United States: SEC Proposes Amendments To Mutual Fund And ETF Disclosure Framework

The SEC proposed amendments designed to tailor mutual fund and exchange-traded fund ("ETF") disclosures to the needs of retail investors. The proposal would amend the mutual fund and ETF disclosure framework as follows:

• Shareholder Reports. The proposed amendments would limit the length and complexity of annual and semi-annual reports in order to make disclosures more "concise and visually engaging." Shareholder reports would be designed to highlight key information for retail investors, including information relating to fund expenses, performance, and portfolio holdings. In addition, the proposal would provide funds with the flexibility to make electronic versions of shareholder reports more interactive.
• Additional Information on Form N-CSR and Online. The proposed amendments would require certain more "in-depth" information to be published online, delivered upon request and submitted on Form N-CSR on a semi-annual basis.
• Disclosures for New and Ongoing Investors. Under the proposal, investors in an open-end fund or ETF would continue to receive a fund prospectus in connection with their initial investment, but would not subsequently receive annual prospectus updates. Instead, the disclosure framework would rely upon shareholder reports and timely notifications to provide investors with material updates.
• Prospectus Disclosure of Fund Fees and Risks. The proposal includes a "layered disclosure" approach in order to help investors better understand fees. The amendments would (i) replace the existing fee table in the summary section of the statutory prospectus with a simplified fee summary, (ii) move the more detailed fee table to the statutory prospectus, and (iii) clarify terminology used in the fee table.
• Fee and Expense Information in Fund Advertising. The proposed amendments would require investment company fee and expense information in advertisements to be consistent with prospectus fee table presentations and to be reasonably current.

Comments on the proposal must be submitted within 60 days of publication in the Federal Register.

SEC Commissioner Statements

Chair Jay Clayton highlighted the layered disclosure approach as a crucial element of the proposed disclosure framework. According to Mr. Clayton, the proposal would provide investors with information in a more useful format without changing the amount or type of information disclosed.

Commissioner Hester M. Peirce "enthusiastically support[ed]" the proposal while also encouraging feedback on how to (i) promote innovation in funds' communications with shareholders and (ii) more clearly convey expenses indirectly incurred by shareholders.

Commissioner Allison Herren Lee identified areas for improvement, including the proposal's treatment of acquired fund fees and expenses (or "AFFEs"). In addition, Ms. Lee encouraged testing of the effectiveness of the disclosures that the SEC is proposing.

Commissioner Elad L. Roisman said the proposal takes an "enormous" step towards evaluating existing disclosure rules. He asked for further input on the requirement for funds to report performance by referencing a "broad-based securities index." He noted that comparing performance to an index (i) costs shareholders licensing fees for the fund to obtain the right to reference the index and (ii) could entrench the market with major index providers.