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On August 5, the Securities and Exchange Commission (SEC) proposed numerous changes that would require mutual funds and exchange-traded funds (ETFs) to tailor disclosures provided to investors. The disclosures would highlight key information investors need to assess and monitor their fund investments and make informed investment decisions. The proposal would:

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The chart below provides an overview of the proposed changes to annual shareholder reports. In addition, the proposed modifications would require a registrant to prepare a separate annual report for each of its series and limit the content a fund may include in its annual report.

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Management’s discussion of fund performance

Add new fund statistics section to the annual report.

Graphical representation of holdings

Add new material fund changes section to the annual report.

Changes in and disagreements with accountants

The entirety of the currently required disclosure would move to Form N-CSR and would need to be available online and delivered (in paper or electronic format) upon request.

Statement regarding the availability of quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record

Include a more general reference to the availability of additional fund information in the annual report.
Add a provision allowing funds to optionally disclose in their annual reports how shareholders may revoke their consent to householding.

Financial statements, including schedule of investments

Move to Form N-CSR. Would need to be available online and delivered (in paper or electronic format) upon request.

Financial highlights

Retain certain data points, but generally move to Form N-CSR. Would need to be available online and delivered (in paper or electronic format) upon request.

Results of any shareholder votes during the period

Remuneration paid to directors, officers and others

Statement regarding the basis for the board’s approval of investment advisory contract

Management information and statement regarding availability of additional information about fund directors

Remove from shareholder reports, but information would remain available in a fund’s SAI, which is available online or delivered upon request.

Rule 30e-3 disclosure

Remove from shareholder reports.

Funds have discretion to provide other information in their shareholder reports (e.g., president’s letter)

Limit annual report disclosures to those that are permitted or required under proposed Item 27A of Form N-1A.

Current Annual Shareholder Report Disclosure

Proposed Amendments

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To reduce the complexity and length of shareholder reports, the proposal would require each registrant to produce a separate shareholder report for each fund. If enacted, shareholders would receive an annual report that only addresses the series or fund in which they are invested. Although the proposal would provide new restrictions, it would not require funds with multiple share classes to produce separate reports for each individual share class. For disclosures that would differ amongst share classes, the amended disclosure would require class-specific information.

Under the proposal, the SEC would modify the information required to be disclosed in shareholder reports. Funds would only be allowed to include the information listed in the new Item 27A of Form N-1A (see below), unless additional information is required to prevent a disclosure from becoming materially misleading or if the disclosure item is inapplicable. Due to the limited number of disclosure requirements, a fund would not be allowed to incorporate by reference any information from a previous source. However, the proposal would not restrict disclosure materials that a fund may transmit with an annual report, which include summary prospectuses, statutory prospectuses, notices of the online availability of proxy materials and other shareholder reports.

The table below outlines the information the proposal would require funds to include in their annual reports. As part of the proposed changes, the SEC released a hypothetical release annual report. As is the case today, the proposed annual report would not be subject to page or word limits.

Cover page or beginning of report

<ul>
<li>Fund/class name(s)</li>
<li>Ticker symbol(s)</li>
<li>Principal U.S. market(s) for ETFs</li>
<li>Statement identifying document as “Annual Shareholder Report”</li>
<li>Legend</li>
</ul>

Content

<ul>
<li>Fund statistics</li>
<li>Management’s discussion of fund performance</li>
<li>Graphical representation of holdings</li>
<li>Material fund changes</li>
<li>Changes in and disagreements with accountants</li>
<li>Statement regarding liquidity risk management program</li>
<li>Availability of additional information</li>
<li>Householding disclosure (optional)</li>
</ul>

The proposal would require a fund to provide a simplified expense presentation that would describe the expenses associated with a hypothetical $10,000 investment in the fund during the precedent reporting period. Each annual shareholder report would be required to include a fee table that would show:

An ETF would include the ending value of the account, based on market value return.

In addition, the proposal would replace the two expense examples currently in the shareholder report with one simplified expense table and the current narrative disclosure prior to the example tables with a specified footnote. A fund would be required to include a footnote to the “Total return before costs paid” column that qualitatively describes, in plain English, other costs included in a fund’s total return, if material to the fund. Furthermore, the fund would be required to briefly explain, in plain English, in a footnote to the “Costs paid as a percentage of your investment” column that the expense information does not reflect shareholder transaction costs associated with purchasing or selling fund shares. Also, the instructions for calculating cost paid would require the fund to multiply the figure in the “Cost paid as a percentage of your investment” column by the average account value over the period, based on an investment of $10,000 at the beginning of the period.

Under the proposal, an ETF would be required to disclose two versions of the ending account value: one based on the ETF’s net asset value return and the other based on its market value return. The ETF would have to present expense information both as a dollar amount and as a percentage of a shareholder’s investment in the fund (which would be an addition to the current presentation).

