Major Changes to Mutual Fund and Exchange-Traded Fund Shareholder Reports

Posted by Lori Ehleben and Richard Wagner on Nov 22, 2022 1:11:41 PM

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.

  • Reports to shareholders will be distinct from a fund’s financial statements. Reports to shareholders must be mailed within 60 days after a fund’s year end (unless an electronic option is elected), while the full financial statements will be filed on Form N-CSR and available to shareholders online within 60 days after a fund’s year end. The shareholder reports require “concise and visually engaging” annual and semi-annual reports to shareholders. It will permit electronic versions of the reports to be user-friendly and interactive.

  • Each class of each fund will have its own report. Multiple funds and/or classes cannot be combined into one report.

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  • Information to be included in the new concise annual and semi-annual shareholder reports that will be mailed to shareholders (See our recent blog post for an in-depth look at these new reports):
    • Cover Page or Beginning of report
    • Fund Expenses
    • Management Discussion of Fund Performance
    • Fund Statistics
    • Graphical Representation of Holdings
    • Material Fund Changes
    • Changes in and Disagreements with Accountants
    • Availability of Additional Information
    • Householding

  • The 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 under N-1A are not affected by this rule change. Therefore, the new annual and semiannual report will be mailed to shareholders, unless the shareholder opts into electronic mailings.

  • Form N-CSR will continue to be filed with the Commission and will be available on SEC.gov and the fund website will include the following changes:
    • The N-CSR will include complete financial statements and include the graphical representation of holdings in the annual and semi-annual reports.
    • Summary schedules of investments are eliminated
    • Funds must disclose any changes in and disagreements with accountants
    • Elimination of the directors and officers table as long as the information remains disclosed in the fund’s SAI
    • Elimination of Liquidity Risk Management Program disclosure
    • Elimination of 30e-3 disclosure

  • If a required disclosure in the new annual report is inapplicable, the rules will permit the fund to omit the disclosure, and a fund similarly may modify a required legend or narrative information if the modified language contains comparable information to what is otherwise required.

  • The Rule will not permit a fund to incorporate by reference any information into its annual report. That is, a fund could not refer to information that is located in other disclosure documents in order to satisfy the content requirements for an annual report.

  • Tax character of distributions are not included in the new shareholder report, which some funds historically have utilized to comply with certain IRS requirements. This information can be included in the MDFP or statistics if the fund determines that such information is relevant.

  • When requested, the fund must send paper/electronic copies of any materials that appear online within three business days. This requirement also applies to any financial intermediary through which shares of the fund are sold.

  • The fund's website address is required to appear on the cover page of the new shareholder report. Fund documents must be easily accessible on the fund’s website and must be specific enough to lead investors directly to the required information but may be a central site with prominent links to the referenced information.

  • A complete listing of portfolio securities is required to be included on the fund’s website for the first and third quarters within 60 days after quarter-end.

  • The current SAI requirement to provide the age and length of service for a fund’s officers and directors has been updated to allow funds to instead disclose for each officer and director the birth year and the year their service began.

  • All investment company advertisements providing fee and expense figures must include: (1) the maximum amount of any sales load, or any other nonrecurring fee, and (2) the total annual expenses without any fee waiver or expense reimbursement arrangement.

  • The Rule also requires the presentation of investment company fees and expenses in advertisements and sales literature be reasonably current and consistent with prospectus fee tables.

  • The Rule becomes effective 60 days after publication in the Federal Register (October 26, 2022) in late December 2022 and has an 18-month transition period after the effective date.

Can we help you? Please reach out if we can provide additional information.

See the final rule: https://www.sec.gov/rules/final/2022/33-11125.pdf

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