end fund prospectus disclosure requirements to provide greater clarity and more consistent information about fees, expenses, and principal risks. Finally, the Commission is proposing amendments to the advertising rules for registered investment companies and business development companies to promote more transparent and balanced statements about investment costs.

DATES:

Comments should be received by January 4, 2021.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

https://www.sec.gov/rules/submitcomments.htm

); or

• Send an email to

rule-comments@sec.gov

. Please include File No. S7-09-20 on the subject line.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (

http://www.sec.gov/rules/proposed.shtml

). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information you wish to make available publicly. Persons wishing to provide comments regarding the proposal may wish to submit our Investor Feedback Flier or Smaller Fund Feedback Flier, available at Appendices B and C, respectively.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Zeena Abdul-Rahman, Daniel K. Chang, Mykaila DeLesDernier, Pamela K. Ellis, Angela Mokodean, Senior Counsels; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551-6792, Investment Company Regulation Office; Daniel Rooney, Assistant Chief Accountant; Keith Carpenter or Michael Kosoff, Senior Special Counsels, at (202) 551-6921, Disclosure Review and Accounting Office; Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION:

The Commission is proposing new 17 CFR 230.498B [new rule 498B] under the Securities Act of 1933 (“Securities Act”).

We also are proposing amendments to the following

rules and forms:

15 U.S.C. 77a

et seq.

15 U.S.C. 80a

et seq.

15 U.S.C. 78a

et seq.

Commission reference

CFR citation

[17 CFR]

Organization; Conduct and Ethics; And Information and Requests

§§ 200.1 through 200.800.

Section 800

§ 200.800.

Securities Act:

Rule 156

§ 230.156.

Rule 433

§ 230.433.

Rule 482

§ 230.482.

Rule 498

§ 230.498.

Form N-14

§ 239.23.

Securities Act and Investment Company Act of 1940 (“Investment Company Act”):

Form N-1A

§§ 239.15A and 274.11A.

Securities Exchange Act of 1934 (“Exchange Act”):

Schedule 14A

§ 240.14a-101.

Exchange Act and Investment Company Act:

Form N-CSR

§§ 249.331 and 274.128.

Investment Company Act:

Rule 30e-1

§ 270.30e-1.

Rule 30e-3

§ 270.30e-3.

Rule 31a-2

§ 270.31a-2.

Rule 34b-1

§ 270.34b-1.

Table of Contents

I. Introduction and Background

A. Current Approach To Disclosure for Fund Shareholders

B. Information About Investor Preferences

1. Fund Shareholder Preferences Regarding Ongoing Disclosures

2. Fee and Risk Disclosure Preferences

3. Disclosure Delivery Preferences

C. Developments Affecting Fund Disclosure and Marketing Practices

II. Discussion

A. Overview of Proposed New Disclosure Framework

1. Executive Summary

2. Considerations and Goals

B. Annual Shareholder Report

1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments

2. Contents of the Proposed Annual Report

3. Format and Presentation of Annual Report

4. Electronic Annual Reports

C. Semi-Annual Shareholder Report

1. Scope and Contents of the Proposed Semi-Annual Report

2. Format and Presentation of Semi-Annual Report

3. Electronic Semi-Annual Reports

D. New Form N-CSR and website Availability Requirements

1. Proposed Form N-CSR Filing Requirements

2. Proposed website Availability Requirements

3. Proposed Delivery Upon Request Requirements

E. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N-CSR

F. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework

1. Overview

2. Scope of Proposed New Rule 498B

3. Conditions To Rely Upon Proposed New Rule 498B

4. Other Requirements

G. Amendments Narrowing Scope of Rule 30e-3

H. Proposed Amendments To Fund Prospectus Disclosure Requirements

1. Improved Prospectus Fee Disclosures

2. Improved Prospectus Risk Disclosures

3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)

I. Investment Company Advertising Rule Amendments

J. Technical and Conforming Amendments

K. Compliance Date

III. Economic Analysis

A. Introduction

B. Economic Baseline and Affected Parties

1. Descriptive Industry Statistics

2. Fund Prospectuses

3. Fund Shareholder Reports

4. Delivery of Fund Prospectuses and Shareholder Reports

5. Investor Use of Fund Disclosure

6. Fund Advertisements

C. Costs and Benefits

1. Broad Economic Considerations

2. Modified Disclosure Framework for Existing Fund Shareholders

3. Prospectus Disclosure Amendments

4. Advertising Rule Amendments

D. Effects on Efficiency, Competition, and Capital Formation

E. Reasonable Alternatives

1. More or Less Frequent Disclosure

2. More or Less Information in Shareholder Reports

3. Retaining Rule 30e-3 Flexibility for Open-End Funds Registered on Form N-1A

4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds

5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a Different Manner

6. Amending Shareholder Report Requirements for Variable Insurance Contracts or Registered Closed-End Funds

7. Requiring Funds To Comply With Proposed Rule 498B

8. Requiring Form N-CSR to be Tagged in Inline XBRL Format

9. Modifying the AFFE Amendment

F. Request for Comment

IV. Paperwork Reduction Act Analysis

A. Introduction

B. Form N-1A

C. Proposed New Shareholder Report Requirements Under Rule 30e-1

D. Form N-CSR

E. Proposed Rule 498B

F. Rule 482

G. Rule 34b-1

H. Rule 433

I. Rule 30e-3

J. Rule 498

K. Request for Comment

V. Initial Regulatory Flexibility Act Analysis

A. Reasons for and Objectives of the Proposed Actions

B. Legal Basis

C. Small Entities Subject to the Rule

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

1. Annual and Semi-Annual Reports

2. New Form N-CSR and website Availability Requirements

3. Proposed Rule 498B, and Treatment of Annual Prospectus Updates under Proposed Disclosure Framework

4. Amendments to Scope of Rule 30e-3

5. Proposed Amendments to Fund Prospectus Disclosure Requirements

6. Investment Company Advertising Rules

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

G. General Request for Comment

VI. Consideration of Impact on the Economy

VII. Statutory Authority

I. Introduction and Background

The Commission is proposing to tailor the disclosures that mutual funds and exchange-traded funds (“ETFs” and, collectively with mutual funds, “funds”) must provide to investors to highlight key information investors need to assess and monitor their fund investments and make informed investment decisions.

Currently, most mutual funds and ETFs rely on a layered disclosure framework with respect to the prospectus information they provide to fund investors in order to tailor this disclosure to investors' informational needs.

The vast majority of funds provide: (1) A summary prospectus to investors in connection with their initial investment decision; and (2) more-detailed information that may be of interest to some investors, which is available online in the form of the “statutory prospectus” and Statement of Additional Information (“SAI”).

However, this approach to

layered, tailored disclosure does not extend to other disclosure funds provide to their shareholders. After making their initial decision to invest in a fund, fund shareholders typically receive an updated prospectus annually, as well as annual and semi-annual shareholder reports (or “annual reports” and “semi-annual reports” respectively, and collectively “shareholder reports”).

These shareholder reports provide detailed information about a fund's operations and activities during the last full- or half-year period and can be quite lengthy. For example, it is not unusual for annual reports to exceed 100 pages in length.

For purposes of this release, the term “fund” generally refers to an open-end management investment company registered on Form N-1A or a series thereof, unless otherwise specified. Mutual funds and most ETFs are open-end management investment companies registered on Form N-1A. An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer.

See

sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)].

Throughout this release, we generally use the term “investor” to refer to both prospective investors in a fund and fund shareholders (

i.e.,

persons who hold an investment in securities issued by a fund). We generally use the term “shareholder” to refer specifically to those who hold an investment in securities issued by a fund.

See

section 5(b)(2) of the Securities Act [15 U.S.C. 77e(b)(2)] (generally requiring that a fund or financial intermediary deliver a prospectus to an investor in connection with his or her purchase of the fund's securities). Funds generally amend their prospectuses annually to reflect changes to the disclosed information.

A fund's prospectus generally must include information contained in the fund's registration statement.

See

section 10(a) of the Securities Act [15 U.S.C. 77j(a)]. For purposes of this release, a prospectus meeting the requirements of a section

10(a) prospectus is referred to as a “statutory prospectus.” Form N-1A requires a fund to disclose the information that Items 2 through 8 of Form N-1A require in numerical order at the front of the prospectus.

See

General Instruction C.3.a to Form N-1A. For purposes of this release, we refer to this front section of the statutory prospectus as the “summary section of the statutory prospectus.”

A fund may use a summary prospectus (which includes the information required or permitted by Items 2 through 8 of Form N-1A) to satisfy prospectus delivery obligations under certain conditions (

e.g.,

the statutory prospectus is posted online).

See

rule 498 under the Securities Act [17 CFR 230.498]. For purposes of this release, a summary prospectus that a fund uses to satisfy its prospectus delivery obligations, as rule 498 permits, is referred to as a “summary prospectus.”

See

section 30(e) of the Investment Company Act [15 U.S.C. 80a-29(e)]; rule 30e-1 under the Investment Company Act [17 CFR 270.30e-1]. Shareholders in a fund typically receive an annual update of the fund's prospectus to satisfy prospectus delivery requirements for any additional shares of the fund the shareholder may purchase.

See infra

discussion accompanying and following footnote 11. In addition to the annual prospectus update, a shareholder also may receive prospectus supplements, or “stickers,” during the year if material or other changes occur to the fund.

See infra

footnote 13 and accompanying text.

In June 2018, the Commission issued a request for comment seeking feedback on retail investors' experience with fund disclosure and on ways to improve fund disclosure.

We have considered feedback the Commission received in response to this request for comment, which generally showed that retail investors prefer concise, layered disclosure and feel overwhelmed by the volume of fund information they currently receive. We have also considered prior investor testing and surveys, past fund disclosure reform initiatives, and developments affecting fund disclosure practices.

See

Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11, 2018)] (“Fund Investor Experience RFC”).

See, e.g., infra

Sections I.B and I.C.

After considering this information, we are proposing a layered disclosure framework for fund shareholders that would highlight key information for assessing and monitoring a fund investment and informing investment decisions (

e.g.,

whether to buy additional shares, continue to hold, or sell a fund investment), with additional information available online and upon request. The proposal would implement this new framework principally by amending the requirements for funds' annual and semi-annual reports to highlight information that we believe is particularly important for retail shareholders to assess and monitor their ongoing fund investments. These tailored shareholder reports would serve as the primary fund disclosure that existing shareholders receive each year, in addition to notices of certain material changes if they occur during the year.

