Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, 70716-70896 [2020-17449]

Download as PDF 70716 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 230, 239, 240, 270, and 274 [Release Nos. 33–10814; 34–89478; IC– 33963; File No. S7–09–20] RIN 3235–AM52 Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is proposing rule and form amendments that would modernize the disclosure framework for open-end management investment companies. The disclosure framework would feature concise and visually engaging shareholder reports that would highlight key information that is particularly important for retail investors to assess and monitor their fund investments. Certain information that may be less relevant to retail investors—and of more interest to financial professionals and investors who desire more in-depth information— would no longer appear in funds’ shareholder reports but would be available online, delivered free of charge upon request, and filed on a semiannual basis on Form N–CSR. Funds’ shareholder reports would serve as the central source of fund disclosure for existing shareholders. Thus, instead of delivering prospectus updates to existing shareholders each year, openend funds would have an alternative way to keep shareholders informed. This framework would rely on the SUMMARY: shareholder report (which would include a summary of material fund changes), along with timely notifications to shareholders about material fund changes as they occur and continued availability of the fund’s prospectus. The Commission is also proposing amendments to open-end fund prospectus disclosure requirements to provide greater clarity and more consistent information about fees, expenses, and principal risks. Finally, the Commission is proposing amendments to the advertising rules for registered investment companies and business development companies to promote more transparent and balanced statements about investment costs. DATES: Comments should be received by January 4, 2021. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/submitcomments.htm); or • Send an email to rule-comments@ sec.gov. Please include File No. S7–09– 20 on the subject line. Paper Comments • Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–09–20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s website (https://www.sec.gov/rules/ proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information you wish to make available publicly. Persons wishing to provide comments regarding the proposal may wish to submit our Investor Feedback Flier or Smaller Fund Feedback Flier, available at Appendices B and C, respectively. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Daniel K. Chang, Mykaila DeLesDernier, Pamela K. Ellis, Angela Mokodean, Senior Counsels; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551–6792, Investment Company Regulation Office; Daniel Rooney, Assistant Chief Accountant; Keith Carpenter or Michael Kosoff, Senior Special Counsels, at (202) 551–6921, Disclosure Review and Accounting Office; Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. The Commission is proposing new 17 CFR 230.498B [new rule 498B] under the Securities Act of 1933 (‘‘Securities Act’’).1 We also are proposing amendments to the following rules and forms: SUPPLEMENTARY INFORMATION: CFR citation [17 CFR] khammond on DSKJM1Z7X2PROD with PROPOSALS2 Commission reference Organization; Conduct and Ethics; And Information and Requests .................................................................. Section 800 ................................................................................................................................................. Securities Act: Rule 156 ...................................................................................................................................................... Rule 433 ...................................................................................................................................................... Rule 482 ...................................................................................................................................................... Rule 498 ...................................................................................................................................................... Form N–14 .................................................................................................................................................. Securities Act and Investment Company Act of 1940 (‘‘Investment Company Act’’): 2 Form N-1A .................................................................................................................................................. Securities Exchange Act of 1934 (‘‘Exchange Act’’): 3 Schedule 14A .............................................................................................................................................. Exchange Act and Investment Company Act: Form N–CSR .............................................................................................................................................. 1 15 U.S.C. 77a et seq. VerDate Sep<11>2014 23:41 Nov 04, 2020 2 15 Jkt 253001 PO 00000 U.S.C. 80a et seq. Frm 00002 Fmt 4701 3 15 Sfmt 4702 E:\FR\FM\05NOP2.SGM §§ 200.1 through 200.800. § 200.800. § 230.156. § 230.433. § 230.482. § 230.498. § 239.23. §§ 239.15A and 274.11A. § 240.14a–101. §§ 249.331 and 274.128. U.S.C. 78a et seq. 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules CFR citation [17 CFR] Commission reference Investment Company Act: Rule 30e–1 .................................................................................................................................................. Rule 30e–3 .................................................................................................................................................. Rule 31a–2 .................................................................................................................................................. Rule 34b–1 .................................................................................................................................................. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Table of Contents I. Introduction and Background A. Current Approach To Disclosure for Fund Shareholders B. Information About Investor Preferences 1. Fund Shareholder Preferences Regarding Ongoing Disclosures 2. Fee and Risk Disclosure Preferences 3. Disclosure Delivery Preferences C. Developments Affecting Fund Disclosure and Marketing Practices II. Discussion A. Overview of Proposed New Disclosure Framework 1. Executive Summary 2. Considerations and Goals B. Annual Shareholder Report 1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments 2. Contents of the Proposed Annual Report 3. Format and Presentation of Annual Report 4. Electronic Annual Reports C. Semi-Annual Shareholder Report 1. Scope and Contents of the Proposed Semi-Annual Report 2. Format and Presentation of Semi-Annual Report 3. Electronic Semi-Annual Reports D. New Form N–CSR and website Availability Requirements 1. Proposed Form N–CSR Filing Requirements 2. Proposed website Availability Requirements 3. Proposed Delivery Upon Request Requirements E. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N–CSR F. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework 1. Overview 2. Scope of Proposed New Rule 498B 3. Conditions To Rely Upon Proposed New Rule 498B 4. Other Requirements G. Amendments Narrowing Scope of Rule 30e–3 H. Proposed Amendments To Fund Prospectus Disclosure Requirements 1. Improved Prospectus Fee Disclosures 2. Improved Prospectus Risk Disclosures 3. Prospectuses and SAIs Transmitted Under Rule 30e–1(d) I. Investment Company Advertising Rule Amendments J. Technical and Conforming Amendments K. Compliance Date III. Economic Analysis A. Introduction B. Economic Baseline and Affected Parties 1. Descriptive Industry Statistics 2. Fund Prospectuses VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 3. Fund Shareholder Reports 4. Delivery of Fund Prospectuses and Shareholder Reports 5. Investor Use of Fund Disclosure 6. Fund Advertisements C. Costs and Benefits 1. Broad Economic Considerations 2. Modified Disclosure Framework for Existing Fund Shareholders 3. Prospectus Disclosure Amendments 4. Advertising Rule Amendments D. Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives 1. More or Less Frequent Disclosure 2. More or Less Information in Shareholder Reports 3. Retaining Rule 30e–3 Flexibility for Open-End Funds Registered on Form N– 1A 4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds 5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a Different Manner 6. Amending Shareholder Report Requirements for Variable Insurance Contracts or Registered Closed-End Funds 7. Requiring Funds To Comply With Proposed Rule 498B 8. Requiring Form N–CSR to be Tagged in Inline XBRL Format 9. Modifying the AFFE Amendment F. Request for Comment IV. Paperwork Reduction Act Analysis A. Introduction B. Form N–1A C. Proposed New Shareholder Report Requirements Under Rule 30e–1 D. Form N–CSR E. Proposed Rule 498B F. Rule 482 G. Rule 34b–1 H. Rule 433 I. Rule 30e–3 J. Rule 498 K. Request for Comment V. Initial Regulatory Flexibility Act Analysis A. Reasons for and Objectives of the Proposed Actions B. Legal Basis C. Small Entities Subject to the Rule D. Projected Reporting, Recordkeeping, and Other Compliance Requirements 1. Annual and Semi-Annual Reports 2. New Form N–CSR and website Availability Requirements 3. Proposed Rule 498B, and Treatment of Annual Prospectus Updates under Proposed Disclosure Framework 4. Amendments to Scope of Rule 30e–3 5. Proposed Amendments to Fund Prospectus Disclosure Requirements 6. Investment Company Advertising Rules PO 00000 Frm 00003 Fmt 4701 70717 Sfmt 4702 § 270.30e–1. § 270.30e–3. § 270.31a–2. § 270.34b–1. E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives G. General Request for Comment VI. Consideration of Impact on the Economy VII. Statutory Authority I. Introduction and Background The Commission is proposing to tailor the disclosures that mutual funds and exchange-traded funds (‘‘ETFs’’ and, collectively with mutual funds, ‘‘funds’’) must provide to investors to highlight key information investors need to assess and monitor their fund investments and make informed investment decisions.4 Currently, most mutual funds and ETFs rely on a layered disclosure framework with respect to the prospectus information they provide to fund investors in order to tailor this disclosure to investors’ informational needs.5 The vast majority of funds provide: (1) A summary prospectus to investors in connection with their initial investment decision; and (2) more-detailed information that may be of interest to some investors, which is available online in the form of the ‘‘statutory prospectus’’ and Statement of Additional Information (‘‘SAI’’).6 However, this approach to 4 For purposes of this release, the term ‘‘fund’’ generally refers to an open-end management investment company registered on Form N–1A or a series thereof, unless otherwise specified. Mutual funds and most ETFs are open-end management investment companies registered on Form N–1A. An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer. See sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a–4 and 80a–5(a)(1)]. 5 Throughout this release, we generally use the term ‘‘investor’’ to refer to both prospective investors in a fund and fund shareholders (i.e., persons who hold an investment in securities issued by a fund). We generally use the term ‘‘shareholder’’ to refer specifically to those who hold an investment in securities issued by a fund. 6 See section 5(b)(2) of the Securities Act [15 U.S.C. 77e(b)(2)] (generally requiring that a fund or financial intermediary deliver a prospectus to an investor in connection with his or her purchase of the fund’s securities). Funds generally amend their prospectuses annually to reflect changes to the disclosed information. A fund’s prospectus generally must include information contained in the fund’s registration statement. See section 10(a) of the Securities Act [15 U.S.C. 77j(a)]. For purposes of this release, a prospectus meeting the requirements of a section E:\FR\FM\05NOP2.SGM Continued 05NOP2 70718 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 layered, tailored disclosure does not extend to other disclosure funds provide to their shareholders. After making their initial decision to invest in a fund, fund shareholders typically receive an updated prospectus annually, as well as annual and semi-annual shareholder reports (or ‘‘annual reports’’ and ‘‘semiannual reports’’ respectively, and collectively ‘‘shareholder reports’’).7 These shareholder reports provide detailed information about a fund’s operations and activities during the last full- or half-year period and can be quite lengthy. For example, it is not unusual for annual reports to exceed 100 pages in length. In June 2018, the Commission issued a request for comment seeking feedback on retail investors’ experience with fund disclosure and on ways to improve fund disclosure.8 We have considered feedback the Commission received in response to this request for comment, which generally showed that retail investors prefer concise, layered disclosure and feel overwhelmed by the volume of fund information they currently receive. We have also considered prior investor testing and surveys, past fund disclosure reform initiatives, and developments affecting fund disclosure practices.9 After considering this information, we are proposing a layered disclosure framework for fund shareholders that would highlight key information for assessing and monitoring a fund 10(a) prospectus is referred to as a ‘‘statutory prospectus.’’ Form N–1A requires a fund to disclose the information that Items 2 through 8 of Form N– 1A require in numerical order at the front of the prospectus. See General Instruction C.3.a to Form N–1A. For purposes of this release, we refer to this front section of the statutory prospectus as the ‘‘summary section of the statutory prospectus.’’ A fund may use a summary prospectus (which includes the information required or permitted by Items 2 through 8 of Form N–1A) to satisfy prospectus delivery obligations under certain conditions (e.g., the statutory prospectus is posted online). See rule 498 under the Securities Act [17 CFR 230.498]. For purposes of this release, a summary prospectus that a fund uses to satisfy its prospectus delivery obligations, as rule 498 permits, is referred to as a ‘‘summary prospectus.’’ 7 See section 30(e) of the Investment Company Act [15 U.S.C. 80a–29(e)]; rule 30e–1 under the Investment Company Act [17 CFR 270.30e–1]. Shareholders in a fund typically receive an annual update of the fund’s prospectus to satisfy prospectus delivery requirements for any additional shares of the fund the shareholder may purchase. See infra discussion accompanying and following footnote 11. In addition to the annual prospectus update, a shareholder also may receive prospectus supplements, or ‘‘stickers,’’ during the year if material or other changes occur to the fund. See infra footnote 13 and accompanying text. 8 See Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11, 2018)] (‘‘Fund Investor Experience RFC’’). 9 See, e.g., infra Sections I.B and I.C. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 investment and informing investment decisions (e.g., whether to buy additional shares, continue to hold, or sell a fund investment), with additional information available online and upon request. The proposal would implement this new framework principally by amending the requirements for funds’ annual and semi-annual reports to highlight information that we believe is particularly important for retail shareholders to assess and monitor their ongoing fund investments. These tailored shareholder reports would serve as the primary fund disclosure that existing shareholders receive each year, in addition to notices of certain material changes if they occur during the year. The proposal is designed to alleviate concerns that fund retail shareholders currently may receive disclosure materials that are not well-suited to their needs, which may contribute to investor confusion or indifference. Current disclosures, for example, may include information that is less useful for most retail shareholders to assess and monitor their fund investments, either because the information is primarily designed to inform an initial purchase decision, or because the information is of interest to only some investors (for example, those investors who want detailed fund information), as well as financial professionals and market analysts. Furthermore, current fund disclosures in some cases are delivered close in time to one another and include similar sets of information that may appear redundant or inconsistent to shareholders. Under the proposal, the amounts and types of available fund information would remain largely unchanged. However, information that is of interest only to some shareholders, or information that we believe generally is less useful for purposes of assessing and monitoring an ongoing investment, would be available online and delivered upon request to fund shareholders who want that additional information. In addition to layering disclosure for existing fund shareholders, we are proposing certain amendments to the way funds present their fees and expenses and principal risks in prospectuses. Many retail investors responding to the Fund Investor Experience RFC stated that current fee and expense and principal risk disclosure is difficult to understand and use. The proposed amendments are designed to provide investors with simpler, easier-to-understand information about a fund’s fees and expenses and principal risks, including a summary presentation of bottom-line fee figures that uses plain language PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 descriptions and more concise principal risk disclosure that generally orders risks by importance. Consistent with the current layered approach to prospectus disclosure, additional information about a fund’s fee and expenses and risks would remain available for interested investors. To improve the clarity of fee and expense information that is available to investors more generally, we also propose to amend the Commission’s investment company advertising rules. The proposed amendments would require that a registered investment company or business development company (‘‘BDC’’) advertisement discussing fees and expenses include certain standardized figures and provide reasonably current information. In addition, we are proposing amendments to address potentially misleading statements about fees and expenses in these investment company advertisements. A. Current Approach To Disclosure for Fund Shareholders Today, a fund investor receives a prospectus in connection with his or her initial purchase of fund shares. A fund’s prospectus serves as the principal selling document for potential investors to help inform investment decisions and facilitate fund comparisons. Fund prospectuses provide important information that an investor should consider when making an investment, including information about a fund’s principal investment strategies, fees and expenses, principal risks, and performance.10 Under the Federal securities laws, a fund (or a financial intermediary) must deliver an updated copy of the fund’s summary or statutory prospectus to an existing fund shareholder if the shareholder purchases additional shares of the fund.11 We understand that, to satisfy 10 See, e.g., Enhanced Disclosure and New Prospectus Delivery Option for Registered OpenEnd Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)] (‘‘2009 Summary Prospectus Adopting Release’’). The summary prospectus that the Commission adopted took into account investors’ preferences as reflected in focus group interviews and a telephone survey. See 2009 Summary Prospectus Adopting Release at n.32 and accompanying text. 11 Section 10(a)(3) of the Securities Act, and section 24(e) and 17 CFR 270.8b–16 [rule 8b–16 under the Investment Company Act], generally require a fund to update its registration statement (which includes its prospectus) annually. The effect of section 10(a)(3) is to require funds to update their prospectuses annually to reflect current fee, performance, and other financial information (the ‘‘annual prospectus update’’). Section 5(b)(2) of the Securities Act makes it unlawful to deliver a security for purposes of sale or for delivery after sale ‘‘unless accompanied or E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 applicable prospectus delivery requirements, most funds send an updated summary or statutory prospectus annually to all shareholders to avoid the need to track each shareholder’s additional purchase activity throughout the year. Other funds may track this activity and send a summary or statutory prospectus only to those shareholders who have purchased fund shares during the relevant period. The vast majority of funds use summary prospectuses.12 Outside of the annual prospectus update, a fund shareholder may also receive updates at other times during the year when a fund supplements, or ‘‘stickers,’’ its prospectus disclosure to reflect material or other changes.13 In addition to annual prospectus updates and interim stickers, fund shareholders also receive shareholder reports on a semi-annual basis.14 These reports include detailed information about a fund’s operations over a given half- or full-year period, including preceded’’ by a statutory prospectus. Because the requirements of section 5(b)(2) are applicable to ‘‘any person,’’ its obligations apply to financial intermediaries through which funds are sold, as well as to the funds themselves. See supra footnote 6 (recognizing that a fund or financial intermediary may deliver a summary prospectus to satisfy this prospectus delivery obligation under certain conditions). 12 We estimate that as of December 31, 2018, approximately 93% of mutual funds and ETFs use summary prospectuses. This estimate is based on data on the number of mutual funds and ETFs that filed a summary prospectus in 2018 in the Commission’s Electronic Data, Gathering, Analysis, and Retrieval system (‘‘EDGAR’’) (10,808) and the Investment Company Institute’s estimated number of mutual funds and ETFs as of December 31, 2018 (11,656). See Investment Company Institute, 2019 Investment Company Fact Book, at 50, available at https://www.ici.org/pdf/2019_factbook.pdf. 13 See generally 17 CFR 230.497 [rule 497 under the Securities Act]; see also section 12(a)(2) of the Securities Act (providing a civil remedy if a prospectus includes an untrue statement of a material fact or omits to state a fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading); 17 CFR 230.408 [rule 408 under the Securities Act] (requiring registrants to include, in addition to the information expressly required to be included in a registration statement, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading). 14 See section 30(e) of the Investment Company Act [15 U.S.C. 80a–29(e)]; rule 30e–1 under the Investment Company Act [17 CFR 270.30e–1]. A fund or an intermediary may transmit the shareholder report to an investor. Most fund investors engage an investment professional and hold their fund investments as beneficial owners through accounts with intermediaries. As a result, intermediaries commonly assume responsibility for distributing fund shareholder reports to beneficial owners. See Optional internet Availability of Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)] (‘‘Rule 30e– 3 Adopting Release’’), at paragraph accompanying n.274. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 information about the following items. Certain of this information, including fund performance information, appears only in annual reports. • The ongoing costs of a $1,000 fund investment for the most recent fiscal half-year, including actual expenses (which a shareholder can use to understand his or her ongoing costs of investing in the fund) and hypothetical expenses (which a shareholder can use to compare different funds’ ongoing costs); • Performance, including information about the fund’s performance over the past 10 years and fund management’s discussion of fund performance for the last fiscal year; • Portfolio holdings, which includes a list of the fund’s investments and graphical representations of the fund’s holdings by certain categories (e.g., type of security, industry sector, geographic region, credit quality, or maturity); 15 • Fund financials, including financial statements and financial highlights, which are audited in annual reports; 16 • A fund’s board of directors and management, including remuneration that the fund paid to these and certain other parties; • Results of any shareholder vote held during the relevant period; • The availability of additional information regarding the fund’s proxy voting record, code of ethics, quarterly portfolio holdings, and board of directors; • Changes in and disagreements with fund accountants; • Any board approval of an investment advisory contract during the relevant period; and • The operation and effectiveness of the fund’s liquidity risk management program.17 Additionally, some funds currently include other information in their shareholder reports that is not required by Commission rules or forms. For example, some funds typically include 15 A fund may include a summary schedule of its investments in securities of unaffiliated issuers, which includes approximately its 50 largest holdings, in the financial statements it provides in the shareholder report, provided it makes the complete list of investments in unaffiliated issuers available online and upon request. Alternatively, a fund must include that complete list of its investments in securities of unaffiliated issuers in its shareholder reports. See Instruction 1 to Item 27(b)(1) of Form N–1A; Instruction to Item 27(c)(1) of Form N–1A; 17 CFR 210.12–12B [rule 12–12B of Regulation S–X]. 16 See Items 27(b)(1) and 27(b)(2) of Form N–1A. The financial statements and financial highlights in a fund’s semi-annual report need not be audited. See Items 27(c)(1) and 27(c)(2) of Form N–1A. 17 See Item 27(b), (c), and (d) of Form N–1A; rule 30e–1(b) under the Investment Company Act [17 CFR 270.30e–1(b)]. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 70719 in their shareholder reports information such as president’s letters, interviews with portfolio managers, market commentary, or specific portfolio statistics that are not required (e.g., top ten largest holdings, summary statistics with respect to debt yields and maturities).18 Based on staff analysis, the average annual report is approximately 134 pages long, and the average semi-annual report is approximately 116 pages long.19 Shareholder reports and prospectuses provide some of the same categories of information, including information about expenses and performance. A fund shareholder typically receives an annual report and an annual prospectus update close in time, commonly within two months of one another.20 We understand that some funds even deliver a shareholder report and the annual prospectus update at the same time. With respect to the delivery mechanism, a fund shareholder currently receives shareholder reports and prospectuses in paper or electronically.21 We understand that 18 See, e.g., Fund Investor Experience RFC, supra footnote 8, at Section II.D.5. 19 We recognize, however, that the length of funds’ shareholder reports can vary substantially. For example, the staff observed annual reports ranging in length from 22 pages to more than 600 pages. These figures are based on a 2020 staff review that included a sample of reports from large, mid-sized, and small funds that were available on fund websites. One apparent reason for the different lengths of these reports is that some reports covered a single fund (or series), while others covered many. For example, most reports that were between 22 and 45 pages long covered a single series. However, the number of series a report covered did not solely explain the differences in length. For reports that were longer than 45 pages, there generally was not a clear and consistent relationship between the number of series a report covered and the report’s length. See also Comment Letter of Investment Company Institute on File No. S7–08–15 (Mar. 14, 2016), at n.49, available at https://www.sec.gov/ comments/s7-08-15/s70815-581.pdf (estimating that, in 2016, the average annual report was 114 pages long). 20 Under rule 30e–1, funds generally must transmit annual reports within 60 days after the close of the fiscal year. See rule 30e–1(c) [17 CFR 270.30e–1(c)]. Under Securities Act section 10(a)(3) and Investment Company Act rule 8b–16(a), funds typically update their prospectuses within 120 days of the end of fiscal year-end, and updated prospectuses are often delivered to existing shareholders soon thereafter. 21 See Use of Electronic Media for Delivery Purposes, Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (providing Commission views on the use of electronic media to deliver information to investors, with a focus on electronic delivery of prospectuses, annual reports, and proxy solicitation materials); Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, Investment Company Act Release No. 21945 (May 9, 1996) [61 FR 24644 (May 15, 1996)]; Use of Electronic Media, Investment Company Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]. E:\FR\FM\05NOP2.SGM 05NOP2 70720 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 shareholders electing electronic delivery of fund disclosure materials typically receive an email that contains a link to where the materials are available online. Additionally, if a fund chooses to rely on rule 30e–3, beginning as early as January 1, 2021, a shareholder who currently receives fund shareholder reports in the mail may begin receiving instead notices that a shareholder report is available at an identified website address.22 Nonetheless, a shareholder may continue to receive the full report in paper if he or she notifies the fund (or relevant financial intermediary) that he or she wishes to receive paper copies of the reports. The costs of delivering prospectuses and shareholder reports, including printing and mailing costs and processing fees, are generally fund expenses borne by shareholders. Beyond prospectuses and shareholder reports, many funds prepare other information for potential or current investors that the securities laws and Commission rules do not require. For example, many funds prepare advertising materials, which can include materials in newspapers, magazines, radio, television, direct mail advertisements, fact sheets, newsletters, and on various web-based platforms. Advertising materials are subject to certain requirements under Commission rules.23 As an example, many funds prepare monthly or quarterly fact sheets that concisely provide certain information about a fund, such as the fund’s performance and strategies, illustrations of the fund’s holdings, and certain fund statistics (e.g., net asset value, expense ratio). Fact sheets are often one or two pages long. Some shareholders or financial professionals may use fact sheets to monitor fund investments because, for example, they include more up-to-date performance information than shareholder reports or prospectuses. B. Information About Investor Preferences Our understanding of investor preferences regarding fund disclosure is informed by many sources, including responses to the Fund Investor Experience RFC, prior investor testing and surveys, and past disclosure reform initiatives. In response to the Fund Investor Experience RFC, the Commission received many comments from individual investors, including through a Feedback Flier on Improving 22 See rule 30e–3 under the Investment Company Act [17 CFR 270.30e–3]; Rule 30e–3 Adopting Release, supra footnote 14. 23 See infra Section II.I (discussing the Commission’s advertising rules and certain proposed changes to these rules). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Fund Disclosure (the ‘‘Feedback Flier’’) that accompanied the release to facilitate retail investor input.24 In addition to the input we received from individual investors, some other commenters on the Fund Investor Experience RFC provided the results of investor surveys they conducted regarding fund disclosure.25 Moreover, the Commission and its staff have been involved with other relevant investor testing and surveys, including investor testing regarding shareholder reports in 2011 and a study on financial literacy in 2012.26 Several past Commission rulemakings have also provided information about investors’ disclosure preferences, including rulemakings regarding summary prospectuses for mutual funds and ETFs, summary prospectuses for variable annuity and variable life insurance contracts, and broker-dealer and investment adviser relationship summaries.27 1. Fund Shareholder Preferences Regarding Ongoing Disclosures Based on available information, as detailed below, we understand that many fund shareholders would prefer to receive a smaller volume of fund 24 The majority of individual investors responding to the Fund Investor Experience RFC used the Feedback Flier to provide their views. See Fund Investor Experience RFC, supra footnote 8, at Appendix B. Unless otherwise indicated, comments cited in this release are the public comments on the Fund Investor Experience RFC, supra footnote 8, which are available at https://www.sec.gov/ comments/s7-12-18/s71218.htm. 25 See, e.g., Comment Letter of Broadridge Financial Solutions, Inc. (Oct. 31, 2018) (‘‘Broadridge Comment Letter I’’); Comment Letter of the Consumer Federation of America (Oct. 31, 2018) (‘‘CFA Comment Letter’’); Comment Letter of Investment Company Institute (Oct. 24, 2018) (‘‘ICI Comment Letter I’’); Comment Letter of Broadridge Financial Solutions, Inc. (Apr. 28, 2020) (‘‘Broadridge Comment Letter II’’). 26 See Investor Testing of Selected Mutual Fund Annual Reports (Feb. 9, 2012) (‘‘2012 Report on Investor Testing of Fund Annual Reports’’), available at https://www.sec.gov/comments/s7-0815/s70815-3.pdf; SEC Staff, Study Regarding Financial Literacy Among Investors (Aug. 2012) (‘‘Financial Literacy Study’’), available at https:// www.investor.gov/publications-research-studies/ sec-research; see also Recommendation of the Investor Advisory Committee on Disclosure Effectiveness (May 21, 2020) (‘‘IAC Disclosure Effectiveness Recommendation’’), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/disclosure-effectiveness.pdf (discussing, among other things, research findings relating to investors’ understanding of fund disclosure). 27 See 2009 Summary Prospectus Adopting Release, supra footnote 10; Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Investment Company Act Release No. 33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)] (‘‘Variable Contract Summary Prospectus Adopting Release’’); Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers Act Release No. 5247 (June 5, 2019) [84 FR 33492 (July 12, 2019)] (‘‘Form CRS Adopting Release’’). PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 disclosures each year. In addition, many shareholders view funds’ current annual and semi-annual reports as overly long and complex. Available evidence suggests that, as a result of the volume and complexities of fund disclosures, many shareholders do not read much, if any, of the ongoing disclosures they receive. We understand that fund shareholders would prefer concise, layered shareholder report disclosure that highlights key information and that uses design features to make the reports easier to understand and use. Investor Preferences for Concise, Layered Disclosure The vast majority of individual investors responding to questions in the Fund Investor Experience RFC about summary disclosure expressed a preference for summary disclosure with additional information available online or upon request, while only a very few stated that they did not prefer concise, summary disclosure.28 Some investors specifically addressed and supported a more concise, summary shareholder report.29 Moreover, several investors expressed concern about the current length of fund disclosure materials.30 Commenters’ overall preference for summary disclosure is generally consistent with other information the Commission has received—through investor testing, surveys, and other information-gathering—that similarly 28 For example, of the 49 individual investors who responded to a question about summary disclosure in the Feedback Flier, 46 investors preferred summary disclosure and three investors did not. See, e.g., Comment Letter of Carol Palmer (June 5, 2018) (‘‘Palmer Comment Letter’’); Comment Letter of Perry Balke (June 5, 2018) (‘‘Balke Comment Letter’’) (‘‘Seems like there should be a disclosure for the ultimate investor and then additional/other disclosures for Advisors/ Institutions to analyze.’’); Comment Letter of Sara Karlidag (June 6, 2018) (‘‘Karlidag Comment Letter’’); Comment Letter of Chip Morton (Dec. 28, 2018) (‘‘Morton Comment Letter’’) (‘‘I like the more detailed reports’’). Investors who responded to the Fund Investor Experience outside of the Feedback Flier also supported more concise, summary disclosure. See, e.g., Comment Letter of Virginia Lamp (Aug. 13, 2018); Comment Letter of Mark Pitts (July 15, 2018). 29 See, e.g., Comment Letter of Ann Watters (Oct. 8, 2018); Comment Letter of Allen Weaver (Oct. 8, 2018) (‘‘Weaver Comment Letter’’); Comment Letter of Steve Henry (Oct. 8, 2018) (‘‘Henry Comment Letter’’). 30 See, e.g., Comment Letter of Carla Rojas (June 9, 2018) (‘‘Rojas Comment Letter’’) (stating that fund disclosure is too long); Comment Letter of Richard Franco (Sept. 24, 2018) (‘‘Franco Comment Letter’’); Comment Letter of Lisa Nevin (June 13, 2018) (‘‘Nevin Comment Letter’’); Comment Letter of Mike Woods (Sept. 2, 2018) (‘‘Woods Comment Letter’’); Comment Letter of David (Aug. 30, 2018) (‘‘David Comment Letter’’) (stating that fund disclosures are too overwhelming to be useful). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules indicates that investors strongly prefer concise, layered disclosure.31 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Investor Views on the Usability and Design of Funds’ Shareholder Reports Available evidence suggests that investors generally view fund shareholder reports as difficult to understand. Several investors responding to the Fund Investor Experience RFC stated that fund disclosure is too complicated.32 For instance, many investors indicated that there is too much technical writing in fund disclosure.33 Investors also expressed a strong preference for the inclusion of more tables, charts, and 31 See, e.g., Broadridge Comment Letter I; ICI Comment Letter I; Broadridge Comment Letter II; 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26 (noting that the concept of a shortened annual report appealed to many focus group participants); see also 2009 Summary Prospectus Adopting Release, supra footnote 10, at Section II (discussing investors’ preferences for summary disclosure with respect to fund prospectuses); Financial Literacy Study, supra footnote 26 (noting that, based on the feedback of commenters and the results of quantitative and qualitative research, ‘‘[w]ith respect to investment product disclosures, investors favor summary documents containing key information about the investment product’’); Understanding Investor Preferences for Mutual Fund Information, Investment Company Institute (2006) (‘‘Investor Preferences Report’’), available at https:// www.ici.org/pdf/rpt_06_inv_prefs_full.pdf; Form CRS Adopting Release, supra footnote 27, at n.36 (discussing similar preferences for concise disclosure with respect to broker-dealer and investment adviser relationship summaries); Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at n.33 (discussing commenters’ support for layered disclosure in the case of variable annuity and variable life insurance contracts); IAC Disclosure Effectiveness Recommendation, supra footnote 26 (discussing, among other things, the use of layered disclosure as an approach to develop more investor-friendly disclosures). 32 See, e.g., Karlidag Comment Letter; Rojas Comment Letter; Comment Letter of Melanie Jallah (June 12, 2018) (‘‘Jallah Comment Letter’’); Nevin Comment Letter; Comment Letter of Roberto Delmonte (June 15, 2018) (‘‘Delmonte Comment Letter’’); Broadridge Comment Letter I (stating that in a quantitative survey, 72% of investors who review mutual fund or ETF disclosure said they do not find the information easy to understand); Comment Letter of Helen and Bob Hague (Aug. 30, 2018) (‘‘Hague Comment Letter’’) (stating that they understand summary prospectus disclosure, but not annual report disclosure); Comment Letter of Michael Dougle (Aug. 30, 2018) (‘‘Dougle Comment Letter’’); David Comment Letter. 33 See, e.g., Comment Letter of Harold Thomas (June 8, 2018) (‘‘Thomas Comment Letter’’); Rojas Comment Letter; Jallah Comment Letter; Comment Letter of Kate Freedman (June 12, 2018) (‘‘Freedman Comment Letter’’); Nevin Comment Letter; Delmonte Comment Letter; Comment Letter of Rich Kirchoff (June 21, 2018) (‘‘Kirchoff Comment Letter’’); Comment Letter of Tom Arnold (June 23, 2018) (‘‘Arnold Comment Letter’’) (stating that there is too much boilerplate in fund disclosures, which are legal documents instead of informative documents); Comment Letter of Mimi Solo (July 16, 2018) (‘‘Solo Comment Letter’’); Woods Comment Letter (stating that fund disclosure is not useful because there is too much boilerplate and legalese). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 graphs in fund disclosure to make information more understandable to the average investor.34 Similarly, the majority of investors participating in certain past quantitative and qualitative investor testing initiatives on the Commission’s behalf expressed the view that funds’ annual reports are written more for advanced investors, financial professionals, or regulators than for an average investor.35 Investor surveys that other market participants have conducted further support the conclusion that investors view funds’ shareholder reports as too lengthy and complicated, and difficult for the average investor to use to effectively find information of interest.36 These surveys have found that, for example, approximately 41% to 72% of surveyed investors find fund shareholder reports difficult to understand.37 34 See, e.g., Comment Letter of Jack Wilhelm (Aug. 30, 2018) (‘‘Wilhelm Comment Letter’’); Comment Letter of Frank W. (Aug. 30, 2018) (‘‘Frank W. Comment Letter’’); Comment Letter of Caryn Stiles (Aug. 30, 2018) (‘‘Stiles Comment Letter’’); Comment Letter of Mrs. Kellie (Aug. 30, 2018); Hague Comment Letter; Comment Letter of J.L. (Aug. 30, 2018) (‘‘J.L. Comment Letter’’); Woods Comment Letter; Comment Letter of Amanda Yukle (Sept. 6, 2018) (‘‘Yukle Comment Letter’’); Comment Letter of Joanna Baker (Sept. 11, 2018) (‘‘Baker Comment Letter’’). However, one investor expressed a preference for text disclosure. See Comment Letter of Mark Freeland (Dec. 2, 2018) (‘‘Freeland Comment Letter’’). See also Financial Literacy Study, supra footnote 26 (explaining that, based on public comments and qualitative and quantitative research, investors prefer that disclosures be written in clear, concise, understandable language, using bullet points, tables, charts, and/or graphs); Investor Preferences Report, supra footnote 31 (indicating that investors prefer graphics and charts describing an investment over a narrative description). 35 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 10, 75, and 80. For example, one focus group participant in the 2012 research described the annual report disclosure they reviewed as ‘‘mind-clogging,’’ while another participant suggested that annual reports ‘‘should be written in fifth grade English.’’ Another participant stated, ‘‘If they’re sending it to us, use a summary and pie charts. (The more sophisticated investors) can go online.’’ 36 See Broadridge Comment Letter I (explaining the findings of qualitative feedback from 45 retail investors regarding a typical mutual fund annual report, including that investors found the document to be too long and overwhelming and preferred disclosures that can be read in a few minutes and that focus on essential information); Mutual Fund Investors’ Views on Shareholder Reports: Reactions to a Summary Shareholder Report Prototype, Investment Company Institute (Oct. 2018) (‘‘ICI Investor Survey’’), available at https://www.ici.org/ pdf/ppr_18_summary_shareholder.pdf; Broadridge Comment Letter II. 37 See Broadridge Comment Letter I (stating that 72% of surveyed investors that review mutual fund or ETF disclosures do not find them easy to understand); ICI Investor Survey, supra footnote 36 (stating that 67% of surveyed mutual fund investors who recalled receiving fund shareholder reports indicated that the reports are difficult to understand); Broadridge Comment Letter II (providing the results of two surveys in which 41% PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 70721 Investors’ Current Use of Fund Disclosures Several investors responding to the Fund Investor Experience RFC stated that they do not review funds’ disclosure materials at all.38 Investor testing and surveys also suggest that many fund shareholders tend to read very little, if any, of funds’ disclosure materials. For example, in one investor survey, 12% of fund shareholders stated that they ‘‘never’’ review mutual fund or ETF disclosure, while an additional 37% said that they review this disclosure ‘‘some of the time.’’39 Another survey found that 63% of mutual fund shareholders who recalled receiving fund shareholder reports read, at most, very little of them.40 Two other surveys found somewhat higher readership levels of shareholder reports, with only 4% and 8% of surveyed shareholders responding that they do not read the reports.41 However, a majority of fund shareholders in one of these surveys also indicated that they spend 15 minutes or less reviewing the reports.42 Survey results relating to readership of shareholder reports also suggest that shareholders may not read some, or all, and 53% of surveyed investors, respectively, found the reports very or somewhat difficult to understand, with older investors and those with lower incomes more likely to find the reports difficult to understand). 38 See, e.g., Delmonte Comment Letter; Comment Letter of Helena Krus (July 29, 2018) (‘‘Krus Comment Letter’’); Comment Letter of Logan Fowler (Aug. 13, 2018) (‘‘Fowler Comment Letter’’); Wilhelm Comment Letter; Comment Letter of Nina Grano (Aug. 30, 2018) (‘‘Grano Comment Letter’’); Comment Letter of Jack Olstrom (Aug. 30, 2018) (‘‘Olstrom Comment Letter’’); Dougle Comment Letter; Comment Letter of Frank J. (Aug. 30, 2018); J.L. Comment Letter; Franco Comment Letter; Comment Letter of Irwin Joseph (Nov. 19, 2018) (‘‘Joseph Comment Letter’’). Some of these commenters stated that they do not review fund disclosure materials because they are too long or complex, or generally are not well suited to investors’ needs. See, e.g., Fowler Comment Letter; Franco Comment Letter; Grano Comment Letter. 39 See Broadridge Comment Letter I. 40 See ICI Investor Survey, supra footnote 36; see also 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 61, 69 (stating that, of participants in the qualitative component of this testing, 52% read a few key sections of fund annual reports, 14% scan the table of contents and/ or the first few pages, and 25% file it or discard it unread; of online survey respondents, 72% read a few key sections, 10% scan the first few pages, and 3% file it or discard it unread). 41 See Broadridge Comment Letter II. One of these surveys found that 8% of surveyed investors do not read the reports, 19% read very little of the reports, and 28% read some of the reports. The other survey found that 4% of surveyed investors do not read the reports and 56% read some of the reports. 42 See id. (providing the results of a survey in which 21% of investors said that they typically spend 5 minutes or less reviewing shareholder reports and an additional 41% of investors said that they typically spend 6 to 15 minutes reviewing the reports). E:\FR\FM\05NOP2.SGM 05NOP2 70722 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules of a fund’s shareholder report due, in part, to the fact that many view shareholder reports as overly long and complex documents that are not designed to meet the average shareholder’s needs.43 Fund shareholders may, however, be more likely to read a more concise version of a fund’s shareholder report.44 Academic research similarly suggests that, due to limits on an individual’s ability to absorb and process information, investors may be more likely to understand and effectively use concise disclosure that is well-organized and focused on key information.45 Investor Views on the Content of Funds’ Shareholder Reports khammond on DSKJM1Z7X2PROD with PROPOSALS2 Investors participating in investor testing and surveys have expressed a consistent interest in certain specific shareholder report disclosure items.46 The principal items of interest that investors have consistently identified for purposes of monitoring an ongoing fund investment include performance, 43 See, e.g., ICI Investor Survey, supra footnote 36 (‘‘The survey results demonstrate that mutual fund investors who find the current reports difficult to understand are less likely to read them.’’). 44 See, e.g., Broadridge Comment Letter I (discussing the results of a quantitative survey related to fund disclosure in which approximately 39% of investors said they would be more likely to look at or review a summary format of a fund’s annual and semi-annual reports); ICI Comment Letter I (discussing an investor survey of a summary shareholder report prototype, in which more than 90% of participants indicated that they would be more likely to read the summary prototype than a full-length shareholder report); Broadridge Comment Letter II (providing the results of a survey in which 88% of investors indicated that they were more likely to read a summary shareholder report than a full-length report). Two commenters used the same summary shareholder report prototype, developed by the ICI, in their investor surveys. The prototype was approximately three pages in length and primarily focused on performance, fund expenses, and illustrations of fund holdings. See ICI Comment Letter I; Broadridge Comment Letter II. 45 See, e.g., Disclosure: Psychology Changes Everything, George Loewenstein, Cass R. Sunstein, and Russell Goldman, Annual Review of Economics (2014) (providing a comprehensive survey of literature relevant to disclosure regulation and suggesting that ‘‘[g]iven the limits of human attention, perhaps the most obvious way to improve the effectiveness of disclosures is to simplify them . . . [and] to reduce the number of less important disclosures so as to increase the salience of the most important ones’’); see also infra Section III.C.1 (discussing additional academic research on characteristics that may increase the effectiveness of a given disclosure). 46 We are not aware of investor testing or surveys that specifically have explored fund shareholders’ level of interest in prospectus-related disclosure they receive through annual prospectus updates or interim prospectus stickers. However, the results of at least one survey suggest that fund shareholders are more likely to use shareholder reports than prospectuses to monitor their fund investments. See Investor Preferences Report, supra footnote 31, at 15. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 holdings, and fund expenses.47 For example, investor testing and surveys have found that approximately 60% to more than 80% of investors believe that fund performance information is important.48 As for fund holdings information, testing and surveys have found that approximately 38% to 79% of investors view this information as important.49 Testing and surveys have 47 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 51–52 (stating that about half of online survey respondents considered items regarding performance, holdings, and expenses as ‘‘absolutely essential information for any investor’’); Broadridge Comment Letter I; ICI Comment Letter I; Investor Preferences Report, supra footnote 31; Broadridge Comment Letter II. Some commenters on the Fund Investor Experience RFC also suggested that a summary or streamlined shareholder report should focus on a fund’s expenses, performance, and holdings. See, e.g., Comment Letter of The Capital Group Companies (Oct. 30, 2018) (‘‘Capital Group Comment Letter’’); Henry Comment Letter. Similarly, we understand that these content topics are those that experts recommend that investors consider in understanding a fund investment. See, e.g., IAC Disclosure Effectiveness Recommendation, supra footnote 26, at n.4 and accompanying text (‘‘To select a mutual fund, for example, experts are nearly unanimous in recommending that investors consider the fund’s investment objectives and strategies, risks, fees and expenses, past performance, including the volatility of that performance, the reputation of the fund manager, tax implications of an investment in the fund, and information about such account features as investment minimums.’’). 48 See Broadridge Comment Letter I (finding that, of the 50% of surveyed investors that review mutual fund or ETF annual and semi-annual reports ‘‘always’’ or ‘‘most of the time,’’ 75% of those investors often look at or review fund performance information); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (stating that 61% of participants in the qualitative component of this testing ranked the discussion of fund performance in the top three most important shareholder report items); ICI Comment Letter I (finding that approximately 83% of surveyed investors said that performance highlights information is very important or somewhat important); Investor Preferences Report, supra footnote 31 (stating that, after purchase, 76% of investors review performance information); Broadridge Comment Letter II (providing the results of an investor survey in which 89% of investors rated the performance section of the annual report as important and 63% rated the portfolio commentary (or performance highlights) section as important). 49 See Broadridge Comment Letter I (stating that, of the 50% of surveyed investors that review mutual fund or ETF annual and semi-annual reports ‘‘always’’ or ‘‘most of the time,’’ 67% of those investors often look at or review fund portfolio holdings information); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (finding that 38% of participants in the qualitative component of this testing ranked the graphical representation of holdings in the top three most important shareholder report items); see also ICI Comment Letter I (stating that approximately 79% of surveyed investors said that graphical representation of holdings information is very important or somewhat important); Investor Preferences Report, supra footnote 31 (stating that, after purchase, 41% of investors review portfolio holdings); Broadridge Comment Letter II (discussing a survey in which 63% of investors rated disclosure about the characteristics of a fund—including top PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 also found that approximately 34% to 72% of investors believe that fund expense information is important.50 Investors have expressed varying levels of interest in reviewing a fund’s financial statements and financial highlights. For example, at least one survey has found somewhat high levels of interest in this information from shareholders who currently review fund shareholder reports (i.e., 63% of these investors often review a fund’s financial statements), and another survey found that a majority of investors rated financial highlights disclosure as important.51 Other surveys, as well as comments on the Investor Experience RFC, suggest that the average investor may have less interest in financial statements and financial highlights.52 As for other types of shareholder report disclosure, investors typically have expressed less interest in these other disclosures.53 holdings, asset allocations, and industry allocations—as important for annual reports and 64% of investors rated this disclosure as important for semi-annual reports). 50 See Broadridge Comment Letter I (stating that, of the 50% of surveyed investors that review mutual fund or ETF annual and semi-annual reports ‘‘always’’ or ‘‘most of the time,’’ 61% of those investors often look at or review fund expense information); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (finding that 34% of participants in the qualitative component of this testing ranked the expense example in the top three most important shareholder report items); Broadridge Comment Letter II (discussing a survey in which 69% of investors rated expense disclosure as important for annual reports and 66% of investors rated it as important for semi-annual reports); see also ICI Comment Letter I (stating that approximately 72% of surveyed investors said that the fund expense example is very important or somewhat important); Investor Preferences Report, supra footnote 31 (stating that, after purchase, 55% of investors review fund fees and expenses). 51 See Broadridge Comment Letter I; Broadridge Comment Letter II (stating that 55% of investors rated the financial highlights as important annual report disclosure and 53% of investors rated this disclosure as important for semi-annual reports, but 47% of surveyed investors viewed the statement of financial condition and operations as important disclosure for annual or semi-annual reports). 52 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 and 52 (indicating that approximately 38% to 41% of surveyed investors found the financial highlights to be important, while approximately 24% to 33% of surveyed investors believed that financial statements were important); see also ICI Comment Letter I (determining not to include financial statements and most financial highlights data points in a summary shareholder report mockup and instead concluding that ‘‘they were of a more technical nature that a typical retail investor would not read or understand,’’ although such information would be available online under the commenter’s proposed approach); Rojas Comment Letter (‘‘What am I supposed to do with a very long list of holdings and financial statements?’’); Balke Comment Letter (‘‘Financial Statements are of little value.’’); Fowler Comment Letter (‘‘What am I supposed to do with fund financial statements?’’). 53 See Broadridge Comment Letter I (finding that surveyed investors tended to have less interest in E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Investor Views on the Volume and Frequency of Fund Disclosure In addition to concerns about the length of funds’ shareholder reports, some investors responding to the Fund Investor Experience RFC expressed concern about the overall volume and frequency of fund disclosures they receive each year. For example, several investors expressed the view that they receive too many fund disclosure materials and that they feel overwhelmed by the amount of information they receive.54 Another investor expressed a preference for less frequent disclosure.55 However, with respect to shareholder reports in particular, one investor survey found that 86% of investors thought that the current semi-annual frequency at which they receive reports was ‘‘about the right frequency,’’ while 11% of investors viewed semi-annual reports as too frequent and 3% expressed a preference for more frequent shareholder reports. In this survey, investors’ preferred frequency changed somewhat for a prototype summary shareholder report.56 If they were to receive a summary shareholder report, 56% of investors preferred semiannual reports, 27% preferred quarterly reports, 17% preferred annual reports, and 1% did not want to receive the reports.57 khammond on DSKJM1Z7X2PROD with PROPOSALS2 2. Fee and Risk Disclosure Preferences We understand that investors generally prefer concise, summary disclosure that allows them to quickly understand key information. Similarly, remuneration paid to directors, officers, and others, as well as information about directors and officers); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 52 (stating that surveyed investors generally had less interest in information about changes in, and disagreements with accountants; results of any shareholder vote; discussion of the reasons the board approved an advisory contract; statements about where to find certain additional fund information; and information about directors and officers); Broadridge Comment Letter II (providing the results of a survey in which 26% of investors rated disclosure about the fund’s directors and officers as important, and 25% of investors rated disclosure about the board’s approval of the investment advisory contract as important). 54 See, e.g., Delmonte Comment Letter (‘‘There is too much information provided to me. I buy a mutual fund because I want convenience and to more efficiently spend my time. Stop giving me hours[’] worth of reading I do not understand.’’); Solo Comment Letter (stating that there are too many fund disclosure materials, they are too long, and they do not distill the right information); Rojas Comment Letter. 55 Comment Letter of Anonymous (Aug. 30, 2018) (‘‘Anonymous Comment Letter’’) (‘‘I invest for the long term. I do not need constant updates.’’) 56 See supra footnote 44 (discussing the prototype summary shareholder report developed by the ICI). 57 See Broadridge Comment Letter II. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 we understand that this general preference extends to investors’ preferences about disclosures regarding fund fees and risks. Investor Views on Fee and Risk Disclosure The majority of investors responding to a question in the Feedback Flier about fee disclosure expressed the view that funds do not clearly disclose their fees and expenses.58 Many of these investors suggested that funds should simplify their fee and expense disclosure.59 Several investors recommended reducing the number of line items in the prospectus fee table or providing only one ‘‘bottom-line’’ number showing the fees associated with an investment in the fund.60 Several investors also expressed an interest in comparing fees and expenses across multiple funds to help inform their investment decisions.61 Other commenters who responded more generally to the Fund Investor Experience RFC also expressed concern that fund fees are hard to understand, and that certain terminology Form N– 1A uses (e.g., use of terms like ‘‘12b–1 fees’’ and ‘‘front-end loads’’) is similarly difficult to understand.62 Some commenters suggested that funds should disclose fees in terms of dollars rather than percentages to make the disclosure more understandable to investors.63 58 Approximately 33 investors responded to the Feedback Flier question asking, ‘‘Do you think funds clearly disclose their fees and expenses?’’ Of these 33 investors, 21 investors replied ‘‘no’’ and 12 investors replied ‘‘yes.’’ 59 See, e.g., Krus Comment Letter; Stiles Comment Letter; Anonymous Comment Letter; Hague Comment Letter; J.L. Comment Letter; Woods Comment Letter; Comment Letter of Jake Hamm (Sept. 3, 2018); Yukle Comment Letter. 60 See, e.g., Grano Comment Letter; Anonymous Comment Letter; Yukle Comment Letter; J.L. Comment Letter. 61 See, e.g., Palmer Comment Letter; Balke Comment Letter; Karlidag Comment Letter; Kirchoff Comment Letter; Solo Comment Letter; Krus Comment Letter. 62 See, e.g., Comment Letter of AARP (Oct. 31, 2018) (‘‘AARP Comment Letter’’); Comment Letter of Independent Directors Council (Oct. 30, 2018); Comment Letter of Carla Ruiz (Aug. 17, 2018) (‘‘Ruiz Comment Letter’’). A recent study of mutual fund financial literacy also found that many survey participants were unable to correctly answer certain true-or-false questions about general aspects of funds’ fee structures, as well as other characteristics of funds. See Brian Scholl and Angela Fontes, Adding Depth to Financial Literacy: What Does the Public Know About Mutual Funds? Towards a New Index of Investor Knowledge, SEC Office of the Investor Advocate (July 18, 2019). 63 See, e.g., AARP Comment Letter; Comment Letter of A. Miller (July 21, 2018); see also infra footnote 573 (citing other evidence that dollar-based disclosure may be easier for some investors to understand). PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 70723 Investor Views on Principal Risk Disclosure Many investors responding to the Fund Investor Experience RFC also suggested that disclosure about a fund’s risks is too long.64 Some investors suggested that funds should order risks by importance and provide the most important risks first.65 Other investors suggested that more focused risk disclosure would be helpful.66 Consistent with these investor preferences, Commission staff has encouraged funds to take steps to improve their principal risk disclosure including by, for example, ordering risks by importance, better tailoring their risk disclosure, and concisely summarizing principal risks in the summary prospectus.67 3. Disclosure Delivery Preferences Based on information from the Fund Investor Experience RFC and investor testing and surveys, investors have shown a general familiarity with using the internet to find information about a fund and have expressed a range of preferences regarding how they receive fund disclosure (i.e., in paper or electronically). In the Fund Investor Experience RFC, the Commission sought information on investors’ use of the internet to communicate about and find information on fund investments, as well as their preferences on the form and manner of disclosure delivery.68 In response, many investors indicated that they go to fund or intermediary websites to get information about a fund investment.69 Many investors also expressed a preference for receiving fund disclosure electronically, either through email, mobile application, or 64 See, e.g., Krus Comment Letter; Solo Comment Letter; Fowler Comment Letter; Stiles Comment Letter; Comment Letter of Hector Ewing (Aug. 30, 2018) (‘‘Ewing Comment Letter’’); J.L. Comment Letter; Woods Comment Letter; Baker Comment Letter; Olstrom Comment Letter. 65 See, e.g., Stiles Comment Letter; Dougle Comment Letter; J.L. Comment Letter; Ruiz Comment Letter; see also Frank W. Comment Letter (expressing interest in disclosure that better explains the level of a given risk). 66 See, e.g., Freeland Comment Letter (stating that funds should only disclose risks based on how the fund normally and actually invests). 67 See Division of Investment Management, Accounting and Disclosure Information 2019–08, Improving Principal Risks Disclosure, available at https://www.sec.gov/investment/accounting-anddisclosure-information/principal-risks/adi-2019-08improving-principal-risks-disclosure (‘‘ADI 2019– 08’’). 68 See Fund Investor Experience RFC, supra footnote 8, at Section II.B.2. 69 See, e.g., Karlidag Comment Letter; Thomas Comment Letter; Jallah Comment Letter; Delmonte Comment Letter; Solo Comment Letter; Comment Letter of C. Scott (July 26, 2018) (‘‘Scott Comment Letter’’); Comment Letter of James McRitchie (Sept. 4, 2018) (‘‘McRitchie Comment Letter’’). E:\FR\FM\05NOP2.SGM 05NOP2 70724 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 website availability.70 Several other investors preferred to access most fund information electronically, with the exception of certain information they preferred to receive on paper.71 Other investors stated that they generally prefer to receive fund information in paper format.72 A few investors specifically suggested that paper should be the default delivery mechanism for a ‘‘summary’’ shareholder report.73 In addition, investor testing and surveys suggest that many investors would prefer enhanced availability of fund information on the internet in a layered disclosure framework, although some investors prefer to receive fund disclosures in paper format.74 70 See, e.g., Rojas Comment Letter; Jallah Comment Letter; Freedman Comment Letter; Nevin Comment Letter; Kirchoff Comment Letter; Arnold Comment Letter; Scott Comment Letter; Krus Comment Letter. Some funds responding to the Fund Investor Experience RFC also suggested that website disclosure is consistent with many investors’ preferences. See, e.g., Capital Group Comment Letter; Comment Letter of Fidelity Investments (Oct. 31, 2018) (‘‘Fidelity Comment Letter’’); Comment Letter of Vanguard (Oct. 31, 2018) (‘‘Vanguard Comment Letter’’). 71 Many of these investors preferred to receive statements in paper. See Comment Letter of Arthur Blanchard (Nov. 19, 2018) (‘‘Blanchard Comment Letter’’); Ewing Comment Letter; Joseph Comment Letter; Krus Comment Letter. Other investors appeared to have different preferences. See Comment Letter of Mark S. (Aug. 30, 2018) (preferring to receive ‘‘important’’ information by mail); Olstrom Comment Letter (preferring to receive tax forms in paper); Comment Letter of Carl Waranowksi (Nov. 25, 2018) (‘‘Waranowski Comment Letter’’) (preferring to receive ‘‘important’’ information in paper). 72 See, e.g., Grano Comment Letter; Comment Letter of Jane D. Nelson (Aug. 30, 2018); Comment Letter of Duane Lee (Dec. 3, 2018) (‘‘Lee Comment Letter’’); Comment Letter of Mark Moran (Dec. 4, 2018); Morton Comment Letter; Comment Letter of Brad Shockey (Oct. 9, 2018). 73 See Henry Comment Letter; Weaver Comment Letter. 74 For example, the 2012 investor testing suggested that an investor looking for a fund’s annual report is most likely to seek it out on the fund’s website, rather than request it by mail or phone or by retrieving it from the Commission’s EDGAR system. See 2012 Report on Investor Testing of Fund Annual Reports supra footnote 26, at 72. Many investors indicated that they would prefer that fund information be made available in both electronic and paper versions, with a plurality of respondents preferring electronic transmission by email with the option to easily request a paper copy of a particular report, though a significant minority indicated that they would still prefer to receive a paper copy through the mail. Id. at 183. See also Broadridge Comment Letter I (providing data on surveyed investors’ current methods for receiving mutual fund and ETF disclosure and preferred delivery methods that suggest that preferences are mixed, with 47% of investors primarily receiving fund disclosure by mail and 44% primarily receiving fund disclosure by email); CFA Comment Letter (stating that the following percent of respondents to a 2006 survey expressed interest in using the internet to: (1) Obtain general information about funds (59%); (2) research individual funds (58%); (3) receive periodic reports and disclosure documents (49%); (4) use a calculator to compare VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 C. Developments Affecting Fund Disclosure and Marketing Practices In addition to evidence about investor preferences regarding fund disclosure, our proposal is informed by developments affecting fund disclosure and marketing practices. With respect to our proposed amendments to promote more concise, layered disclosure, these developments include advances in technology and the Commission’s experience with summary prospectus disclosure, as well as the growing length and complexity of funds’ shareholder reports since the mid-1990s. Additionally, our proposed amendments to investment company advertising rules are informed by our observations about recent investment company marketing practices in light of increased industry focus on fees, and competition based on fees. Advances in Technology For more than 20 years, the Commission has recognized the internet’s important role in providing disclosure materials and other information to investors and maximizing investor access to information.75 During this time, technology has continued to evolve, and investors’ access to the internet has increased. For example, as of 2019, approximately 94% of households owning mutual funds had internet access, while only 68% of these households had internet access in 2000.76 Moreover, advances in technology, including increasing use of mobile devices to access information, are expanding the avenues that funds and intermediaries can use to communicate with investors and make it easier to provide interactive or costs (47%); (5) communicate with a financial services professional (39%); or (6) purchase mutual funds (26%)); Broadridge Comment Letter II (providing the results of a survey in which 34% of investors said they were more likely to review a summary shareholder report if received by mail and 50% of investors said they were more likely to review such a report if received by email). See also infra footnote 76 (discussing increasing internet access over the years). 75 See, e.g., supra footnote 21. For a more-detailed discussion of other Commission releases that have involved using the internet to provide or improve access to information, see Rule 30e–3 Adopting Release, supra footnote 14, at n.18; see also Exchange-Traded Funds, Investment Company Act Release No. 33646 (Sept. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (‘‘ETF Adopting Release’’), at n.229 (encouraging ETFs to consider whether there are technological means to make their disclosure more accessible). 76 See Ownership of Mutual Funds, Shareholder Sentiment, and Use of the internet, ICI Research Perspectives (Oct. 2019) (‘‘Study on Mutual Fund Investors’ Use of the internet’’), available at https:// www.ici.org/pdf/per25-08.pdf; see also CFA Comment Letter (providing a 2014 report discussing the growth of internet usage). PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 customizable information.77 We understand that many funds and financial intermediaries are using technology in an effort to communicate more effectively with fund investors and to respond to investor preferences, and continue to explore additional ways to use technology to better communicate with investors.78 The Commission, while considering the needs and preferences of investors, also has recognized that modernizing the manner in which funds and others make information available to investors allows them to leverage the benefits of technology and reduce fund costs.79 Experience With Layered Disclosure, and the Growing Length and Complexity of Shareholder Reports Over Time The Commission also has taken multiple steps with respect to fund prospectuses to both recognize investors’ preferences for concise and engaging disclosure of key information and ensure that additional information that may be of interest to some investors is available through a layered approach to disclosure.80 We believe these initiatives have benefitted investors. For example, research shows that the introduction of a more concise summary prospectus may allow investors to spend less time and effort to arrive at the same portfolio decision they would have made after reading the longer statutory prospectus.81 Approximately 77 See, e.g., Vanguard Comment Letter; ICI Comment Letter I; CFA Comment Letter. 78 See, e.g., Fidelity Comment Letter; Comment Letter of Putnam Investments (on behalf of the Mutual Fund Broker-Dealer Working Group) (Nov. 30, 2018) (‘‘Putnam Comment Letter’’); ICI Comment Letter I; Capital Group Comment Letter (stating that a growing percentage of fund shareholders and their advisers use the fund group’s website to obtain information about its funds, its organization, and other investment insights); CFA Comment Letter (providing a 2014 study entitled ‘‘Can the internet Transform Disclosures for the Better?’’ that, among other things, reviewed the content and design of fund and intermediary websites). For example, we understand that several funds and financial intermediaries provide interactive features on their websites such as fund screener tools, expense calculators, and retirement planning tools and use mobile applications to engage with fund shareholders. 79 See Rule 30e-3 Adopting Release, supra footnote 14; Variable Contract Summary Prospectus Adopting Release, supra footnote 27. 80 See New Disclosure Option for Open-End Management Investment Companies, Investment Company Act Release No. 23065 (Mar. 13, 1998) [63 FR 13968 (Mar. 23, 1998); 2009 Summary Prospectus Adopting Release, supra footnote 10; Variable Contract Summary Prospectus Adopting Release, supra footnote 27. 