The Staff of the SEC’s Division of Investment Management issued a series of FAQs related to the SEC’s adoption of the October 2022 final rule and form amendments on tailored investment reports that require mutual funds and ETFs to transmit concise and visually engaging annual and semi-annual shareholder reports under the Investment Company Act and promote transparent and balanced presentations of fees and expenses in investment company advertisements. This latest update provides guidance in anticipation of the approaching compliance deadline on July 24, 2024.
The following is an overview of the FAQs:
Appropriate Broad-Based Securities Market Index
The final rules require a fund to show its performance against an “appropriate broad-based securities market index,” which is defined as “the overall applicable domestic or international equity or debt markets, as appropriate.” The adopting release stated that a fund must select an index that “reasonably represents” the applicable market and included some examples. The FAQ provided that:
- An index that pertains to the equity or fixed income market of a group of countries, a group of countries excluding a specific country or countries, or a group of countries with shared characteristics such as emerging markets or developed markets could qualify as an appropriate broad-based securities market index, provided that the index represents the overall applicable international equity or debt market relative to the fund’s investments.
- An index representing the national municipal securities market—as opposed to an index for the national aggregate fixed income securities market—could qualify as a broad-based securities market index for a tax-exempt municipal securities fund, including a fund that invests primarily in the municipal securities of a single state.
Form N-CSR and Website Availability Requirements
Under the final rules, a fund must make its disclosures pursuant to Items 7 through 11 of Form N-CSR publicly available, free of charge, at the website address specified at the beginning of its shareholder report. Alternatively, the fund may post the complete Form N-CSR. The FAQ provided that:
- Information responsive to Items 7-11 may be grouped by series and/or type of materials, and need not be presented individually by share class, so long as it:
- effectively communicates the information;
- clearly distinguishes the materials and/or series; and
- provides a means of easily locating information (i.e., table of contents that includes hyperlinks).
- Posting the required Form N-CSR information online will not be a violation of Rule 502(c) of Regulation D, so long as the fund posts only the information required by the rule and does not use its website to offer or sell securities or in a manner that is deemed to be general solicitation or advertising for offers or sales of its securities.
Binding Individual Shareholder Reports of Multiple Funds
- Where an investor has invested in multiple funds (or in multiple share classes of funds), the individual shareholder reports of each of such funds (or, as applicable, share classes) may be bound, stapled, or stitched together for transmission to the investor because such practice does not raise the same concerns about multiple series shareholder reports that the SEC discussed in the Adopting Release. The Staff notes that a fund should consider including a table of contents to any bound, stapled, or stitched shareholder report for investors’ ease of use.
Electronically Provided Shareholder Reports
- There is more than one approach that would be consistent with the requirements of Instruction 4 to Item 27A(a) of Form N-1A for a fund to deliver its fund and share-class specific shareholder report directly to an investor, including delivering an email, or otherwise electronically transmitting a notification to investors, that (i) includes direct links to the shareholder report(s) of the fund(s) and share class(es) that the investor owns, and (ii) specifies the investor’s fund(s) and share-class(es) and includes a link directing the investor to a website page that includes direct links that are limited to the shareholder report(s) for the fund(s) and share class(es) that the investor owns.
Compliance Date and Inline XBRL Issues
- The funds should include the shareholder report that was actually transmitted to shareholders in the respective Form N-CSR, regardless of whether the Form N-CSR is filed before or after the compliance date (i.e., July 24, 2024).
While these responses only represent the views of the Staff and have no legal force or effect, they provide clarity and guidance on questions regarding certain elements of the rule.
Tailored Shareholder Reports Frequently Asked Questions (Jan. 26, 2024), available at: https://www.sec.gov/investment/tailored-shareholder-reports-faqs.
Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, SEC. Rel. Nos. 33-11125; 34-96158 (Oct. 26, 2022), available at: https://www.sec.gov/files/rules/final/2022/33-11125.pdf.