The Securities and Exchange Commission has adopted rules and form amendments that are designed to require mutual funds and exchange-traded funds (“ETFs”) to transmit concise and visually engaging annual and semi-annual reports to shareholders. The updated approach to funds’ shareholder reports will highlight key information that is particularly important for retail investors to assess and monitor their fund investments.

In this summary, we will provide an overview of the major changes affecting open-end and exchange traded funds.

The Securities and Exchange Commission has adopted rules and form amendments that are designed to require mutual funds and exchange-traded funds (“ETFs”) to transmit concise and visually engaging annual and semi-annual reports to shareholders. The updated approach to funds’ shareholder reports will highlight key information that is particularly important for retail investors to assess and monitor their fund investments.

The new Rule will amend Rule 30e-3 to exclude open-end funds, including ETFs. Closed-end funds, unit investment trusts and other open-end funds that do not file Form N-1A are not affected by this rule change.

In this summary, we will outline the format of the new annual and semi-annual report. Funds must prepare a separate annual report for each fund in a series and each class in a multi-class structure. The reports should be concise and visually engaging but will not be subject to any page or word limits.

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The Securities and Exchange Commission has long enforced consistency between the name and strategy of a regulated investment company.

The original “Names Rule,” Rule 35d-1 of the Investment Company Act of 1940, was issued in 2001 and was intended to help ensure a fund’s name does not misrepresent the fund’s investments and risks to investors. It generally requires that if a fund’s name suggests a focus in a particular investment type, industry or geographic region, the fund must adopt a policy to invest at least 80% of its assets accordingly. Similarly, if the fund’s name suggests that its distributions are tax-exempt, for example, the investment policy must adhere to this claim.

BBD's Industry Insights video series offers our clients and industry friends a brief look into important and timely developments in the investment management industry.

Preparing the Financial Statements

As part of the preparation of financial statements, Management should actively search for events occurring and information available after the fiscal year-end but before financial statements are issued– commonly known as subsequent events. In the context of an investment company, most subsequent event considerations of a material nature are one of a handful of events – for example valuation of investments, litigation, liquidation or reorganization, or significant capital changes.

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As investors continue to search for new ways to drive alpha, lower costs and increase accessibility, there has been increased discussion across the investment management industry about converting separately managed accounts (“SMA”s) into exchange traded funds (“ETF”s).

Should an ETF investing in foreign securities utilize fair value adjustment factors? Before answering this question, we should address why investment companies use fair value adjustment factors. Funds that invest in international securities could be subject to market timers looking to take advantage of the arbitrage that may occur between the time a foreign stock exchange closes and the time the U.S. stock exchange closes. The market timer buys into the fund and then sells out of the fund the next day, driving up costs and diluting the share value for long-term investors.

Hedge funds can incur start-up costs called organization and offering costs. Oftentimes, the treatment of these costs for Generally Accepted Accounting Principles in the United States (GAAP) purposes can cause headaches during the audit process. The key to avoiding this particular headache is understanding the issue and then coordinating with your auditor on a plan of action during the organization of the fund.