The proposal is designed to alleviate concerns that fund retail shareholders currently may receive disclosure materials that are not well-suited to their needs, which may contribute to investor confusion or indifference. Current disclosures, for example, may include information that is less useful for most retail shareholders to assess and monitor their fund investments, either because the information is primarily designed to inform an initial purchase decision, or because the information is of interest to only some investors (for example, those investors who want detailed fund information), as well as financial professionals and market analysts. Furthermore, current fund disclosures in some cases are delivered close in time to one another and include similar sets of information that may appear redundant or inconsistent to shareholders. Under the proposal, the amounts and types of available fund information would remain largely unchanged. However, information that is of interest only to some shareholders, or information that we believe generally is less useful for purposes of assessing and monitoring an ongoing investment, would be available online and delivered upon request to fund shareholders who want that additional information.

In addition to layering disclosure for existing fund shareholders, we are proposing certain amendments to the way funds present their fees and expenses and principal risks in prospectuses. Many retail investors responding to the Fund Investor Experience RFC stated that current fee and expense and principal risk disclosure is difficult to understand and use. The proposed amendments are designed to provide investors with simpler, easier-to-understand information about a fund's fees and expenses and principal risks, including a summary presentation of bottom-line fee figures that uses plain language descriptions and more concise principal risk disclosure that generally orders risks by importance. Consistent with the current layered approach to prospectus disclosure, additional information about a fund's fee and expenses and risks would remain available for interested investors.

To improve the clarity of fee and expense information that is available to investors more generally, we also propose to amend the Commission's investment company advertising rules. The proposed amendments would require that a registered investment company or business development company (“BDC”) advertisement discussing fees and expenses include certain standardized figures and provide reasonably current information. In addition, we are proposing amendments to address potentially misleading statements about fees and expenses in these investment company advertisements.

A. Current Approach To Disclosure for Fund Shareholders

Today, a fund investor receives a prospectus in connection with his or her initial purchase of fund shares. A fund's prospectus serves as the principal selling document for potential investors to help inform investment decisions and facilitate fund comparisons. Fund prospectuses provide important information that an investor should consider when making an investment, including information about a fund's principal investment strategies, fees and expenses, principal risks, and performance.

Under the Federal securities laws, a fund (or a financial intermediary) must deliver an updated copy of the fund's summary or statutory prospectus to an existing fund shareholder if the shareholder purchases additional shares of the fund.

We understand that, to satisfy

applicable prospectus delivery requirements, most funds send an updated summary or statutory prospectus annually to all shareholders to avoid the need to track each shareholder's additional purchase activity throughout the year. Other funds may track this activity and send a summary or statutory prospectus only to those shareholders who have purchased fund shares during the relevant period. The vast majority of funds use summary prospectuses.

Outside of the annual prospectus update, a fund shareholder may also receive updates at other times during the year when a fund supplements, or “stickers,” its prospectus disclosure to reflect material or other changes.

See, e.g.,

Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)] (“2009 Summary Prospectus Adopting Release”). The summary prospectus that the Commission adopted took into account investors' preferences as reflected in focus group interviews and a telephone survey.

See

2009 Summary Prospectus Adopting Release at n.32 and accompanying text.

Section 10(a)(3) of the Securities Act, and section 24(e) and 17 CFR 270.8b-16 [rule 8b-16 under the Investment Company Act], generally require a fund to update its registration statement (which includes its prospectus) annually. The effect of section 10(a)(3) is to require funds to update their prospectuses annually to reflect current fee, performance, and other financial information (the “annual prospectus update”).

Section 5(b)(2) of the Securities Act makes it unlawful to deliver a security for purposes of sale or for delivery after sale “unless accompanied or

preceded” by a statutory prospectus. Because the requirements of section 5(b)(2) are applicable to “any person,” its obligations apply to financial intermediaries through which funds are sold, as well as to the funds themselves.

See supra

footnote 6 (recognizing that a fund or financial intermediary may deliver a summary prospectus to satisfy this prospectus delivery obligation under certain conditions).

We estimate that as of December 31, 2018, approximately 93% of mutual funds and ETFs use summary prospectuses. This estimate is based on data on the number of mutual funds and ETFs that filed a summary prospectus in 2018 in the Commission's Electronic Data, Gathering, Analysis, and Retrieval system (“EDGAR”) (10,808) and the Investment Company Institute's estimated number of mutual funds and ETFs as of December 31, 2018 (11,656).

See

Investment Company Institute, 2019 Investment Company Fact Book, at 50,

available at

https://www.ici.org/pdf/2019_factbook.pdf

See generally

17 CFR 230.497 [rule 497 under the Securities Act];

see also

section 12(a)(2) of the Securities Act (providing a civil remedy if a prospectus includes an untrue statement of a material fact or omits to state a fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading); 17 CFR 230.408 [rule 408 under the Securities Act] (requiring registrants to include, in addition to the information expressly required to be included in a registration statement, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading).

In addition to annual prospectus updates and interim stickers, fund shareholders also receive shareholder reports on a semi-annual basis.

These reports include detailed information about a fund's operations over a given half- or full-year period, including information about the following items. Certain of this information, including fund performance information, appears only in annual reports.

See

section 30(e) of the Investment Company Act [15 U.S.C. 80a-29(e)]; rule 30e-1 under the Investment Company Act [17 CFR 270.30e-1]. A fund or an intermediary may transmit the shareholder report to an investor. Most fund investors engage an investment professional and hold their fund investments as beneficial owners through accounts with intermediaries. As a result, intermediaries commonly assume responsibility for distributing fund shareholder reports to beneficial owners.

See

Optional internet Availability of Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)] (“Rule 30e-3 Adopting Release”), at paragraph accompanying n.274.

• The ongoing costs of a $1,000 fund investment for the most recent fiscal half-year, including actual expenses (which a shareholder can use to understand his or her ongoing costs of investing in the fund) and hypothetical expenses (which a shareholder can use to compare different funds' ongoing costs);

• Performance, including information about the fund's performance over the past 10 years and fund management's discussion of fund performance for the last fiscal year;

• Portfolio holdings, which includes a list of the fund's investments and graphical representations of the fund's holdings by certain categories (

e.g.,

type of security, industry sector, geographic region, credit quality, or maturity);

A fund may include a summary schedule of its investments in securities of unaffiliated issuers, which includes approximately its 50 largest holdings, in the financial statements it provides in the shareholder report, provided it makes the complete list of investments in unaffiliated issuers available online and upon request. Alternatively, a fund must include that complete list of its investments in securities of unaffiliated issuers in its shareholder reports.

See

Instruction 1 to Item 27(b)(1) of Form N-1A; Instruction to Item 27(c)(1) of Form N-1A; 17 CFR 210.12-12B [rule 12-12B of Regulation S-X].

• Fund financials, including financial statements and financial highlights, which are audited in annual reports;

See

Items 27(b)(1) and 27(b)(2) of Form N-1A. The financial statements and financial highlights in a fund's semi-annual report need not be audited.

See

Items 27(c)(1) and 27(c)(2) of Form N-1A.

• A fund's board of directors and management, including remuneration that the fund paid to these and certain other parties;

• Results of any shareholder vote held during the relevant period;

• The availability of additional information regarding the fund's proxy voting record, code of ethics, quarterly portfolio holdings, and board of directors;

• Changes in and disagreements with fund accountants;

• Any board approval of an investment advisory contract during the relevant period; and

• The operation and effectiveness of the fund's liquidity risk management program.

See

Item 27(b), (c), and (d) of Form N-1A; rule 30e-1(b) under the Investment Company Act [17 CFR 270.30e-1(b)].

Additionally, some funds currently include other information in their shareholder reports that is not required by Commission rules or forms. For example, some funds typically include in their shareholder reports information such as president's letters, interviews with portfolio managers, market commentary, or specific portfolio statistics that are not required (

e.g.,

top ten largest holdings, summary statistics with respect to debt yields and maturities).

Based on staff analysis, the average annual report is approximately 134 pages long, and the average semi-annual report is approximately 116 pages long.

See, e.g.,

Fund Investor Experience RFC,

supra

footnote 8, at Section II.D.5.

We recognize, however, that the length of funds' shareholder reports can vary substantially. For example, the staff observed annual reports ranging in length from 22 pages to more than 600 pages. These figures are based on a 2020 staff review that included a sample of reports from large, mid-sized, and small funds that were available on fund websites. One apparent reason for the different lengths of these reports is that some reports covered a single fund (or series), while others covered many. For example, most reports that were between 22 and 45 pages long covered a single series. However, the number of series a report covered did not solely explain the differences in length. For reports that were longer than 45 pages, there generally was not a clear and consistent relationship between the number of series a report covered and the report's length.

see also

Recommendation of the Investor Advisory Committee on Disclosure Effectiveness (May 21, 2020) (“IAC Disclosure Effectiveness Recommendation”),

available at

https://www.sec.gov/spotlight/investor-advisory-committee-2012/disclosure-effectiveness.pdf

(discussing, among other things, research findings relating to investors' understanding of fund disclosure).

See

2009 Summary Prospectus Adopting Release,

supra

footnote 10; Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Investment Company Act Release No. 33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)] (“Variable Contract Summary Prospectus Adopting Release”); Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers Act Release No. 5247 (June 5, 2019) [84 FR 33492 (July 12, 2019)] (“Form CRS Adopting Release”).

1. Fund Shareholder Preferences Regarding Ongoing Disclosures

Based on available information, as detailed below, we understand that many fund shareholders would prefer to receive a smaller volume of fund disclosures each year. In addition, many shareholders view funds' current annual and semi-annual reports as overly long and complex. Available evidence suggests that, as a result of the volume and complexities of fund disclosures, many shareholders do not read much, if any, of the ongoing disclosures they receive. We understand that fund shareholders would prefer concise, layered shareholder report disclosure that highlights key information and that uses design features to make the reports easier to understand and use.