81 See John Beshears, James Choi, David Laibson, and Brigitte Madrian, How Does Simplified Disclosure Affect Individuals’ Mutual Fund Choices?, Explorations in the Economics of Aging, E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 93% of funds use summary prospectuses.82 On the other hand, the Commission has not taken comprehensive steps to create a layered disclosure framework for funds’ shareholder reports.83 Funds’ shareholder reports generally have become longer and more complex over the years. For example, until 1994, funds were only required to provide certain financial information in their shareholder reports, generally consistent with the types of information that section 30(e) of the Investment Company Act identifies.84 During this time, however, many funds provided other information in these reports voluntarily, including information about general economic conditions, the fund’s performance, and services provided to shareholders.85 Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds 75, 76 (David A. Wise ed., 2011), available at https://scholar.harvard.edu/laibson/publications/ how-does-simplified-disclosure-affect-individualsmutual-fund-choices. 82 See supra footnote 12. 83 The Commission has, however, adopted rules that permit streamlined disclosure of portfolio holdings in funds’ shareholder reports. In 2004, the Commission adopted an approach that gives funds the option to include summary portfolio schedules in their shareholder reports, provided the complete portfolio schedule is filed on Form N–CSR and available, free of charge, to investors. See Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, Investment Company Act Release No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)], at Section II.B and paragraph accompanying n.111 (‘‘February 2004 Shareholder Report Adopting Release’’) (noting that these amendments were ‘‘designed to streamline shareholder reports and help investors to focus on a fund’s principal holdings, and thereby better evaluate the fund’s risk profile and investment strategy,’’ and would reduce printing and mailing costs for most funds). 84 See, e.g., Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 13436 (Aug. 12, 1983) [48 FR 37928, 37951 (Aug. 22, 1983)] (adopting Form N–1A, which included annual and semi-annual report requirements in what was then Item 23 of the form). In 1994, the Commission adopted amendments requiring funds to disclose information in their shareholder reports about the results of shareholder votes and any changes in and disagreements with accountants. See, e.g., Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 20614 (Oct. 13, 1994) [59 FR 52689 (Oct. 19, 1994)]. In 1996, Congress added section 30(f) to the Investment Company Act, which allows the Commission to require that funds’ semi-annual reports include such other information as the Commission deems necessary or appropriate in the public interest or for the protection of investors. National Securities Markets Improvement Act of 1996, Public Law 104–290, Section 207, 110 Stat. 3416, 3430 (Oct. 11, 1996). 85 See, e.g., Standardization of Financial Statement Requirements in Management Investment Company Registration Statements and Reports to Shareholders, Investment Company Act Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 1980)], at nn.3–4 and accompanying text. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 otherwise voluntarily include in these reports) has increased substantially.86 Developments Affecting Investment Company Advertisements In recent years, investment companies increasingly have been marketing themselves on the basis of costs in an effort to attract investors. For instance, we have observed some funds calling themselves ‘‘no-expense’’ or ‘‘zeroexpense’’ funds, or emphasizing their low expense ratios, despite the fact that investors may experience other investment costs.87 These other investment costs include, for example, securities lending costs or wrap program fees that may provide revenue to the fund’s adviser, its affiliates, or others and that may effectively allow the fund to reduce its reported expense ratio because the prospectus fee table is not required to reflect the relevant category of costs. Investment company advertising rules currently place limits on how a fund may present its performance to promote comparability and prevent potentially misleading advertisements.88 These rules, however, generally do not prescribe the presentations of fees and expenses in 86 See, e.g., Role of Independent Directors of Investment Companies, Investment Company Act Release No. 24816 (Jan. 2, 2001) [66 FR 3734 (Jan. 16, 2001)] (‘‘Independent Directors Release’’) (requiring shareholder report disclosure regarding a fund’s board of directors); Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Investment Company Act Release No. 25922 (Jan. 31, 2003) [68 FR 6564 (Feb. 7, 2003)] (requiring funds to disclose in their annual and semi-annual reports to shareholders the methods by which shareholders may obtain information about proxy voting); February 2004 Shareholder Report Adopting Release, supra footnote 83 (requiring funds to add shareholder report disclosure regarding fund expenses borne by shareholders, a tabular or graphic presentation of a fund’s portfolio holdings by identifiable categories, and management’s discussion of fund performance, while allowing funds to include a summary portfolio schedule in these reports); Disclosure Regarding Approval of Investment Advisory Contracts by Directors of Investment Companies, Investment Company Act Release No. 26486 (June 23, 2004) [69 FR 39798 (June 30, 2004)] (requiring shareholder report disclosure about the basis for the board’s approval of advisory contracts during the most recent fiscal half-year). 87 A fund’s expense ratio is the figure in its prospectus fee table that represents the fund’s total annual operating expenses, expressed as a percent of the fund’s average net assets. See also infra Section II.H.1.c (discussing costs that the expense ratio does not reflect). 88 See, e.g., Amendments to Investment Company Advertising Rules, Investment Company Act Release No. 26195 (Sept. 29, 2003) [68 FR 57760 (Oct. 6, 2003)]; Advertising by Investment Companies, Investment Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868 (Feb. 10, 1988)] (‘‘1988 Advertising Rules Release’’); Mutual Fund Sales Literature Interpretive Rule, Investment Company Act Release No. 10915 (Oct. 26, 1979) [44 FR 64070 (Nov. 6, 1979)]. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 70725 advertisements to address similar concerns about comparability or potentially misleading information.89 II. Discussion D. Overview of Proposed New Disclosure Framework 1. Executive Summary The amendments we are proposing would modify the disclosure framework for funds registered on Form N–1A to create a new layered disclosure approach designed to highlight key information for retail investors. The new disclosure approach is designed to tailor the information that investors receive to help investors better assess and monitor their fund investments and make informed investment decisions. We recognize that investors have different levels of knowledge and experience, and we seek to promote disclosure that is inviting and usable to a broad spectrum of investors. In order to help achieve these goals, the proposal includes the following principal elements: • Shareholder Reports Tailored to the Needs of Retail Shareholders: Under the proposal, fund investors would continue to receive fund prospectuses in connection with their initial investment in a fund, as they do today. Thereafter, a shareholder would receive concise and visually engaging annual and semiannual reports designed to highlight information that we believe is particularly important for retail shareholders to assess and monitor their fund investments on an ongoing basis. This information would include— among other things—fund expenses, performance, and portfolio holdings. We also propose to provide funds the flexibility to make electronic versions of their shareholder reports more userfriendly and interactive. • Availability of Additional Information on Form N–CSR and Online: Information currently included in annual and semi-annual reports that may be less relevant to retail fund shareholders, and of more interest to financial professionals and other investors who desire more in-depth information, would be made available online and delivered free of charge in paper or electronically upon request by the fund (or intermediary through which shares of the fund may be purchased or sold). This information 89 While Commission rules require a fund to disclose maximum sales loads in some advertisements, and FINRA rules also limit how a fund advertisement may describe investment costs in some respects, these limitations currently apply only to a subset of fund advertisements. See infra Section II.H.2. E:\FR\FM\05NOP2.SGM 05NOP2 70726 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 also would be filed on a semi-annual basis with the Commission on Form N– CSR. This information would include, for example, the schedule of investments and other financial statement elements. Shareholder reports would contain cover page legends directing investors to websites containing this information. • Amendments to Scope of Rule 30e– 3 to Exclude Funds Registered on Form N–1A: The proposal contemplates that a fund’s shareholder reports, as modified pursuant to the proposed rule and form amendments, would serve as the central source of fund disclosure for existing shareholders. To ensure that all fund investors would experience the anticipated benefits of the proposed new tailored disclosure framework, we are proposing to amend the scope of rule 30e–3 to exclude open-end funds.90 Beginning as early as January 1, 2021, funds may begin relying on rule 30e–3, which generally permits funds to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports’ online availability, instead of directly providing the reports to shareholders.91 The new proposed disclosure framework considers feedback that commenters provided in response to the Fund Investor Experience RFC and reflects the Commission’s continuing efforts to search for better ways of providing investors with the disclosure that they need. In light of these and other considerations, we preliminarily believe that the proposed disclosure approach represents a more-effective means of improving investors’ ability to access and use fund information, and of reducing expenses associated with printing and mailing, than continuing to permit open-end funds to rely on rule 30e–3. • Tailoring Required Disclosures to Needs of New versus Ongoing Fund Investors: It is currently common for fund shareholders to receive an updated annual prospectus each year. We are proposing new rule 498B, which would provide an alternative approach that uses layered disclosure, discussed in more detail below, to keep investors informed about their fund investment and updates to their fund that occur 90 We discuss the operational aspects of this proposed amendment to the scope of rule 30e–3, including compliance date issues, in Section II.G infra. 91 Notwithstanding rule 30e–3, investors who have elected electronic delivery of fund documents or have opted in to paper delivery of shareholder reports receive delivery of shareholder reports pursuant to their elections. See infra footnote 532 and accompanying text. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 year over year. Under this proposed rule, new investors would receive a fund prospectus in connection with their initial investment in a fund, as they currently do, but funds would not deliver annual prospectus updates to investors thereafter. The proposed layered disclosure framework would instead rely on the shareholder report (including a summary in the annual report of material changes that occurred over the prior year), as well as timely notifications to shareholders regarding material fund changes as they occur, to keep investors informed about their fund investments and enable them to make informed decisions about whether to buy, sell, or hold fund shares. Current versions of the fund’s prospectus would remain available online and would be delivered upon request in a manner consistent with the shareholder’s delivery preference. • Improvements to Prospectus Disclosure of Fund Fees and Risks; Request for Comment on Improving Fund Fee and Expense Disclosures: We recognize that fund fees and risks are two areas that investors find particularly important to assessing a prospective fund investment, and two disclosure areas that can be complex and confusing. We are proposing amendments to funds’ prospectus disclosure that are designed to help investors more readily understand a fund’s fees and risks, and that use layered disclosure principles that tailor disclosures of these topics to different types of investors’ informational needs. We are also proposing amendments that would refine the scope of funds that are required to disclose the fees and expenses associated with investments in other funds as a component of a fund’s bottom line annual expenses in the prospectus fee table. Furthermore, we are requesting comment on how we could improve the ways in which funds disclose their fees and expenses, in order to represent the full costs associated with a fund investment more accurately and to help investors better understand their investment costs. • Fee and Expense Information in Fund Advertisements: Finally, we are proposing amendments that are designed to respond to developments that we have observed in fund advertising. The proposed amendments would require that presentations of investment company fees and expenses in advertisements and sales literature be consistent with relevant prospectus fee table presentations and be reasonably current. The proposed amendments also address representations of fund fees and expenses that could be materially misleading. The proposed advertising PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 rule amendments would affect all registered investment company and BDC advertisements and would not be limited to open-end fund advertisements. 2. Considerations and Goals Concerns and Considerations About Current Disclosure Framework The proposed new disclosure framework—particularly, the new tailored approach to disclosure with respect to fund shareholder reports and prospectuses—is designed to address the concern that shareholder report and prospectus disclosures may appear redundant or inconsistent to shareholders, as well as our belief that prospectus disclosure in particular may often be less relevant to the informational needs of a shareholder who is simply monitoring his or her fund investment. As a preliminary matter, fund prospectuses and shareholder reports have historically served different purposes. The prospectus acts as the principal selling document for investors to inform investment decisions and facilitate fund comparisons. The shareholder report, on the other hand, provides information to a fund’s current shareholders about the fund’s operations and performance during the past fiscal period. Moreover, the shareholder report and prospectus present certain of the same types of information (e.g., fund performance and expenses) differently in light of their intended audiences.92 As a result, there are ways in which the current disclosure framework may not tailor fund disclosure contents to the needs of different types of investors. Much of the information in a fund’s prospectus, including disclosure about the fund’s principal investment strategy and principal risks, often remains the same from year to year. Receiving continuing disclosure of this unchanging information therefore might not be useful to existing fund investors, although investors typically receive annual prospectus updates that include this content. On the other hand, to the extent a fund has a material change (e.g., it materially changes its principal investment strategy and has different 92 For example, a shareholder report currently includes backward-looking information about a fund’s actual ongoing expenses over the most recent fiscal half-year, while a prospectus includes forward-looking information about fees for new investments in a fund (i.e., sales charges) and the fund’s projected future expenses. As another example, a shareholder report typically provides performance and other information as of the end of the fund’s most recent fiscal year, while a prospectus presents fund performance as of the end of a calendar year to help prospective investors compare potential fund investments. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 principal risks, or changes its fees), this information may be more salient to a shareholder’s monitoring of his or her investments. Under the current disclosure framework, these changes might not be highlighted to shareholders.93 The fact that current fund disclosures might not meet investors’ informational needs may contribute to investor disinterest or confusion. The potential for disinterest or confusion may be particularly pronounced when a shareholder receives prospectus and shareholder report disclosure close in time, which often occurs in the case of the annual report and the annual prospectus update.94 Although prospectus disclosure may be less well-suited for analyzing and monitoring an ongoing fund investment, some fund shareholders may be more likely to review a fund’s prospectus instead of its shareholder reports based simply on length. Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds otherwise voluntarily include in these reports) has increased substantially.95 This amount of disclosure may not correspond with investors’ expressed preferences for concise, layered disclosure that highlights key information. The substantial length of shareholder reports also may make it more difficult for investors to understand and effectively use the information.96 In addition, we have considered the extent to which modifying the disclosure framework for funds, for example by requiring funds to transmit the tailored shareholder reports that this proposal envisions, could result in cost savings.97 Shareholders generally bear these fund expenses, and therefore may be bearing costs for information they prefer not to be delivered to them. For example, retail shareholders may prefer 93 For example, to the extent a fund has a known or expected increase in its fees and expenses for the current year, a fund shareholder would receive information about the new fee and expense levels in the annual prospectus update. That is, the prospectus fee table in year 1 would present fees as x%, and in year 2 would present fees as y%. But the prospectus would not necessarily highlight or explain the change from year to year, nor would the fund’s shareholder reports. 94 See supra footnote 20 and accompanying text. 95 See supra footnote 19 and accompanying text (noting that the average page length of annual reports is approximately 134 pages). 96 See supra Section I.B. 97 See infra Section III.C.2.d (as discussed in this section, we anticipate that the proposed new disclosure framework would produce cost savings, due to reduced printing and mailing costs and processing fees, even after taking into account the effects of our proposed exclusion of open-end funds from the scope of rule 30e–3). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 not to have delivered to them information that is more technical in nature and may be more relevant for financial professionals and other investors who desire more in-depth information (such as complete fund financial statements, as opposed to receiving summary disclosure about fund holdings and expenses). This proposal reevaluates funds’ disclosure framework in light of all of these considerations. The proposed new approach is based on the goal of promoting more-digestible, tailored disclosure that fund shareholders can use to monitor their ongoing fund investments efficiently and meaningfully, with layered information that may be less relevant to retail shareholders available online and upon request. Likewise, the proposed approach is designed to help a fund shareholder to use shareholder reports to compare funds he or she already owns and assess how the shareholder’s mix of funds fits into his or her overall investment portfolio. The proposed approach to funds’ overarching disclosure framework would be complemented by moretargeted proposed improvements to fund prospectus fee and risk disclosures, as well as proposed amendments to investment company advertising rules. Collectively, the proposed amendments are designed to facilitate investors’ ability to make informed investment decisions and monitor their investments thereafter. Tailoring Fund Disclosure Using Layered Disclosure Principles The layered disclosure approach underlying the proposed new disclosure framework would build on the Commission’s experience in conforming required fund disclosures to the informational needs of different types of investors. In recent years, the Commission has adopted rules that rely on layered disclosure principles to tailor fund disclosures to the particular needs of retail investors, as well as financial professionals and other investors who desire more in-depth information.98 Similarly, in past years the Commission has taken into account the relative informational needs of new investors and ongoing shareholders in tailoring the requirements for investment company disclosures.99 98 See 2009 Summary Prospectus Adopting Release, supra footnote 10; Variable Contract Summary Prospectus Adopting Release, supra footnote 27; see also discussion at supra footnotes 5–6 and accompanying text. 99 See Variable Contract Summary Prospectus Adopting Release, supra footnote 27. In particular, the Commission received positive feedback on its PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 70727 The proposed new disclosure framework also would reflect various stakeholders’ suggestions and stated preferences for fund disclosure that more directly highlights key fund information and is tailored to investors’ needs. For example, the Commission’s Investor Advisory Committee has recommended that the Commission develop an approach to funds’ shareholder reports that would rely on summary disclosure and layered disclosure principles.100 Similarly, the proposed new disclosure framework would reflect investor preferences as we understand them based on investor testing, surveys, and other informationgathering, which have consistently indicated that retail fund investors prefer concise disclosure that focuses on the most important fund information.101 Leveraging Technology To Modernize Funds’ Disclosure Requirements In addition, the proposed new disclosure framework would leverage technology to modernize funds’ disclosure requirements.102 Our proposal to provide an ‘‘initial summary prospectus’’ to new investors in variable annuity and variable life insurance contracts, and an ‘‘updating summary prospectus’’ to investors each year after their initial investment in a variable contract. Id. at text accompanying nn.33 and 335. In part on the basis of that positive feedback, the Commission adopted that proposal. 100 See Recommendation of the Investor Advisory Committee Regarding Promotion of Electronic Delivery and Development of a Summary Disclosure Document for Delivery of Investment Company Shareholder Reports (Dec. 7, 2017), available at https://www.sec.gov/spotlight/investoradvisory-committee-2012/recommendationpromotion-of-electronic-delivery-anddevelopment.pdf. The recommendation provided, among other things, that the Commission explore: (1) Methods to encourage a transition to electronic delivery that respect investor preferences and that increase the likelihood that investors will see and read important disclosure documents; and (2) development of a summary, layered disclosure document for shareholder reports that incorporates key information from the report along with prominent notice regarding how to obtain a copy of the full report, and would be designed to be delivered either by mail or by email (depending on the investors’ delivery preferences). This proposal also takes into account the Investor Advisory Committee’s recent recommendation on improving the effectiveness of investor disclosures (including in the context of fund disclosures). See IAC Disclosure Effectiveness Recommendation, supra footnote 26. 101 See discussion at supra Section I.B.1. 102 Individuals’ access to and use of the internet has increased significantly in the last few decades, including among demographic groups that have previously been less apt to use the internet. See Pew Research Center, internet/Broadband Fact Sheet (last updated June 12, 2019), available at https://www.pewresearch.org/internet/fact-sheet/ internet-broadband. We understand these trends extend to individuals’ use of online resources to manage their finances and investments. See, e.g., Can the internet Transform Disclosures for the Better? Consumer Federation of America (Jan. E:\FR\FM\05NOP2.SGM Continued 05NOP2 70728 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules proposal would use the internet as a medium to provide information to investors and distinguish between information that investors receive directly (either in paper or electronically, depending on investors’ preferences) and information that is available to investors online. The proposal also takes steps to encourage funds to use online tools to enhance and personalize the information that they provide to shareholders, as constantly developing online technology presents unique potential to enrich investors’ experience in understanding and engaging with their fund investments.103 Shareholder Report as the Central Source of Fund Disclosure for Existing Shareholders In proposing the new disclosure framework, which employs the shareholder report as the central source of fund disclosure for existing shareholders, we considered the extent to which permitting open-end funds to continue relying on rule 30e–3 to transmit shareholder reports would affect our policy goals. Since adopting rule 30e–3, we have continued to analyze and hear from industry participants regarding further improvements to our disclosure regime. As a result, we now believe that a tailored shareholder report that highlights key information would provide better information for investors than the notices required under rule 30e–3. Furthermore, if a fund were permitted to rely upon both rule 30e–3 and proposed rule 498B, shareholders in such a fund would no longer directly receive shareholder reports or annual prospectus updates, and thus would not be sent any periodic regulatory disclosure documents.104 We believe the proposed new disclosure framework would also largely preserve the expected cost savings to funds and investors that funds would experience by choosing to rely on rule 30e–3.105 E. Annual Shareholder Report We are proposing to add new Item 27A to Form N–1A to specify the design and content of funds’ annual and semiannual reports. We also are proposing to remove the provisions in current Item 27 of Form N–1A that relate to annual and semi-annual reports. The table below summarizes the proposed content that funds would include in their annual reports or Form N–CSR reports in comparison to current shareholder report disclosure requirements.106 While the proposed content requirements for shareholder reports that are transmitted in paper would generally be the same as the requirements for reports that are transmitted electronically (and that appear online or are accessible through mobile electronic devices), we are proposing instructions that address electronic presentation and are designed to provide flexibility to enhance the usability of reports that appear online or on mobile devices.107 TABLE 1—ANNUAL REPORT CONTENTS Current annual shareholder report disclosure (current Form provision) Expense example (Form N–1A Item 27(d)(1)). Management’s discussion of fund performance (‘‘MDFP’’) (Form N–1A Item 27(b)(7)). Graphical representation of holdings (Form N–1A Item 27(d)(2)). khammond on DSKJM1Z7X2PROD with PROPOSALS2 Changes in and disagreements with accountants (Form N–1A Item 27(b)(4)). Statement regarding liquidity risk management program (Form N– 1A Item 27(d)(6)(ii)). Statement regarding the availability of quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record (Form N–1A Item 27(d)(3) through (5)). Description of proposed amendments Proposed rule and form provisions Add new identifying information to the beginning of the annual report. Retain in annual report in a more concise form. Retain in annual report in summary form ....... Item 27A(b) of Form N–1A ........... Section II.B.2.a. Item 27A(c) of Form N–1A ........... Section II.B.2.b. Item 27A(d) of Form N–1A ........... Section II.B.2.c. Add new fund statistics section to the annual report. Retain in annual report ................................... Item 27A(e) of Form N–1A ........... Section II.B.2.d. Item 27A(f) of Form N–1A ............ Section II.B.2.e. Add new material fund changes section to the annual report. Retain in annual report in summary form ....... Item 27A(g) of Form N–1A ........... Section II.B.2.f. Item 27A(h) of Form N–1A ........... Section II.B.2.g 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. Retain in annual report ................................... Item 8 of Form N–CSR ................ Rule 30e–1(b)(2) and (b)(3) ......... Section II.D.1.c. Item 27A(i) of Form N–1A ............ Section II.B.2.h. Include a more general reference to the availability of additional fund information in the annual report. Item 27A(j) of Form N–1A ............ Section II.B.2.i. Add provision allowing funds to optionally disclose in their annual reports how shareholders may revoke their consent to householding. Item 27A(k) of Form N–1A ........... Section II.B.2.j. 2014), available at https://consumerfed.org/pdfs/ can-the-internet-transform-disclosures-for-thebetter.pdf. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 103 See infra Section II.B.4. infra Section III.C.2.d. 105 See id. 104 See PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 Discussed below in 106 This release separately discusses the proposed content requirements for funds’ semi-annual reports. See infra Section II.C. 107 See infra Section II.B.4. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 70729 TABLE 1—ANNUAL REPORT CONTENTS—Continued Current annual shareholder report disclosure (current Form provision) Description of proposed amendments Proposed rule and form provisions Financial statements, including schedule of investments (Form N–1A Item 27(b)(1)). Move to Form N–CSR .................................... Would need to be available online and delivered (in paper or electronic format) upon request. 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. Move to Form N–CSR .................................... Would need to be available online and delivered (in paper or electronic format) upon request. Move to Form N–CSR .................................... Would need to be available online and delivered (in paper or electronic format) upon request. Move to Form N–CSR .................................... Would need to be available online and delivered (in paper or electronic format) upon request. Remove from shareholder reports, but information would remain available in a fund’s SAI, which is available online or delivered upon request. Item 7(a) of Form N–CSR ............ Rule 30e–1(b)(2) and (b)(3) ......... Section II.D.1.a. Item 7(b) of Form N–CSR ............ Rule 30e–1(b)(2) and (b)(3) ......... Section II.D.1.b. Item 9 of Form N–CSR ................ Rule 30e–1(b)(2) and (b)(3) ......... Section II.D.1.d. Item 10 of Form N–CSR .............. Rule 30e–1(b)(2) and (b)(3) ......... Section II.D.1.e. Item 11 of Form N–CSR .............. Rule 30e–1(b)(2) and (b)(3) ......... Section II.D.1.f. ....................................................... Section II.E. Remove from shareholder reports .................. ....................................................... Section II.G. Limit annual report disclosure to that which is permitted or required under proposed Item 27A of Form N–1A. Instruction 1 to Item 27A(a) of Form N–1A. Section II.B.1.b. Financial highlights (Form N–1A Item 27(b)(2)). Results of any shareholder votes during the period (Rule 30e– 1(b)). Remuneration paid to directors, officers, and others (Form N–1A Item 27(b)(3)). Statement regarding the basis for the board’s approval of investment advisory contract (Form N– 1A Item 27(d)(6)(i)). Management information and statement regarding availability of additional information about fund directors (Form N–1A Item 27(b)(5) and (6)). Rule 30e–3 disclosure, if applicable (Form N–1A Item 27(d)(7)). Funds have discretion to provide other information in their shareholder reports (e.g., president’s letters). khammond on DSKJM1Z7X2PROD with PROPOSALS2 1. Scope of Annual Report Disclosure, and Registrants Subject to Amendments We propose to limit the scope of funds’ annual reports in several respects to reduce their overall length and complexity. First, we propose to require a fund to prepare separate annual reports for each of its series. Second, we generally propose to limit the content a fund may include in its annual report. a. Scope With Respect to Separate Series and Classes Many mutual funds and ETFs are organized as single registrants with several series (sometimes referred to as portfolios).108 Each series has its own investment objectives, policies, and restrictions. The Federal securities laws and Commission rules often treat each series as a separate fund.109 A single fund or series can have multiple share classes. Classes typically differ based on fee structure, with each class having a different sales load and distribution fee. 108 See sections 18(f)(1) and (2) of the Investment Company Act [15 U.S.C. 80a–18(f)(1) and (2)]; 17 CFR 270.18f–2 [rule 18f–2 under the Investment Company Act]. 109 See, e.g., 17 CFR 270.22c–2(c)(2); 17 CFR 270.22e–4(a)(5); General Instruction A to Form N– 1A (defining ‘‘fund’’ to mean a registrant or a separate series of the registrant). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Series and classes of a registrant are often marketed separately, without reference to other series or classes or to the registrant’s name.110 Currently, fund registrants may prepare a single shareholder report that covers multiple series. We believe this approach contributes to the length and complexity of shareholder reports. For example, a shareholder that is invested in one series of the registrant would need to spend more time searching through the report to find disclosure related to his or her investment. Moreover, a shareholder report that provides information for multiple series may present an increased risk of shareholder confusion. For instance, if two series included in the same shareholder report were to have similar names, there could be a greater risk that a shareholder would mistakenly review information that does not relate to his or her investment. Because the length and complexity associated with multi-series shareholder reports are inconsistent with our goal of creating concise shareholder report disclosure that a 110 See Rulemaking for EDGAR System, Investment Company Act Release No. 26990 (July 18, 2005) [70 FR 43558 (July 27, 2005)], at text following n.17. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 Discussed below in shareholder can more easily use to assess and monitor his or her ongoing fund investment, we are proposing to require fund registrants to prepare separate annual reports for each series of the fund.111 As a result, a shareholder would receive an annual report that only addresses the series in which he or she is invested. We believe that this more-focused annual report would be more relevant to shareholders than a multi-series report and, accordingly, shareholders would be more likely to read such disclosure. Although we are proposing to restrict funds’ annual reports to include only one series of a fund, our proposal would not require a shareholder report to cover 111 See Instruction 4 to proposed Item 27A(a). Similarly, we have generally required that registrants present summary information separately for each fund in a multiple fund prospectus to promote the goal of concise, readable summaries. See 2009 Summary Prospectus Adopting Release, supra footnote 10, at text accompanying nn.43–60. Under the proposal, fund registrants could continue to include multiple shareholder reports that cover different series in a single Form N–CSR report filed on EDGAR. We do not believe this would affect the usability of the information for shareholders because shareholder reports for each series would separately be available online, and we understand that shareholders generally do not go to EDGAR to find fund shareholder reports. See, e.g., supra footnote 74. E:\FR\FM\05NOP2.SGM 05NOP2 70730 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 a single class of a multiple-class fund.112 Because different share classes of a fund represent interests in the same investment portfolio, much of the proposed shareholder report disclosure would be the same for all classes.113 For disclosure that would differ among classes, such as expenses and performance data, the amended disclosure requirements that we are proposing would specifically require funds to provide certain class-specific information.114 We request comment on the proposed scope of disclosure for the annual report, including the following: 1. Would the proposed requirement that a fund registrant prepare separate annual reports for each of its series result in shareholder report disclosure that is easier for fund shareholders to navigate and assess? If not, why not? Would requiring separate annual reports for each series increase the reports’ relevance to shareholders and increase the likelihood that shareholders would read them? If not, why not? How would this proposed requirement affect the approach fund registrants currently use to prepare and transmit shareholder reports? Are there ways to modify the proposed instruction that would further improve disclosure for shareholders or reduce burdens for fund registrants? Instead of the proposed instruction, should we continue to permit fund registrants to prepare a single annual report that covers multiple fund series, as they may today? If so, why, and should there be any limits on the number of series for which information is presented? 