Management’s Discussion of Fund Performance

The proposal largely maintains the current requirements for management’s discussion of fund performance (MDFP). The SEC did propose amendments to the MDFP requirements to make the disclosure more concise and to consider that shareholders may no longer receive fund prospectuses. The requirements include:

Performance Line Graph and Use of Market Indexes in Performance Disclosure

The SEC proposed to retain the requirements for the performance line graph currently included in annual reports, with certain amendments designed to improve the current presentation, including:

The proposal retains the current requirement that an annual report include a table presenting average annual total returns for the past one-, five- and 10-year periods, although with amendments to require three additional pieces of information:

The SEC would simplify the current requirement that a fund discuss the effect of any policy or practice of maintaining a specified level of distribution to shareholders on the fund’s investment strategies and per share net asset value during the last fiscal year, as well as the extent to which the fund’s distribution policy resulted in distributions of capital. The amendment would simply require a fund that has a stable distribution policy and that was unable to maintain the specified level during the past fiscal year to disclose this shortfall.

Under the proposal, a fund would be required to disclose certain statistics in its annual report, including its:

The proposal includes two changes to the current requirements relating to the graphical representation of holdings. Currently, a fund has the flexibility to base the tabular or graphic presentation of holdings on its net asset value or total investments. The proposed amendments would:

The SEC proposed a new section in the annual report that would describe material changes to a fund. Specifically, a fund would have to describe briefly any material change in an enumerated list of items (as well as any other material change that the fund chooses to disclose) that has occurred since the beginning of the reporting period or that the fund plans to make in connection with its annual prospectus update. The fund would be required to include disclosure in its annual report that briefly describes a material change with respect to any of the following items:

Changes in and Disagreements with Accountants

The SEC proposed to require a fund to include in its annual report a concise discussion of certain disagreements with accountants. A fund currently is required to disclose certain information concerning changes in and disagreements with its accountant if the accountant has resigned or was dismissed. Under the proposal, the current disclosure would be moved to Form N-CSR and replaced in the annual report with a high-level summary of information the fund would report on Form N-CSR. Specifically, when a fund has a material disagreement with an accountant who has resigned or been dismissed, the fund would have to include in its annual report a statement of whether the former accountant resigned, declined to stand for reelection or was dismissed and the date thereof and a brief, plain English description of any disagreement(s) with the former accountant during the fund’s two most recent fiscal years and any subsequent interim period that the fund discloses on Form N-CSR.

Under the proposal, a fund would be required to include in its annual report a brief, plain English statement informing investors that additional information is available on the fund’s website. The statement would have to include plain English references to, as applicable, the fund’s prospectus, financial information, holdings and proxy voting information. In addition, if the shareholder report appears on the fund’s website or otherwise is provided electronically, the fund must provide a means of immediately accessing this additional information (such as a hyperlink or QR code).

The SEC proposed to retain the provision that permits funds to explain how to revoke consent to the householding of the annual report.

The SEC also proposed changes to the format and presentation of annual reports:

The SEC proposed instructions designed to clarify requirements for electronic annual reports and promote the use of interactive, user-friendly design features that may be tailored to meet individual investors’ needs and improve investor engagement. In addition to specifying that annual reports may be electronic as well as paper-based, the instructions would:

Under the proposal, the design and content specifications for semi-annual reports are similar to those proposed for annual reports. The table below summarizes the proposed content that a fund would include in its semi-annual report. The proposal would limit the scope of semi-annual reports in several respects to reduce their overall length and complexity. It would require a fund’s registrant to prepare a separate semi-annual report for each series of the fund and generally limit the content the fund may include to the information in Item 27A of Form N-1A.

<ul>
<li>Fund/class name(s)</li>
<li>Ticker symbol(s)</li>
<li>Principal U.S. market(s) for ETFs</li>
<li>Statement identifying as “semi-annual shareholder report”</li>
<li>Legend</li>
</ul>

<ul>
<li>Expense example</li>
<li>Management’s discussion of fund performance (optional)</li>
<li>Fund statistics</li>
<li>Graphical representation of holdings</li>
<li>Material fund changes (optional)</li>
<li>Changes in and disagreements with accountants</li>
<li>Statement regarding liquidity risk management program</li>
<li>Availability of additional information</li>
</ul>

The proposal specifies that a semi-annual report would be generally subject to the same format and presentation requirements as an annual report.

Under the proposal, instructions for electronic annual reports, including those that promote the use of interactive, user-friendly electronic design features, would also apply to semi-annual reports. The proposed instructions would provide ordering and presentation requirements for semi-annual reports that appear on a website or are otherwise provided electronically, provide additional flexibility for funds to add additional tools and features to semi-annual reports that appear on a website or are otherwise provided electronically, and require a semi-annual report to include a link or some other means of immediately accessing information referenced in the report that is available online.