Investor Preferences for Concise, Layered Disclosure

The vast majority of individual investors responding to questions in the Fund Investor Experience RFC about summary disclosure expressed a preference for summary disclosure with additional information available online or upon request, while only a very few stated that they did not prefer concise, summary disclosure.

Some investors specifically addressed and supported a more concise, summary shareholder report.

Moreover, several investors expressed concern about the current length of fund disclosure materials.

Commenters' overall preference for summary disclosure is generally consistent with other information the Commission has received—through investor testing, surveys, and other information-gathering—that similarly

indicates that investors strongly prefer concise, layered disclosure.

For example, of the 49 individual investors who responded to a question about summary disclosure in the Feedback Flier, 46 investors preferred summary disclosure and three investors did not.

See, e.g.,

Comment Letter of Carol Palmer (June 5, 2018) (“Palmer Comment Letter”); Comment Letter of Perry Balke (June 5, 2018) (“Balke Comment Letter”) (“Seems like there should be a disclosure for the ultimate investor and then additional/other disclosures for Advisors/Institutions to analyze.”); Comment Letter of Sara Karlidag (June 6, 2018) (“Karlidag Comment Letter”); Comment Letter of Chip Morton (Dec. 28, 2018) (“Morton Comment Letter”) (“I like the more detailed reports”). Investors who responded to the Fund Investor Experience outside of the Feedback Flier also supported more concise, summary disclosure.

See, e.g.,

Comment Letter of Virginia Lamp (Aug. 13, 2018); Comment Letter of Mark Pitts (July 15, 2018).

See, e.g.,

Comment Letter of Ann Watters (Oct. 8, 2018); Comment Letter of Allen Weaver (Oct. 8, 2018) (“Weaver Comment Letter”); Comment Letter of Steve Henry (Oct. 8, 2018) (“Henry Comment Letter”).

See, e.g.,

Comment Letter of Carla Rojas (June 9, 2018) (“Rojas Comment Letter”) (stating that fund disclosure is too long); Comment Letter of Richard Franco (Sept. 24, 2018) (“Franco Comment Letter”); Comment Letter of Lisa Nevin (June 13, 2018) (“Nevin Comment Letter”); Comment Letter of Mike Woods (Sept. 2, 2018) (“Woods Comment Letter”); Comment Letter of David (Aug. 30, 2018) (“David Comment Letter”) (stating that fund disclosures are too overwhelming to be useful).

See, e.g.,

Broadridge Comment Letter I; ICI Comment Letter I; Broadridge Comment Letter II; 2012 Report on Investor Testing of Fund Annual Reports,

supra

footnote 26 (noting that the concept of a shortened annual report appealed to many focus group participants);

see also

2009 Summary Prospectus Adopting Release,

supra

footnote 10, at Section II (discussing investors' preferences for summary disclosure with respect to fund prospectuses); Financial Literacy Study,

supra

footnote 26 (noting that, based on the feedback of commenters and the results of quantitative and qualitative research, “[w]ith respect to investment product disclosures, investors favor summary documents containing key information about the investment product”); Understanding Investor Preferences for Mutual Fund Information, Investment Company Institute (2006) (“Investor Preferences Report”),

available at

https://www.ici.org/pdf/rpt_06_inv_prefs_full.pdf

; Form CRS Adopting Release,

supra

footnote 27, at n.36 (discussing similar preferences for concise disclosure with respect to broker-dealer and investment adviser relationship summaries); Variable Contract Summary Prospectus Adopting Release,

supra

footnote 27, at n.33 (discussing commenters' support for layered disclosure in the case of variable annuity and variable life insurance contracts); IAC Disclosure Effectiveness Recommendation,

supra

footnote 26 (discussing, among other things, the use of layered disclosure as an approach to develop more investor-friendly disclosures).

Investor Views on the Usability and Design of Funds' Shareholder Reports

Available evidence suggests that investors generally view fund shareholder reports as difficult to understand. Several investors responding to the Fund Investor Experience RFC stated that fund disclosure is too complicated.

For instance, many investors indicated that there is too much technical writing in fund disclosure.

Investors also expressed a strong preference for the inclusion of more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor.

Similarly, the majority of investors participating in certain past quantitative and qualitative investor testing initiatives on the Commission's behalf expressed the view that funds' annual reports are written more for advanced investors, financial professionals, or regulators than for an average investor.

Investor surveys that other market participants have conducted further support the conclusion that investors view funds' shareholder reports as too lengthy and complicated, and difficult for the average investor to use to effectively find information of interest.

These surveys have found that, for example, approximately 41% to 72% of surveyed investors find fund shareholder reports difficult to understand.

See, e.g.,

Karlidag Comment Letter; Rojas Comment Letter; Comment Letter of Melanie Jallah (June 12, 2018) (“Jallah Comment Letter”); Nevin Comment Letter; Comment Letter of Roberto Delmonte (June 15, 2018) (“Delmonte Comment Letter”); Broadridge Comment Letter I (stating that in a quantitative survey, 72% of investors who review mutual fund or ETF disclosure said they do not find the information easy to understand); Comment Letter of Helen and Bob Hague (Aug. 30, 2018) (“Hague Comment Letter”) (stating that they understand summary prospectus disclosure, but not annual report disclosure); Comment Letter of Michael Dougle (Aug. 30, 2018) (“Dougle Comment Letter”); David Comment Letter.

See, e.g.,

Comment Letter of Harold Thomas (June 8, 2018) (“Thomas Comment Letter”); Rojas Comment Letter; Jallah Comment Letter; Comment Letter of Kate Freedman (June 12, 2018) (“Freedman Comment Letter”); Nevin Comment Letter; Delmonte Comment Letter; Comment Letter of Rich Kirchoff (June 21, 2018) (“Kirchoff Comment Letter”); Comment Letter of Tom Arnold (June 23, 2018) (“Arnold Comment Letter”) (stating that there is too much boilerplate in fund disclosures, which are legal documents instead of informative documents); Comment Letter of Mimi Solo (July 16, 2018) (“Solo Comment Letter”); Woods Comment Letter (stating that fund disclosure is not useful because there is too much boilerplate and legalese).

See, e.g.,

Comment Letter of Jack Wilhelm (Aug. 30, 2018) (“Wilhelm Comment Letter”); Comment Letter of Frank W. (Aug. 30, 2018) (“Frank W. Comment Letter”); Comment Letter of Caryn Stiles (Aug. 30, 2018) (“Stiles Comment Letter”); Comment Letter of Mrs. Kellie (Aug. 30, 2018); Hague Comment Letter; Comment Letter of J.L. (Aug. 30, 2018) (“J.L. Comment Letter”); Woods Comment Letter; Comment Letter of Amanda Yukle (Sept. 6, 2018) (“Yukle Comment Letter”); Comment Letter of Joanna Baker (Sept. 11, 2018) (“Baker Comment Letter”). However, one investor expressed a preference for text disclosure.

See

Comment Letter of Mark Freeland (Dec. 2, 2018) (“Freeland Comment Letter”).

see also

2012 Report on Investor Testing of Fund Annual Reports,

supra

footnote 26, at 61, 69 (stating that, of participants in the qualitative component of this testing, 52% read a few key sections of fund annual reports, 14% scan the table of contents and/or the first few pages, and 25% file it or discard it unread; of online survey respondents, 72% read a few key sections, 10% scan the first few pages, and 3% file it or discard it unread).

See

Broadridge Comment Letter II. One of these surveys found that 8% of surveyed investors do not read the reports, 19% read very little of the reports, and 28% read some of the reports. The other survey found that 4% of surveyed investors do not read the reports and 56% read some of the reports.

See id.

(providing the results of a survey in which 21% of investors said that they typically spend 5 minutes or less reviewing shareholder reports and an additional 41% of investors said that they typically spend 6 to 15 minutes reviewing the reports).

Survey results relating to readership of shareholder reports also suggest that shareholders may not read some, or all,

of a fund's shareholder report due, in part, to the fact that many view shareholder reports as overly long and complex documents that are not designed to meet the average shareholder's needs.

Fund shareholders may, however, be more likely to read a more concise version of a fund's shareholder report.

Academic research similarly suggests that, due to limits on an individual's ability to absorb and process information, investors may be more likely to understand and effectively use concise disclosure that is well-organized and focused on key information.

See, e.g.,

ICI Investor Survey,

supra

footnote 36 (“The survey results demonstrate that mutual fund investors who find the current reports difficult to understand are less likely to read them.”).

See, e.g.,

Broadridge Comment Letter I (discussing the results of a quantitative survey related to fund disclosure in which approximately 39% of investors said they would be more likely to look at or review a summary format of a fund's annual and semi-annual reports); ICI Comment Letter I (discussing an investor survey of a summary shareholder report prototype, in which more than 90% of participants indicated that they would be more likely to read the summary prototype than a full-length shareholder report); Broadridge Comment Letter II (providing the results of a survey in which 88% of investors indicated that they were more likely to read a summary shareholder report than a full-length report). Two commenters used the same summary shareholder report prototype, developed by the ICI, in their investor surveys. The prototype was approximately three pages in length and primarily focused on performance, fund expenses, and illustrations of fund holdings.

See

ICI Comment Letter I; Broadridge Comment Letter II.

See, e.g.,

Disclosure: Psychology Changes Everything, George Loewenstein, Cass R. Sunstein, and Russell Goldman, Annual Review of Economics (2014) (providing a comprehensive survey of literature relevant to disclosure regulation and suggesting that “[g]iven the limits of human attention, perhaps the most obvious way to improve the effectiveness of disclosures is to simplify them . . . [and] to reduce the number of less important disclosures so as to increase the salience of the most important ones”);

see also

ICI Comment Letter I (stating that approximately 79% of surveyed investors said that graphical representation of holdings information is very important or somewhat important); Investor Preferences Report,

supra

footnote 31 (stating that, after purchase, 41% of investors review portfolio holdings); Broadridge Comment Letter II (discussing a survey in which 63% of investors rated disclosure about the characteristics of a fund—including top holdings, asset allocations, and industry allocations—as important for annual reports and 64% of investors rated this disclosure as important for semi-annual reports).