2. Are there certain types of funds for which a multi-series presentation in an annual report may be useful to shareholders? If so, which types of funds, and what are the benefits of a multi-series presentation to shareholders? Should we permit certain types of funds, but not others, to prepare annual reports covering multiple series of the same fund? 112 See Instruction 4 to proposed Item 27A(a). This approach is similar to the approach taken in the summary prospectus, which similarly may describe more than one class of a fund. See rule 498(b)(4) [17 CFR 230.498(b)(4)]. 113 For example, this would include, among other disclosure items, graphical representations of holdings, the required statistics (i.e., the size of the fund, its number of holdings, and portfolio turnover rate), the narrative discussion of factors that affected the fund’s performance, and most categories of material fund changes. 114 We discuss these proposed requirements in more detail below. See infra Section II.B.2.b (discussing the proposed requirement to provide expense information for each class) and Section II.B.2.c.ii (discussing the proposed requirement to disclose average annual total returns for 1-, 5-, and 10-year periods for each class). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 3. Are there ways we could allow multi-series presentations in annual reports while also promoting our goals of providing concise, readable disclosure to existing shareholders that is tailored to their informational needs? If so, how? 4. A fund may have multiple share classes with differing fee structures. Should these multi-class funds be permitted to reflect only one or a subset of classes, rather than all share classes in a shareholder report so long as a fund produces a shareholder report that relates to each share class? Would such an approach reduce the complexity of the disclosure and provide moretailored information that is specific to a shareholder’s investment in the fund? Or, conversely, would such a requirement not benefit shareholders? For example, could it reduce shareholders’ ability to compare classes of a fund? Should there be limits on the number or types of classes that a single annual report may cover to reduce potential complexity or length? For example, should we prohibit an annual report transmitted to retail shareholders from including disclosure related to a fund’s institutional class? Are there potential complexities or burdens associated with such an approach? Please explain. b. Scope of Content As a general matter, we are proposing to allow a fund to include in its annual report only the information that Item 27A of Form N–1A specifically permits or requires.115 We believe that allowing only the required or permitted information to appear in a fund’s annual report would promote consistency of information presented to shareholders and would allow retail shareholders to focus on information particularly helpful in monitoring their investment in a fund.116 We also believe this approach would encourage more impartial information by preventing 115 See Instruction 3 to proposed Item 27A(a) of Form N–1A; see also infra Section II.B.2 (discussing the content requirements of the proposed annual report, as well as certain optional content that a fund may include in its annual report). We are, however, proposing flexibility with respect to the use of online tools to assist shareholders in understanding the contents of an annual report that appears online or otherwise is provided electronically. See Instruction 8 to proposed Item 27A(a) of Form N–1A; see also discussion at section II.B.4 infra. 116 Many of the proposed instructions to each requirement provide some flexibility so that a fund can tailor its presentation of information to match how the fund invests. For instance, a fund has the ability to select the categories that are reasonably designed to depict clearly the types of a fund’s investments when preparing its graphical representation of holdings. See proposed Item 27A(f) of Form N–1A. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 funds from adding information commonly used in marketing materials. We recognize, however, that there may be limited circumstances in which it may be appropriate for a fund to provide more or less information than what proposed Item 27A of Form N–1A would permit or require. Specifically, if a fund’s particular circumstances may cause the required disclosures to be misleading, the proposal would allow the fund to add additional information to the report that is necessary to make the required disclosure items not misleading.117 As an example, if a fund changed its investment policies or structure during or since the period shown, the expense, performance, or holdings information that a fund must include in its annual report may require additional disclosure to render those presentations not misleading. Disclosure in response to this provision should generally be as brief as possible. Moreover, if a required disclosure is inapplicable, the proposed rule would permit the fund to omit the disclosure.118 Similarly, to promote better-tailored disclosure, a fund would be permitted to modify a required legend or narrative information if the modified language contains comparable information to what is otherwise required.119 The proposed amendments to Form N–1A would not permit a fund to incorporate by reference any information into its annual report.120 That is, a fund could not refer to information that is located in other disclosure documents in order to satisfy the content requirements for an annual report. The limited number of proposed disclosure items in the annual report is designed to promote the goal of providing a concise, more-engaging report that gives shareholders key information to assess and monitor their ongoing fund investments.121 We do not believe that permitting funds to 117 See Instruction 2 to proposed Item 27A of Form N–1A (permitting a fund to include disclosure that is required under 17 CFR 270.8b–20 (rule 8b– 20 under the Investment Company Act)); rule 8b– 20 under the Investment Company Act (providing, ‘‘[i]n addition to the information expressly required to be included in a registration statement or report, there shall be added such further information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading’’). 118 See Instruction 7 to proposed Item 27A(a) of Form N–1A. 119 See id. 120 See Instruction 5 to proposed Item 27A(a). Incorporation by reference refers to the practice of, instead of including disclosure in a specific document, referring to another document that contains the specified information. 121 See, e.g., Instructions 1, 3, and 5 to proposed Item 27A(a) of Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 incorporate information by reference into the shareholder report is consistent with this goal, because it would require shareholders to take an additional step to locate information that funds incorporate by reference into their reports. While the proposed rule would require or permit a fund’s shareholder report to refer to other materials in some cases, those other materials would not incorporate information into the fund’s shareholder report for purposes of satisfying the annual report disclosure requirements.122 Although the proposed rule would only permit the inclusion of certain information in the annual report, it would not prevent a fund from referring shareholders to the availability of certain additional website information near the end of the report or providing additional information to shareholders in the same transmission as the annual report.123 For example, the proposed rule would not preclude a fund from providing a letter to investors explaining its management philosophy or investment outlook in the same transmission that includes the annual report. However, the proposal would require that the shareholder report be given greater prominence than these other materials, except for certain specified disclosure materials.124 We would generally consider a fund to satisfy the ‘‘greater prominence’’ requirement if, for example, the shareholder report is on top of a group of paper documents that are provided together or, in the case of an electronic transmission, the email or other message includes a direct link to the report or provides the report in full in the body of the message.125 This proposed 122 See, e.g., Instructions 8 and 9 to proposed Item 27A(a) of Form N–1A; proposed Items 27A(b)(4) and 27A(j) of Form N–1A. 123 See proposed Item 27A(j) of Form N–1A; infra Section II.B.2.i (discussing the provision that would allow funds to refer to the availability of additional website information, if the fund reasonably believes shareholders would likely view the information as important). 124 See Instruction 12 to proposed Item 27A(a) of Form N–1A. This is substantially similar to a requirement in rule 498, which provides that a fund’s summary prospectus generally must be given greater prominence than other materials that accompany the summary prospectus. See rule 498(f)(2). 125 These examples of how funds may satisfy the proposed prominence requirement are consistent with interpretations of similar requirements in other Commission rules and forms. See, e.g., 2009 Summary Prospectus Adopting Release, supra footnote 10, at text accompanying n.220 (‘‘Generally, we believe that the ‘greater prominence’ requirement would be satisfied if the placement of the Summary Prospectus is more prominent than accompanying materials, e.g., the Summary Prospectus is on top of a group of paper documents that are provided together.’’); General Instructions 10.C and 10.D of Form CRS (requiring VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 requirement would not, however, apply to certain specified 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.126 We request comment on the scope of content that the proposed rule would require or permit a fund to include in its annual report, including the following: 5. Is it appropriate to restrict the content of a fund’s annual report to include only the information the form would permit or require? If not, why not? Would these proposed limits on content create a more effective presentation for investors? Are there other approaches we should consider (such as permitting space in the annual report for funds to disclose other information they deem important to investors)? What are the benefits and drawbacks of shorter or longer disclosure, or a more flexible approach to disclosure, for investors relative to the proposed approach? 6. Is it appropriate for funds to have flexibility to include other communications to shareholders in the same transmission as a shareholder report? Should the shareholder report be subject to the proposed prominence requirement? If not, should we require other prominence or formatting standards if the transmission includes other materials, or should we impose other requirements or limitations associated with materials that funds could transmit along with the shareholder report? 7. As proposed, should we allow a fund to modify a required legend or narrative information as long as the modified language contains comparable information? If not, why not? Should we use this approach for all aspects of the annual report, or are there particular areas where requiring uniform language across all funds’ annual reports would be particularly valuable to shareholders, for example, to facilitate comparisons or improve shareholder understanding? If so, how should we balance the potential value of uniform language with potential concerns that uniform language may not be well-tailored to a particular fund or its shareholders? 8. Is it appropriate not to permit funds to incorporate information by reference a relationship summary delivered in paper format to be the first among any documents delivered at that time, and a relationship summary delivered electronically to be presented prominently in the electronic medium (e.g., as a direct link or in the body of an email or message)). 126 See id. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 70731 into their annual reports, as proposed? If not, why not? Is there certain information that a fund should be permitted to incorporate by reference into its annual report? If so, what information, and why? c. Scope With Respect to Other Registrants Our proposed amendments to annual reports would only apply to shareholder reports for investment companies registered on Form N–1A. These funds represent the vast majority of investment company assets under management.127 We also have recently adopted changes to the disclosure framework for closed-end funds and variable insurance contracts tailored to these investment companies’ characteristics and, in the case of closed-end funds, to implement congressional directives.128 The recently adopted changes to closed-end fund disclosure include multiple changes to these funds’ shareholder report disclosures, and we would like to understand funds’ and investors’ experience with this new disclosure framework before proposing additional disclosure amendments.129 Similarly, we anticipate that the recently adopted changes to the variable insurance contract disclosure framework would significantly change investors’ experience with variable contract disclosure. While these changes are focused more on prospectus disclosure and not shareholder report disclosure, we would like to assess the impact of these changes prior to proposing additional disclosure changes for variable contracts.130 Our proposed amendments therefore do not extend at this time to other investment companies such as closed-end funds, unit investment trusts, or managed open-end investment companies not registered on Form N–1A (i.e., issuers of variable 127 See infra Section III.B.1. Variable Contract Summary Prospectus Adopting Release, supra footnote 27; Securities Offering Reform for Closed-End Investment Companies, Investment Company Act Release No. 33836 (Apr. 8, 2020) [85 FR 33290 (Jun. 1, 2020)] (‘‘Closed-End Fund Offering Reform Adopting Release’’). 129 See, e.g., Closed-End Fund Offering Reform Adopting Release, supra footnote 128, at Section II.I.2.a (discussing new annual report requirements for funds that file a short-form registration statement), Section II.I.2.b (discussing proposed MDFP disclosure that would appear in registered closed-end funds’ annual reports), and Section II.I.5 (discussing enhancements to certain registered closed-end funds’ annual report disclosure). 130 Moreover, of the variable contract structures, only variable contracts with separate accounts structured as management investment companies— those registered on Form N–3—have annual and semi-annual shareholder reporting requirements under rule 30e–1. 128 See E:\FR\FM\05NOP2.SGM 05NOP2 70732 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules annuity contracts registered on Form N– 3). We request comment on the scope of entities that would be covered by our proposed amendments to annual reports, including the following: 9. To what extent, if any, should the proposed amendments to shareholder reports be extended to other investment companies besides open-end mutual funds and ETFs organized as management investment companies? 10. For example, ETFs can be organized as management investment companies registered on Form N–1A or as unit investment trusts (‘‘UITs’’) that are registered on Form N–8B–2 and subject to certain Commission exemptive orders. UIT ETFs are organized differently than and subject to a different disclosure framework than funds.131 For example, exemptive orders for UIT ETFs generally require these ETFs to transmit annual reports that include their financial statements, but the content of these ETFs’ annual reports is not necessarily the same as the current content of funds’ annual reports. Despite these differences between funds and UIT ETFs, should UIT ETFs be permitted to rely upon proposed rule 498B, or permitted or required to use a tailored annual report? If so, to what extent, if any, should the conditions to rely on proposed rule 498B or use a tailored annual report be modified for UIT ETFs? If a UIT ETF were to use a tailored annual report, should the content of its report differ from the content of a tailored annual report for open-end management companies? For example, should this ETF’s financial statements remain in the report in accordance with its exemptive order, or should it be able to provide its financial statements through other means (e.g., on a website and through a Form N–CSR report, even though these ETFs are not otherwise required to file Form N–CSR reports), subject to potential conditions that the ETF provide other information in an annual report? Do shareholders in UIT ETFs have the same informational needs as fund shareholders? For example, do UIT ETFs’ shareholders need the same performance information, or do their needs differ since a UIT ETF generally replicates an index? 11. Should the Commission amend the requirements for registered closedend funds’ and BDCs’ annual reports, to reflect any of the amendments we are proposing for open-end funds’ annual reports?132 As an example, the Commission recently adopted rules requiring: (1) Certain closed-end funds (registered closed-end funds, as well as BDCs) to include key information in their annual reports regarding fees and expenses, premiums and discounts, and outstanding senior securities that the funds currently disclose in their prospectuses; and (2) registered closedend funds to provide management’s discussion of fund performance in their annual reports to shareholders.133 If the Commission were to propose to tailor closed-end funds’ shareholder reports in a manner that is similar to how we are proposing to tailor open-end funds’ shareholder reports, how should such tailoring incorporate these recently adopted disclosure requirements, as well as the other content that currently appears in closed-end funds’ shareholder reports? For example, should we propose to update the fee and expense information that appears in closed-end funds’ shareholder reports to more closely match the proposed fund expense presentation that would appear in open-end funds’ shareholder reports? As another example, would it be appropriate to require closed-end funds to file on Form N–CSR certain information that currently appears in their shareholder reports (such as their full financial statements) and make this information available on a website, instead of including it in their reports, as we are proposing for open-end funds? 2. Contents of the Proposed Annual Report The following table outlines the information the proposed rule would generally require funds to include in their annual reports. As is the case today, the proposed annual report would not be subject to page or word limits. We are not proposing page or word limits because we believe such limits could constrain appropriate disclosure or lead funds to omit material information. However, we believe that the proposed limits on the contents of these reports would limit their length, which would support our goal of concise, readable disclosure.134 TABLE 2—OUTLINE OF PROPOSED ANNUAL REPORT Proposed item of form N–1A Description Cover Page or Beginning of Report ................. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Content ............................................................. 131 A UIT is an investment company organized under a trust indenture or similar instrument that issues redeemable securities. See section 4(2) of the Investment Company Act [15 U.S.C. 80a–4]. By statute, a UIT is unmanaged and its portfolio is fixed. A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust. ETFs organized as UITs seek to track the performance of an index by investing in the component securities of an index in the same approximate proportions as VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Fund/Class Name(s) ....................................... Ticker Symbol(s) ............................................. Principal U.S. Market(s) for ETFs ................... Statement Identifying as ‘‘Annual Shareholder Report’’. Legend ............................................................ Expense Example ........................................... Management’s Discussion of Fund Performance. Fund Statistics ................................................ Graphical Representation of Holdings ............ Material Fund Changes .................................. the index. See ETF Adopting Release, supra footnote 75, at nn.42, 44. 132 See also infra text accompanying footnote 645 (asking whether to extend any of the new requirements for funds’ prospectus risk disclosure to the risk disclosure that certain closed-end funds are required to include in their annual reports). 133 See supra footnote 129. 134 For example, we believe funds generally would be able to reduce the length of their annual PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 Item Item Item Item 27A(b) 27A(b) 27A(b) 27A(b) Current item of form N–1A containing similar requirements ................ ................ ................ ................ Item 27A(b) ................ Item 27A(c) ................. Item 27A(d) ................ Item 27A(e) ................ Item 27A(f) ................. Item 27A(g) ................ Item 27(d)(1). Item 27(b)(7). Item 27(d)(2). reports from more than 100 pages on average to a more concise presentation that is approximately 3 to 4 pages in length for paper reports, or an equivalent length for electronic reports. For paper reports, the amendments may allow funds to deliver annual reports using a trifold self-mailer (or a similarly concise mailing). A trifold self-mailer can eliminate the need for an envelope or separate pieces of paper. It is generally a large piece of paper that is folded to create multiple pages of information within a self-contained piece of mail. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 70733 TABLE 2—OUTLINE OF PROPOSED ANNUAL REPORT—Continued khammond on DSKJM1Z7X2PROD with PROPOSALS2 * Rule 30e–1(f)(3) currently requires a fund to explain, at least once a year, how a shareholder may revoke his or her consent to householding. This explanation is not currently required in funds’ shareholder reports, and we similarly would not require it in the proposed annual report. To help market participants understand this proposed disclosure, Appendix A to this release includes a hypothetical annual report. This hypothetical annual report is provided solely for illustrative purposes and is not intended to imply that it would reflect a ‘‘typical’’ annual report under the proposed amendments. We also are providing the hypothetical annual report to illustrate for investors what a more concise, tailored shareholder report could look like and are providing a feedback flier that investors can use to provide their views on the hypothetical report and other issues in Appendix B.135 We discuss each of the proposed content requirements in detail below, including specific requests for comment regarding each proposed item of the annual report. In addition to the morespecific requests for comment below, we also request general comments on the proposed content requirements for funds’ annual reports. 12. In addition to the proposed content requirements for funds’ annual reports, should we require or permit funds to provide additional information 135 The hypothetical annual report is substantially similar to the prototype summary shareholder report that two commenters used in investor surveys. See supra footnote 44. For example, both of these sample reports provide information about a fund’s expenses, performance, and holdings. The primary differences between the sample reports are that the hypothetical annual report would include a modified expense presentation, a performance line graph similar to current shareholder reports, and two new items related to fund statistics and material fund changes. Further, while the commenter that developed the prototype summary shareholder report supported the inclusion of liquidity risk management program disclosure, the prototype did not include this disclosure because the underlying requirement was not effective at that time. See ICI Comment Letter I. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Current item of form N–1A containing similar requirements Description Proposed item of form N–1A Changes in and Disagreements with Accountants. Statement Regarding Liquidity Risk Management Program. Availability of Additional Information ............... Item 27A(h) ................ Item 27(b)(4). Item 27A(i) .................. Item 27(d)(6)(ii). Item 27A(j) .................. Householding Disclosure (optional) ................ Item 27A(k) ................. Item 27(d)(3) through (5). *. in their shareholder reports? For example, is there other information that funds typically include in their annual reports as a matter of practice or to comply with other regulatory requirements (e.g., tax-related disclosure under the Internal Revenue Code about the fund’s distributions)? Would it be beneficial to shareholders to receive any additional information in the annual report, or should funds provide this information through other mechanisms (e.g., on their websites, in materials separately transmitted with the annual report, or in account statements)? 13. Are the topics that funds would discuss in their annual reports under the proposed amendments appropriate to provide fund shareholders with key information for assessing and monitoring their fund investments? Are there additional topics that should be required? Please explain. Are any of the topics redundant with information that appears in other disclosure requirements? If so, which topics, and why are they redundant? 14. How would the proposed amendments affect the length of funds’ annual reports? Would the length of the proposed reports affect a fund’s approach for delivering the full report in the mail, relative to its current approach for mailing annual reports? 15. Would proposed Item 27A result in disclosure that is of an appropriate length to be engaging and accessible to fund shareholders, or should we take additional steps to limit the length or complexity of annual report disclosure? For example, should we impose page or word limits on annual reports? If so, what should they be? Should we limit the length of any particular section of the annual shareholder report, and if so, what should these limits be? a. Cover Page or Beginning of the Report The proposed amendments to Form N–1A would require a fund to provide the following information on the cover page or at the beginning of the annual report: PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 • The name of the fund, as well as the class(es) to which the annual report relates; • The exchange ticker symbol of the fund’s shares, or the ticker symbol of each class adjacent to the class name; • If the fund is an ETF, the principal U.S. market(s) on which the fund’s shares are traded; • A statement identifying the document as an ‘‘annual shareholder report;’’ and • The following legend: ‘‘This annual shareholder report contains important information about [the Fund] for the period of [beginning date] to [end date] [as well as certain changes to the Fund]. You can find additional information about the Fund at [Fund website address]. You can also request this information by contacting us at [toll-free telephone number and, as applicable, email address].’’ 136 Currently, funds are not required to include specific cover page information in their shareholder reports. However, we understand that, as a matter of practice, funds typically include identifying information—such as the fund’s name, the period of time the report covers, and whether the report is an annual or semi-annual report—at the beginning of the report or on a cover page. We are proposing to require specific identifying information at the beginning of the annual report so that shareholders can readily identify the purpose and scope of the report. This is also substantially similar to information that must appear at the beginning of fund prospectuses.137 The proposed legend is designed to help shareholders understand the purpose of the annual report, as well as the time period covered by the report. It also describes how a shareholder can obtain additional information about the 136 See proposed Item 27A(b) of Form N–1A. The reference to the ‘‘beginning’’ of an annual report is designed to address circumstances in which there is not a physical page that would precede the report, for example, when the report appears online or on a mobile device. See infra Section II.B.4. 137 See Item 1 of Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 fund, consistent with similar legends that appear on the cover page of the summary prospectus.138 The website address a fund would provide in the legend would need to be specific enough to lead shareholders directly to the materials that would be required to be accessible on the fund’s website under this proposal, including the fund’s financial statements and financial highlights.139 Funds also would have discretion to include other ways a shareholder can find or request additional information about the fund, such as Quick Response Code (‘‘QR code’’) or referring the reader to mobile applications.140 In addition, the proposed amendments would permit funds to include graphics, logos, and other design or text features to help shareholders identify the materials as the fund’s annual report.141 We request comment generally on the proposed content requirements for the 138 See rule 498(b)(1)(v). Instruction 2 to proposed Item 27A(b); infra Section II.C. The website could be a central site with prominent links to the materials that would need to be accessible under the proposed amendments to rule 30e–1. 140 A QR code is a two-dimensional barcode capable of encoding information such as a website 139 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 cover page or beginning of the annual report, and specifically on the following issues: 16. Is there additional information that we should permit or require funds to provide on the cover page or at the beginning of their annual reports? If so, what are the benefits of that additional information? For example, should we permit or require funds to include a table of contents, or would a table of contents add undue length to the shareholder report and provide limited benefits to shareholders given the general brevity of the report? 17. Should we remove or modify any of the information the proposed rule would permit or require funds to include on the cover page or at the beginning of their annual report, and if so, what information and how should we modify it? b. Fund Expenses We are proposing a simplified expense presentation in the annual address, text information, or contact information. For example, when included on print materials, these codes can be read using the camera on a smartphone to take the user directly to a specific website address. 141 See Instruction 1 to proposed Item 27A(b) of Form N–1A. PO 00000 Frm 00020 Fmt 4701 Sfmt 4725 report that would require a fund to provide the expenses associated with a hypothetical $10,000 investment in the fund during the preceding reporting period. In particular, the table must show: (1) An assumed $10,000 beginning account value; (2) total return during the period, before deducting expenses; (3) expenses in dollars paid during the period; (4) ending account value in dollars, based on net asset value return and the assumed $10,000 beginning account value; and (5) expenses as a percent of an investor’s investment in the fund (i.e. expense ratio).142 ETFs must also include the ending value of the account based on market value return.143 The proposed expense example would appear as follows, and the individual aspects of the example are described in more detail below. What were your Fund costs for the period? (based on a hypothetical $10,000 investment) 142 See proposed Item 27A(c) of Form N–1A; see also discussion at infra Section II.B.4 and infra footnote 338 and accompanying text for a discussion of additional tools a fund can provide online to facilitate shareholder engagement. 143 See proposed Item 27A(c) of Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.000</GPH> 70734 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Commenters on the Fund Investor Experience RFC stated that shareholders believe the information provided in the current shareholder report expense example is important because it helps them understand the costs associated with investing in the fund.144 The proposed expense information is intended to reflect shareholders’ preferences to understand fee and expense information, while simplifying the expense example that currently appears in funds’ shareholder reports. Funds’ shareholder reports currently include an expense example consisting of two different tables.145 • The first table shows the actual cost in dollars for a $1,000 investment in the fund over the prior six-month period based on the actual return of the fund. This presentation is intended to help a shareholder calculate the actual ongoing fund expenses, in dollars, that he or she has incurred. • The second table shows the cost in dollars for a $1,000 investment in the fund over the prior six-month period based on a hypothetical 5% annual return (and not, as for the first table, the actual return of the fund during that period). Because funds are required to use the same hypothetical annual return in calculating their expenses here, this second table is designed to help shareholders compare the expenses of their fund with those of other funds.146 Currently, the fund expenses presented in the shareholder report expense examples are different in several respects from those in the prospectus fee table and example. The shareholder report example is derived from a fund’s financial statements and therefore reflects actual historical expenses that a shareholder incurred over the past year (i.e., backwardslooking expenses). The prospectus example, on the other hand, reflects hypothetical future expenses (i.e., 144 See, e.g., ICI Comment Letter I (stating that the information provided in the current expense example is responsive to investors’ keen interest in knowing how much it will cost them to invest in a fund); see also Capital Group Comment Letter (noting that the current expense example provides investors with information on the cost of their investments). 145 See Item 27(d)(1) of Form N–1A. The instructions to this item require a fund to calculate the expense example using a fund’s expense ratio for the preceding six months and not to include the impact of sales loads, if any. 146 The first table does not permit a direct comparison of fund costs because positive performance would make fund expenses expressed as a dollar amount higher and negative performance would make fund expenses expressed as a dollar amount lower. So, for example, if two funds had the same fees, the fund with the better performance would appear more expensive. See February 2004 Shareholder Report Adopting Release, supra footnote 83. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 forward-looking expenses).147 Currently, the prospectus fee table also reflects sales loads that an investor would pay and the expenses associated with the fund’s investments in another fund (referred to as Acquired Fund Fees and Expenses (‘‘AFFE’’)), whereas the shareholder report expense presentation does not, because these elements are not reflected in the fund’s financial statements.148 Additionally, unlike the shareholder report example, the prospectus fee table must reflect any material changes in fees that occurred since the prior fiscal year and cannot reflect certain fee waivers.149 The information about fund expenses that we are proposing funds include in the annual report is designed to simplify the expense example that currently appears in funds’ shareholder reports, and to provide shareholders with additional tools to understand the expenses they paid during the prior fiscal year. The proposal would replace the two current expense examples in the shareholder report with one simplified expense table. The new table would vary from the current disclosures in several respects. First, under the proposal, funds would have to provide the expenses associated with a $10,000 investment in the fund, rather than the current $1,000 investment amount.150 We are proposing to increase the dollar value because we believe that $10,000 is a more realistic investment amount for an individual shareholder today.151 Additionally, because Form N–1A requires funds to use an assumed $10,000 investment for the expense presentation in the prospectus, the 147 See February 2004 Shareholder Report Adopting Release, supra footnote 83, at text following n.96. 148 See Item 27(d)(1) of Form N–1A; see also Section II.H.1.g (discussing proposed changes to the disclosure requirements for AFFE in fund prospectuses, which would permit funds that invest 10% or less of their 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). 149 See Instruction 3(d)(ii) and 3(e) of Item 3 of Form N–1A (prohibiting a fund from reflecting fee waivers unless they reduce the fund’s operating expenses for no less than one year from the effective date of the fund’s prospectus). 150 See proposed Item 27A(c) of Form N–1A. 151 See Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998] (‘‘1998 Form N–1A Prospectus Amendments’’), at n.74 and accompanying text (increasing the hypothetical investment to $10,000 in the prospectus example presentation because the Commission recognized that the typical fund investment was increasing in size). Because we are proposing to raise the hypothetical investment amount to $10,000, we are also proposing to similarly raise the required rounding conventions for dollar values in the table to the nearest dollar, rather than the nearest cent. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 70735 proposal would align this aspect of the two expense presentations and promote a more consistent disclosure experience for investors.152 Similarly, we are proposing to align the rounding conventions of the expense presentations in the shareholder report with those of the prospectus.153 Furthermore, funds would no longer be required to show the total amount of expenses along with hypothetical return information for the period. Instead, funds would continue to provide expense information along with actual return information, with amendments to this presentation of expenses that we believe would help show shareholders how much of their money was actually invested in the market (versus how much of their money was paid for fees and expenses).154 Like the current expense presentation, the proposed presentation would show an assumed beginning account value, an ending account value, and expenses paid during the period. However, rather than only requiring funds to disclose the ending account value net of fees (as they do today), we are proposing to require funds to disaggregate this amount. Funds would individually disclose: (1) The costs paid during the period, (2) the fund’s total return during the period before costs were paid, and (3) the ending account value based on the fund’s net asset value return. A fund would have to provide each of these figures as a mathematical expression (using ‘‘+’’, ‘‘¥’’, and ‘‘=’’ signs), as shown in the example above.155 Costs would have to be expressed as a negative amount (with a ‘‘¥’’ sign preceding the cost amount), and total return, if negative during the period, also would have to be expressed as a negative amount with a ‘‘¥’’ sign preceding it. Conversely, if the fund’s total return were positive during the period, it would be preceded by a ‘‘+’’ sign. 152 But see supra footnotes 147 through 149 and accompanying text (discussing the key differences between the presentation of expense information in the prospectus and the shareholder report). 153 See proposed Instruction 1(a) of Item 27A(c) of Form N–1A (requiring all percentages in the table to be rounded to the nearest hundredth of one percent and all dollar figures in the table to be rounded to the nearest dollar). 154 The expense example in the annual report would provide expense information that covers a 12-month reporting period. 155 See proposed Instructions 1(b) of Item 27A(c) of Form N–1A (‘‘Provide the amounts in each of the columns as a mathematical expression, as appropriate (i.e., include +, ¥ and = symbols). Costs paid during the period must be expressed as a negative amount. Total return, if negative during the period, must be expressed as a negative amount.’’). E:\FR\FM\05NOP2.SGM 05NOP2 70736 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 We believe that this presentation would facilitate a shareholder’s understanding of how costs and performance affect his or her ending account value. Fund fees and expenses are central information for shareholders because they can significantly affect a fund’s investment returns over time.156 We recognize that shareholders could benefit from additional transparency into the costs associated with investing in the fund. However, while some of these costs are fixed and easily quantifiable, others are variable and can be difficult to calculate.157 The proposed presentation is designed to help investors evaluate these costs by disclosing costs directly deducted from the fund’s assets alongside the fund’s return. The fund’s return will reflect these costs as well as any performance expenses associated with the fund’s portfolio management activities (such as the fund’s securities lending activities and transaction costs associated with the fund purchasing and selling portfolio investments). Similarly, some fund expenses are paid directly as fees for investing in the fund, while others are performance expenses associated with the fund’s portfolio management activities. We believe it is important for shareholders to appreciate fully the costs they pay to invest in a fund, and how performance expenses affect the fund’s investment return. We also are proposing to require that funds qualitatively describe, in a footnote to the example, any of these performance expenses that are material as discussed below. We are not proposing to require a similar presentation based on hypothetical performance, because we believe that the primary purpose of a shareholder report is to provide 156 See Fund Investor Experience RFC, supra footnote 8, at text accompanying n. 36. Some commenters on the Fund Investor Experience RFC expressed concern that fund disclosure may not accurately represent the full costs associated with a fund investment. See, e.g., Delmonte Comment Letter; Fowler Comment Letter; Blanchard Comment Letter. 157 For example, some commenters on the Fund Investor Experience RFC discussed challenges associated with disclosing transaction costs, including a potential negative impact on investors’ ability to understand fund costs. See, e.g., ICI Comment Letter I; Comment Letter of BlackRock, Inc. (Oct. 31, 2018) (‘‘BlackRock Comment Letter’’). Based on experience in certain jurisdictions that require transaction cost disclosure, these commenters indicated that transaction cost disclosure can confuse or mislead investors— including through reported transaction costs of zero or negative amounts in some instances in those jurisdictions—because funds may use different calculation methods and certain calculation inputs are subjective in nature. See ICI Comment Letter I; see also Slippage Causes Confusion in MiFID II Fund Rules Row, Chris Flood, Financial Times (Jan. 26, 2018), available at https://www.ft.com/content/ 7b37016a-00fc-11e8-9650-9c0ad2d7c5b5. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 shareholders with actual information about the fund’s performance and expenses over the past year or half-year period.158 We also are proposing certain ETFspecific disclosures that would provide shareholders more transparency into the unique cost structure of an ETF. Under our 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.159 This proposed requirement is designed to allow shareholders to understand any difference between the ETF’s performance and market price, and to highlight for shareholders the indirect costs associated with investing in an ETF, including commissions and premium/discount costs.160 Unlike the current expense presentation, we are proposing to require funds to present expense information in two formats: (1) As a dollar amount, as discussed above; and (2) as a percentage of a shareholder’s investment in the fund (which would be a new addition to the current presentation). We believe that requiring two formats would provide shareholders with a more complete understanding of the expenses associated with their investments. The proposed new percentage-based expense information is designed to provide shareholders with a basis for comparing the level of current period expenses of different funds (as percentages are comparable). This addition would complement the dollarbased expense presentation, which is designed to permit shareholders to estimate the costs, in dollars, that they incurred over the reporting period.We are also proposing to require funds to give the expense columns (i.e., the 158 See supra footnote 147 and accompanying text. While the current expense example based on a hypothetical 5% annual return was designed to help shareholders compare the expenses of their fund with those of other funds, we believe that the proposed requirement to present expense information as a percentage as well as a dollar amount also would provide this comparative value. See supra footnote 146 and accompanying text; infra paragraph accompanying footnote 161. 159 We are also proposing conforming changes to Item 13(a) of Form N–1A to incorporate the requirement for ETFs to disclose total return based on the ETF’s per share market value return in the financial highlights. See proposed amendments to General Instruction 3 of Item 13(a) of Form N–1A. 160 See proposed General Instruction 1(i)(i) of Item 27A(c) of Form N–1A. We also are proposing to maintain the current instructions specific to ETFs, including the requirement to state that investors may pay brokerage commissions on their purchases and sales of ETF shares, which are not reflected in the expense table, as well as the requirement to exclude any fees charged for the purchase and redemption of the ETF’s creation units. See proposed General Instruction 1(i)(ii) and 1(i)(iii) of Item 27A of Form N–1A. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 ‘‘costs paid’’ and ‘‘costs paid as a percentage of your investment’’ columns) of the table more prominence than the remainder of the expense table to draw the attention of investors to these important data points. Funds would have flexibility to use various text and table features to satisfy this requirement.161 We also are proposing several modifications to simplify other aspects of the required expense disclosure. First, we are proposing to remove the currently required narrative preamble to the expense table in its entirety.162 As a replacement for this preamble, we are proposing certain specified brief required footnotes to the table.163 We believe that the simplified expense table, along with the footnotes to the table that we would require funds to include, would provide shareholders with the most relevant information from the lengthy preamble that currently precedes the expense example. First, 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 that are included in the fund’s total return, if material to the fund. For example, if applicable, the fund should explain that total return includes fund investment transaction costs, securities lending costs, or AFFE, and that these costs materially reduced the fund’s return.164 We believe that requiring this qualitative discussion would give funds the opportunity to describe certain expenses that may be difficult to calculate, but that materially affect fund performance. Also, by requiring funds to describe these types of performance expenses in a footnote, while including the direct costs of the fund in the expense example, shareholders might be better able to appreciate the fact that the costs associated with their investment include both fixed costs and indirect variable costs. 161 See proposed General Instruction 1(c) of Item 27A(c) of Form N–1A (providing flexibility for funds to use, for example, graphics, larger font size, different border width or column shading, or different colors or font styles to satisfy this prominence requirement). 162 Currently, a fund must precede the expense example with a narrative preamble explaining that the purpose of the expense example disclosure is to help shareholders understand the ongoing costs of investing in the fund and to compare those costs with the ongoing costs of investing in other mutual funds. The preamble defines ongoing costs as fund expenses, including management fees and distribution [and/or service] (12b–1) fees. See Item 27(d)(1) of Form N–1A. 163 See footnotes to the expense example in proposed Item 27A(c). 164 See Instruction 1(f) to proposed Item 27A(c) E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Furthermore, a 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.165 This would draw investor attention to the fact that there may be additional costs not reflected in the expense example, if applicable. Finally, if a fund’s shareholder report covers a period of time that is less than a full reporting year, the fund would be required to include a footnote to the table noting this and explaining that expenses for a full reporting period would be higher than the figures shown.166 We also are proposing certain modifications to the instructions associated with the computation of fund expenses to reflect the proposed changes to the expense example. We are proposing an instruction that would direct funds to calculate ‘‘Costs paid’’ by multiplying 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.167 The figure in the ‘‘Cost paid as a percentage of your investment’’ column, in turn, would be the fund’s expense ratio as it appears in the fund’s most recent audited financial statements or financial highlights.168 The figure in the ‘‘Ending account value (based on net asset value return)’’ column would similarly be derived from figures in the fund’s audited financial statements or financial highlights. To calculate this figure, the fund would multiply $10,000 by the fund’s net asset value return as it appears in the fund’s most recent audited financial statements or financial highlights.169 The figure in the ‘‘Total return before costs paid’’ column would be calculated by subtracting $10,000 (the figure in the ‘‘Beginning account value’’ column) and the figure in the ‘‘Costs paid’’ column from the ‘‘Ending account value (based on net asset value 165 See Instruction 1(g) to proposed Item 27A(c). Funds would not be required to disclose the amount of such fees. 166 See Instruction 1(i) to proposed Item 27A(c). This would generally apply to newly formed funds that are required to file an annual or semi-annual report for a period less than the reporting period. 167 See Instruction 2(a) to proposed Item 27A(c) of Form N–1A. 168 See proposed Instruction 2(c). In the semiannual report, the fund’s expense ratio would be calculated in the manner required by Instruction 4(b) to Item 13(a) of Form N–1A, using the expenses for the fund’s most recent fiscal half-year. Id. 169 See proposed Instruction 2(e). In the semiannual report, the fund’s ending account value would be calculated in the manner required by Instruction 3 to Item 13(a) of Form N–1A. Id. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 return)’’ column.170 Additionally, for ETFs we are proposing an instruction for how an ETF should calculate the ETF’s ending account based on market value return.171 We are proposing to maintain certain of the current instructions that we believe would continue to provide useful information to shareholders. If a fund incurred any ‘‘extraordinary expenses’’ during the reporting period, we are proposing to continue to allow the fund to briefly describe, in a footnote to the expense table, what the actual expenses would have been if these extraordinary expenses were not incurred.172 Similarly, if a fund is a feeder fund, we are proposing to continue to allow that fund to reflect the aggregate expenses of the feeder fund and the master fund in the expense table and to include a footnote stating that the expense table reflects the expenses of both the feeder and master funds.173 Additionally, if the shareholder report covers more than one class of a fund or more than one feeder fund that invests in the same master fund, the shareholder report may include a separate expense table, or a separate line item in the expense table, for each class or feeder fund.174 We request comment on our proposed approach to revising the expense information that would appear in funds’ annual reports, and specifically on the following issues: 18. Would the information that would be included in the proposed expense 170 See proposed Instruction 2(d) of Item 27A(c) of Form N–1A. 171 See proposed Instruction 2(f) of Item 27A(c) of Form N–1A (requiring funds to multiply $10,000 by the fund’s market value return). In an ETF’s annual report, an ETF would be required to use the market value return as it appears in the ETF’s most recent audited financial statements or financial highlights in its calculations. In the semi-annual report, the fund’s market value return should be calculated in the manner required by Instruction 3 to Item 13(a) of Form N–1A. Id. 172 See Instruction 1(k) to proposed Item 27A(c) of Form N–1A (defining ‘‘extraordinary expenses’’ as ‘‘expenses that are distinguished by their unusual nature and by the infrequency of their occurrence. Unusual nature means the expense has a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the Fund, taking into account the environment in which the Fund operates. Infrequency of occurrence means the expense is not reasonably expected to recur in the foreseeable future, taking into consideration the environment in which the Fund operates. The environment of a Fund includes such factors as the characteristics of the industry or industries in which it operates, the geographical location of its operations, and the nature and extent of government regulation’’); see also Instruction 2(a)(ii) to Item 27(d) of Form N–1A. 173 See Instruction 1(d) to proposed Item 27A(c) of Form N–1A. 174 See Instruction 1(e) to proposed Item 27A(c) of Form N–1A. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 70737 example permit shareholders to estimate the actual costs, in dollars, that they incurred over the reporting period and provide shareholders with a basis for comparing expenses across different funds? If not, why not? Which, if any, of the proposed disclosure requirements should we modify? Is there a better way of describing the fund’s expenses to shareholders in the annual report? 19. Should we, as proposed, require funds to provide the costs in dollars associated with investing in the fund based on an assumed $10,000 investment? Should we increase the assumed investment amount from $1,000 to $10,000, as proposed? Should we use some other amount, and if so, what amount would be more appropriate and why? 20. Should we, as proposed, align the rounding conventions included in the expense example instructions in the shareholder report with those included in the instructions to the prospectus expense table? 21. Should we, as proposed, require funds to disclose individually: (1) The costs paid during the period, (2) the fund’s total return during the period before costs were paid, and (3) the ending account value based on the fund’s net asset value return? Why or why not? Instead, should we require funds to disclose the total return net of fees? Are the proposed calculation instructions for these figures appropriate? Why or why not? Would providing expense information in this disaggregated manner facilitate shareholder understanding of how costs and performance each affect the ending account value? Why or why not? 22. Should we, as proposed, require funds to disclose the figures in the expense table as a mathematical expression? Would shareholders find this presentation useful? 23. Should we, as proposed, require funds to use text features to highlight the columns showing costs paid during the period (both in dollars and as a percentage of the investment)? Would this approach draw shareholder attention to those figures? Is there a particular format that we should require to highlight these columns, instead of (as proposed) providing flexibility in how to highlight them? 24. Should we require funds to provide the costs associated with investing in the fund as a percentage of a shareholder’s investment in the fund (i.e., expense ratio)? Would this disclosure assist shareholders in comparing the level of current period expenses of different funds? 25. Should we, as proposed, require ETFs to provide the ending value of the E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70738 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules account based on market value return, in addition to the value based on net asset value return? If so, should we require or permit ETFs to provide any additional information to explain the costs reflected in these two values to shareholders? For example, should we require or permit ETFs to provide a narrative explanation of what these values represent, how they differ from each other, and/or what impact they have on the fund’s performance? 26. Should we require, as proposed, funds to include the expense ratio and cost in dollars only for the period covered by the report? Should we instead require funds to include fund expense information over other historical periods, such as 5 years, 10 years, or some other period? 27. Should we, as proposed, require funds to describe qualitatively other costs included in total return, if material to the fund? Would this requirement be helpful to investors, and if so, what types of investors would find the disclosure to be particularly helpful? If the disclosure would not be helpful to investors, why not? Should we instead permit, rather than require, funds to include these costs in the expense example or in a footnote? Should we require funds to separately disclose the amount of securities lending costs, or fund investment transaction costs, that the fund incurred during the period? Should we require funds to include in the footnote the amount of any acquired fund fees and expenses that the fund includes in its then-effective prospectus fee table? Would quantifying acquired fund fees and expenses in the footnote be appropriate in light of the fact that acquired fund fees and expenses are not included in a fund’s audited financial statements, and calculation of acquired fund fees and expenses can require a degree of estimation when the acquired funds have different fiscal year-ends than the acquiring fund? Would disclosing quantitative amounts of securities lending or fund investment transaction costs present the same or additional considerations? Is it appropriate for any or all of these costs to be included in a footnote? Should funds instead be required to include this information in the expense table itself? Is there another, more appropriate, place to include this information? 28. Should we, as proposed, require funds to briefly explain in a footnote that the example does not reflect transaction costs associated with purchasing or selling fund shares? Alternatively, should we permit, rather than require, funds to include this footnote? VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 29. Should we, as proposed, continue to allow a fund that is a feeder fund to reflect the aggregate expenses of the feeder fund and the master fund in the expense table and to include a footnote stating that the expense table reflects the expenses of both the feeder and master funds? Should we instead require feeder funds to separately disclose the fees associated with the feeder and the master funds, respectively? 30. Do the proposed footnotes to the expense presentation adequately convey the information that was previously included in the preamble to the current expense examples? If not, what additional information should we require or permit funds to disclose, and in what format should funds have to present this additional disclosure? Instead of including the information in footnotes, is there a more appropriate location for the information? Is there any additional information that we should permit or require funds to convey in notes to the expense presentation? For example, if the fund plans to increase its fees materially and this change would be disclosed in the proposed ‘‘Material Fund Changes’’ of the annual report, should we either permit or require the fund to crossreference this disclosure as a note to the expense presentation? 31. Should we adopt any additional or different expense disclosure requirements for certain types of funds? For example, in addition to what we proposed, are there any additional or different expenses that may only be relevant to ETFs (accounting for the unique characteristics of their structure) that we should require or permit ETFs to disclose? 32. Should we allow funds to crossreference additional resources that would allow each shareholder to calculate the actual expenses that he or she paid? For example, should we allow funds to cross-reference online expense calculators produced by third-party vendors? Alternatively, should we allow funds to cross-reference an online expense calculator provided by the Commission or FINRA, such as FINRA’s fund analyzer tool? Since FINRA’s fund analyzer only provides forward-looking information, rather than the actual past expenses that shareholders have paid during the period, would this information be useful to shareholders? 33. In what ways can technology make personalized expense information possible? For example, should funds or intermediaries provide calculators or other tools to help investors understand their individual investment costs? Have improvements in technology since 2004, when the Commission considered PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 requiring personalized expense information in quarterly account statements, made it easier for funds or intermediaries to provide personalized expense information in quarterly account statements or through other mechanisms? 175 If funds were to provide personalized expense information, how can we design the disclosure to reduce potential investor concerns about sharing their personal information or about data security? Are there any other concerns associated with such disclosure? 34. Should we require funds to submit interactive data files (for example, formatted using eXtensible Business Reporting Language (‘‘XBRL’’)) containing their expense example information? Why or why not? Would it be useful for shareholders to have access to the expense example in a structured data format? Would this meaningfully complement the current requirement that funds submit their prospectus risk/ return summary information in Inline XBRL format, or would it be duplicative with this current requirement? Is there any other information from funds’ shareholder reports that we should require funds to submit in a structured data format? c. Management’s Discussion of Fund Performance Given fund investors’ interest in performance information for purposes of monitoring and assessing their ongoing fund investments, we propose largely to maintain the current requirements for the management’s discussion of fund performance (‘‘MDFP’’) section of the annual report, with several proposed targeted changes.176 Currently, MDFP disclosure consists of the following: • A narrative discussion of the factors that materially affected the fund’s performance during the most recently completed fiscal year; • A line graph providing account values for each of the most recently completed 10 fiscal years (or for the life of the fund, if shorter) based on an initial $10,000 investment in comparison to the returns of an appropriate broad-based securities 175 See February 2004 Shareholder Report Adopting Release, supra footnote 83, at paragraph accompanying n.36 (recognizing that a requirement for individualized expense disclosure in quarterly statements would have required costly systems changes for funds and intermediaries at that time). 176 See supra footnote 47 and accompanying text (discussing information about investors’ interest in shareholder report performance information, including the results of various investor testing and surveys in which approximately 60–80% of surveyed investors expressed interest in fund performance information or the narrative discussion of factors affecting the fund’s performance). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules market index for the same period (as well as more narrowly based indexes that reflect the market sectors in which the fund invests, at the fund’s discretion); • A table showing the fund’s average annual total returns for the past 1-, 5-, and 10-year periods (or for the life of the fund, if shorter); • A statement accompanying the line graph and table to the effect that past performance does not predict future performance and that these presentations do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares; • A discussion of the effect of any policy or practice of maintaining a specified level of distributions to shareholders on the fund’s investment strategies and per share net asset value, as well as the extent to which the fund’s distribution policy resulted in distributions of capital; and • For ETFs that do not provide certain premium or discount information on their websites, a table showing the number of days the fund shares traded at a premium or discount to net asset value.177 We are proposing amendments to the MDFP requirements to make the disclosure more concise and to take into account that shareholders may no longer receive fund prospectuses—which include performance information—after their initial purchase of fund shares.178 These proposed amendments therefore would require the MDFP to include additional performance-related information that is available in fund prospectuses, including certain classspecific performance information and comparative information showing the average annual total returns of one or more relevant benchmarks. We also are proposing to amend the definition of an appropriate broad-based securities market index to clarify that all funds should compare their performance to the overall applicable securities market, for purposes of both fund annual reports and prospectuses. khammond on DSKJM1Z7X2PROD with PROPOSALS2 i. Narrative MDFP Disclosure We propose to retain the current requirement that funds’ annual reports include a narrative discussion of factors that materially affected the fund’s performance during the most recent fiscal year, with minor modifications to encourage concise disclosure.179 The 177 See Item 27(b)(7) of current Form N–1A. infra Section II.F. 179 See Item 27(b)(7)(i) of Form N–1A; proposed Item 27A(d)(1) of Form N–1A. Currently, funds are required to discuss the factors that materially 178 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 narrative MDFP disclosure is designed to aid shareholders in assessing a fund’s performance over the prior year.180 We continue to believe this disclosure provides information that helps shareholders understand and evaluate fund performance over that time period. However, based on staff review of current disclosures, we believe that some funds provide overly long narrative discussions that likely impede shareholders’ ability to understand easily the key factors that affected the fund’s performance. Therefore, we are proposing to amend the current requirement to specify that the disclosure must ‘‘briefly summarize’’ the ‘‘key’’ factors that materially affected the fund’s performance during the last fiscal year, including the relevant market conditions and the investment strategies and techniques used by the fund’s investment adviser.181 A proposed instruction would direct funds not to include lengthy, generic, or overly broad discussions of the factors that generally affected market performance during a fund’s last fiscal year.182 The proposed instruction would also direct funds to use graphics or text features—such as bullet lists or tables— to present the key factors, as appropriate. We understand that some funds currently attempt to make their narrative disclosure easier for shareholders to understand by, for example, using tables or charts to show how the fund performed in comparison to a relevant benchmark or to identify the significant contributors to or detractors from the fund’s performance by holding, industry, geographic region, or other relevant category. We believe these types of presentations may be helpful to shareholders, and funds could continue to include them in annual reports under the proposal. We recognize that funds currently may include additional information in their shareholder reports that is designed to help shareholders understand fund performance and market conditions, such as a fund president’s letter to shareholders, interviews with portfolio managers, affected the fund’s performance during the most recently completed fiscal year, including the relevant market conditions and the investment strategies and techniques used by the fund’s investment adviser. Item 27(b)(7)(i) of Form N–1A. 180 See February 2004 Shareholder Report Adopting Release, supra footnote 83, at paragraph accompanying n.96; Disclosure of Mutual Fund Performance and Portfolio Managers, Investment Company Act Release No. 19382 (Apr. 6, 1993) [58 FR 19050 (Apr. 12, 1993)] (‘‘MDFP Adopting Release’’). 181 See proposed Item 27A(d)(1) of Form N–1A. 182 See Instruction 1 to proposed Item 27A(d)(1) of Form N–1A. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 70739 market commentary, and other similar information. Under the proposed amendments, a fund could not include this additional information in its annual report.183 We believe that information about the key factors affecting a fund’s performance, which the proposal would require, would likely satisfy many fund shareholders’ needs and would provide a more focused presentation. Although we understand that the additional information funds currently include in shareholder reports may be helpful to some shareholders, we believe the potential benefits of this information to a subset of shareholders, on balance, do not warrant the additional length they would contribute to the annual report. We also believe that allowing this discretionary information would not further our goal of presenting shareholders with the information that is most central to understanding their fund’s performance. Funds would, however, be able to provide materials that include this additional information to shareholders in the same transmission as the annual report (e.g., in the same email or envelope), provided that the annual report is given greater prominence.184 Funds could also provide this additional information on their websites, as we understand many funds do today. Further, funds could refer to additional website information near the end of their shareholder reports if they reasonably believe that shareholders will likely view the information as important.185 We request comment on the proposed amendments to the narrative MDFP disclosure, including: 35. Should we retain the requirement for a fund to include narrative MDFP disclosure in annual reports? Why or why not? Does this disclosure help shareholders better understand a fund’s performance? 36. Should we require the narrative MDFP disclosure to summarize briefly the key factors that materially affected 183 See supra Section II.B.1.b (discussing the proposed instruction that would permit funds only to include in their annual reports information that is permitted or required by proposed Item 27A). 184 Commission rules currently do not preclude a fund from including other materials in the same transmission as shareholder reports. Our proposal similarly would not limit a fund’s ability to provide other materials in the same transmittal as the proposed annual report. We believe this would allow funds to communicate with shareholders more efficiently through a single transmittal without detracting from our goal of concise, readable shareholder reports. However, we are proposing to require that the annual report be given greater prominence than other materials, with the exception of certain other specified disclosure materials. See supra footnotes 124–126 and accompanying text. 185 See infra Section II.B.2.i. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70740 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules the fund’s performance during the last fiscal year, as proposed? Would different instructions better further the Commission’s goals of making narrative MDFP disclosure more concise so shareholders can understand more efficiently the key factors that affected a fund’s performance? If so, what should those alternative instructions be, and how would they better further our goals? 37. As proposed, should we direct funds to use graphics or text features, such as bullet lists or tables, to present the key factors, as appropriate? Should we require funds to use specific graphics or text features to help shareholders more readily understand the key factors affecting fund performance and to create consistency among annual reports? Or is a more flexible approach, like we propose, more appropriate to allow funds to develop presentations tailored to individual funds and the needs of their shareholders? 38. Should we expressly limit the length of the narrative MDFP disclosure? If so, how (e.g., word or page limits)? If not, why not? 39. Are there other ways we could require or encourage funds to provide concise narrative MDFP disclosure focused on the key factors that affected the fund’s performance, beyond our proposed revisions and instruction directing funds not to include lengthy, generic, or overly broad discussions of the factors that generally affected market performance? For example, should we expressly require a discussion about the types of investments that drove fund performance, or can shareholders intuit this by reviewing the fund’s investment strategy? 40. Should we amend the narrative MDFP disclosure requirement to limit or expand the examples of the types of factors that funds should discuss? For example, should we refer to other factors, beyond the current references in this requirement to relevant market conditions and the investment strategies and techniques the fund’s adviser used? Should we require funds to discuss holdings that significantly contributed to or detracted from their performance during the past fiscal year (e.g., by holding, industry, geographic region, or other relevant category), as many funds do today? Should we require or encourage funds to discuss other topics, such as: (1) The fund’s performance in relation to its benchmark; (2) the reason for and effect of any large cash or temporary defensive position on fund performance; (3) the effect of any tax strategies, or the effects of taxes, on fund performance; or (4) whether the fund VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 engages in high portfolio turnover and the effect of portfolio turnover on fund performance? 41. Should we incorporate concepts or requirements from management’s discussion and analysis requirements that apply to annual reports of operating companies and BDCs on Form 10–K? 186 For example, should we require or encourage funds to disclose material financial and statistical data that the fund believes would enhance a shareholder’s understanding of the fund’s performance? As another example, would it be appropriate to require or permit forward-looking disclosure? If so, are there any related rules or rule amendments we should adopt to facilitate this disclosure? For instance, should we require or permit a fund to disclose when a key factor that materially affected the fund’s performance for the last fiscal year is not expected to materially affect the fund’s future performance (e.g., because the fund has sold the underlying investment or because of an unusual or infrequent event or transaction)? 42. Are there ways we could prevent funds from providing generic or boilerplate narrative MDFP disclosure that does not change much from year to year? If so, how? 43. Are there any best practices in narrative MDFP disclosure that we should encourage or require? 