SEC Adopts Modernized Disclosure Framework for Shareholder Reports

Client Alert
October 28, 2022

On October 26, 2022, the Securities and Exchange Commission (“SEC”) adopted rule and form amendments that modernize the disclosure framework for mutual funds and exchange-traded funds (“ETFs”) to create a new layered disclosure approach (the “Amendments”).[1] 

Overview

The modernized disclosure framework under the Amendments includes the following:

Additionally, the Amendments include amendments to the investment company and business development company (“BDC”) advertising rules to promote more transparent and balanced statements about investment costs.

Although proposed by the SEC, the Amendments do not include proposed rule 498B, which would have provided an alternative approach to satisfy prospectus delivery for existing shareholders, nor do they include the proposed amendments to funds’ prospectus fee and risk disclosure requirements. 

Each of these Amendments is discussed below in more detail.

Compliance Dates

There will be a transition period of 18 months from the time that the Adopting Release is published in the Federal Register. 

Annual Shareholder Reports

The Amendments add new Item 27A to Form N-1A, which specifies the design and content of fund annual and semi-annual reports.  Current provisions in Item 27 of Form N-1A that relate to fund annual and semi-annual reports are being rescinded. 

Scope of Annual Report Disclosure

A separate annual report will be required for each fund series, so that investors only receive information about the fund that they are invested in.  Additionally, in a change from the proposal, the Amendments will require that a fund prepare and send to shareholders a shareholder report that covers the specific class that the shareholder has invested in if the fund is a multi-class fund.

While the content of a fund’s annual report will be limited to the information specifically required or permitted by Item 27A to Form N-1A, the instructions provide some flexibility so that a fund can tailor its presentation of information to match how the fund invests (including that in certain limited circumstances, additional information will be allowed to the extent needed to make the required disclosure items not misleading).  A fund will also be allowed to omit an item if it is not applicable to that fund.  Item 27A will not allow incorporation by reference of any information to an annual report for purposes of satisfying the annual report disclosure requirements.

There are also new instructions relating to the format and presentation of the shareholder reporting, and funds are encouraged to consider using, as appropriate, question and answer format, charts, graphs, tables, bullet point lists and other graphics. 

Content of Annual Report

Below is a description of the information that will be required in a fund annual report under the Amendments.  The design and content specifications required for funds’ semi-annual reports will be similar.[2]  Under the Amendments, there is no limit of the length of the shareholder report. 

The following information will be required to be on the cover page or at the beginning of the annual report:

The following are the items required in the content of the annual report, which do contain some variation from what was included in the proposal:

New Form N-CSR and Website Availability Requirements

The Amendments amend Form N-CSR and Rule 30e-1 under the 1940 Act.  Certain information currently included in shareholder reports will now be filed on Form N-CSR. Funds will have to make available on their website the information that will now be filed on Form N-CSR and will be required to provide such to shareholders free of charge upon request.  The information being moved from shareholder reports to Form N-CSR include:

Under the Amendments, the required information will have to be on the fund’s website within 60 days after the end of the fiscal period until 60 days after the end of the next fiscal period, at which time it would be updated.

Disclosure Items Proposed to be Removed from Shareholder Report and Not Filed on Form N-CSR

The Amendments result in the following items being removed from a fund’s annual report and additionally, they will not have to be included in Form N-CSR:

With respect to the management information table, the Adopting Release notes that this information is also included in a fund’s SAI and that it is not necessary to include it in multiple locations.  With respect to the statement regarding the liquidity risk management program, the Adopting Release notes that information relevant to the program will still be available on Form N-PORT, on Form N-CEN and in prospectuses. 

Amendments Narrowing the Scope of Rule 30e-3

Rule 30e-3 currently permits investment companies to satisfy shareholder report delivery requirements by making those reports and other materials available online and sending a notice of that availability instead of having to directly mail the shareholder report.  The Amendments are changing Rule 30e-3 to exclude investment companies registered on Form N-1A from being allowed to rely on the Rule as those funds will now be delivering tailored shareholder reports to shareholders.   

Investment Company and Business Development Company Advertising Rule Amendments

The Amendments also include changes to the SEC’s investment company advertising rules (which include Rules 482, 156 and 433 under the Securities Act and Rule 34b-1 under the 1940 Act) to promote transparent and balanced presentations of fees and expenses in investment company advertisements.  These amendments apply to all investment companies, including mutual funds, ETFs, registered closed-end funds and BDCs.  The amendments require that investment company advertisements providing fee and expense figures 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 arrangements based on the method of computation for a prospectus. Additionally, the Amendments will allow investment companies to include other figures regarding its fees and expenses, such as net expenses after fee waivers, so long as they are not any more prominent than the figures that are required.  The Amendments also provide that representations about fees or expenses associated with an investment in a fund could be misleading because of statements or omissions involving a material fact, including situations where portrayals of the fees and expenses associated with an investment in the fund omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading. 



[1] Release IC-334731, Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements (October 26, 2022) at https://www.sec.gov/rules/final/2022/33-11125.pdf  (“Adopting Release”).

[2] The MDFP and Material Fund Changes sections will be optional for semi-annual reports.  If a fund does determine to include the MDFP in the semi-annual report, it will have to comply with the content requirements for MFDP.  Additionally, the cover page statement and legend will be tailored for a semi-annual report rather than annual report.

[3] This change in definition also applies to the performance table in fund prospectuses.

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