See

Broadridge Comment Letter I (stating that, of the 50% of surveyed investors that review mutual fund or ETF annual and semi-annual reports “always” or “most of the time,” 61% of those investors often look at or review fund expense information); 2012 Report on Investor Testing of Fund Annual Reports,

supra

footnote 26, at 49 (finding that 34% of participants in the qualitative component of this testing ranked the expense example in the top three most important shareholder report items); Broadridge Comment Letter II (discussing a survey in which 69% of investors rated expense disclosure as important for annual reports and 66% of investors rated it as important for semi-annual reports);

see also

ICI Comment Letter I (stating that approximately 72% of surveyed investors said that the fund expense example is very important or somewhat important); Investor Preferences Report,

supra

footnote 31 (stating that, after purchase, 55% of investors review fund fees and expenses).

Investors have expressed varying levels of interest in reviewing a fund's financial statements and financial highlights. For example, at least one survey has found somewhat high levels of interest in this information from shareholders who currently review fund shareholder reports (

i.e.,

63% of these investors often review a fund's financial statements), and another survey found that a majority of investors rated financial highlights disclosure as important.

Other surveys, as well as comments on the Investor Experience RFC, suggest that the average investor may have less interest in financial statements and financial highlights.

As for other types of shareholder report disclosure, investors typically have expressed less interest in these other disclosures.

See

Broadridge Comment Letter I; Broadridge Comment Letter II (stating that 55% of investors rated the financial highlights as important annual report disclosure and 53% of investors rated this disclosure as important for semi-annual reports, but 47% of surveyed investors viewed the statement of financial condition and operations as important disclosure for annual or semi-annual reports).

See

2012 Report on Investor Testing of Fund Annual Reports,

supra

footnote 26, at 49 and 52 (indicating that approximately 38% to 41% of surveyed investors found the financial highlights to be important, while approximately 24% to 33% of surveyed investors believed that financial statements were important);

see also

ICI Comment Letter I (determining not to include financial statements and most financial highlights data points in a summary shareholder report mockup and instead concluding that “they were of a more technical nature that a typical retail investor would not read or understand,” although such information would be available online under the commenter's proposed approach); Rojas Comment Letter (“What am I supposed to do with a very long list of holdings and financial statements?”); Balke Comment Letter (“Financial Statements are of little value.”); Fowler Comment Letter (“What am I supposed to do with fund financial statements?”).

See

Broadridge Comment Letter I (finding that surveyed investors tended to have less interest in

remuneration paid to directors, officers, and others, as well as information about directors and officers); 2012 Report on Investor Testing of Fund Annual Reports,

supra

footnote 26, at 52 (stating that surveyed investors generally had less interest in information about changes in, and disagreements with accountants; results of any shareholder vote; discussion of the reasons the board approved an advisory contract; statements about where to find certain additional fund information; and information about directors and officers); Broadridge Comment Letter II (providing the results of a survey in which 26% of investors rated disclosure about the fund's directors and officers as important, and 25% of investors rated disclosure about the board's approval of the investment advisory contract as important).

Investor Views on the Volume and Frequency of Fund Disclosure

In addition to concerns about the length of funds' shareholder reports, some investors responding to the Fund Investor Experience RFC expressed concern about the overall volume and frequency of fund disclosures they receive each year. For example, several investors expressed the view that they receive too many fund disclosure materials and that they feel overwhelmed by the amount of information they receive.

Another investor expressed a preference for less frequent disclosure.

See, e.g.,

Delmonte Comment Letter (“There is too much information provided to me. I buy a mutual fund because I want convenience and to more efficiently spend my time. Stop giving me hours['] worth of reading I do not understand.”); Solo Comment Letter (stating that there are too many fund disclosure materials, they are too long, and they do not distill the right information); Rojas Comment Letter.

Comment Letter of Anonymous (Aug. 30, 2018) (“Anonymous Comment Letter”) (“I invest for the long term. I do not need constant updates.”)

However, with respect to shareholder reports in particular, one investor survey found that 86% of investors thought that the current semi-annual frequency at which they receive reports was “about the right frequency,” while 11% of investors viewed semi-annual reports as too frequent and 3% expressed a preference for more frequent shareholder reports. In this survey, investors' preferred frequency changed somewhat for a prototype summary shareholder report.

If they were to receive a summary shareholder report, 56% of investors preferred semi-annual reports, 27% preferred quarterly reports, 17% preferred annual reports, and 1% did not want to receive the reports.

See supra

footnote 44 (discussing the prototype summary shareholder report developed by the ICI).

See

Broadridge Comment Letter II.

2. Fee and Risk Disclosure Preferences

We understand that investors generally prefer concise, summary disclosure that allows them to quickly understand key information. Similarly, we understand that this general preference extends to investors' preferences about disclosures regarding fund fees and risks.

Investor Views on Fee and Risk Disclosure

The majority of investors responding to a question in the Feedback Flier about fee disclosure expressed the view that funds do not clearly disclose their fees and expenses.

Many of these investors suggested that funds should simplify their fee and expense disclosure.

Several investors recommended reducing the number of line items in the prospectus fee table or providing only one “bottom-line” number showing the fees associated with an investment in the fund.

Several investors also expressed an interest in comparing fees and expenses across multiple funds to help inform their investment decisions.

Other commenters who responded more generally to the Fund Investor Experience RFC also expressed concern that fund fees are hard to understand, and that certain terminology Form N-1A uses (

e.g.,

use of terms like “12b-1 fees” and “front-end loads”) is similarly difficult to understand.

Some commenters suggested that funds should disclose fees in terms of dollars rather than percentages to make the disclosure more understandable to investors.

Approximately 33 investors responded to the Feedback Flier question asking, “Do you think funds clearly disclose their fees and expenses?” Of these 33 investors, 21 investors replied “no” and 12 investors replied “yes.”

See, e.g.,

Krus Comment Letter; Stiles Comment Letter; Anonymous Comment Letter; Hague Comment Letter; J.L. Comment Letter; Woods Comment Letter; Comment Letter of Jake Hamm (Sept. 3, 2018); Yukle Comment Letter.

See, e.g.,

Grano Comment Letter; Anonymous Comment Letter; Yukle Comment Letter; J.L. Comment Letter.

See, e.g.,

Palmer Comment Letter; Balke Comment Letter; Karlidag Comment Letter; Kirchoff Comment Letter; Solo Comment Letter; Krus Comment Letter.

See, e.g.,

Comment Letter of AARP (Oct. 31, 2018) (“AARP Comment Letter”); Comment Letter of Independent Directors Council (Oct. 30, 2018); Comment Letter of Carla Ruiz (Aug. 17, 2018) (“Ruiz Comment Letter”). A recent study of mutual fund financial literacy also found that many survey participants were unable to correctly answer certain true-or-false questions about general aspects of funds' fee structures, as well as other characteristics of funds.

See

Brian Scholl and Angela Fontes, Adding Depth to Financial Literacy: What Does the Public Know About Mutual Funds? Towards a New Index of Investor Knowledge, SEC Office of the Investor Advocate (July 18, 2019).

See, e.g.,

AARP Comment Letter; Comment Letter of A. Miller (July 21, 2018);

see also

Frank W. Comment Letter (expressing interest in disclosure that better explains the level of a given risk).

See, e.g.,

Freeland Comment Letter (stating that funds should only disclose risks based on how the fund normally and actually invests).

See

Division of Investment Management, Accounting and Disclosure Information 2019-08, Improving Principal Risks Disclosure,

available at

https://www.sec.gov/investment/accounting-and-disclosure-information/principal-risks/adi-2019-08-improving-principal-risks-disclosure

(“ADI 2019-08”).

3. Disclosure Delivery Preferences

Based on information from the Fund Investor Experience RFC and investor testing and surveys, investors have shown a general familiarity with using the internet to find information about a fund and have expressed a range of preferences regarding how they receive fund disclosure (

i.e.,

in paper or electronically). In the Fund Investor Experience RFC, the Commission sought information on investors' use of the internet to communicate about and find information on fund investments, as well as their preferences on the form and manner of disclosure delivery.

In response, many investors indicated that they go to fund or intermediary websites to get information about a fund investment.

Many investors also expressed a preference for receiving fund disclosure electronically, either through email, mobile application, or

website availability.

Several other investors preferred to access most fund information electronically, with the exception of certain information they preferred to receive on paper.

Other investors stated that they generally prefer to receive fund information in paper format.

A few investors specifically suggested that paper should be the default delivery mechanism for a “summary” shareholder report.

In addition, investor testing and surveys suggest that many investors would prefer enhanced availability of fund information on the internet in a layered disclosure framework, although some investors prefer to receive fund disclosures in paper format.

See

Fund Investor Experience RFC,

supra

footnote 8, at Section II.B.2.

See, e.g.,

Karlidag Comment Letter; Thomas Comment Letter; Jallah Comment Letter; Delmonte Comment Letter; Solo Comment Letter; Comment Letter of C. Scott (July 26, 2018) (“Scott Comment Letter”); Comment Letter of James McRitchie (Sept. 4, 2018) (“McRitchie Comment Letter”).

See, e.g.,

Rojas Comment Letter; Jallah Comment Letter; Freedman Comment Letter; Nevin Comment Letter; Kirchoff Comment Letter; Arnold Comment Letter; Scott Comment Letter; Krus Comment Letter. Some funds responding to the Fund Investor Experience RFC also suggested that website disclosure is consistent with many investors' preferences.

See, e.g.,

Capital Group Comment Letter; Comment Letter of Fidelity Investments (Oct. 31, 2018) (“Fidelity Comment Letter”); Comment Letter of Vanguard (Oct. 31, 2018) (“Vanguard Comment Letter”).

Many of these investors preferred to receive statements in paper.

See

Comment Letter of Arthur Blanchard (Nov. 19, 2018) (“Blanchard Comment Letter”); Ewing Comment Letter; Joseph Comment Letter; Krus Comment Letter. Other investors appeared to have different preferences.

See

Comment Letter of Mark S. (Aug. 30, 2018) (preferring to receive “important” information by mail); Olstrom Comment Letter (preferring to receive tax forms in paper); Comment Letter of Carl Waranowksi (Nov. 25, 2018) (“Waranowski Comment Letter”) (preferring to receive “important” information in paper).

See, e.g.,

Grano Comment Letter; Comment Letter of Jane D. Nelson (Aug. 30, 2018); Comment Letter of Duane Lee (Dec. 3, 2018) (“Lee Comment Letter”); Comment Letter of Mark Moran (Dec. 4, 2018); Morton Comment Letter; Comment Letter of Brad Shockey (Oct. 9, 2018).