44. Should we permit or require additional information in the annual report that is intended to help shareholders understand fund performance, such as interviews with portfolio managers or a president’s letter? Is this additional information helpful to shareholders? If so, should it be included as part of the MDFP, or in some other part of a fund’s annual report? ii. Performance Line Graph and Request for Comment on Use of Market Indexes in Performance Disclosure We also are proposing to retain the requirements for the performance line graph currently included in annual reports, with certain amendments designed to improve the current presentation.187 The line graph generally shows the performance of a $10,000 investment in the fund and in an appropriate broad-based securities 186 See, e.g., Item 303 of Regulation S–K; Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Securities Act Release No. 10750 (Jan. 30, 2020) [85 FR 12068 (Feb. 28, 2020)]. 187 See Item 27(b)(7)(ii)(A) of Form N–1A; proposed Item 27A(b)(2)(A). PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 market index over a 10-year period.188 This disclosure is designed to permit a comparison of the performance of the fund with ‘‘the market’’ and to put the narrative discussion into perspective.189 In addition to required information about an appropriate broad-based securities market index’s performance, a fund has the option to compare its performance to other indexes, including more narrowly based indexes that reflect the market sectors in which the fund invests.190 We continue to believe the line graph presentation helps shareholders understand how the fund has performed over a 10-year time horizon in comparison to an appropriate broad-based securities market index and other relevant indexes, as applicable.191 Because this presentation shows performance in dollar terms, based on an initial $10,000 investment, we believe the line graph may contribute to shareholders’ understanding of fund performance—because some individuals may find it easier to assess dollar figures than percentages—and complements the percentage-based presentation in the average annual total returns table.192 We also believe the line graph helps illustrate the variability of a fund’s returns (e.g., whether the fund’s returns have been volatile or relatively consistent from year to year) and 188 An ‘‘appropriate broad-based securities market index’’ is one that is administered by an organization that is not an affiliated person of the fund, its investment adviser, or principal underwriter, unless the index is widely recognized and used. See Instruction 5 to Item 27(b)(7)(ii) of current Form N–1A; Instruction 6 to proposed Item 27A(d)(2) of Form N–1A. 189 See MDFP Adopting Release, supra footnote 180, at paragraph accompanying n.17. 190 See Instruction 6 to Item 27(b)(7)(ii) of Form N–1A; Instruction 7 to proposed Item 27A(d)(2) of Form N–1A. 191 Many investors view performance information as important for purposes of monitoring a fund investment. See supra footnote 48 and accompanying text. With respect to the performance line graph in particular, one study found that 55% of surveyed investors ranked the line graph and table of fund’s performance in the top three most important categories of annual report information. Approximately 49% of surveyed investors classified this information as ‘‘absolutely essential for any investor.’’ See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49, 51. 192 See infra Section II.B.2.c.iii (discussing total returns table). To the extent that a fund chooses to provide tools to help shareholders better understand online or mobile presentations of annual reports, the ability to customize the investment amount and investment time horizon could be areas that lend themselves to add-on functionality that funds may wish to build into these presentations. If a fund provides such tools, the default presentation would be required to be the values that the proposed Form N–1A requirements prescribe (e.g., an initial investment of $10,000 would be the default presentation for the line graph, although the tools would allow a shareholder to increase or reduce this investment amount). See discussion at infra Section II.B.4 and infra footnote 338 and accompanying text. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 therefore provides shareholders with some information about the risks of their fund investment. Moreover, the line graph presentation may help investors understand the general benefits of long-term investments (e.g., compound interest). We recognize potential critiques that the line graph may not show the variability of a fund’s returns as clearly as certain other presentations (such as the bar chart we require in fund prospectuses that shows annual total returns as a percentage of an investment).193 However, given the other benefits of the line graph— particularly that it presents performance in dollar terms that may be easier for some shareholders to assess—we are proposing to retain the line graph presentation. We are proposing to retain the current requirement to present fund performance in relation to an appropriate broad-based securities market index because we continue to believe that performance disclosure without relevant context showing market performance would not provide the information that shareholders need to understand how their fund performed. For example, performance disclosure without this type of context would not give shareholders a sense of how their investments might have performed had their money been invested elsewhere. However, we request comment on this proposed requirement below. We also recognize potential critiques about the use of market indexes in presenting performance information. These include critiques that index licensing fees can be costly to funds (and, indirectly, to fund investors) and that, depending on the index selected, comparing a fund’s performance against the index in some cases may be less effective in helping shareholders understand the fund’s performance and risks. For example, because funds have discretion to choose an appropriate broad-based securities market index, a fund may choose an index that it is 193 See Item 4(b)(2)(ii) of Form N–1A (requiring a bar chart in a fund’s prospectus that shows a fund’s annual total returns for each of the last 10 calendar years (or the life of the fund, if shorter). Because the prospectus bar chart shows the percentage of returns for each year, it may more clearly show variations in a fund’s returns than the line graph, which shows the cumulative performance of a $10,000 investment. For example, assume a fund experienced returns of negative 10% in year 1 and year 9. The bar chart would clearly show a negative 10% return in each of these years. However, in the line graph presentation, the negative 10% return in year 1 could appear as a much smaller change than a negative 10% return in year 9 (e.g., a $1,000 decrease on a $10,000 investment in year 1 versus, for example, a $3,000 decrease in year 9 if the account value had increased to $30,000 in year 8). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 more likely to outperform to make it look like the fund is doing better than the corresponding market (for instance, this could occur if a bond fund selects a more conservative bond market index). In addition, index providers can experience errors or other difficulties in constructing, computing, or maintaining indexes. For example, an index that includes companies in emerging and frontier markets may experience data or computational errors if there is less information publicly available about these companies due to differences in regulatory, accounting, auditing, and financial recordkeeping standards.194 While we propose largely to maintain the current line graph presentation and associated instructions, we are proposing three revisions to the instructions associated with the line graph. First, we propose to add a new instruction to clarify the scope of required disclosure in an annual report that covers multiple classes.195 The proposed instruction would require a fund to present performance information for at least one class in the line graph (in addition to the required information for an appropriate broadbased securities market index). The proposed instruction provides funds with discretion to determine which class or classes to present in the line graph, subject to certain limitations that are consistent with existing limitations on prospectus performance presentations.196 Second, we propose to remove an instruction that allows the line graph to cover periods longer than the past 10 fiscal years. We are concerned that this current instruction may introduce variability that reduces the benefits of the line graph. For example, as the time period on the line graph lengthens, any volatility of the fund’s returns may 194 See SEC Chairman Jay Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman, SEC Division of Investment Management Director Dalia Blass, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (Apr. 21, 2020), available at https://www.sec.gov/news/publicstatement/emerging-market-investments-disclosurereporting. 195 See Instruction 13(a) to proposed Item 27A(d)(2). 196 See current Instruction 3 to Item 4(b)(2) of Form N–1A (allowing a fund to select which class to include (e.g., the oldest class, the class with the greatest net assets) if the fund: (1) Selects the class with 10 or more years of annual returns if other classes have fewer than 10 years of annual returns; (2) selects the class with the longest period of annual returns when the classes all have fewer than 10 years of returns; and (3) if the fund provides annual total returns for a class that is different from the class selected for the most immediately preceding period, it explains in a footnote the reasons for selecting a different class). PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 70741 become harder to identify because the scale of the line graph typically would need to cover a wider range of account values (e.g., a scale of $0 to $1,000,000 rather than $0 to $30,000) that reflects growth in the account. This increase in scale generally would make any particular increase or decrease in account value (e.g., an increase or decrease of $3,000) harder to identify. Further, this current instruction may result in performance presentations that could give rise to unrealistic investor expectations. For funds in existence for a long period of time (e.g., 40 years), a line graph that shows the performance of a $10,000 investment at the outset of the fund may not be particularly relevant for the average shareholder, who likely has not been invested in the fund for such an extended period of time. The line graph also could show an ending account value that is substantially higher than the value of an initial $10,000 investment at the end of a 10-year period (e.g., an ending account value of $1,000,000 versus an ending account value of $25,000). While we propose to limit the line graph presentation to the fund’s last 10 fiscal years, funds may include similar presentations covering longer periods of time on their websites or in other marketing materials. Third, we propose to clarify the definition of an appropriate broad-based securities market index. Currently, both a fund’s prospectus and annual report must compare the fund’s performance to an ‘‘appropriate broad-based securities market index.’’ 197 The Commission has described such an index as ‘‘one that provides investors with a performance indicator of the overall applicable stock or bond markets, as applicable,’’ while also stating that a fund would have ‘‘considerable flexibility in selecting a broad-based index that it believes best reflects the market(s) in which it invests.’’ 198 Our staff has observed varying practices with respect to the benchmarks funds use. Some funds, for example, disclose their performance against a benchmark index that may not provide a performance indicator of ‘‘the overall applicable stock or bond markets,’’ such as an index tied to a particular sector, industry, geographic location, asset class, or strategy (e.g., 197 See Item 4(b)(2)(iii) and Instruction 5 to Item 27(b)(7) of Form N–1A. 198 In 1993, the Commission adopted rules requiring funds to compare their performance to a ‘‘broad-based index in order to provide investors with a benchmark for evaluating fund performance that affords a greater basis for comparability than a narrow index would afford.’’ See MDFP Adopting Release, supra footnote 180, at paragraph preceding nn.19–20, and n.21 and accompanying paragraph. E:\FR\FM\05NOP2.SGM 05NOP2 70742 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 growth or value indexes).199 While indexes based on narrow segments of the market may be useful for comparison purposes, we believe that all funds should compare their performance to the overall market. Therefore, we are proposing to include language that clarifies that a ‘‘broad-based index’’ is one that represents the overall applicable domestic or international equity or debt markets, as appropriate.200 This clarifying language would continue to provide a fund with flexibility in selecting a broad-based index that the fund believes best reflects the market(s) in which it invests. The form instructions also would continue to encourage a fund to include narrower indexes that reflect the market segments in which the fund invests in its performance presentation along with its appropriate broad-based securities market index.201 If a fund invests in both equity and debt securities, such as a balanced fund, the fund may include more than one appropriate broad-based securities market index. The fund may also include a blended index—one that combines the performance of more than one index, such as equity and debt indexes—as an additional index to supplement the appropriate broad-based securities market index(es) that the fund includes. The proposed amendments to the definition of an appropriate broadbased securities market index would affect performance presentations in fund prospectuses, as well as fund annual reports.202 We request comment on the proposed line graph presentation and on the use of market indexes more generally in performance presentations, including the following: 45. Should we require the annual report to include the performance line graph, as proposed? Why or why not? Should we modify the proposed requirements for the line graph? For example, should the line graph show returns in terms of percentages instead of dollar values? Are there other presentations that would help shareholders better understand a fund’s performance over the past 10 years (or 199 When the Commission adopted the requirement to compare a fund’s performance against an appropriate broad-based securities market index, the Commission clarified, ‘‘An index would not be considered to be broad-based if it is composed of securities of firms in a particular industry or group of related industries.’’ See id. at n.21. 200 See proposed Instruction 6 to proposed Item 27A(d)(2) of Form N–1A. 201 See proposed Instruction 7 to proposed Item 27A(d)(2) of Form N–1A. 202 See proposed Item 4(b)(2)(iii) of Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 for the life of the fund, if shorter) and the variability of its returns? 46. We understand that the line graph can be difficult to read in black and white and may not fully illustrate volatility in the early years displayed in the graph.203 Are there other performance presentations that could better address these issues than the proposed approach and that would retain the benefits of the line graph presentation to shareholders? For example, should we replace the line graph with something similar to the bar chart required in fund prospectuses, which may be easier to read in black and white? 204 Would this alternative presentation better show year-to-year volatility? Is the risk/return bar chart easy for shareholders to understand, or do shareholders prefer the line graph presentation that shows returns in terms of dollars rather than percentages? If we were to replace the line graph with something similar to the risk/return bar chart, should that alternative presentation present returns in terms of dollars instead of percentages? 47. Should we require the line graph to cover at least one class of a fund when a single shareholder report covers multiple classes, as proposed? Alternatively, should the graph be limited to one class or required to cover more than one class? How can we make sure that the line graph remains readable but provides sufficient information to help shareholders understand fund performance and risks? 48. Should we no longer allow funds to provide a line graph that covers periods longer than 10 years in their annual reports, as proposed? What are the benefits and drawbacks of permitting line graph presentations that cover more than 10 years, if a fund’s registration statement has been effective for more than 10 years? If we were to continue to permit the line graph to cover a period of time that is longer than 10 years, should we limit the time period that the graph may cover in any way (e.g., limit the time period to no more than 20 years)? 49. Should we require funds to provide information in shareholder reports about the performance of an appropriate broad-based securities market index, as proposed? What are the advantages and disadvantages of this information? Does information about an appropriate broad-based securities market index’s performance provide investors with a helpful performance indicator of the overall relevant 203 See 204 See PO 00000 supra footnote 193. Item 4(b)(2)(ii) of Form N–1A. Frm 00028 Fmt 4701 Sfmt 4702 market? 205 If so, do these benefits justify the burdens, including costs to the fund (and ultimately its shareholders) of paying one or more index providers to allow the fund to include this information in the fund’s disclosure? Is cost a significant factor for funds when they determine which, and how many, indexes to include in their shareholder reports? How are these costs assessed (for example, are they assessed on a per-disclosure basis or on some other basis)? 50. Should we modify the definition of ‘‘appropriate broad-based securities market index,’’ as proposed? If not, why not? If so, is the proposed definition appropriate, or should we modify it in any way? For example, should we permit funds to use blended indexes only as secondary indexes, as proposed (as an index could be ‘‘broad-based’’ only if it represents the overall applicable equity or debt markets), or should we permit funds to use these indexes as primary appropriate broadbased securities market indexes under certain circumstances? If we were to permit this, what if any conditions would be appropriate to ensure that the index remains ‘‘broad-based’’? For example, should there be requirements limiting a fund to the number of indexes that could be blended for this purpose (e.g., 2), or the types of indexes that could be blended? Similarly, should we modify current requirements that permit funds to use non-securities market indexes only as secondary indexes, and not as appropriate broad-based securities market indexes? Are there concerns with certain funds using blended indexes or non-securities market indexes as secondary, rather than primary, indexes, such as concerns about investor understanding or costs associated with disclosing multiple indexes (e.g., index licensing fees)? Do blended or non-securities market indexes provide an appropriate point of comparison for an investor to evaluate his or her fund’s performance? If we were to allow blended indexes or nonsecurities market indexes as a primary index, how could we tailor this approach to make sure that investors receive a performance indicator of the overall applicable market? 206 Is the proposed definition clear? For example, is it clear that an index composed of securities of firms in a particular industry or group of related industries would not be broad-based? 205 See MDFP Adopting Release, supra footnote 180, at n.21 and accompanying text. 206 See MDFP Adopting Release, supra footnote 180, at n.21 and accompanying text. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 51. Are there other changes we should make to the definition of appropriate broad-based securities market index, or to the framework for providing index performance more generally? For example, are there ways we could facilitate an investor’s ability to understand the relevance of an appropriate broad-based securities market index, while maintaining funds’ flexibility to select an appropriate and cost-effective benchmark? 207 As another example, are there ways we could address concerns that some funds may choose an index for the purpose of making the fund’s performance look better? Are there other instructions or guidance we could provide regarding the selection of an appropriate broadbased securities market index? 52. We are proposing to amend the definition of appropriate broad-based securities market index for purposes of Form N–1A. Should the same amended definition apply to fund prospectuses and fund shareholder reports, as proposed? If not, why not? Should we make corresponding amendments to the definition of appropriate broad-based securities market index in Form N–2 with respect to MDFP requirements for registered closed-end funds? 208 Why or why not? 53. Should funds have discretion to provide information in shareholder reports about the performance of more narrowly based indexes that reflect the market sectors in which the fund invests, as proposed? Is the information these indexes provide helpful to shareholders, or does additional index performance information make the disclosure more difficult for shareholders to understand? 54. Should index providers be required to meet certain governance, due diligence, or other similar standards if an index’s performance will be included in fund disclosure? Why or why not? If we imposed any such requirement, how would funds expect to determine whether those standards have been met? 55. Are there alternative measures that we should permit or require funds to use to provide investors with comparative information about market 207 See, e.g., Fowler Comment Letter (‘‘Compare to a market measure I understand, and the asset class the fund holds.’’); Ewing Comment Letter (‘‘Compare against a market measure I know, like the S&P 500, not some obscure thing I never heard of.’’); Frank W. Comment Letter; see also ICI Comment Letter I (requesting that the Commission be mindful of, and sensitive to, the fees and costs associated with including index information in a fund’s prospectus). 208 See Instruction 4.g(2)(F) to Item 24 of Form N– 2, as amended by Closed-End Fund Offering Reform Adopting Release, supra footnote 128. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 performance, instead of an appropriate broad-based securities market index or more narrowly based indexes that reflect the market sectors in which the fund invests? If so, what alternative measures (e.g., the rate of inflation or a risk free rate), and why are those measures appropriate and preferable to the use of indexes? 209 iii. Performance Table We are proposing to retain the current requirement that funds’ annual reports include a table presenting average annual total returns for the past 1-, 5-, and 10-year periods, although we are proposing amendments to require three pieces of additional information. Specifically, the proposal would require that the table include: (1) The average annual total returns of an appropriate broad-based securities market index; (2) the fund’s average annual total returns without sales charges (in addition to current disclosure that shows returns reflecting applicable sales charges); and (3) average annual total returns for each class that the report covers, in each case for the past 1-, 5-, and 10-year periods.210 The average annual total returns table is designed to assist shareholders in comparing the performance of different funds.211 We also believe that the table complements the line graph to help shareholders evaluate a fund’s performance and risks. The amendments we are proposing to the average annual total returns table are designed, in part, to better conform the table to a similar presentation that funds include in their prospectuses. Like the current prospectus disclosure regarding average annual total returns, we propose to require funds to include in the shareholder report table information about the average annual total returns of an appropriate broad-based securities market index.212 A fund would provide 209 For example, some market participants consider the 10-year U.S. Treasury note rate as a risk-free rate. 210 See Item 27(b)(7)(ii)(B) of Form N–1A; proposed Item 27A(d)(2)(ii) of Form N–1A. Item 27(b)(7)(ii)(B) of Form N–1A currently requires the following: ‘‘In a table placed within or next to the graph, provide the Fund’s average annual total returns for the 1-, 5-, and 10-year periods as of the end of the last day of the most recent fiscal year (or for the life of the Fund, if shorter), but only for periods subsequent to the effective date of the Fund’s registration statement. Average annual total returns should be computed in accordance with Item 26(b)(1).’’ 211 See MDFP Adopting Release, supra footnote 180, at paragraph accompanying n.26. We recognize, however, that the table has certain limitations with respect to fund comparisons because it reflects fiscal year data and funds can have different fiscal year periods. 212 See Item 4(b)(2)(iii) of Form N–1A (requiring that a fund’s prospectus include a table showing its PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 70743 the index’s returns for the same periods as its own returns (e.g., 1-, 5-, and 10year periods). We understand that many funds already provide this information in their annual reports. We believe that requiring all funds to provide this information would help shareholders better understand a fund’s performance and risks in the context of the broader market.213 We also believe that proposing this change would be beneficial because fund shareholders may no longer receive annual prospectus updates as a result of our proposed amendments to the prospectus delivery framework for existing fund shareholders.214 Consistent with the current prospectus performance presentation, the proposed amendments would permit funds to include returns information for one or more other relevant indexes, such as a more narrowly based index that reflects the market sectors in which the fund invests.215 We are proposing to permit funds to include more than one index in the table because we understand that in some cases this approach may help shareholders understand how the fund’s performance compared to, for example, performance of both the broader market and the market sector in which the fund invests. These proposed amendments are designed to help shareholders more easily evaluate a fund’s performance and risks relative to the market and to better align the information in the table with the current line graph presentation so a shareholder has contextual information to help assess both yearover-year returns and average annual returns over set periods. At the same time, we recognize concerns about the use of indexes in performance presentations, and we are seeking comment on our proposed approach.216 average annual total returns for 1-, 5-, and 10calendar year periods, along with the returns of an appropriate broad-based securities market index for the same periods). The proposed amendments to the performance table would use the same amended definition of an appropriate broad-based securities market index as the proposed line graph presentation. See supra paragraph accompanying footnote 197. 213 See 1998 Form N–1A Prospectus Amendments, supra footnote 151, at text accompanying n.69 (discussing the purpose of the required prospectus disclosure regarding the average annual total returns of an appropriate broad-based securities market index). 214 See infra Section II.E. 215 See Instruction 2(b) to Item 4(b)(2) of current Form N–1A; Instruction 2(b) to proposed Item 4(b)(2) of Form N–1A (amending the cross reference to the description of other more narrowly based indexes from Instruction 6 to current Item 27(b)(7) to Instruction 7 to proposed Item 27A(d)(2)); Instruction 7 to proposed Item 27A(d)(2) of Form N–1A. 216 See supra Section II.B.2.c.ii. E:\FR\FM\05NOP2.SGM 05NOP2 70744 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 We further propose to modify the average annual total returns table to require funds to separately provide the average annual total returns with and without sales charges, as applicable.217 Currently, the table is only required to include average annual total returns that reflect sales charges.218 We believe comparative information about average annual total returns with and without sales charges may help shareholders better understand the impact of sales charges on the returns of their investments. We also believe that additional information about average annual total returns without sales charges may help shareholders better compare the fund’s returns to that of a relevant index.219 We also propose to add a new instruction for the average annual total returns table to require a fund to provide average annual total returns information for each class the shareholder report covers.220 This is consistent with the prospectus average annual total returns table, which must reflect average annual total returns for every class a prospectus covers.221 We believe it is important for shareholders to receive performance information that directly relates to the class in which they invest. Because each class can have different expenses that affect the class’s returns, performance information for 217 See proposed Item 27A(d)(2)(ii) of Form N– 1A. One commenter on the Fund Investor Experience RFC prepared a mock summary shareholder report that included average annual total returns shown with and without sales charges, as applicable. See ICI Comment Letter I. Under the proposal, a fund that does not impose sales charges would only provide a single set of average annual total returns figures (i.e., returns without sales charges). 218 See Item 27(b)(7)(ii)(B) of Form N–1A (requiring average annual total returns computed in accordance with Item 26(b)(1), which reflects sales charges in the calculation of returns). In connection with the proposed amendment, we propose to add a new computation instruction to explain that funds should calculate average annual total returns without sales charges in accordance with Item 26(b)(1) of Form N–1A, except the fund should not deduct sales charges as otherwise described in the instructions to that item. To provide a fund’s 1-year annual total return without sales charges, a fund would use the same 1-year total return figure reflected in its most recent audited financial highlights. See Instruction 5 to proposed Item 27A(d)(2) of Form N–1A. 219 Further, the proposed requirement to present the fund’s annual total return without sales charges for the last fiscal year would align with audited information shareholders currently receive in the financial highlights section of shareholder reports. See Item 27(b)(2) of Form N–1A; Instruction 3 to Item 13(a) of Form N–1A. We understand that some shareholders review financial highlights information when assessing and monitoring their fund investments. See, e.g., supra footnote 52. 220 See Instruction 13(b) to proposed Item 27A(d)(2) of Form N–1A. 221 See Instruction 3(c)(i) to Item 4(b)(2) of Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 each class would allow a shareholder to understand the performance of his or her investment better and to compare performance among the classes the report covers.222 While the proposed shareholder report expense disclosure would include class-specific performance information for the reporting period, the average annual total returns table would provide classspecific performance information over a longer time period. Further, although the line graph in the annual report similarly provides longer-term performance information, it is not currently required to include information for each class (nor are we proposing to require this, because we recognize that additional lines in the graph for each class may make the graph difficult to read). Additionally, under the proposal, shareholders generally may not receive annual prospectus updates, which include class-specific returns, and would instead receive prompt notices of certain material changes that generally would not include this information. As a result of these considerations, we believe the average annual total returns table in the shareholder report should include information for each class the report includes. Currently, funds must include a statement accompanying the line graph and table to the effect that past performance does not predict future performance, and that the line graph and table presentations do not reflect taxes that a shareholder would pay on fund distributions or redemptions.223 We propose to simplify the statement about past performance. Specifically, under the proposed amendments, a fund would be required to include a statement to the effect that the fund’s past performance is not a good predictor of how the fund will perform in the future.224 We propose to require funds to use text features to make this statement noticeable and prominent through, for example, graphics, larger font size, or different colors or font styles.225 Under the proposal, funds would continue to be required to state that the disclosed performance information does not reflect the deduction of taxes that a shareholder 222 See 1998 Form N–1A Prospectus Amendments, supra footnote 213, at text accompanying n.66. 223 See Item 27(b)(7)(ii)(B) of Form N–1A. 224 See proposed Item 27A(d)(2)(iii)(A) of Form N–1A. We also propose to make a conforming change to similar language that must appear in the prospectus. See proposed amendments to Item 4(b)(2) of Form N–1A. 225 See proposed Item 27A(d)(2)(iii)(A) of Form N–1A. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 would pay on fund distributions or the redemption of fund shares to alert investors to these tax consequences.226 Additionally, we propose to add a new instruction allowing funds to add brief additional disclosure that would contextualize the line graph and average annual returns table they include in their shareholder reports. Specifically, the proposed instruction provides that if a material change occurred to the fund during the relevant performance period, such as a change in investment adviser or a change to the fund’s investment strategies, the fund may include a brief legend or footnote to describe the material change and when it occurred.227 We believe this additional disclosure could help shareholders understand potential changes in fund performance related to material fund changes that have occurred during the relevant performance period.228 Under the proposal, funds would have discretion to determine when to disclose information about a prior material change to a fund in connection with its performance presentation. We are proposing a discretionary approach, instead of requiring funds to include this disclosure for all material changes, because we recognize that some material changes to a fund may not affect a fund’s performance, or may have only an insignificant effect on performance. Although a fund generally would be able to use discretion to determine when to disclose a prior material change in connection with its performance presentation, a fund would need to disclose information about such a change if, absent that disclosure, the fund’s performance presentation would otherwise be misleading.229 While we believe it is beneficial for shareholders to receive information about a fund’s performance in the annual report each year, we understand that funds provide more current, ongoing performance information through other mechanisms, such as their websites. We are proposing to require funds that provide updated performance 226 See proposed Item 27A(d)(2)(iii)(B) of Form N–1A. 227 See Instruction 14 to proposed Item 27A(d)(2). In addition, consistent with current Form N–1A requirements, if a fund uses an index in a shareholder report that is different from the index used for the immediately preceding reporting period, the later report would need to explain the reason(s) for the change and disclose the returns of both the new and former indexes. See Instruction 7 to Item 27(b)(7)(ii) of Form N–1A; Instruction 8 to proposed Item 27A(d)(2) of Form N–1A. 228 See Blanchard Comment Letter (suggesting that identifying fund changes that may have changed a fund’s performance would improve current fund performance presentations). 229 See, e.g., rule 8b–20 under the Investment Company Act [17 CFR 270.8b–20]. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 information through widely accessible mechanisms, such as fund websites, to include a statement in the shareholder report directing shareholders to where they can find this information.230 If a fund were to include such a statement, it also would be required to provide a means of facilitating access to the updated performance information, including, for example, a hyperlink to where the information may be found if the shareholder report is provided electronically or a URL address or QR code if the shareholder report is delivered in paper format.231 We request comment on the proposed average annual total returns table and associated amendments, including the following: 56. Should the annual report include the average annual total returns table, as proposed? Why or why not? Should we modify the proposed requirements for the table? If so, how? 57. Should we require funds to include the average annual total returns of an appropriate broad-based securities market index and allow funds to include the returns of additional indexes in the average annual total returns table, as proposed, and as funds currently do in their prospectuses? Should we make any changes to this aspect of the proposal? Please explain. 58. Should we require funds to include the average annual total returns of each class that the annual report covers, as proposed, and as funds currently do in their prospectuses? Should we modify this aspect of the proposal? For example, should we only require average annual total returns for one class or for a set number of classes? If so, should we provide funds with flexibility for determining which class to disclose in the average annual total returns table, similar to the proposed instruction for the line graph, or should we take a different approach? 232 Are there ways to improve the design or presentation of the table, particularly when covering multiple classes? 