The SEC proposed several amendments to the disclosures that relate to fees and risks.

The proposal includes revisions to simplify the presentation of fees and expenses in the prospectus and help increase investor comprehension. Under the proposal, the SEC is proposing to:

A fund would be required to adopt a simplified fee summary that would streamline the presentation of fees and focus on the total costs or “bottom line” of an investment in the fund. It would:

In addition, the SEC proposed to simplify the example in the fee summary by modifying the current narrative that precedes the example slightly to enhance clarity and brevity. The proposal also decreases the number of time periods the expense example must show from one, three, five and 10 years to just one and 10 years (or one and three years in the case of a new fund).

The SEC is also proposing changes in some terminology funds would use to describe fees in the prospectus to enhance the presentation of fees and investors’ understanding of them. The changes in terminology used in the fee table would flow through to the fee summary, as applicable. The chart below shows captions and terms that the current fee table references, along with their replacements.

Shareholder fees (Item 3)

Transaction fees (Items 3 and 8A)

Annual fund operating expenses (Item 3)

Ongoing annual fees (Items 3 and 8A)

Maximum sales charge (load) imposed on purchases (Item 3)

Purchase charge (Items 3 and 8A)

Maximum deferred sales charge (load) (Item 3)

Exit charge (Items 3 and 8A)

Redemption fee (Item 3)

Early exit fee (Items 3 and 8A)

Total annual fund operating expenses (Item 3)

Distribution [and/or service] (12b-1) fees (Item 3)

Selling fees (Item 8A)

Fee waiver [and/or expense reimbursement] (Item 3)

Temporary discount (Items 3 and 8A)

Total annual fund operating expenses after fee waiver [and/or expense reimbursement] (Item 3)

[Total] ongoing annual fees with temporary discount (Items 3 and 8A)

Current Caption or Term and Form N-1A Location Proposed Caption

Proposed Caption or Term and Form N-1A Location Proposed Caption

The proposal would modify the current prospectus fee table requirements by refining the scope of funds that must disclose AFFE as a component of bottom-line annual fund operating expenses. Specifically, if adopted, the amendments would permit a fund that invests 10% or less of its total assets in acquired funds to omit the AFFE line item in the fee table and instead disclose the amount of the fund’s AFFE in a footnote to the fee table and fee summary. However, a fund that invests more than 10% of its total assets in acquired funds would still be required to disclose AFFE as a line item in its prospectus fee table and would continue to reflect this amount in its bottom-line ongoing annual fees. Under the proposal, the 10% threshold is based on an average of month-end holdings, rather than holdings as of the end of the fiscal year or another single date, to smooth fluctuations, such as those related to market events and investor flows. Additionally, the proposal would make two minor adjustments to the AFFE disclosure. First, the SEC proposed to correct how a fund that has been in operation for less than a full year calculates AFFE. Rather than calculating it using the number of days in the fund’s fiscal year, the SEC would require the fund to use the number of days since the date the fund made its first investment. Second, the SEC proposed to amend an optional footnote instruction that permits a fund to explain that the total ongoing annual fees in the fee table do not correlate to the ratio of expenses to average net assets provided in the fund’s financial highlights.

Under the proposal, the SEC would include portfolio turnover disclosure in both the fee summary and the full fee table and modify the narrative that accompanies the portfolio turnover rate to enhance clarity and provide more concise disclosure. The following chart shows the current disclosure along with its replacement.

Portfolio Turnover 
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was ___% of the average value of its portfolio. (Item 3)

Portfolio Turnover 
Portfolio turnover measures how often a fund buys and sells its investments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes. The Fund’s annual portfolio turnover rate is ___%. (Items 3 and 8A)

Current Disclosure and Form N-1A Location

Proposed Disclosure and Form N-1A Location

The SEC proposed to revise the current provisions and instructions in Form N-1A requiring that a fund disclose in its prospectus the principal risks of investing in the fund. Specifically, the proposed changes would:

Prospectuses and SAIs Transmitted Under Rule 30e-1(d)

Under the proposal, the SEC would rescind Rule 30e-1(d), which permits a fund to transmit a prospectus and statement of additional information in lieu of an annual report if it requires all information that would otherwise be required to be contained in the shareholder report.

Andrew J. Davalla 614.469.3353 <a href="mailto:Andrew.Davalla@ThompsonHine.com">Andrew.Davalla@ThompsonHine.com</a>

Brian Doyle-Wenger 614.469.3294 <a href="mailto:Brian.Doyle-Wenger@ThompsonHine.com">Brian.Doyle-Wenger@ThompsonHine.com</a>

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SEC Proposes Mutual Fund and ETF Disclosure Amendments

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