See

Henry Comment Letter; Weaver Comment Letter.

For example, the 2012 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 EDGAR system.

See

2012 Report on Investor Testing of Fund Annual Reports

supra

footnote 26, at 72. 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 183.

see also

Exchange-Traded Funds, Investment Company Act Release No. 33646 (Sept. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (“ETF Adopting Release”), at n.229 (encouraging ETFs to consider whether there are technological means to make their disclosure more accessible).

See

Ownership of Mutual Funds, Shareholder Sentiment, and Use of the internet, ICI Research Perspectives (Oct. 2019) (“Study on Mutual Fund Investors' Use of the internet”),

available at

https://www.ici.org/pdf/per25-08.pdf

;

see also

CFA Comment Letter (providing a 2014 report discussing the growth of internet usage).

See, e.g.,

Vanguard Comment Letter; ICI Comment Letter I; CFA Comment Letter.

See, e.g.,

Fidelity Comment Letter; Comment Letter of Putnam Investments (on behalf of the Mutual Fund Broker-Dealer Working Group) (Nov. 30, 2018) (“Putnam Comment Letter”); ICI Comment Letter I; Capital Group Comment Letter (stating that a growing percentage of fund shareholders and their advisers use the fund group's website to obtain information about its funds, its organization, and other investment insights); CFA Comment Letter (providing a 2014 study entitled “Can the internet Transform Disclosures for the Better?” that, among other things, reviewed the content and design of fund and intermediary websites). For example, we understand that several funds and financial intermediaries provide interactive features on their websites such as fund screener tools, expense calculators, and retirement planning tools and use mobile applications to engage with fund shareholders.

See

Rule 30e-3 Adopting Release,

supra

footnote 14; Variable Contract Summary Prospectus Adopting Release,

supra

footnote 27.

Experience With Layered Disclosure, and the Growing Length and Complexity of Shareholder Reports Over Time

The Commission also has taken multiple steps with respect to fund prospectuses to both recognize investors' preferences for concise and engaging disclosure of key information and ensure that additional information that may be of interest to some investors is available through a layered approach to disclosure.

We believe these initiatives have benefitted investors. For example, research shows that the introduction of a more concise summary prospectus may allow investors to spend less time and effort to arrive at the same portfolio decision they would have made after reading the longer statutory prospectus.

Approximately

93% of funds use summary prospectuses.

See

New Disclosure Option for Open-End Management Investment Companies, Investment Company Act Release No. 23065 (Mar. 13, 1998) [63 FR 13968 (Mar. 23, 1998); 2009 Summary Prospectus Adopting Release,

supra

footnote 10; Variable Contract Summary Prospectus Adopting Release,

supra

footnote 27.

See

John Beshears, James Choi, David Laibson, and Brigitte Madrian, How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?, Explorations in the Economics of Aging,

75, 76 (David A. Wise ed., 2011),

available at

https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices

See supra

footnote 12.

On the other hand, the Commission has not taken comprehensive steps to create a layered disclosure framework for funds' shareholder reports.

Funds' shareholder reports generally have become longer and more complex over the years. For example, until 1994, funds were only required to provide certain financial information in their shareholder reports, generally consistent with the types of information that section 30(e) of the Investment Company Act identifies.

During this time, however, many funds provided other information in these reports voluntarily, including information about general economic conditions, the fund's performance, and services provided to shareholders.

Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds otherwise voluntarily include in these reports) has increased substantially.

The Commission has, however, adopted rules that permit streamlined disclosure of portfolio holdings in funds' shareholder reports. In 2004, the Commission adopted an approach that gives funds the option to include summary portfolio schedules in their shareholder reports, provided the complete portfolio schedule is filed on Form N-CSR and available, free of charge, to investors.

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)], at Section II.B and paragraph accompanying n.111 (“February 2004 Shareholder Report Adopting Release”) (noting that these amendments were “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,” and would reduce printing and mailing costs for most funds).

See, e.g.,

Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 13436 (Aug. 12, 1983) [48 FR 37928, 37951 (Aug. 22, 1983)] (adopting Form N-1A, which included annual and semi-annual report requirements in what was then Item 23 of the form). In 1994, the Commission adopted amendments requiring funds to disclose information in their shareholder reports about the results of shareholder votes and any changes in and disagreements with accountants.

See, e.g.,

Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 20614 (Oct. 13, 1994) [59 FR 52689 (Oct. 19, 1994)]. In 1996, Congress added section 30(f) to the Investment Company Act, which allows the Commission to require that funds' semi-annual reports include such other information as the Commission deems necessary or appropriate in the public interest or for the protection of investors. National Securities Markets Improvement Act of 1996, Public Law 104-290, Section 207, 110 Stat. 3416, 3430 (Oct. 11, 1996).

See, e.g.,

Standardization of Financial Statement Requirements in Management Investment Company Registration Statements and Reports to Shareholders, Investment Company Act Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 1980)], at nn.3-4 and accompanying text.

See, e.g.,

Role of Independent Directors of Investment Companies, Investment Company Act Release No. 24816 (Jan. 2, 2001) [66 FR 3734 (Jan. 16, 2001)] (“Independent Directors Release”) (requiring shareholder report disclosure regarding a fund's board of directors); Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Investment Company Act Release No. 25922 (Jan. 31, 2003) [68 FR 6564 (Feb. 7, 2003)] (requiring funds to disclose in their annual and semi-annual reports to shareholders the methods by which shareholders may obtain information about proxy voting); February 2004 Shareholder Report Adopting Release,

supra

footnote 83 (requiring funds to add shareholder report disclosure regarding fund expenses borne by shareholders, a tabular or graphic presentation of a fund's portfolio holdings by identifiable categories, and management's discussion of fund performance, while allowing funds to include a summary portfolio schedule in these reports); Disclosure Regarding Approval of Investment Advisory Contracts by Directors of Investment Companies, Investment Company Act Release No. 26486 (June 23, 2004) [69 FR 39798 (June 30, 2004)] (requiring shareholder report disclosure about the basis for the board's approval of advisory contracts during the most recent fiscal half-year).

Developments Affecting Investment Company Advertisements

In recent years, investment companies increasingly have been marketing themselves on the basis of costs in an effort to attract investors. For instance, we have observed some funds calling themselves “no-expense” or “zero-expense” funds, or emphasizing their low expense ratios, despite the fact that investors may experience other investment costs.

These other investment costs include, for example, securities lending costs or wrap program fees that may provide revenue to the fund's adviser, its affiliates, or others and that may effectively allow the fund to reduce its reported expense ratio because the prospectus fee table is not required to reflect the relevant category of costs. Investment company advertising rules currently place limits on how a fund may present its performance to promote comparability and prevent potentially misleading advertisements.

These rules, however, generally do not prescribe the presentations of fees and expenses in advertisements to address similar concerns about comparability or potentially misleading information.

A fund's expense ratio is the figure in its prospectus fee table that represents the fund's total annual operating expenses, expressed as a percent of the fund's average net assets.

see also

discussion at

supra

footnotes 5-6 and accompanying text.

See

Variable Contract Summary Prospectus Adopting Release,

supra

footnote 27. In particular, the Commission received positive feedback on its proposal to provide an “initial summary prospectus” to new investors in variable annuity and variable life insurance contracts, and an “updating summary prospectus” to investors each year after their initial investment in a variable contract.

Id.

at text accompanying nn.33 and 335. In part on the basis of that positive feedback, the Commission adopted that proposal.

The proposed new disclosure framework also would reflect various stakeholders' suggestions and stated preferences for fund disclosure that more directly highlights key fund information and is tailored to investors' needs. For example, the Commission's Investor Advisory Committee has recommended that the Commission develop an approach to funds' shareholder reports that would rely on summary disclosure and layered disclosure principles.

100

Similarly, the proposed new disclosure framework would reflect investor preferences as we understand them based on investor testing, surveys, and other information-gathering, which have consistently indicated that retail fund investors prefer concise disclosure that focuses on the most important fund information.

101

100

See

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),

available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-promotion-of-electronic-delivery-and-development.pdf

. The recommendation provided, among other things, that the Commission explore: (1) 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 (2) development of a summary, layered disclosure document for 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). This proposal also takes into account the Investor Advisory Committee's recent recommendation on improving the effectiveness of investor disclosures (including in the context of fund disclosures).

See

IAC Disclosure Effectiveness Recommendation,

supra

footnote 26.

101

See

discussion at

supra

Section I.B.1.

Leveraging Technology To Modernize Funds' Disclosure Requirements

In addition, the proposed new disclosure framework would leverage technology to modernize funds' disclosure requirements.

102

Our

proposal would use the internet as a medium to provide information to investors and distinguish between information that investors receive directly (either in paper or electronically, depending on investors' preferences) and information that is available to investors online. The proposal also takes steps to encourage funds to use online tools to enhance and personalize the information that they provide to shareholders, as constantly developing online technology presents unique potential to enrich investors' experience in understanding and engaging with their fund investments.

103

102

Individuals' access to and use of the internet has increased significantly in the last few decades, including among demographic groups that have previously been less apt to use the internet.

See

Pew Research Center, internet/Broadband Fact Sheet (last updated June 12, 2019),

available at

https://www.pewresearch.org/internet/fact-sheet/internet-broadband

. We understand these trends extend to individuals' use of online resources to manage their finances and investments.

See, e.g.,

Can the internet Transform Disclosures for the Better? Consumer Federation of America (Jan.

2014),

available at

https://consumerfed.org/pdfs/can-the-internet-transform-disclosures-for-the-better.pdf

103

See infra

Section II.B.4.

Shareholder Report as the Central Source of Fund Disclosure for Existing Shareholders

In proposing the new disclosure framework, which employs the shareholder report as the central source of fund disclosure for existing shareholders, we considered the extent to which permitting open-end funds to continue relying on rule 30e-3 to transmit shareholder reports would affect our policy goals. Since adopting rule 30e-3, we have continued to analyze and hear from industry participants regarding further improvements to our disclosure regime. As a result, we now believe that a tailored shareholder report that highlights key information would provide better information for investors than the notices required under rule 30e-3. Furthermore, if a fund were permitted to rely upon both rule 30e-3 and proposed rule 498B, shareholders in such a fund would no longer directly receive shareholder reports

annual prospectus updates, and thus would not be sent any periodic regulatory disclosure documents.