59. Should we modify the average annual total returns table to require funds to separately provide the average annual total returns with and without sales charges, as proposed? Would requiring information about average annual total returns without sales 230 See Instruction 15 to proposed Item 27A(d)(2). Instruction 9 to proposed Item 27A(a); see also infra footnotes 342 and 343 and accompanying paragraph. Consistent with this instruction, a fund could provide a direct link to the updated performance information or a link to a central site that provides a direct link to the fund’s updated performance information. 232 See supra footnote 196 and accompanying text. 231 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 charges be helpful to shareholders, or would this information make the table too confusing or complex? Have we provided sufficient calculation instructions for funds to determine average annual total returns without sales charges? If not, what additional information do funds need for purposes of this calculation? 60. Should we, as proposed, modify the statement that currently must accompany the line graph and table indicating that past performance does not predict future performance and retain the statement that the line graph and table presentations do not reflect taxes that a shareholder would pay on fund distributions or redemptions? Are there other ways we could make the statement about past performance more understandable for shareholders? Is the statement clarifying that performance does not reflect the deduction of taxes helpful to shareholders, or is it unnecessary boilerplate? If it is not helpful to shareholders, should we modify or remove this language? 61. Should we, as proposed, allow a fund to include a brief legend or footnote to its line graph and average annual total returns table to describe a material change, such as a change in investment adviser or a change to the fund’s investment strategies, that occurred to the fund during the relevant period? Would this provision provide shareholders with useful contextual information? If so, should we make the disclosure mandatory? If not, why not? Are there ways we could improve the utility or design of this provision? For example, are there ways we should modify the provision to limit any risk that funds might attempt to justify fund losses by referring to an unrelated change to the fund? Is the meaning of ‘‘material change’’ in this provision sufficiently clear, or do funds need more guidance to help them determine whether a change is material for purposes of this provision? Should we modify the standard for determining the types of changes that funds can disclose in connection with their shareholder report performance presentations? For example, rather than refer to material changes, should we identify specific types of changes that funds can disclose? If so, what types of changes should the provision cover (e.g., should it be limited to changes in investment advisers and changes in principal investment strategies, or should it include other changes)? If we retain a principles-based standard, should we use a different standard than material changes (e.g., significant changes)? Should we only allow a ‘‘brief’’ legend or footnote, as proposed? PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 70745 62. Should we require funds that provide updated performance information through widely accessible mechanisms, such as fund websites, to include information in their annual reports directing shareholders to where they can find updated performance information, as proposed? Should we modify or clarify this requirement in any way? Should we instead permit, but not require, a fund to include this information in its annual report? As proposed, should we require funds that provide updated performance information on their websites to inform shareholders of this updated information in their annual shareholders reports and to direct shareholders to where the updated performance information is located? Should we require all funds to provide updated performance information on their websites? If so, what performance information? How often should it be updated? iv. Other MDFP Amendments We propose to simplify the current requirement that a fund discuss in its annual report the effect of any policy or practice of maintaining a specified level of distribution to shareholders (a ‘‘stable distribution policy’’) 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.233 The current disclosure requirement is meant to give shareholders a clearer picture of whether a fund had to distribute capital, as well as profits, to maintain its distribution rate.234 Under the proposed amendments, a fund that has a stable distribution policy and that was unable to maintain the specified level during the past fiscal year would need to disclose this.235 We also propose to maintain disclosure concerning distributions that resulted in returns of capital.236 By modifying this provision to focus on circumstances when a fund was unable to meet the specified level of distribution in its stable distribution policy or had distributions that resulted in returns of capital, the proposal is designed to result in disclosure that is more meaningful to shareholders than 233 See Item 27(b)(7)(iii) of Form N–1A (requiring a fund to ‘‘[d]iscuss the effect of any policy or practice of maintaining a specified level of distributions to shareholders on the Fund’s investment strategies and per share net asset value during the fiscal year [as well as] the extent to which the Fund’s distribution policy resulted in distributions of capital’’). 234 See MDFP Adopting Release, supra footnote 180, at Section I.C.4. 235 See proposed Item 27A(d)(3) of Form N–1A. 236 See id. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70746 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules the current requirement. In particular, we believe that the proposed disclosure about a fund’s inability to maintain a specified level of distribution would be important to shareholders in funds that have stable distribution policies because they typically expect to receive regular distributions. As a result, the fund’s inability to meet the specified level of distributions may affect a shareholder’s investment decision (e.g., whether to continue to hold the fund). In addition, we believe that simplifying the language of this requirement, as proposed, could result in disclosure that is more understandable to shareholders because funds tend to use language in their disclosures that tracks the language of Commission form requirements. As most funds do not have stable distribution policies, we do not anticipate that this proposed disclosure requirement would add to the length of most shareholder reports. The Commission recently adopted amendments to limit the requirement that ETFs provide premium and discount information in their annual reports to only those ETFs that do not provide premium and discount disclosure on their websites in accordance with 17 CFR 270.6c–11 [Investment Company Act rule 6c– 11].237 We are not proposing any amendments to this annual report requirement beyond a technical amendment to clarify that it only applies to ETFs.238 We believe that most ETFs will provide premium and discount information on their websites instead of in their annual reports.239 We request comment on the proposed amendments to the MDFP disclosure regarding stable distribution policies and on the ETF premium and discount information that would remain in the annual report, as well as on MDFP disclosure more generally, including: 63. Should we modify the requirement that funds discuss the effects of any stable distribution policy under current Item 27(b)(7)(iii) in their annual reports, as proposed? Would the proposed requirement provide meaningful information to shareholders that is not otherwise available? Should we instead remove any specific disclosure requirements related to stable distribution policies? If we do not require this type of information in 237 See Adopting Release, supra footnote 75; Item 27(b)(7)(iv) of Form N–1A. 238 See proposed Item 27A(d)(4) of Form N–1A. 239 See ETF Adopting Release, supra footnote 75, at paragraph accompanying n.499 (stating that the Commission believes that most ETFs not relying on rule 6c–11 will choose to comply with the website disclosure requirements in that rule). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 annual reports, should we require funds to make it available elsewhere? 64. Should we continue to require ETFs that do not provide premium and discount information on their websites in accordance with Investment Company Act rule 6c–11 to include premium and discount information in their annual reports? If not, where should they disclose this information? 65. Money market funds currently are not required to provide MDFP disclosure in their annual reports because the Commission has previously noted that the problems that MDFP disclosure seek to address with respect to investor understanding of performance do not appear to exist with respect to money market funds.240 The proposal similarly would not require money market funds to provide MDFP disclosure. Should we require some or all money market funds to provide performance information in their shareholder reports? For example, should we require money market funds to include performance information similar to what they must disclose in their prospectuses (e.g., 7-day yield, average annual total returns table, and performance bar chart) or similar to what other funds must disclose in their annual reports (e.g., performance line graph)? If so, should these requirements apply to all money market funds or to a subset of money market funds, such as only money market funds that rely on proposed rule 498B (i.e., whose shareholders receive prompt notice of certain material changes to the fund, with online access to the prospectus)? 66. Are there other changes we should make to current MDFP disclosure requirements? Please explain. d. Fund Statistics We are proposing to require a fund to disclose certain fund statistics in its annual report, including the fund’s: (1) Net assets, (2) total number of portfolio holdings, and (3) portfolio turnover rate. We are also proposing to permit a fund to disclose any additional statistics that the fund believes would help shareholders better understand the fund’s activities and operation during the reporting period (e.g., tracking error, maturity, duration, average credit quality, or yield).241 Based on information we received in response to the recent Fund Investor Experience RFC, it is our understanding that investors prefer succinct fund 240 See MDFP Adopting Release, supra footnote 180, at Section I.C.5 (noting, however, that money market funds retain the option of providing investors with a discussion of their performance, including illustrative line graphs). 241 See proposed Item 27A(e). PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 disclosures in graphical format, and they are less likely to review information presented in long narratives.242 We believe that permitting funds to provide key fund statistics in a user-friendly format could enable funds to provide more meaningful information to investors, and encourage investors to focus on the more significant factors in evaluating the fund’s operations. We are proposing to require funds to include their net assets as of the end of the reporting period because we believe this disclosure would provide important context for other required information in the shareholder report.243 Under our proposal, funds would be required to provide a graphical presentation of holdings.244 A fund would have the flexibility to provide this graphical presentation either as a percentage of the fund’s net asset value, total investments, or investment exposures.245 We believe that knowing the fund’s net assets would allow a shareholder to appreciate better the impact of each holding on the overall performance of the fund. Similarly, we are proposing to require funds to include the total number of portfolio holdings as of the end of the 242 See Broadridge Comment Letter I (commenter conducted survey showing that investors are more likely to review fund disclosures if they are delivered in a summary format); see also ICI Comment Letter I (encouraging the Commission to allow funds to produce summary shareholder reports that are succinct and informative). 243 Because the measure of a fund’s net assets is included in the fund’s audited financial statements, the fund would be required to use or derive such statistic from the fund’s audited financial statements. See proposed Instruction 3 to proposed Item 27A(e). If a fund provides tools to help shareholders better understand online or mobile presentations of annual reports, it may wish to provide the ability for shareholders to refer to updated net assets when reviewing these presentations, so they are seeing current information. Because the measure of a fund’s net assets that would appear in the annual report would be derived from the fund’s audited financial statements, the ability to update this statistic (which updates would presumably not be based on audited financial statements) would have to be an add-on functionality, and not a replacement for the end-of-period statistic that would appear on online presentations. For example, a fund could include a pop-up box attached to the fund’s net assets information showing the fund’s net assets as of a more recent specified date. See discussion at infra Section II.B.4; see also infra footnote 338 and accompanying text (discussing the proposed instruction requiring that the default presentation that any electronically presented annual report uses must be the value that the applicable form requirement prescribes). 244 See infra footnote 259. Because we are proposing to require that the fund statistics section appear adjacent to the graphical representation of holdings in the annual report, the net assets statistic would provide shareholders with relevant context for the holdings information that we believe would be helpful to shareholders. See infra Section II.B.3. 245 See infra text accompanying footnote 264. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 reporting period.246 Investors historically have viewed information about a fund’s holdings as important to their investment decision process.247 Many funds currently voluntarily provide the number of fund holdings on their websites, but Commission rules do not require them to do so. We believe that, together with the graphical holdings information and net assets, knowing the number of a fund’s holdings could help investor to understand better the fund’s diversification, which could in turn provide insight into the fund’s susceptibility to market fluctuations.248 Accordingly, to help ensure that an investor has access to information about the total number of fund holdings and to help contextualize other information that funds disclose, we are proposing that funds include that information as of the end of the reporting period in their annual reports. Finally, we are proposing to require funds to include their portfolio turnover rate as of the end of the reporting period.249 A higher portfolio turnover rate generally indicates higher transaction costs and may result in higher taxes.250 Therefore, we believe that a fund’s portfolio turnover rate may provide shareholders with a more complete view of the costs associated with investing in the fund. 246 Because all portfolio holdings are included in a fund’s audited financial statements, the fund would be required to use or derive this statistic from the fund’s audited financial statements. See proposed Instruction 3 to proposed Item 27A(e) of Form N–1A; see also supra footnote 243 (discussing the use of online tools to supplement, rather than replace, statistics that are derived from a fund’s audited financial statements). 247 See e.g., 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 9 (noting that 45% of investors deemed a fund’s portfolio holdings as ‘‘absolutely essential information to any investor’’). 248 See, e.g. Morningstar’s Investing Glossary, available at https://www.morningstar.com/ InvGlossary/number_of_holdings_in_portfolio.aspx (noting that number of holdings information is meant to be a measure of portfolio risk because the lower the number of portfolio holdings, ‘‘the more concentrated the fund is in a few companies or issues, and the more the fund is susceptible to the market fluctuations in these few holdings’’). But see Concentrate on Concentration, FINRA Weekly Update, available at https://www.finra.org/ investors/learn-to-invest/advanced-investing/ concentration-risk (stating that a portfolio can be subject to concentration risk even when assets are invested in many different holdings). 249 Because a fund’s portfolio turnover is included in the fund’s audited financial highlights, the fund would be required to use or derive the portfolio turnover from the fund’s audited financial highlights. See Instruction 3 to proposed Item 27A(e); see also supra footnote 243 (discussing the use of online tools to supplement, rather than replace, statistics that are derived from a fund’s audited financial statements). 250 See supra footnote 558. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Besides requiring funds to include their net assets, number of fund holdings, and portfolio turnover rate, we are providing flexibility for funds to disclose additional fund statistics if they are reasonably related to a fund’s investment strategy. In general, funds would be limited in their ability to include information in their annual reports beyond that which Form N–1A would specifically permit or require.251 We are proposing an exception to this limitation because these additional fund statistics may help shareholders better understand the fund’s activities and operation during its most recent fiscal year. Permitting funds to provide key fund statistics that are tailored to the fund’s investment strategy could enable them to provide information that is meaningful to their specific shareholder base. The proposed flexibility to include additional ‘‘statistics’’—a term that we believe conveys a brief presentation of quantitative measures—is designed to provide information in a concise format that would assist shareholders in evaluating significant factors that reflect the fund’s performance and operations. For example, a fund that has a stated investment objective of maintaining returns that correspond to the returns of a securities index might consider including its tracking error as an additional statistic. Similarly, a fund that invests primarily in fixed-income bonds might consider including statistics such as maturity, duration, average credit quality, or yield. In each case, these additional statistics would be reasonably related to the relevant fund’s investment strategy and would help shareholders better understand the fund’s activities and operations during the reporting period. We are proposing several instructions that are designed to help shareholders more easily digest any additional statistics that funds would disclose in their annual reports, and to provide context for understanding the disclosed statistics. First, if a fund provides a statistic that is disclosed elsewhere on Form N–1A, the fund must follow any associated instructions describing the calculation method for the relevant statistic.252 Second, we are proposing an instruction that would encourage a fund to use tables, bullet lists, or other graphics or text features to disclose the 251 For instance, funds have the ability to select the most appropriate categories when preparing their graphical representation of holdings. See proposed Item 27A(f) of Form N–1A. 252 See Instruction 1 to proposed Item 27A(e). For example, a fund that chooses to disclose its yield as an additional statistic would have to calculate the yield pursuant to the requirements of Item 26(b)(2) of Form N–1A. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 70747 statistics.253 This instruction is designed to promote the presentation of fund statistics in a useful format.254 Third, if a statistic is included in, or could be derived from, a fund’s financial statements or financial highlights, we are proposing an instruction that would require a fund to use or derive such statistic from the fund’s most recent financial statements or financial highlights.255 Fourth, we are proposing an instruction that would allow a fund to describe briefly the significance or limitations of any disclosed statistics in a parenthetical, footnote, or similar presentation.256 Finally, if a fund chooses to include additional statistics, we are proposing an instruction that would require additional statistics to be reasonably related to the fund’s investment strategy.257 These proposed instructions are, in the aggregate, designed to help promote the integrity and consistency of the information that funds may choose to provide, while allowing funds to tailor their disclosure to increase its usefulness to investors. We seek comment on our proposal to require funds to provide important fund statistical information in the annual report and specifically on the following issues: 67. Should we require a fund to include its size, in terms of its net assets, in the annual report, as proposed? Should we instead permit, but not require, a fund to include its net assets? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, would knowing a fund’s net assets provide shareholders with useful context for evaluating the required graphical representation of holdings that also would appear in the annual report? 68. Are there any additional statistics we should require funds to disclose that would provide information about their size, or the change in their size over 253 We are not proposing to require such formatting to maintain flexibility and allow a fund to tailor the format of its disclosure to its unique characteristics. 254 See Instruction 2 to proposed Item 27A(e). 255 See proposed Instruction 3 to proposed Item 27A(e) of Form N–1A. 256 See proposed Instruction 4 to proposed Item 27A(e). For example, a fund that chooses to disclose its tracking error may wish to include additional disclosure explaining that tracking error is the difference between a mutual fund portfolio’s returns and its benchmark index, calculated on a scale between 0 and 1.0—with 1.0 representing perfect correlation. 257 See proposed Instruction 5 to proposed Item 27A(e). This proposed instruction is designed to limit the types of statistics a fund includes only to those that are most pertinent in light of a fund’s investment strategy, and to prevent disclosure ‘‘creep.’’ E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70748 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules time? For example, should we require a fund to provide the change in the fund’s net asset value from one year to another over a five-year period, as is currently required in the financial highlights? Why or why not? 69. Should we require a fund to include the total number of portfolio holdings in the annual report, as proposed? Should we instead permit, but not require, funds to include total number of portfolio holdings? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, would knowing this information help shareholders evaluate other aspects of the fund’s investment strategy, risks, and/or performance? Or, would this information be misleading to investors under certain circumstances (for example, if a fund has over 1,000 holdings but the majority of the fund’s assets are invested in only 10–20 of those holdings)? Does the total number of portfolio holdings information serve as a useful statistic for a shareholder to help understand a fund’s diversification and/or susceptibility to market fluctuations? Is the total number of holdings information a useful supplement to the graphical representation of holdings? 70. Should we require a fund to include its portfolio turnover rate in the annual report, as proposed? Should we instead permit, but not require, funds to include portfolio turnover rate? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, does the portfolio turnover rate information serve as a useful statistic for a shareholder to understand the costs associated with investing in the fund? 71. Are there any other statistics that we should require funds to disclose in their annual reports? For example, should we require a fund to include information regarding its annual total return for each of the preceding five years or the fund’s portfolio turnover rate, as is currently required in the financial highlights? 72. Is it appropriate to allow a fund, as proposed, to include additional statistics that are reasonably related to the fund’s investment strategy and that the fund believes would help shareholders better understand the fund’s activities and operations during the reporting period? Why or why not? Should the Commission provide additional guidance on how to determine whether a statistic is reasonably related to the fund’s investment strategy? Would allowing funds to include additional fund statistics in their shareholder reports VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 result in disclosure that may be overly long, complex, technical and/or duplicative? The proposal would permit funds to include additional fund statistics online (for example, in online tools that funds may overlay onto the shareholder reports that they provide on their websites), but not in the version of the report that shareholders receive in paper format.258 Is this approach appropriate? Why or why not? 73. Would funds include additional statistics in their shareholder reports, as the proposed rule would permit? If so, what types of statistics would funds include, and how would these statistics help investors to understand the fund’s investment strategy, risks, and/or performance? For example, would a fixed-income fund include statistics regarding yield, maturity, and/or duration? 74. If a fund chooses to include in its annual report a statistic that Form N–1A requires the fund to disclose elsewhere, should we, as proposed, require such a fund to follow the Form N–1A instructions describing the calculation methodology for the relevant statistic? Should we place any additional limitations on the statistics funds would be allowed to include? For example, should we limit the number of additional statistics a fund could include? Should we specify the share class(es) tied to the statistics funds could disclose (e.g., require funds to include information only for the most expensive share class)? Should we only allow a fund to include a fund statistic that the fund otherwise discloses to shareholders and reports to the Commission, such as information the fund includes on Form N–PORT, Form N–CEN, or in the fund’s financial statements, prospectus, or SAI? Should we include an instruction that would prohibit funds from including information generated by third-party vendors, such as Morningstar or Lipper ratings or sustainability rankings? If so, why, and what should this instruction specify? 75. Is the proposed instruction that would encourage a fund to use graphics or text features, such as bullet lists or tables, as appropriate to disclose fund statistics helpful to promote succinct, useful presentations of information that will help shareholders understand their fund’s investment strategy, risks, and/or performance? Should we require any particular presentation for the statistics that all funds would have to include in their annual report, and if so, what presentation and why? 258 See PO 00000 infra Section II.B.4. Frm 00034 Fmt 4701 Sfmt 4702 76. Should we, as proposed, allow funds to describe the significance or limitations of each disclosed statistic? If so, is the instruction that the additional disclosure be presented in a parenthetical, footnote, or similar presentation appropriate, or are there any more-specific requirements that we should include in the instruction? Should we require, rather than permit, this disclosure? 77. Should we, as proposed, require additional statistics to be reasonably related to the fund’s investment strategy? Would this limitation appropriately tailor the statistics a fund chooses to include to those that are most pertinent in light of a fund’s investment strategy? 78. Should we require a fund to organize the disclosure of the statistics in a manner that gives each statistic similar prominence? Would such a limitation prevent funds from obscuring statistics that reflect less favorably on the fund’s performance returns? Are there other instructions that could achieve this goal? Would a ‘‘similar prominence’’ requirement for fund statistics result in any anomalous disclosure results, or the need for Commission clarification or guidance (for example, if certain statistics require more context than others, or certain statistics lend themselves better to graphic display than others)? 79. Are there any additional instructions that we should include that would permit additional flexibility in presenting fund statistics? For example, if the value of a statistic significantly changed during the most recent fiscal year, should we allow or require funds to briefly describe the factors that contributed to the change? As another example, should we allow funds to provide comparative statistics, such as applying the same statistic to a relevant index or peer group in the same fiscal year? Would investors find this comparative information useful? If so, should we require, rather than permit, this disclosure? If the value of a statistic has significantly changed from the value disclosed in the fund’s previous shareholder report, should we allow a fund to explain the factors that contributed to the change in value? Would shareholders find this information useful? If so, should we require, rather than permit, this disclosure? e. Graphical Representation of Holdings We are proposing to retain the current requirements for the graphical representation of holdings that funds currently include in their shareholder reports, with certain revisions designed E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules to improve the current presentation. The graphical representation of holdings is one or more tables, charts, or graphs depicting the fund’s portfolio holdings by category (for example, type of security, industry sector, geographic region, credit quality, or maturity) as of the end of the reporting period.259 The purpose of this presentation is to illustrate, in a concise and user-friendly format, the allocation of a fund’s investments across particular categories of investments (such as asset classes).260 We understand that many investors, including investors responding to the Fund Investor Experience RFC, have viewed information about a fund’s holdings as important to know when making an investment decision.261 We believe a layered approach to the disclosure of portfolio holdings, where a graphical representation of holdings is provided in the annual report and more detailed and current portfolio holdings information is available online and upon request, helps shareholders understand how the fund invested its assets. While currently investors receive both the graphical representation of holdings and a schedule of investments, we are only retaining the graphical representation of holdings, and not a more complete list of fund portfolio holdings, because we believe it provides a better summary presentation that shareholders can more easily review.262 We are proposing two changes to the current requirements relating to the graphical representation of holdings. Currently, funds have the flexibility to base the tabular or graphic presentation of holdings on the fund’s net asset value or total investments. We also are proposing to permit funds to show their holdings based on either the fund’s net exposure, or total exposure, to particular khammond on DSKJM1Z7X2PROD with PROPOSALS2 259 See Item 27(d)(2) of current Form N–1A. 260 See February 2004 Shareholder Report Adopting Release, supra footnote 83, at Section II.B.3. 261 See, e.g., Baker Comment Letter; Scott Comment Letter; Stiles Comment Letter; Waranowski Comment Letter; Wilhelm Comment Letter; see also supra footnote 47; supra footnote 247 (stating that the 2012 Report on Investor Testing of Fund Annual Reports noted that 45% of investors deemed a fund’s portfolio holdings as ‘‘absolutely essential information to any investor’’). 262 Investors have expressed a strong preference for including more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor. See supra footnote 34. The full schedule of portfolio holdings will be available online and upon request on at least a quarterly basis. See proposed rule 30e–1(b)(2). We discuss the availability of the schedule of investments in infra Sections II.D.1.a and II.D.2.a. See also rule 6c–11 under the Investment Company Act, which requires daily portfolio holdings for ETFs relying on the rule. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 categories of investments.263 As funds do today, a fund would have to disclose its graphical representation of holdings using categories, and with a basis of presentation (i.e., presented according to the fund’s net asset value, total investments, or investment exposures) that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives.264 The proposed amendment to allow investment exposure as a basis for presenting a fund’s graphical representation of holdings is designed, in part, to provide a more meaningful presentation of holdings for funds that use derivatives to obtain investment exposures as part of their investment strategies.265 A graphical representation of holdings based on net asset value or total investments may not represent the true economic exposure of a fund that uses derivatives. For example, a fund that executes its strategy primarily through derivatives transactions (e.g., a managed futures fund or a commodity strategy fund) may invest a majority of its assets in government securities or money market funds, while a substantial portion of the fund’s risks and returns may be derived from derivatives that compose only a small portion of its assets. In this situation, giving a fund the flexibility to present the graphical representation of holdings on an exposure basis could show a more accurate picture of the sources of the fund’s investment risks and returns.266 A fund that uses ‘‘net exposure’’ or ‘‘total exposure’’ as a basis for representing its holdings would also be permitted to include a brief explanation of this presentation. 263 See 264 See proposed Item 27A(f) of Form N–1A. id.; see also Item 27(d)(2) of current Form N–1A. 265 See Use of Derivatives by Registered Investment Companies and Business Development Companies; Required Due Diligence by BrokerDealers and Registered Investment Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles, Investment Company Act Release No. 33704 (Nov. 25, 2019) [85 FR 4446 (Jan. 24, 2020)] ‘‘Derivatives Proposing Release’’), at Section I.A (providing an overview of funds’ use of derivatives). 266 For example, the XYZ Commodity Strategy Fund might invest 20% in commodity-linked derivatives and 75% in money market funds, such that the economic exposure of the fund would be the same as a 95% direct investment in commodities. Under the proposal, the fund would be permitted to show 95% exposure to commodities in its graphical representation of holdings instead of showing both the 20% derivative position and 75% money market fund position. However, a fund would have to select a basis of presentation that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives. See infra footnote 268 and accompanying text. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 70749 The proposed amendment also is designed to provide a more meaningful presentation of holdings for certain funds that hold both long and short positions. Currently, the requirements for the graphical representation of holdings may not take into account both long and short positions. The proposed amendment provides clarity that funds that hold both long and short positions may present the long and short positions separately (i.e., total exposure), or show the combined effect of both positions (i.e., net exposure).267 We believe this additional flexibility will allow certain funds, such as funds with ‘‘long-short’’ investment strategies, to provide representations that are tailored to their holdings and investment strategies. However, funds would not have full discretion to select their basis of presentation. They must select a basis of presentation (i.e., presented according to the fund’s net asset value, total investments, or investment exposures) that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives.268 We are also proposing a minor change with respect to funds that intend to depict portfolio holdings according to credit quality. Currently, such a fund must describe how the credit quality of its holdings was determined and, if credit ratings are used, the fund must explain why it selected a particular credit rating.269 We understand that there is diversity in practice as to the length of these disclosures, with some funds including a significant level of detail, while others include only relatively brief disclosure. We are proposing minor revisions instructing funds to keep these disclosures brief and concise.270 These proposed 267 As an example, if a fund had a 5% long position in XYZ Automotive Co and a 4% short position in QRS Automotive Inc., the fund might show (1) the 5% long position in the automotive industry and separately show a 4% short position (total exposure); or (2) the net position of 1% in the automotive industry (net exposure). 268 See proposed Item 27A(f) of Form N–1A. 269 See Item 27(d)(2) of current Form N–1A. Funds that choose to depict portfolio holdings according to credit quality must include a description of how the credit quality of the holdings was determined. This description should include a discussion of the credit quality evaluation process, the rationale for its selection, and an overview of the factors considered. If the fund uses credit ratings issued by a credit rating agency to depict credit quality, the fund should explain how the credit ratings were identified and selected, and include this description near, or as part of, the graphical representation. See Removal of Certain References to Credit Ratings under the Investment Company Act, Investment Company Act Release No. 30847 (Dec. 27, 2013) [79 FR 1316 (Jan. 8, 2014)], at Section III.B. 270 See proposed Item 27A(f) of Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70750 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules amendments are designed to keep the narrative disclosures in the annual report brief. We request comment on the proposed amendments to the graphical representation of holdings disclosure requirements: 80. Should we retain the graphical representation of holdings in annual reports? Why or why not? Does this graphical representation help shareholders better understand a fund’s holdings? 