Shearman And Sterling

Investment Funds, Hong Kong Stock Market Charts

Jun 20, 2018

SEC Rule Lets Funds Adopt ‘Notice and Access’ Rule for Shareholder Reports and Solicits Input on Broader Overview of Fund Disclosures

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On June 5, 2018, the Securities and Exchange Commission adopted new rule 30e-3, which allows registered investment companies to satisfy their obligations to deliver shareholder reports beginning in 2021, by making them available on their website. Currently, funds must send paper reports to shareholders by mail, or electronic copies by email to shareholders who request them. The rule features a delayed effective date, extensive requirements for notice to investors and provisions to include some substantive information on paper notices. These features reflect compromises that were apparently necessary to win Commission support for the new rule.

Funds may rely on the rule beginning no earlier than January 1, 2021, and are generally required to issue two years of notice of shareholders beginning on January 1, 2019 before relying on the rule. Newly offered funds on or after January 1, 2021 may rely on the rule immediately. Investors preferring to receive the reports in paper may choose that option at any time free of charge.

To rely on the rule, the funds must post the reports on a website, publicly available, free of charge, and send investors a paper notice each time a new report is available. The notice may provide additional substantive information from the report. We note that many fund complexes already make their shareholder reports, and other disclosure documents, available to the public on their websites free of charge, and that many shareholders already elect to receive fund documents electronically.

In two related releases, the SEC:

  • Invited investors to provide their input on ideas for enhancing fund disclosures to improve the investor experience and help investors make more informed investment decisions; and
  • Asked for feedback on the processing fees charged by intermediaries for distributing fund shareholder reports and other materials to investors. 

These three releases are described as part of a long-term project led by the Division of Investment Management to “modernize” the fund disclosure process.

New Rule 30e-3

The January 1, 2021 delayed effective date is intended to provide sufficient time to inform investors of the pending change and for investors to exercise their option to continue to receive hard copies of the reports.

Generally, rule 30e-3 has several conditions:

  • The report must be publicly accessible, free of charge, at a website specified in the notice
  • Quarterly holdings information for all four fiscal quarters of the prior fiscal year must be publicly accessible on the website (funds are not currently required to send first- and third-quarter portfolio holdings information to investors or make that information accessible on their websites)
  • Format and location must be convenient for both reading online and printing on paper, and persons accessing the materials must be able to permanently retain the materials free of charge (i.e., investors must be able to save the report onto their own computers)
  • The notice of availability must identify the website address and instructions for requesting a paper copy of the report, and may also include instructions for requesting electronic delivery and providing additional information from the report (largely mirroring the Commission’s rules mandating the posting of proxy materials online). The notice must be sent to investors within 70 days after the close of the period covered by the related report.

  • Note that notices that do not contain content from the report (as is permitted by the rule) are not required to be filed with the SEC. The SEC has instead chosen to rely on the SEC’s examination program to assess notices’ compliance with the rule.    

  • Investors may elect to receive paper reports by calling a toll-free telephone number or otherwise contacting the fund or intermediary, and the election will apply to other funds held in the same account with the fund complex or intermediary

Request for Comment on Enhancing Fund Disclosure

In seeking public input on the investor experience, the SEC is particularly interested in hearing from individual investors regarding the design, delivery and content of fund disclosures, not only shareholder reports but prospectuses, advertising and other disclosures as well. Feedback is also being sought from academics, literary and design experts, market observers, advisers and boards of directors. The SEC seeks to identify investor preferences for delivery and to improve the investor experience. 

Among other things, the SEC asks whether investors prefer screen-based experiences over traditional paper, and whether they favor more interactive communications or more personalized investor communications. The SEC is interested in investor reactions to the summary prospectus, introduced in 2009. The summary prospectus may have been the precursor of a layered approach to investor notices, which rule 30e-3 now expands. The SEC also acknowledges concern that fund directors and other industry participants may be wary of innovative approaches to disclosure in light of the fact that prospectuses serve, in part, as “legal disclosure documents.” Innovation therefore may give rise to claims for inaccurate or incomplete disclosure and potentially greater liability for issuers and fund directors.

To facilitate feedback, the SEC made a short “Feedback Flier” available, which asks key questions and is available here.

Request for Comment on Processing Fees Charged by Intermediaries

In seeking to further understand the effect of certain fees that investors are charged by intermediaries for disclosure materials, the SEC is also soliciting comments on a number of topics, including:

  • Assessment of processing fees;
  • Transparency of processing fees;
  • Remittances received by intermediaries for delivery of fund documents;
  • Whether structure and level of fees should be set by another entity; and
  • Appropriateness of fees where intermediaries are paid separate shareholder servicing fees from fund assets.

Our Take

We expect many, if not all, fund groups will elect to comply with the rule 30e-3 “notice and access” requirements with the expectation that fund expenses will decrease as a result. We await with interest seeing how and to what extent there is regulatory appetite to reimagine how funds communicate disclosures to investors, and whether investors and funds will embrace those innovations or prefer to rely on traditional prospectuses and shareholder reports.

Authors and Contributors

Paul Schreiber

Of Counsel

Investment Funds

+1 212 848 8920

+1 212 848 8920

New York

Thomas Majewski

Counsel

Investment Funds

+1 212 848 7182

+1 212 848 7182

New York