104

We believe the proposed new disclosure framework would also largely preserve the expected cost savings to funds and investors that funds would experience by choosing to rely on rule 30e-3.

105

104

See infra

Section III.C.2.d.

105

See id.

E. Annual Shareholder Report

We are proposing to add new Item 27A to Form N-1A to specify the design and content of funds' annual and semi-annual reports. We also are proposing to remove the provisions in current Item 27 of Form N-1A that relate to annual and semi-annual reports.

The table below summarizes the proposed content that funds would include in their annual reports or Form N-CSR reports in comparison to current shareholder report disclosure requirements.

106

While the proposed content requirements for shareholder reports that are transmitted in paper would generally be the same as the requirements for reports that are transmitted electronically (and that appear online or are accessible through mobile electronic devices), we are proposing instructions that address electronic presentation and are designed to provide flexibility to enhance the usability of reports that appear online or on mobile devices.

107

106

This release separately discusses the proposed content requirements for funds' semi-annual reports.

See infra

Section II.C.

107

See infra

Section II.B.4.

Table 1—Annual Report Contents

Current annual shareholder report

disclosure

(current Form provision)

Description of proposed amendments

Proposed rule and form

provisions

Discussed below in

Add new identifying information to the beginning of the annual report

Item 27A(b) of Form N-1A

Section II.B.2.a.

Expense example

(Form N-1A Item 27(d)(1))

Retain in annual report in a more concise form

Item 27A(c) of Form N-1A

Section II.B.2.b.

Management's discussion of fund performance (“MDFP”)

(Form N-1A Item 27(b)(7))

Retain in annual report in summary form

Item 27A(d) of Form N-1A

Section II.B.2.c.

Add new fund statistics section to the annual report

Item 27A(e) of Form N-1A

Section II.B.2.d.

Graphical representation of holdings

(Form N-1A Item 27(d)(2))

Retain in annual report

Item 27A(f) of Form N-1A

Section II.B.2.e.

Add new material fund changes section to the annual report

Item 27A(g) of Form N-1A

Section II.B.2.f.

Changes in and disagreements with accountants

(Form N-1A Item 27(b)(4))

Retain in annual report in summary form

Item 27A(h) of Form N-1A

Section II.B.2.g

The entirety of the currently-required disclosure would move to Form N-CSR and would need to be available online and delivered (in paper or electronic format) upon request

Item 8 of Form N-CSR

Rule 30e-1(b)(2) and (b)(3)

Section II.D.1.c.

Statement regarding liquidity risk management program

(Form N-1A Item 27(d)(6)(ii))

Retain in annual report

Item 27A(i) of Form N-1A

Section II.B.2.h.

Statement regarding the availability of quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record

(Form N-1A Item 27(d)(3) through (5))

Include a more general reference to the availability of additional fund information in the annual report

Item 27A(j) of Form N-1A

Section II.B.2.i.

Add provision allowing funds to optionally disclose in their annual reports how shareholders may revoke their consent to householding

Item 27A(k) of Form N-1A

Section II.B.2.j.

Financial statements, including schedule of investments

(Form N-1A Item 27(b)(1))

Move to Form N-CSR

Would need to be available online and delivered (in paper or electronic format) upon request

Item 7(a) of Form N-CSR

Rule 30e-1(b)(2) and (b)(3)

Section II.D.1.a.

Financial highlights

(Form N-1A Item 27(b)(2))

Retain certain data points, but generally move to Form N-CSR

Would need to be available online and delivered (in paper or electronic format) upon request

Item 7(b) of Form N-CSR

Rule 30e-1(b)(2) and (b)(3)

Section II.D.1.b.

Results of any shareholder votes during the period

(Rule 30e-1(b))

Move to Form N-CSR

Would need to be available online and delivered (in paper or electronic format) upon request

Item 9 of Form N-CSR

Rule 30e-1(b)(2) and (b)(3)

Section II.D.1.d.

Remuneration paid to directors, officers, and others

(Form N-1A Item 27(b)(3))

Move to Form N-CSR

Would need to be available online and delivered (in paper or electronic format) upon request

Item 10 of Form N-CSR

Rule 30e-1(b)(2) and (b)(3)

Section II.D.1.e.

Statement regarding the basis for the board's approval of investment advisory contract

(Form N-1A Item 27(d)(6)(i))

Move to Form N-CSR

Would need to be available online and delivered (in paper or electronic format) upon request

Item 11 of Form N-CSR

Rule 30e-1(b)(2) and (b)(3)

Section II.D.1.f.

Management information and statement regarding availability of additional information about fund directors

(Form N-1A Item 27(b)(5) and (6))

Remove from shareholder reports, but information would remain available in a fund's SAI, which is available online or delivered upon request

Section II.E.

Rule 30e-3 disclosure, if applicable

(Form N-1A Item 27(d)(7))

Remove from shareholder reports

Section II.G.

Funds have discretion to provide other information in their shareholder reports (

e.g.,

president's letters)

Limit annual report disclosure to that which is permitted or required under proposed Item 27A of Form N-1A

Instruction 1 to Item 27A(a) of Form N-1A

Section II.B.1.b.

1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments

We propose to limit the scope of funds' annual reports in several respects to reduce their overall length and complexity. First, we propose to require a fund to prepare separate annual reports for each of its series. Second, we generally propose to limit the content a fund may include in its annual report.

a. Scope With Respect to Separate Series and Classes

Many mutual funds and ETFs are organized as single registrants with several series (sometimes referred to as portfolios).

108

Each series has its own investment objectives, policies, and restrictions. The Federal securities laws and Commission rules often treat each series as a separate fund.

109

A single fund or series can have multiple share classes. Classes typically differ based on fee structure, with each class having a different sales load and distribution fee. Series and classes of a registrant are often marketed separately, without reference to other series or classes or to the registrant's name.

110

108

See

sections 18(f)(1) and (2) of the Investment Company Act [15 U.S.C. 80a-18(f)(1) and (2)]; 17 CFR 270.18f-2 [rule 18f-2 under the Investment Company Act].

109

See, e.g.,

17 CFR 270.22c-2(c)(2); 17 CFR 270.22e-4(a)(5); General Instruction A to Form N-1A (defining “fund” to mean a registrant or a separate series of the registrant).

110

See

Rulemaking for EDGAR System, Investment Company Act Release No. 26990 (July 18, 2005) [70 FR 43558 (July 27, 2005)], at text following n.17.

Currently, fund registrants may prepare a single shareholder report that covers multiple series. We believe this approach contributes to the length and complexity of shareholder reports. For example, a shareholder that is invested in one series of the registrant would need to spend more time searching through the report to find disclosure related to his or her investment. Moreover, a shareholder report that provides information for multiple series may present an increased risk of shareholder confusion. For instance, if two series included in the same shareholder report were to have similar names, there could be a greater risk that a shareholder would mistakenly review information that does not relate to his or her investment. Because the length and complexity associated with multi-series shareholder reports are inconsistent with our goal of creating concise shareholder report disclosure that a shareholder can more easily use to assess and monitor his or her ongoing fund investment, we are proposing to require fund registrants to prepare separate annual reports for each series of the fund.

111

As a result, a shareholder would receive an annual report that only addresses the series in which he or she is invested. We believe that this more-focused annual report would be more relevant to shareholders than a multi-series report and, accordingly, shareholders would be more likely to read such disclosure.

111

See

Instruction 4 to proposed Item 27A(a). Similarly, we have generally required that registrants present summary information separately for each fund in a multiple fund prospectus to promote the goal of concise, readable summaries.

See

2009 Summary Prospectus Adopting Release,

supra

footnote 10, at text accompanying nn.43-60. Under the proposal, fund registrants could continue to include multiple shareholder reports that cover different series in a single Form N-CSR report filed on EDGAR. We do not believe this would affect the usability of the information for shareholders because shareholder reports for each series would separately be available online, and we understand that shareholders generally do not go to EDGAR to find fund shareholder reports.

See, e.g., supra

footnote 74.

Although we are proposing to restrict funds' annual reports to include only one series of a fund, our proposal would not require a shareholder report to cover

a single class of a multiple-class fund.

112

Because different share classes of a fund represent interests in the same investment portfolio, much of the proposed shareholder report disclosure would be the same for all classes.

113

For disclosure that would differ among classes, such as expenses and performance data, the amended disclosure requirements that we are proposing would specifically require funds to provide certain class-specific information.

114

112

See

Instruction 4 to proposed Item 27A(a). This approach is similar to the approach taken in the summary prospectus, which similarly may describe more than one class of a fund.

See

rule 498(b)(4) [17 CFR 230.498(b)(4)].

113

For example, this would include, among other disclosure items, graphical representations of holdings, the required statistics (

i.e.,

the size of the fund, its number of holdings, and portfolio turnover rate), the narrative discussion of factors that affected the fund's performance, and most categories of material fund changes.

114

We discuss these proposed requirements in more detail below.

See infra

Section II.B.2.b (discussing the proposed requirement to provide expense information for each class) and Section II.B.2.c.ii (discussing the proposed requirement to disclose average annual total returns for 1-, 5-, and 10-year periods for each class).

We request comment on the proposed scope of disclosure for the annual report, including the following:

1. Would the proposed requirement that a fund registrant prepare separate annual reports for each of its series result in shareholder report disclosure that is easier for fund shareholders to navigate and assess? If not, why not? Would requiring separate annual reports for each series increase the reports' relevance to shareholders and increase the likelihood that shareholders would read them? If not, why not? How would this proposed requirement affect the approach fund registrants currently use to prepare and transmit shareholder reports? Are there ways to modify the proposed instruction that would further improve disclosure for shareholders or reduce burdens for fund registrants? Instead of the proposed instruction, should we continue to permit fund registrants to prepare a single annual report that covers multiple fund series, as they may today? If so, why, and should there be any limits on the number of series for which information is presented?

2. Are there certain types of funds for which a multi-series presentation in an annual report may be useful to shareholders? If so, which types of funds, and what are the benefits of a multi-series presentation to shareholders? Should we permit certain types of funds, but not others, to prepare annual reports covering multiple series of the same fund?

