On Oct. 26, 2022, the Securities and Exchange Commission (SEC) voted on a final rule amendment approving major changes for mutual fund and exchange-traded funds (ETFs) registered on Form N-1A (open-end funds or funds).

The final rule, “Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds,” requires these fund companies to compose “concise and visually engaging” reports that emphasize key information for retail investors.

According to SEC Chair Gary Gensler, the shift is related to important information communicated in shareholder reports. While these documents are among the most important documents fund managers receive, the reports can go on for hundreds of pages, forcing managers to sift through needless financial information. Shareholder reports have continued to increase in length and complexity, which can leave retail investors without a clear understanding of their investment performance.

The new rule requires fund reports to highlight key information in a concise manner that will “get to the heart of the matter,” said Gensler. Further, the modernized reports should be more interactive, readable, and user-friendly. These shareholder reports will still include key metrics on performance, fees, and other fund statistics in a “concise and visually engaging manner.”

The final rule went into effect Jan. 24, 2023, 60 days after publication in the Federal Register. The SEC had allowed an 18-month transition period to provide ample time for fund companies to comply with the new regulations.

New Requirements Tailored for Retail Shareholder Needs

There are several key changes to shareholder reports that fund companies should note for the upcoming fiscal year.

First, the updated reporting instructions “encourage the use of graphic and text features” that highlight relevant information for retail investors. This is designed to ensure information is communicated with transparency and that investors better understand disclosures. The reports could be as short as five pages if relevant information is communicated effectively.

In addition, shareholder reporting should provide different layers of detail depending on the audience and required level of intricacy. This approach, already utilized with summary prospectuses, streamlines key information in reports while showcasing more detailed information online.

Upon the request of financial professionals, in-depth financial statistics and analysis must be made available by the fund. While this abundant performance and financial metric information will not be included in the shareholder report, it must be provided free of charge on a website indicated in the shareholder report.

Fund companies should understand their responsibility to create unique shareholder reports for “each series of a fund complex and for each class of a fund.”

Another relevant change requires the funds to tag information housed within the shareholder report using Inline XBRL. This will greatly benefit retail investors who can use this “machine-readable information” to efficiently “access and evaluate investments.”

Exclusion from the Scope of Rule 30e-3

Rule 30e-3 permits certain registered investment companies to make reports and other materials available online and provide notice of such availability to satisfy shareholder transmission requirements.

In general, shareholder transmission requirements must be satisfied by directly providing shareholders with an annual or semiannual report. The SEC decided to exclude the final rule on tailored shareholder reports from rule 30e-3 to ensure that shareholders “experience the benefits of the new tailored shareholder annual and semiannual reports.” This means that fund companies must send shareholder reports to investors in either paper or digital form.

The Bottom Line for Lawyers and Their Clients

With this new rule now in effect, lawyers should communicate the new regulations to clients in order to remain compliant with SEC regulations. This change puts the burden on fund companies to consolidate and communicate financial metrics in a new way, highlight data in an engaging manner, and create multiple levels of detail for various investors. While this is undoubtedly more work for fund companies, this shift will hopefully increase transparency and strengthen investor relations.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.