SEC Proposes Rule to Modernize Shareholder Reports and Disclosure

The U.S. Securities and Exchange Commission (SEC) has announced a proposal to modify and modernize the disclosure framework of mutual funds and exchange-traded funds that is intended to better serve the needs of retail investors. The SEC has identified in its press release several highlights of the proposal.


Shareholder Reports Tailored to Retail Shareholders

The proposal encourages the use of graphic or text features to promote effective communication. It would also provide flexibility for open-end funds to make electronic versions more user-friendly and interactive.


Availability of Additional Information

Information that is currently included in an open-end fund’s annual and semi-annual reports may be less relevant to retail shareholders but of more interest to financial professionals. This information would be filed on a semi-annual basis with the SEC on Form N-CSR, and would also be available online or delivered free of charge upon request.


Required Disclosures Tailored to New and Ongoing Fund Investors

Under the new proposal, annual prospectus updates would no longer be delivered to shareholders once the first prospectus is provided upon initial investment. Rather, shareholders would receive information from the fund through the shareholder report and timely notifications of material changes. The fund’s prospectus would remain available online and could be delivered upon request.


Improvements to Prospectus Disclosure of Fees and Risks

The proposal would tailor disclosures using a layered approach that would replace existing fee tables in the summary section of the prospectus with a simplified fee summary and replace certain terms in the fee table with terms that may be clearer to investors. The proposal would also improve risk disclosures in open-end funds by promoting the disclosure of principal risks and disclosing how these risks are assessed.


Fee and Expense Information in Advertisements

Advertisements and sales literature would be required to contain presentations of investment company fees and expenses that are consistent with relevant prospectus fee tables and are reasonably current and free of misleading representations.

Much of the framework for the SEC’s proposal is in response to a 2018 request for comments regarding retail investors’ experience with fund disclosures. There is a 60-day comment period upon publication in the Federal Register.