3. Are there ways we could allow multi-series presentations in annual reports while also promoting our goals of providing concise, readable disclosure to existing shareholders that is tailored to their informational needs? If so, how?

4. A fund may have multiple share classes with differing fee structures. Should these multi-class funds be permitted to reflect only one or a subset of classes, rather than all share classes in a shareholder report so long as a fund produces a shareholder report that relates to each share class? Would such an approach reduce the complexity of the disclosure and provide more-tailored information that is specific to a shareholder's investment in the fund? Or, conversely, would such a requirement not benefit shareholders? For example, could it reduce shareholders' ability to compare classes of a fund? Should there be limits on the number or types of classes that a single annual report may cover to reduce potential complexity or length? For example, should we prohibit an annual report transmitted to retail shareholders from including disclosure related to a fund's institutional class? Are there potential complexities or burdens associated with such an approach? Please explain.

b. Scope of Content

As a general matter, we are proposing to allow a fund to include in its annual report only the information that Item 27A of Form N-1A specifically permits or requires.

115

We believe that allowing only the required or permitted information to appear in a fund's annual report would promote consistency of information presented to shareholders and would allow retail shareholders to focus on information particularly helpful in monitoring their investment in a fund.

116

We also believe this approach would encourage more impartial information by preventing funds from adding information commonly used in marketing materials.

115

See

Instruction 3 to proposed Item 27A(a) of Form N-1A;

see also

discussion at section II.B.4

infra.

116

Many of the proposed instructions to each requirement provide some flexibility so that a fund can tailor its presentation of information to match how the fund invests. For instance, a fund has the ability to select the categories that are reasonably designed to depict clearly the types of a fund's investments when preparing its graphical representation of holdings.

See

proposed Item 27A(f) of Form N-1A.

We recognize, however, that there may be limited circumstances in which it may be appropriate for a fund to provide more or less information than what proposed Item 27A of Form N-1A would permit or require. Specifically, if a fund's particular circumstances may cause the required disclosures to be misleading, the proposal would allow the fund to add additional information to the report that is necessary to make the required disclosure items not misleading.

117

As an example, if a fund changed its investment policies or structure during or since the period shown, the expense, performance, or holdings information that a fund must include in its annual report may require additional disclosure to render those presentations not misleading. Disclosure in response to this provision should generally be as brief as possible. Moreover, if a required disclosure is inapplicable, the proposed rule would permit the fund to omit the disclosure.

118

Similarly, to promote better-tailored disclosure, a fund would be permitted to modify a required legend or narrative information if the modified language contains comparable information to what is otherwise required.

119

117

See

Instruction 2 to proposed Item 27A of Form N-1A (permitting a fund to include disclosure that is required under 17 CFR 270.8b-20 (rule 8b-20 under the Investment Company Act)); rule 8b-20 under the Investment Company Act (providing, “[i]n addition to the information expressly required to be included in a registration statement or report, there shall be added such further information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading”).

118

See

Instruction 7 to proposed Item 27A(a) of Form N-1A.

119

See id.

The proposed amendments to Form N-1A would not permit a fund to incorporate by reference any information into its annual report.

120

That is, a fund could not refer to information that is located in other disclosure documents in order to satisfy the content requirements for an annual report. The limited number of proposed disclosure items in the annual report is designed to promote the goal of providing a concise, more-engaging report that gives shareholders key information to assess and monitor their ongoing fund investments.

121

We do not believe that permitting funds to

incorporate information by reference into the shareholder report is consistent with this goal, because it would require shareholders to take an additional step to locate information that funds incorporate by reference into their reports. While the proposed rule would require or permit a fund's shareholder report to refer to other materials in some cases, those other materials would not incorporate information into the fund's shareholder report for purposes of satisfying the annual report disclosure requirements.

122

120

See

Instruction 5 to proposed Item 27A(a). Incorporation by reference refers to the practice of, instead of including disclosure in a specific document, referring to another document that contains the specified information.

121

See, e.g.,

Instructions 1, 3, and 5 to proposed Item 27A(a) of Form N-1A.

122

See, e.g.,

Instructions 8 and 9 to proposed Item 27A(a) of Form N-1A; proposed Items 27A(b)(4) and 27A(j) of Form N-1A.

Although the proposed rule would only permit the inclusion of certain information in the annual report, it would not prevent a fund from referring shareholders to the availability of certain additional website information near the end of the report or providing additional information to shareholders in the same transmission as the annual report.

123

For example, the proposed rule would not preclude a fund from providing a letter to investors explaining its management philosophy or investment outlook in the same transmission that includes the annual report. However, the proposal would require that the shareholder report be given greater prominence than these other materials, except for certain specified disclosure materials.

124

We would generally consider a fund to satisfy the “greater prominence” requirement if, for example, the shareholder report is on top of a group of paper documents that are provided together or, in the case of an electronic transmission, the email or other message includes a direct link to the report or provides the report in full in the body of the message.

125

This proposed requirement would not, however, apply to certain specified disclosure materials that a fund may transmit with an annual report, which include summary prospectuses, statutory prospectuses, notices of the online availability of proxy materials, and other shareholder reports.

126

123

See

proposed Item 27A(j) of Form N-1A;

infra

Section II.B.2.i (discussing the provision that would allow funds to refer to the availability of additional website information, if the fund reasonably believes shareholders would likely view the information as important).

124

See

Instruction 12 to proposed Item 27A(a) of Form N-1A. This is substantially similar to a requirement in rule 498, which provides that a fund's summary prospectus generally must be given greater prominence than other materials that accompany the summary prospectus.

See

rule 498(f)(2).

125

These examples of how funds may satisfy the proposed prominence requirement are consistent with interpretations of similar requirements in other Commission rules and forms.

See, e.g.,

2009 Summary Prospectus Adopting Release,

supra

footnote 10, at text accompanying n.220 (“Generally, we believe that the `greater prominence' requirement would be satisfied if the placement of the Summary Prospectus is more prominent than accompanying materials,

e.g.,

the Summary Prospectus is on top of a group of paper documents that are provided together.”); General Instructions 10.C and 10.D of Form CRS (requiring a relationship summary delivered in paper format to be the first among any documents delivered at that time, and a relationship summary delivered electronically to be presented prominently in the electronic medium (

e.g.,

as a direct link or in the body of an email or message)).

126

See id.

We request comment on the scope of content that the proposed rule would require or permit a fund to include in its annual report, including the following:

5. Is it appropriate to restrict the content of a fund's annual report to include only the information the form would permit or require? If not, why not? Would these proposed limits on content create a more effective presentation for investors? Are there other approaches we should consider (such as permitting space in the annual report for funds to disclose other information they deem important to investors)? What are the benefits and drawbacks of shorter or longer disclosure, or a more flexible approach to disclosure, for investors relative to the proposed approach?

6. Is it appropriate for funds to have flexibility to include other communications to shareholders in the same transmission as a shareholder report? Should the shareholder report be subject to the proposed prominence requirement? If not, should we require other prominence or formatting standards if the transmission includes other materials, or should we impose other requirements or limitations associated with materials that funds could transmit along with the shareholder report?

7. As proposed, should we allow a fund to modify a required legend or narrative information as long as the modified language contains comparable information? If not, why not? Should we use this approach for all aspects of the annual report, or are there particular areas where requiring uniform language across all funds' annual reports would be particularly valuable to shareholders, for example, to facilitate comparisons or improve shareholder understanding? If so, how should we balance the potential value of uniform language with potential concerns that uniform language may not be well-tailored to a particular fund or its shareholders?

8. Is it appropriate not to permit funds to incorporate information by reference into their annual reports, as proposed? If not, why not? Is there certain information that a fund should be permitted to incorporate by reference into its annual report? If so, what information, and why?

c. Scope With Respect to Other Registrants

Our proposed amendments to annual reports would only apply to shareholder reports for investment companies registered on Form N-1A. These funds represent the vast majority of investment company assets under management.

127

We also have recently adopted changes to the disclosure framework for closed-end funds and variable insurance contracts tailored to these investment companies' characteristics and, in the case of closed-end funds, to implement congressional directives.

128

The recently adopted changes to closed-end fund disclosure include multiple changes to these funds' shareholder report disclosures, and we would like to understand funds' and investors' experience with this new disclosure framework before proposing additional disclosure amendments.

129

Similarly, we anticipate that the recently adopted changes to the variable insurance contract disclosure framework would significantly change investors' experience with variable contract disclosure. While these changes are focused more on prospectus disclosure and not shareholder report disclosure, we would like to assess the impact of these changes prior to proposing additional disclosure changes for variable contracts.

130

Our proposed amendments therefore do not extend at this time to other investment companies such as closed-end funds, unit investment trusts, or managed open-end investment companies not registered on Form N-1A (

i.e.,

issuers of variable

annuity contracts registered on Form N-3).

127

See infra

Section III.B.1.

128

See

Variable Contract Summary Prospectus Adopting Release,

supra

footnote 27; Securities Offering Reform for Closed-End Investment Companies, Investment Company Act Release No. 33836 (Apr. 8, 2020) [85 FR 33290 (Jun. 1, 2020)] (“Closed-End Fund Offering Reform Adopting Release”).

129

See, e.g.,

Closed-End Fund Offering Reform Adopting Release,

supra

footnote 128, at Section II.I.2.a (discussing new annual report requirements for funds that file a short-form registration statement), Section II.I.2.b (discussing proposed MDFP disclosure that would appear in registered closed-end funds' annual reports), and Section II.I.5 (discussing enhancements to certain registered closed-end funds' annual report disclosure).

130

Moreover, of the variable contract structures, only variable contracts with separate accounts structured as management investment companies—those registered on Form N-3—have annual and semi-annual shareholder reporting requirements under rule 30e-1.

We request comment on the scope of entities that would be covered by our proposed amendments to annual reports, including the following:

9. To what extent, if any, should the proposed amendments to shareholder reports be extended to other investment companies besides open-end mutual funds and ETFs organized as management investment companies?

10. For example, ETFs can be organized as management investment companies registered on Form N-1A or as unit investment trusts (“UITs”) that are registered on Form N-8B-2 and subject to certain Commission exemptive orders. UIT ETFs are organized differently than and subject to a different disclosure framework than funds.

