SEC Proposes Amendments to Improve the Retail Investor Experience

In August, the Securities and Exchange Commission (SEC) announced the proposal of comprehensive modifications to the mutual fund and exchange-traded fund disclosure framework to improve the experience for retail investors.

The proposed framework features concise and visually engaging shareholder reports which highlight information that is important for retail investors to assess and monitor their fund investments. The proposal is a central component of the SEC’s investor experience initiative and responds to feedback it received in response to a 2018 request for comment on retail investors’ experience with fund disclosure.

According to SEC Chairman Jay Clayton, “By encouraging fund disclosures that use modern communication techniques to emphasize clearly and concisely the information investors find most useful, today’s proposal should facilitate better-informed decision making.”

Highlights of the proposal include:

  • Shareholder Reports – Streamlined shareholder reports would be required to include fund expenses, performance, illustrations of holdings, and material fund changes, among other things. To promote effective investor communications, open-end funds are encouraged to use graphic or text features including tables, bullet lists, and question-and-answer formats. Also, the proposal provides flexibility for open-end funds to make electronic versions of their shareholder reports more user-friendly and interactive. To view the SEC’s hypothetical streamlined shareholder report, click here.
  • Form N-CSR and Online Availability – According to the SEC, some information currently included in an open-end fund’s annual and semi-annual reports may be less relevant to retail shareholders. However, it may be of more interest to financial services professionals and investors who want more in-depth details like the schedule of investments and other financial statement elements. This information would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the SEC on Form N-CSR.
  • Updated Required Disclosures – Currently, open-end fund shareholders generally receive an updated prospectus each year. Under proposed new rule 498B, new investors would still receive a fund prospectus with their initial investment in an open-end fund, but not for subsequent annual updates. Instead, funds would keep shareholders informed through the shareholder report and timely notifications of material fund changes as they occur. Current versions of the fund’s prospectus would remain available online and delivered upon request in paper or electronically, according to the shareholder’s delivery preference.
  • Rule 30e-3 Amendments – The proposal would help ensure that all open-end fund shareholders experience the benefits of the proposal’s modified disclosure framework, which contemplates direct transmission of concise shareholder reports that serve as the central source of fund disclosure for existing shareholders. Find out more in an earlier blog post
  • Fund Fees and Risks – Amendments to the open-end fund prospectus disclosure would help investors more readily understand fund fees and risks, which investors have identified as two areas that are critically important in assessing a prospective fund investment, but can often be complex and confusing. It would simplify and tailor disclosures of these topics to different types of investors’ informational needs.
  • Advertising Rules – Presentations of investment company fees and expenses in advertisements and sales literature would have to be consistent with relevant prospectus fee table presentations and be reasonably current. The proposed amendments also address representations of fund fees and expenses that could be materially misleading. These amendments would affect all registered investment company and business development company advertisements.

The public can comment on the proposed amendments until 60 days after they were published in the Federal Register.

https://www.sec.gov/news/press-release/2020-172