LATEST DEVELOPMENTS: FUNDS
Final Rules
SEC Adopts Major Changes to Shareholder Reports and Amendments to Investment Company Advertising Rules
On October 26, 2022, the SEC, in a unanimous vote, adopted rule and form amendments that make major changes to the required content of open-end fund shareholder reports and delivery requirements. The SEC also adopted amendments to the advertising rules under the Investment Company Act for open-end and closed-end funds. The changes to the fund disclosure framework were initially proposed in 2020 under previous SEC Chairman Jay Clayton. The new rules finalize two of the disclosure changes proposed in 2020. The SEC staff is continuing discussions with market participants with respect to its earlier proposals relating to fund prospectus disclosure requirements.
Tailored Shareholder Reports
The amendments will require mutual funds and exchange-traded funds (ETFs) to provide shareholders with "concise and visually engaging" shareholder reports that are designed to allow retail investors to better assess and monitor their fund investments. The shareholder report could be as short as three pages in length and will include a more simplified presentation of fees and expenses and performance information. The report will also contain a graphical representation of portfolio holdings (as it currently does), a summary of material changes that occurred during the reporting period and required fund statistics. The changes are intended to address concerns regarding shareholder reports that have gotten increasingly lengthy and complex over the years and allow for a "layered" disclosure approach, borrowing from summary prospectuses, which provide key information in a streamlined and user-friendly format with more detailed information available online. Fund complexes will need to prepare separate shareholder reports for each series of a fund complex and for each share class of a fund; this differs from the current approach where fund complexes are permitted to include multiple series, and multiple share classes of each series, in a single report. The new shareholder reports will need to be filed and tagged using Inline XBRL structured data language so that they provide machine-readable information that retail investors and others can use to "more efficiently access and evaluate investments."
Under the final rule, the schedule of investments and other financial and performance information must continue to be prepared and filed with the SEC on Form N-CSR semi-annually. The new shareholder reports are also required to be filed on Form N-CSR. Form N-CSR must be available on a fund's website and delivered free of charge, upon request, to financial professionals and other investors seeking more in-depth information.
The amendments also change Form N-1A's definition of "appropriate broad-based securities market index" to require funds to compare their performance to an index that represents the overall domestic or international equity or debt markets, as appropriate. Funds may continue to compare their performance to other indexes, including narrower indexes, as an additional comparison point. This amendment will impact performance presentations in both prospectuses and shareholder reports.
Exclusion of Funds from the Scope of Rule 30e-3 under the Investment Company Act
The amendments exclude open-end funds from the scope of Rule 30e-3 with respect to electronic delivery of shareholder reports. Rule 30e-3 currently allows funds to provide shareholders with a paper notice of the online availability of shareholder reports rather than mailing the entire shareholder report. Under the amendments, funds will be required to mail the new concise shareholder reports to fund shareholders, unless a shareholder affirmatively consents to e-delivery. The SEC's rationale for narrowing Rule 30e-3 was to help ensure all fund shareholders realize the anticipated benefits of the new disclosure framework, which the SEC believes represents a more effective way for shareholders to use and access fund information, while still saving costs.
Fund Fees and Expenses Information in Investment Company Act Advertisements
The final rule amendments impact open-end and closed-end funds' presentations of fund fees and expenses information disclosed in fund advertisements and sales literature. Specifically, the fees and expenses information presentations must be current and consistent with the fee table presentations contained in a fund's prospectus. Further, the fees and expenses information contained in fund advertisements and sales literature must include standardized fee and expense figures and adhere to certain prominence requirements. The amendments are intended to ensure that the presentation of fees and expenses in fund marketing materials is not materially misleading.
Compliance Date and Other Information
In a change from the original rule proposal, which is discussed in more detail in our October 2020 Regulatory Update, the SEC did not take final action with respect to proposed Rule 498B under the Securities Act, which would continue to require funds to furnish a prospectus to new investors but funds would not be required to annually deliver prospectus updates to investors after their initial investment. This proposal received mixed reviews from commentators, and the SEC is taking additional time to further consider such commentary. The SEC also did not adopt proposed amendments regarding prospectus fee and risk disclosures.
The effective date for the rule and form amendments is January 24, 2023. Funds will be required to comply with the amendments 18 months after the effective date, which is July 24, 2024.
Sources: SEC Adopts Amendments to Modernize Fund Shareholder Reports and Promote Transparent Fee- and Expense-Related Information in Fund Advertisements, SEC Press Release 2022-193 (Oct. 26, 2022), available here; Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, Release No. IC-34731 (Oct. 26, 2022), available here; Shareholder Reports for Mutual Funds and ETFs; Fee Information in Investment Company Advertisements, SEC Fact Sheet (Oct. 26, 2022), available here; Chair Gary Gensler, Statement on Final Rule Amendments Regarding Shareholder Reports (Oct. 26, 2022), available here.
SEC Adopts Rules to Enhance Proxy Voting Disclosure by Funds and Require Disclosure on "Say-on-Pay" Votes for Institutional Investment Managers
On November 2, 2022, in a 3-2 vote, the SEC adopted final amendments to Form N-PX under the Investment Company Act and new Rule 14Ad-1 under the Exchange Act. The form amendments are intended to enhance the information funds currently provide on Form N-PX about their proxy votes. The new rule will require institutional investment managers to report on Form N-PX how they voted proxies with respect to executive compensation (i.e., "say-on-pay" votes), implementing a requirement added by the Dodd-Frank Act of 2010.
Form N-PX Amendments
Funds are required to file their proxy voting record for the 12-months ended June 30 on Form N-PX on an annual basis. The current rules do not require standardized disclosure regarding proxy votes, which makes it difficult for investors and other market participants to analyze and compare votes across fund complexes. The amendments to Form N-PX will require funds to:
- Identify proxy proposals using the same language as disclosed in an issuer's proxy card and in the same order as presented in such proxy card.
- Categorize proxy votes so that investors are able to focus on the topics they find important. Such categories include, among others, director elections, extraordinary transactions, "say-on-pay," shareholder rights and defenses, and the environment or climate.
- Disclose (1) the number of shares voted or instructed to be voted and how such shares were voted, and (2) the number of shares loaned (but not recalled to vote). At their option, funds may provide additional information regarding the considerations as to what led to a decision not to recall securities on loan.
- Provide Form N-PX disclosure separately by series for fund complexes that offer multiple series.
- File reports using XML structured data language, which is intended to make data easier to analyze and compare.
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