SEC Proposes Overhaul of Retail Fund Disclosure Framework

The proposed disclosure framework would feature ‘concise and visually engaging shareholder reports,’ according to the federal securities market regulator.

The U.S. Securities and Exchange Commission (SEC) voted Wednesday morning to propose significant modifications to its mutual fund and exchange-traded fund (ETF) disclosure framework.

The text of the proposal will soon be published in the Federal Register, and the public will have 60 days after the publication to offer feedback and formal comments.

According to a fact sheet published by the SEC, the proposed disclosure framework would feature “concise and visually engaging shareholder reports that would highlight information that is particularly important for retail investors to assess and monitor their fund investments.”

Other aspects of the proposal would require streamlined reports to shareholders that would include, among other things, fund expenses, performance, illustrations of holdings and material fund changes. The proposal also significantly revises the content of these disclosure reports “to better align disclosures with developments in the markets and investor expectations.”

To that end, the proposal encourages funds to use graphic or text features—such as tables, bullet lists and Q&A formats—to promote effective communication. The SEC proposal, according to Chairman Jay Clayton, promotes “a layered and comprehensive disclosure framework” by continuing to make available online more detailed information that is currently required in shareholder reports.

Additionally, the proposed framework would provide an alternative approach to keeping investors informed about their ongoing fund investments. Instead of receiving both prospectus updates and shareholder reports, existing investors would receive only the streamlined shareholder report. Clayton says this would provide investors with timely and concise information to effectively assess and monitor their fund investments.

The proposal would further amend prospectus disclosure requirements to provide greater clarity and more consistent information regarding fees, expenses and principal risks, according to the fact sheet. To improve fee- and expense-related information more broadly, the proposal would amend investment company advertising rules “to promote more transparent and balanced statements about investment costs.”

The proposed advertising rule amendments would affect all registered investment companies and business development companies, the SEC fact sheet says.

The fact sheet states that the forthcoming proposal would, in part, replace the existing fee table in the summary section of a statutory prospectus with a simplified fee summary. It would also move the existing fee table to the statutory prospectus, for use by investors seeking additional details about fund fees, and it would replace certain terms in the current fee table with terms that may be clearer to investors.

The amendments also would refine current requirements for funds to disclose the “acquired fund fees and expenses” associated with investments in other funds. Specifically, the proposal would permit open-end funds that make limited investments in other funds to disclose the fees and expenses associated with those investments—i.e., “acquired fund fees and expenses”—in a footnote to the fee table and fee summary, rather than as a fee table line item.

Other changes are detailed in more depth in the fact sheet.