131

For example, exemptive orders for UIT ETFs generally require these ETFs to transmit annual reports that include their financial statements, but the content of these ETFs' annual reports is not necessarily the same as the current content of funds' annual reports. Despite these differences between funds and UIT ETFs, should UIT ETFs be permitted to rely upon proposed rule 498B, or permitted or required to use a tailored annual report? If so, to what extent, if any, should the conditions to rely on proposed rule 498B or use a tailored annual report be modified for UIT ETFs? If a UIT ETF were to use a tailored annual report, should the content of its report differ from the content of a tailored annual report for open-end management companies? For example, should this ETF's financial statements remain in the report in accordance with its exemptive order, or should it be able to provide its financial statements through other means (

e.g.,

on a website and through a Form N-CSR report, even though these ETFs are not otherwise required to file Form N-CSR reports), subject to potential conditions that the ETF provide other information in an annual report? Do shareholders in UIT ETFs have the same informational needs as fund shareholders? For example, do UIT ETFs' shareholders need the same performance information, or do their needs differ since a UIT ETF generally replicates an index?

131

A UIT is an investment company organized under a trust indenture or similar instrument that issues redeemable securities.

See

section 4(2) of the Investment Company Act [15 U.S.C. 80a-4]. By statute, a UIT is unmanaged and its portfolio is fixed. A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust. ETFs organized as UITs seek to track the performance of an index by investing in the component securities of an index in the same approximate proportions as the index.

See

ETF Adopting Release,

supra

footnote 75, at nn.42, 44.

11. Should the Commission amend the requirements for registered closed-end funds' and BDCs' annual reports, to reflect any of the amendments we are proposing for open-end funds' annual reports?

132

As an example, the Commission recently adopted rules requiring: (1) Certain closed-end funds (registered closed-end funds, as well as BDCs) to include key information in their annual reports regarding fees and expenses, premiums and discounts, and outstanding senior securities that the funds currently disclose in their prospectuses; and (2) registered closed-end funds to provide management's discussion of fund performance in their annual reports to shareholders.

133

If the Commission were to propose to tailor closed-end funds' shareholder reports in a manner that is similar to how we are proposing to tailor open-end funds' shareholder reports, how should such tailoring incorporate these recently adopted disclosure requirements, as well as the other content that currently appears in closed-end funds' shareholder reports? For example, should we propose to update the fee and expense information that appears in closed-end funds' shareholder reports to more closely match the proposed fund expense presentation that would appear in open-end funds' shareholder reports? As another example, would it be appropriate to require closed-end funds to file on Form N-CSR certain information that currently appears in their shareholder reports (such as their full financial statements) and make this information available on a website, instead of including it in their reports, as we are proposing for open-end funds?

132

see also

discussion at

infra

Section II.B.4 and

infra

footnote 338 and accompanying text for a discussion of additional tools a fund can provide online to facilitate shareholder engagement.

143

See

proposed Item 27A(c) of Form N-1A.

What were your Fund costs for the period?

(based on a hypothetical $10,000 investment)

EP05NO20.000

Commenters on the Fund Investor Experience RFC stated that shareholders believe the information provided in the current shareholder report expense example is important because it helps them understand the costs associated with investing in the fund.

144

The proposed expense information is intended to reflect shareholders' preferences to understand fee and expense information, while simplifying the expense example that currently appears in funds' shareholder reports.

144

See, e.g.,

ICI Comment Letter I (stating that the information provided in the current expense example is responsive to investors' keen interest in knowing how much it will cost them to invest in a fund);

see also

Capital Group Comment Letter (noting that the current expense example provides investors with information on the cost of their investments).

Funds' shareholder reports currently include an expense example consisting of two different tables.

145

See

Item 27(d)(1) of Form N-1A. The instructions to this item require a fund to calculate the expense example using a fund's expense ratio for the preceding six months and not to include the impact of sales loads, if any.

• The first table shows the actual cost in dollars for a $1,000 investment in the fund over the prior six-month period based on the actual return of the fund. This presentation is intended to help a shareholder calculate the actual ongoing fund expenses, in dollars, that he or she has incurred.

• The second table shows the cost in dollars for a $1,000 investment in the fund over the prior six-month period based on a hypothetical 5% annual return (and not, as for the first table, the actual return of the fund during that period). Because funds are required to use the same hypothetical annual return in calculating their expenses here, this second table is designed to help shareholders compare the expenses of their fund with those of other funds.

146

The first table does not permit a direct comparison of fund costs because positive performance would make fund expenses expressed as a dollar amount higher and negative performance would make fund expenses expressed as a dollar amount lower. So, for example, if two funds had the same fees, the fund with the better performance would appear more expensive.

See

February 2004 Shareholder Report Adopting Release,

supra

footnote 83.

Currently, the fund expenses presented in the shareholder report expense examples are different in several respects from those in the prospectus fee table and example. The shareholder report example is derived from a fund's financial statements and therefore reflects actual historical expenses that a shareholder incurred over the past year (

i.e.,

backwards-looking expenses). The prospectus example, on the other hand, reflects hypothetical future expenses (

i.e.,

forward-looking expenses).

147

Currently, the prospectus fee table also reflects sales loads that an investor would pay and the expenses associated with the fund's investments in another fund (referred to as Acquired Fund Fees and Expenses (“AFFE”)), whereas the shareholder report expense presentation does not, because these elements are not reflected in the fund's financial statements.

148

Additionally, unlike the shareholder report example, the prospectus fee table must reflect any material changes in fees that occurred since the prior fiscal year and cannot reflect certain fee waivers.

149

147

See

February 2004 Shareholder Report Adopting Release,

supra

footnote 83, at text following n.96.

148

See

Item 27(d)(1) of Form N-1A;

see also

Section II.H.1.g (discussing proposed changes to the disclosure requirements for AFFE in fund prospectuses, which would permit funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table and instead disclose the amount of the fund's AFFE in a footnote to the fee table).

149

See

Instruction 3(d)(ii) and 3(e) of Item 3 of Form N-1A (prohibiting a fund from reflecting fee waivers unless they reduce the fund's operating expenses for no less than one year from the effective date of the fund's prospectus).

The information about fund expenses that we are proposing funds include in the annual report is designed to simplify the expense example that currently appears in funds' shareholder reports, and to provide shareholders with additional tools to understand the expenses they paid during the prior fiscal year. The proposal would replace the two current expense examples in the shareholder report with one simplified expense table. The new table would vary from the current disclosures in several respects. First, under the proposal, funds would have to provide the expenses associated with a $10,000 investment in the fund, rather than the current $1,000 investment amount.

150

We are proposing to increase the dollar value because we believe that $10,000 is a more realistic investment amount for an individual shareholder today.

151

Additionally, because Form N-1A requires funds to use an assumed $10,000 investment for the expense presentation in the prospectus, the proposal would align this aspect of the two expense presentations and promote a more consistent disclosure experience for investors.

152

Similarly, we are proposing to align the rounding conventions of the expense presentations in the shareholder report with those of the prospectus.

153

150

See

proposed Item 27A(c) of Form N-1A.

151

See

Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998] (“1998 Form N-1A Prospectus Amendments”), at n.74 and accompanying text (increasing the hypothetical investment to $10,000 in the prospectus example presentation because the Commission recognized that the typical fund investment was increasing in size). Because we are proposing to raise the hypothetical investment amount to $10,000, we are also proposing to similarly raise the required rounding conventions for dollar values in the table to the nearest dollar, rather than the nearest cent.

152

But see supra

footnotes 147 through 149 and accompanying text (discussing the key differences between the presentation of expense information in the prospectus and the shareholder report).

153

See

proposed Instruction 1(a) of Item 27A(c) of Form N-1A (requiring all percentages in the table to be rounded to the nearest hundredth of one percent and all dollar figures in the table to be rounded to the nearest dollar).

Furthermore, funds would no longer be required to show the total amount of expenses along with hypothetical return information for the period. Instead, funds would continue to provide expense information along with actual return information, with amendments to this presentation of expenses that we believe would help show shareholders how much of their money was actually invested in the market (versus how much of their money was paid for fees and expenses).

154

Like the current expense presentation, the proposed presentation would show an assumed beginning account value, an ending account value, and expenses paid during the period. However, rather than only requiring funds to disclose the ending account value net of fees (as they do today), we are proposing to require funds to disaggregate this amount. Funds would individually disclose: (1) The costs paid during the period, (2) the fund's total return during the period before costs were paid, and (3) the ending account value based on the fund's net asset value return. A fund would have to provide each of these figures as a mathematical expression (using “+”, “−”, and “=” signs), as shown in the example above.

155

Costs would have to be expressed as a negative amount (with a “−” sign preceding the cost amount), and total return, if negative during the period, also would have to be expressed as a negative amount with a “−” sign preceding it. Conversely, if the fund's total return were positive during the period, it would be preceded by a “+” sign.

154

The expense example in the annual report would provide expense information that covers a 12-month reporting period.

155

See

proposed Instructions 1(b) of Item 27A(c) of Form N-1A (“Provide the amounts in each of the columns as a mathematical expression, as appropriate (

i.e.,

include +, − and = symbols). Costs paid during the period must be expressed as a negative amount. Total return, if negative during the period, must be expressed as a negative amount.”).

We believe that this presentation would facilitate a shareholder's understanding of how costs and performance affect his or her ending account value. Fund fees and expenses are central information for shareholders because they can significantly affect a fund's investment returns over time.

156

We recognize that shareholders could benefit from additional transparency into the costs associated with investing in the fund. However, while some of these costs are fixed and easily quantifiable, others are variable and can be difficult to calculate.

157

156

See

Fund Investor Experience RFC,

supra

footnote 8, at text accompanying n. 36. Some commenters on the Fund Investor Experience RFC expressed concern that fund disclosure may not accurately represent the full costs associated with a fund investment.

See, e.g.,

Delmonte Comment Letter; Fowler Comment Letter; Blanchard Comment Letter.

157

For example, some commenters on the Fund Investor Experience RFC discussed challenges associated with disclosing transaction costs, including a potential negative impact on investors' ability to understand fund costs.

See, e.g.,

ICI Commen

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