The disclosure amendments would tailor mutual fund and ETF disclosures to retail investors’ needs and promote diversity of background, and perspective, according to the Commission.
The SEC has unanimously proposed modifications to the mutual fund and exchange-traded fund disclosure frameworks to enhance transparency and modernize disclosure by encouraging "visually engaging" shareholder reports highlighting information particularly important to retail investors. Separately, the SEC also published procedures setting forth a staff-led process to nominate candidates for appointment to the Investor Advisory Committee (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, Release No. 33-10814, August 5, 2020).
"The Commission is committed to improving the Main Street investor experience and modernizing information content and delivery," said SEC Chairman Jay Clayton.
Disclosure. In particular, the Commission’s new fund disclosure proposal would: (1) require streamlined shareholder reports including fund expenses, performance, illustrations of holdings, and material fund changes; (2) revise the content of the disclosure items to better align with market developments and investor expectations; (3) encourage additional graphic or text features; and (4) promote a layered framework by providing currently required information available online.
According to the SEC, the proposed framework would provide an alternative approach to keeping investors informed; instead of receiving complex prospectus updates and shareholder reports, existing investors would receive a streamlined report, with improvements in delivery and design and the end of excessive data, statistics, and narratives. Information currently required would be available online, delivered free of charge upon request, and filed with the Commission semiannually on Form N-CSR.
Under the existing framework, beginning as early as January 1, 2021, funds may begin relying on Investment Company Act Rule 30e-3 permitting funds to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of online availability. Taking into account feedback from investors in response to the 2018 request for comment, the proposal would amend the scope of the rule to exclude open-end funds. This amendment would ensure that open-end fund shareholders would experience the anticipated benefits of the modified framework.
The Commission also noted that the proposal would amend prospectus disclosure requirements to provide more clarity regarding fees, expenses, and principal risks. To improve fee- and expense-related information, the proposal would also amend investment company advertising rules to promote more transparent and balanced statements about investment costs. Using layered disclosure, the proposal would tailor disclosures of topics by replacing the existing fee table in the summary section of the statutory prospectus with a simplified fee summary and moving the existing fee table to the statutory prospectus.
The amendments also would revise current requirements to permit open-end funds that make limited investments in other funds to disclose the fees and expenses associated with those investments in a footnote to the fee table and fee summary, rather than as a fee table line item.
The Commission also approved for use two short-form feedback fliers to gather information from retail investors and smaller funds and are designed to help them provide feedback on the proposal.
Regarding the proposal, Commissioner Hester Peirce asked: "[I]s there anything more we can do to encourage technological innovation in funds’ communications with shareholders?" Shareholders should have access to accurate information about the fees the incur, she said.
IAC nomination transparency. The SEC also published procedures setting forth a staff-led process to nominate candidates for the Investor Advisory Committee. The nominating committee will identify candidates based on certain categories, and members of the public are encouraged to express their interest in serving. The key is engaging fresh perspectives, according to the Commission.
"These procedures bring much needed improvements to the process of appointing members to the Investor Advisory Committee," said Chairman Jay Clayton.
"It is my sincere hope that this will allow us to consider candidates from outside of Washington who can offer different viewpoints than we already receive," according to Commissioner Elad Roisman.
Commissioner Allison Herren Lee dissented, however, noting that "[t]he new process marginalizes participation by the office best situated to handle the process—the Office of the Investor Advocate—and restricts functional membership categories in a way that fails to prioritize the most pressing needs of investors."
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