An In-Depth Look at the New Open-End Fund Shareholder Reports

Posted by Richard Wagner on Nov 14, 2022 6:41:12 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.

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.

Cover Page or Beginning of Report

The cover page or the beginning of the report will be required to have the following information: 
  • Name of the fund and class to which the report relates
  • Ticker exchange symbol of the fund’s shares
  • For ETFs, principal U.S. market(s) on which the fund’s shares are traded
  • A statement identifying the documents as an “annual shareholder report”
  • The period the report covers
  • Where you can find additional information about the fund
  • A prominent statement that describes any material changes
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Fund Expenses

The fund will be required to provide a table showing the expenses associated with a hypothetical $10,000 investment in the fund during the preceding reporting period in two formats: (1) as a percentage of a shareholder’s investment in the fund (expense ratio) and (2) as a dollar amount.

Management, Discussion and Analysis of Fund Performance

Performance Line Graph and Market Indexes

The report will include a performance line graph that will reflect the class in the report and will compare to an appropriate broad based securities market index over a 10-year period. The graph can also include narrower indexes that reflect the market segments in which the fund invests.

Performance Table

The report will include a table presenting average annual total returns for the past one, five, and 10 years for a single class of the fund, including sales charges. The table will also include the annual average returns of an appropriate broad-based securities index and the fund’s average annual total returns without sales charges.

Narrative Management Discussion of Fund Performance (“MDFP”) Disclosure

The report will be required to include a narrative discussion of factors that materially affected a fund’s performance during the most recent fiscal year. The Rule will not allow the fund to include any additional information, such as a fund president’s letter to shareholders, interviews with portfolio managers, general market commentary and/or other similar information.

Other MFDP Amendments

The report will also require a discussion on the effect of any stable distribution policy on the fund’s investment strategies and per share net asset value, as well as the extent to which the fund’s distribution policy resulted in distributions of capital.

Fund Statistics

Funds will be required to provide the following fund statistics:

  • Net assets
  • Number of portfolio holdings
  • Portfolio turnover
  • Advisory fees paid during the reporting period
Additional statistics can be included that the fund believes would help shareholders better understand the fund activities and operations during the period. The fund statistics that are included in or could be derived from the fund’s financial statements or financial highlights should be derived from the fund’s most recent financial statements or financial highlights. The required statistics will precede any additional statistics. The Rule also encourages the fund to use tables, bulleted lists and other graphics or text features.

Graphical Representation of Holdings

The fund will be required to include one or more tables, charts or graphs depicting the fund’s portfolio holdings by category, as of the end of the reporting period. The graph must disclose its holdings using categories designed to clearly depict the types of investments made by the fund, given its investment objectives. The fund will also be permitted to show its holdings based on total exposure and credit quality. The fund can also show its top 10 largest portfolio holdings in a table or chart.

Material Fund Changes

The following changes are required to be disclosed:

  • Name changes
  • Investment objective or goal changes
  • Changes in annual operating expenses, shareholder fees, or maximum account fees, including the termination or introduction of an expense reimbursement or fee waiver arrangements
  • Changes in a fund’s principal investment strategies
  • Changes in the principal risks of investing in a fund
  • Changes in the fund advisor or subadvisor are required to be disclosed
The Rule also permits a fund to describe other changes that may be helpful for investors to understand the fund’s operations and/or performance over the reporting period.

 

Changes in and Disagreements with Accountants

The report will also include a concise discussion of certain disagreements with accountants in the annual report when the accountant has resigned or has been dismissed.

Availability of Additional Information

The report must include a brief, plain English statement in the shareholder report that informs its investors about certain additional information that is available on the fund’s website. If the shareholder report appears on the fund website or is provided electronically, the report is required to have a hyperlink or QR code to the other information.

Householding

The Rule retains the current provision that permits funds to explain in their annual report how to revoke consent to the householding of the annual report.

Filing / Posting Requirements

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 Firm 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.

Instructions

The format and instruction to the new annual and semi-annual report are included in Item 27A of Form N-1A. No additional disclosures are allowed.

Effective Date

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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