81. Are there any concerns about the current graphical representation of holdings presentation in shareholder reports? Are there any best practices we should encourage or require? 82. For funds that take significant derivatives positions or hold both long and short positions, would an exposurebased presentation help shareholders better understand a fund’s holdings? Should we permit all funds to present their holdings on an exposure basis, as proposed? Should we require certain funds to present their holdings on an exposure basis? Why or why not? If so, for what types of funds and fund strategies would an exposure-based presentation be particularly useful? Should we be more prescriptive as to how to calculate exposure? If so, how? Should an exposure presentation be on a net or total basis or permit flexibility? Why or why not? Should we permit funds to pick how they present their holdings or should we prescribe when funds should use net asset value, total investments, net exposure, or total exposure? If we prescribe the basis of presentation, how should we determine which type of fund uses which type of presentation? 83. For funds that depict portfolio holdings according to credit quality, we are proposing to require that a fund briefly describe how the credit quality of its holdings was determined and, if credit ratings are used, the fund must concisely explain why it selected a particular credit rating. Is this additional disclosure about credit quality necessary and/or useful? If so, why? Would funds be able to succinctly provide this information? If not, why not? 84. Should we expressly permit or require other types of presentations, such as top 10 holdings or changes in holdings over time? If so, what types of presentations and why? If not, why not? 85. Should we permit or require other ways of presenting a fund’s holdings? For example, instead of or in addition to the graphical representation of holdings, should we require disclosure of a fund’s top holdings or a complete schedule of investments in the annual VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 report? If so, what types of presentations should we require and why? 86. Should we consider any other changes to the graphical representation of holdings requirements? f. Material Fund Changes We propose to add a new section to the annual report to describe material changes to the 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.271 This proposed requirement is designed to highlight for fund shareholders the most salient information they typically receive through annual prospectus updates and tailor the presentation of this information to these existing shareholders’ needs (as opposed to the needs of new or prospective investors for whom prospectus disclosure is primarily designed). We believe this new shareholder report disclosure would allow shareholders to better recognize and understand material changes to their fund investment, which may inform a shareholder’s future investment decisions (i.e., whether to hold or sell the fund investment, or to purchase additional shares). Under the proposal, a 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: • A change in the fund’s name (as described in Item 1(a)(1) of Form N–1A); • A change in the fund’s investment objectives or goals (as described in Item 2 of Form N–1A); • An increase in the fund’s ongoing annual fees, transaction fees, or maximum account fee (as described in Item 3 of Form N–1A); 272 271 See proposed Item 27A(g) of Form N–1A; see also supra footnote 20 (recognizing that funds generally must transmit annual reports within 60 days after fiscal year-end and funds’ annual prospectus updates are typically finalized within 120 days after fiscal year-end) and infra paragraph accompanying footnote 287 (discussing the annual report disclosure of material changes the fund plans to make in connection with its annual prospectus update). 272 See infra Section II.H (discussing proposed amendments to Item 3 of Form N–1A). The proposed rule would only require funds to disclose material increases to the fund’s ongoing annual fees, transaction fees (e.g., purchase charges or exit charges), or maximum account fee because we believe shareholders would be more interested in investment cost increases, rather than decreases. A fund may, however, voluntarily disclose material decreases to its fees and expenses in its annual report. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 • A change in the fund’s principal investment strategies (as described in Item 4(a) of Form N–1A); 273 • A change in the principal risks of investing in the fund (as described in Item 4(b) of Form N–1A); • A change in the fund’s investment adviser(s), including sub-adviser(s) (as described in Item 5(a) of Form N– 1A); 274 and • A change in the fund’s portfolio manager(s) (as described in Item 5(b) of Form N–1A). Additionally, a fund could include any other material fund change that it would like to disclose to its shareholders.275 This item would notify fund shareholders of material changes to the fund that have occurred or that the fund expects to make in its forthcoming annual prospectus update. Currently, fund shareholders typically receive information about these changes in: (1) Annual prospectus updates; or (2) other prospectus updates they may receive throughout the year (which can take the form of a prospectus ‘‘sticker’’ or an updated copy of the fund’s prospectus or, under the proposal, a notice of material change under proposed rule 498B).276 While fund shareholders 273 Under 17 CFR 270.35d–1 [Investment Company Act rule 35d–1], a fund with a name that suggests investments in certain industries, investments, countries, or geographic regions generally must have a policy to invest at least 80% of the value of its assets in the relevant investments that its name suggests (a ‘‘names rule investment policy’’). This names rule investment policy is part of the fund’s principal investment strategy. Under rule 35d–1, a fund must provide shareholders with at least 60 days prior notice of any change to its names rule investment policy under certain circumstances. See rule 35d–1(a)(2)(ii), (a)(3)(iii), and (c); Request for Comments on Fund Names, Investment Company Act Release No. 33809 (Mar. 2, 2020) [85 FR 13221 (Mar. 6, 2020)]. If, under the proposed requirement to disclose certain material fund changes in the annual report, the fund provides notice of a change to its names rule investment policy, that notice would satisfy the requirements of rule 35d–1 if: (1) The annual report is provided to shareholders at least 60 days before the fund changes its names rule investment policy; (2) the annual report contains the statement required by rule 35d–1(c)(2) (e.g., ‘‘Important Notice Regarding Change in Investment Policy’’); (3) and the envelope in which the shareholder report is delivered (if applicable) has this same statement, as required by rule 35d–1(c)(3). 274 The proposal would not require a fund to disclose a change in a sub-adviser where Item 5 of Form N–1A would not require the fund to disclose the name of the sub-adviser in its prospectus. See Instructions 1 and 2 to Item 5 of Form N–1A. 275 For example, a fund may wish to disclose in its annual report plans to liquidate or merge the fund, even if previously disclosed to shareholders. 276 See supra footnote 13 and accompanying text; Comment Letter of Investment Company Institute (Oct. 1, 2019) (‘‘ICI Comment Letter II’’) (stating that respondents to an ICI member survey indicated that they primarily mail prospectus stickers to inform shareholders of material changes to the portfolio manager, material increases in fees, material (but E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 receive information about material changes today, we are concerned that material changes to a fund may not always be readily apparent to an existing shareholder. For example, changes that the annual prospectus update discusses may not be easy for an average shareholder to identify, as there is no requirement for a fund to identify or highlight changes to the fund in its prospectus.277 Instead, a fund only has to update the prospectus disclosure to reflect the substance of the change. For example, if a fee has changed, the prospectus disclosure would include the new fee, but the prospectus would not have to disclose the old fee or highlight that the fee had changed. Thus, we believe the proposed requirement to disclose material fund changes in the annual report may increase the salience of material fund changes for shareholders and help shareholders more efficiently monitor and assess their fund investments relative to current disclosure requirements. The categories of fund changes that we propose to require funds to disclose in their annual reports are meant to capture the types of material changes to prospectus disclosure that we believe are important to fund shareholders, that may influence their investment decisions, and that are more likely to occur. Specifically, the types of material changes that a fund would need to disclose in its annual report generally align with the key prospectus disclosure items the Commission requires in summary prospectuses (and in the summary section of statutory prospectuses) that we understand investors typically use to make nonfundamental) changes to the fund’s investment objectives or strategies, changes to subadvisory agreements or subadvisers, changes in the fund’s index or benchmark, changes to the fund’s name, or planned fund mergers or liquidations). See also infra Section II.F.3.b (discussing proposed rule 498B’s notice requirement). 277 This also may be the case when a fund delivers an updated version of its prospectus to reflect material or other changes at other times throughout the year. However, a prospectus sticker that a fund instead may deliver for the same purpose typically would identify a change more explicitly. Some other types of registered investment companies currently are required to identify certain changes in their shareholder disclosure materials. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27 (requiring updating summary prospectuses for variable contracts, which provide a brief description of any important changes with respect to the contract that occurred within the prior year to allow investors to better focus their attention on new or updated information relating to the contract); rule 8b–16(b) under the Investment Company Act (requiring certain registered closed-end funds to identify specific types of material changes in their annual reports). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 investment decisions.278 We believe the annual report should help a shareholder monitor and assess his or her fund investment, which includes information to help a shareholder assess whether to maintain or change a fund investment. Because we understand that investors often use information about a fund’s principal investment strategy, principal risks, fees, investment objectives or goals, name, investment adviser, and portfolio manager to inform initial investment decisions, we believe that material changes to these items may affect a shareholder’s assessment of whether to hold, buy, or sell fund shares.279 In addition to the identified types of changes, funds could disclose other material changes on a discretionary basis, which we believe would provide flexibility to funds to highlight any additional material changes for investors concisely. Instead of identifying the types of material changes a fund must disclose and providing flexibility for funds to disclose other material changes, we considered proposing a more principlesbased approach.280 However, we believe that our proposed approach would provide more certainty to funds about the types of changes they must disclose and enhance consistency of annual report disclosure across funds. Under the proposal, a fund would not be required to disclose material changes to other summary prospectus items (or to the corresponding items in the summary section of the statutory prospectus) because either they are unlikely to change, and we believe they are less likely to affect a shareholder’s investment decisions (e.g., tax information or financial intermediary compensation), or the shareholder report already provides similar information (e.g., performance information). Additionally, information about shareholder voting results would not be required to be disclosed in the annual report because we believe that the material fund changes section of the report would reflect many of the types of material fund changes that may result from a shareholder vote.281 For 278 See 2009 Summary Prospectus Adopting Release, supra footnote 10, at n.35 and accompanying text; see also Arnold Comment Letter; Baker Comment Letter; Dougle Comment Letter; Freeland Comment Letter; Wilhelm Comment Letter. 279 See supra footnote 278; What US Households Consider When They Select Mutual Funds, 2018, ICI Research Perspective (May 2019), available at https://www.ici.org/pdf/per25-03.pdf. 280 For example, we considered an approach that would direct funds to disclose all material changes, without identifying the categories of material changes they would need to disclose. 281 See infra Section II.D.1.d. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 70751 example, if shareholders approve a change in the fund’s concentration policy, implementing this change would likely affect the fund’s principal investment strategy and principal risks and warrant shareholder report disclosure of the associated change to the fund’s principal investment strategy and principal risks. Further, if shareholders approve a new investment advisory contract with a higher management fee, this would likely increase the fund’s ongoing annual fees and would trigger disclosure under this item if the resulting increase was material. A fund would be required to disclose a change in its annual report only if the change is material to the particular fund. A fund should base this materiality determination on the facts and circumstances of the fund and the specific change. For example, an index fund might determine that a change in its portfolio manager is not a ‘‘material’’ change that it would need to disclose in its annual report, given the nature of the manager’s involvement in portfolio decisions for the fund. At the same time, a fund that changes its principal investment strategy from primarily investing in U.S. investment-grade bonds to primarily investing in emerging market high-yield bonds would disclose this change in its annual report, as well as through earlier communications to shareholders if the change already occurred.282 To help shareholders understand the material changes, a fund would have to provide a concise description of each change that provides enough detail to allow shareholders to understand the change and how it may affect shareholders.283 For example, this could include stating that the fund’s ongoing annual fees have increased from 0.55% to 0.65%, rather than simply stating that the fund’s ongoing annual fees have changed or increased. As another example, if a fund’s principal risks have materially changed, it could identify the newly identified or newly removed types of principal risks, rather than only stating that the principal risks have changed. Disclosure of material fund changes in the annual report would include a legend to the effect of the following: This is a summary of certain changes [and planned changes] to the Fund since [date]. For more complete information, you may 282 These earlier communications may include, for example, notices about a change in the fund’s names rule investment policy, prospectus stickers, or notices under proposed rule 498B. See, e.g., supra footnotes 273 and 276 and infra Section II.F.3.b. 283 See Instruction 1 to proposed Item 27A(g). E:\FR\FM\05NOP2.SGM 05NOP2 70752 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules review the Fund’s next prospectus, which we expect to be available by [date] at [website address] or upon request at [toll-free telephone number and, as applicable, email address].284 The proposed legend would inform shareholders that they can obtain more information about a specific material change by consulting the fund’s next annual prospectus update. It also would explain how shareholders may find or request a copy of the annual prospectus update once it is available. Under the proposed rule, funds generally would be required to disclose any enumerated material change that occurred since the beginning of the fund’s most recently completed fiscal year, even if the fund already disclosed the material change to shareholders through other mechanisms during the year.285 For example, if a shareholder received a prospectus sticker discussing the change, the change would still appear in the annual report.286 As a result, the annual report would be a general repository for the enumerated material changes that occurred throughout the year. We believe it may be helpful for shareholders to be able to review a brief summary of all material changes that occurred during the year, instead of requiring shareholders to compile information from different sources if they want to understand all material changes for the year. Along with changes that occurred since the beginning of the last fiscal year, the fund’s annual report also would have to disclose material changes that the fund plans to make in connection with updating its prospectus for the current fiscal year. We are proposing this requirement so the annual report could be the primary disclosure source for fund shareholders, and they generally would not need to review the fund’s annual prospectus update (other than to gather additional khammond on DSKJM1Z7X2PROD with PROPOSALS2 284 See Instruction 2 to proposed Item 27A(g) of Form N–1A. A fund would provide the internet address of the central site where a link to the fund’s next prospectus will be available, if applicable, as well as a toll-free telephone number and, as applicable, the email address that shareholders can use to request copies of the fund’s prospectus. 285 However, the proposed rule would not require a fund to disclose a material change that it already disclosed in its last annual report. This could occur if, for example, a material change took place at the beginning of the last fiscal year before the fund transmitted the last annual report or the fund planned to make the material change in connection with its annual prospectus update for the last fiscal year. See Instruction 3 to proposed Item 27A(g) of Form N–1A. 286 Under proposed rule 498B, a fund would need to timely notify existing shareholders of material fund changes. A fund also would have to disclose recent material changes in its annual report even if previously disclosed through a rule 498B notice. See infra Section II.F.3.b. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 information about a particular fund change of interest). For example, we believe it would be more efficient for a shareholder to be able to review a single report to assess and monitor his or her fund investment, instead of receiving an annual report and then subsequently receiving an annual prospectus update or notice of additional material changes approximately two months later.287 We understand that it is common for funds generally to be aware of material changes they plan to make in connection with updating their prospectuses before they transmit annual reports.288 However, we recognize that the fund’s associated post-effective amendment making these changes to its prospectus may not be effective at the time the fund transmits its annual report and may be subject to the staff review process.289 As a result, the manner in which the fund describes the change in its prospectus may be subject to modification at the time the fund is required to transmit an annual report. Under these circumstances, we believe it would be appropriate for a fund to provide only a high-level description of the change because the exact disclosure regarding the change in the prospectus could be subject to modification. The proposed legend that would accompany this disclosure would direct shareholders to the fund’s next prospectus for additional detail, and the fund would need to provide a date by which it expects the updated prospectus to be available. In any event, a fund would not have to use the same language describing the change in its annual report as it uses in its prospectus (although neither description of the change would be permitted to be misleading). We acknowledge that there could be scenarios where a material change 287 See supra footnote 20 and accompanying text; infra Section II.F.3.b (discussing a proposed requirement that a fund provide timely notices of material fund changes to shareholders if the fund relies on proposed rule 498B to no longer deliver prospectuses to its shareholders). 288 A fund typically must file a post-effective amendment to its registration statement that includes material changes at least 60 days prior to the time the amendment is effective (that is, before the fund can use it), and a fund typically aims for the amendment to be effective within 120 days of its fiscal year-end. See generally 17 CFR 230.485 [rule 485 under the Securities Act]; supra footnote 20. As a result, we understand that funds typically have already prepared and filed these post-effective amendments within 60 days of fiscal year-end, before they must transmit annual reports under Commission rules. See rule 30e–1(c) under the Investment Company Act [17 CFR 270.30e–1(c)]. 289 Generally, the staff reviews post-effective amendments to fund registration statement that contain material changes (other than certain specific routine items). See generally rule 485 under the Securities Act. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 occurs shortly before a fund transmits its annual report and, as a result, it would be difficult for the fund to disclose the material change in the annual report while still transmitting the report to shareholders within the required period (60 days after the fund’s fiscal year-end).290 For example, a fund’s high-profile portfolio manager may resign shortly before the fund must transmit its annual report to shareholders. Under these circumstances, a fund (or intermediary) should provide a timely notice of the material change to shareholders under proposed rule 498B, if applicable, or through a prospectus sticker or annual prospectus update. The fund would also need to disclose the material change in its next annual report.291 We request comment on the proposed material fund changes section of the annual report, including the following: 87. Should funds be required to disclose material fund changes in their annual reports, as proposed? Should all funds be required to disclose fund changes in their annual reports, as proposed, or should we exclude any subset of funds from this requirement (for example, should we exclude funds that do not rely on proposed rule 498B and that deliver annual prospectus updates to existing shareholders each year)? Instead of requiring disclosure about material changes in the annual report, should we require disclosure of these changes somewhere else, such as the prospectus or the fund’s website? What location would be most appropriate for purposes of making the information available to shareholders? What location would be the most efficient for these purposes? 88. Are the categories of fund changes in the proposed enumerated list the types of changes that are most relevant to fund shareholders and that may 290 See rule 30e–1(c) [17 CFR 270.30e–1]. an example, assume a fund’s fiscal year ends on December 31, 2020. As a result, it would be required to transmit its 2020 annual report by March 1, 2021 (60 days after December 31) and would likely finalize its annual prospectus update by April 30, 2021 (120 days after December 31). If the fund’s high-profile portfolio manager resigned on February 25, 2021, and it were difficult for the fund to prepare disclosure about this change to include in its 2020 annual report before March 1, 2021, the fund could instead disclose this change in its 2021 annual report. Shareholders would also receive more-timely notice of the change through other mechanisms, including the annual prospectus update, prospectus stickers, or notices under proposed rule 498B, depending on the circumstances. If the fund instead were able to disclose the change in its portfolio manager in the 2020 annual report, it would not be required to also disclose that change in its 2021 annual report or, if the fund relied on proposed rule 498B, in a notice under that rule. See Instruction 3 to proposed Item 27A(g) of Form N–1A; proposed rule 498B(c)(2). 291 As E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules influence their investment decisions? Are there other categories of material changes that should be disclosed in the annual report? For example, should funds be required to disclose all material changes that occur as a result of a shareholder vote, rather than just the ones included in the enumerated list? 89. Is the scope of the categories of fund changes in the proposed enumerated list appropriate? If not, how should we modify the scope? For example, rather than requiring a fund to disclose material increases in a fund’s ongoing annual fees, transaction fees, or maximum account fee (as described in proposed Item 3 of Form N–1A), should we require funds to disclose any material changes (that is, both increases and decreases) to fee and expense information described in its prospectus fee summary or fee table? 90. Should we expand or reduce the scope of fee-related items that the material fund changes disclosure would include? For example, should we only require funds to disclose a material increase in ongoing annual fees because the annual report is directed to existing shareholders, or is it valuable for a fund shareholder to receive information about material increases to the fund’s transaction fees in case he or she is considering purchasing additional shares in the fund? We understand that account fees are relatively rare and typically small in size. Should the proposed item refer to account fees, or should it only refer to ongoing annual fees and transaction fees? Additionally, we are proposing to allow funds that invest 10% or less of their total assets in acquired funds to disclose acquired fund fees and expenses in a footnote to the prospectus fee table, instead of in the bottom-line ongoing annual fees.292 Although such a fund’s investments in acquired funds would be limited, are there circumstances in which its acquired fund fees and expenses could increase to such an extent that we should require the fund to disclose the increase in acquired fund fees and expenses in the annual report (e.g., as a separate material change, or as a material increase to the fund’s ongoing annual fees if the fund’s combined ongoing annual fees and acquired fund fees and expenses materially increase in the aggregate)? 91. Would disclosure about the identified categories of material changes be redundant with other shareholder report disclosure? For example, would funds discuss certain categories of material changes, such as material 292 See infra Section II.H.1.g. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 changes to the fund’s principal investment strategy, in the narrative MDFP disclosure? If so, do the two disclosure items serve sufficiently different purposes, or should we modify the proposed requirements to limit potential redundancy? For example, if we require funds to disclose information about material strategy changes in the narrative MDFP disclosure and not in the material fund changes disclosure, would it be more difficult for shareholder to identify and understand information about material fund changes? Under that approach, where should a fund disclose information about a material strategy change the fund plans to make in its annual prospectus update? 92. Instead of identifying particular types of material changes a fund must disclose in its annual report, as proposed, should we use a more principles-based or flexible framework for disclosing fund changes? For example, should we require funds to disclose all material changes without identifying particular categories of changes? Under a more principles-based or flexible framework, how could we make sure the disclosure focuses on fund changes that would be of interest to fund shareholders and is not unduly long or complex? 93. Does the proposed provision allowing funds to disclose additional material changes on a discretionary basis provide funds with appropriate flexibility to consider their particular facts and circumstances? Would the benefits of this flexibility justify any resulting increase in the shareholder report’s length and complexity? Should we provide more flexibility by permitting funds to disclose other changes that may not necessarily be material to the fund? If so, what types of other changes would funds disclose, and how would information about that change assist shareholders? Alternatively, should we not permit funds to optionally disclose other categories of material changes and instead limit the types of material changes funds can disclose in the annual report to only those listed in the form item? 94. Should funds be required to disclose only material changes, as proposed? Would requiring funds to make a materiality assessment of relevant changes introduce unnecessary subjectivity into the disclosure? Or is a materiality threshold appropriate to limit the annual report disclosure to the types of changes that would be most important to shareholders? Would a different threshold be more appropriate? For example, should we require a fund PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 70753 to disclose ‘‘significant’’ or ‘‘substantial’’ changes in its annual report? If so, why? 95. As proposed, should funds be required to disclose any material changes in their annual reports that occurred since the beginning of the fund’s last fiscal year (even if the fund has already disclosed any of these changes to existing shareholders, for example through prospectus supplements, notices under proposed rule 498B, or other non-shareholder report mechanisms)? Would it be beneficial for shareholders to see all of these changes summarized in a single place? Alternatively, would this approach have unintended consequences, such as increased investor confusion? 96. Should funds be required to disclose material changes that they plan to make in connection with updating their prospectuses under section 10(a)(3) of the Securities Act for the current fiscal year, as proposed? Does this proposed requirement raise timing concerns, compliance difficulties, liability risks, or other concerns that we have not adequately addressed? Are there certain types of changes where these concerns are more pronounced (e.g., where the parameters of the change are more likely to be modified between the time a fund transmits its annual report within 60-days after its fiscal year end and the time its posteffective amendment updating the relevant prospectus disclosure is effective, generally within 120 days after its fiscal year end)? How should we address any associated concerns? Are there other mechanisms, other than the annual report, that funds should be required or permitted to use to notify existing shareholders of these changes? 97. How detailed should annual report disclosure of a fund change be? Should we require, as proposed, that the description of the change be concise but with sufficient detail to allow shareholders to understand the change and how the change may affect shareholders? If not, should the description of the change be more or less detailed than proposed? Please explain. 98. Should funds be required to provide the proposed legend in the fund changes section of the annual report? Would the proposed requirement to provide an estimated date by which the fund’s next prospectus will be available on its website or upon request present difficulties for funds or shareholders? What are those difficulties, and how could we address them? Would the proposed legend make it sufficiently clear to fund shareholders that the E:\FR\FM\05NOP2.SGM 05NOP2 70754 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules prospectus with additional information about the change is not currently available but will be available at a later date? If not, how could we make this clearer? khammond on DSKJM1Z7X2PROD with PROPOSALS2 g. Changes in and Disagreements With Accountants We are proposing to require funds to include a concise discussion of certain disagreements with accountants in the annual report. Funds currently are required to disclose certain information concerning changes in and disagreements with accountants in their shareholder reports. The current disclosure requirement is applicable only if a fund’s accountant has resigned or was dismissed.293 In this case, the fund has to disclose the information that 17 CFR 229.304 [Item 304 of Regulation S–K] requires, concerning the circumstances surrounding the former accountant’s dismissal or resignation, whether in the fund’s two most recent fiscal years there were certain accounting-related disagreements with the former accountant, and other related information.294 We understand that funds rarely include disclosure about disagreements with accountants, and therefore we assume that the events that necessitate this disclosure rarely occur. In addition, we believe that current disclosure regarding these types of events may not be particularly investorfriendly because of the complexity of the accounting issues that may give rise to any disagreements. However, we believe that retaining this disclosure in funds’ shareholder reports in summary form continues to be important because this would put investors on notice of the dismissal or resignation of an accountant and the existence of a material disagreement with that accountant.295 We believe this shareholder report disclosure could discourage funds’ audit ‘‘opinion 293 Specifically, the disclosure requirement is applicable when the independent accountant who was engaged as the principal accountant to audit the fund’s financial statements, or an independent accountant who was previously engaged to audit a significant subsidiary and on whom the principal accountant expressed reliance in its report, has resigned or was dismissed. 294 See 17 CFR 229.304; see also Item 27(b)(4) and Item 27(c)(4) of Form N–1A. The types of disagreements that funds are required to disclose relate to—among other things— internal controls over financial reporting, management representations, the need to expand the scope of the audit based on information suggesting issues with a prior audit report, and questions regarding reliability of previous audit reports. See Items 304(a)(1)(v)(A)–(D) of Regulation S–K. 295 See, e.g., ICI Comment Letter I (noting that changes in and disagreements with accountants are not common, but when they do occur, this information is key information for shareholders). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 shopping.’’ 296 ‘‘Opinion shopping’’ generally refers to the search for an auditor that is willing to support a proposed accounting treatment that is designed to help a fund achieve its reporting objectives, even though that treatment could frustrate reliable reporting.297 We propose to move the currentlyrequired disclosure to Form N–CSR and to replace it in the annual report with a high-level summary of information that funds would report on Form N– CSR.298 Specifically, when a fund has a material disagreement with an accountant that has resigned or been dismissed, the fund would have to include in its annual report: (1) A statement of whether the former accountant resigned, declined to stand for re-election, or was dismissed and the date thereof; and (2) a brief, plain English description of 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.299 Funds would not be required to disclose, and we would not expect funds to disclose, the absence of disagreements in response to this proposed disclosure requirement. We request comment on the proposed amendments to the current requirements to include disclosure about disagreements with accountants in funds’ annual reports, including: 99. Should we require funds to include high-level disclosure about changes in and disagreements with accountants in their annual reports, as proposed? Why or why not? Is the current disclosure requirement regarding changes in and disagreements with accountants helpful to fund shareholders? How frequently do the events that necessitate this disclosure occur? Would the proposed amendments improve shareholders’ ability to understand this information? 100. As proposed, funds would only need to disclose certain disagreements 296 See Disclosure Amendments to Regulation S– K, Form 8–K and Schedule 14A Regarding Changes in Accountants and Potential Opinion Shopping Situations, Securities Act Release No. 6766 (Apr. 7, 1988) [53 FR 12924 (Apr. 12, 1988)] (‘‘Changes in Accountants and Potential Opinion Shopping Adopting Release’’); see also Foreign Issuer Reporting Enhancements, Securities Act Release No. 8959 (Sept. 23, 2008) [73 FR at 58310 (Oct. 6, 2008)]. 297 See Changes in Accountants and Potential Opinion Shopping Adopting Release, supra footnote 296, at Section I. 298 See infra Section II.D.1.c (discussing proposed Form N–CSR filing requirement). 299 See proposed Item 27A(h) of Form N–1A. This proposed disclosure requirement is applicable specifically in the circumstances that footnote 293, supra, describe. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 with accountants (those that occurred within the past two fiscal years and where the accountant either has resigned or was dismissed) in the annual report. Should we require any additional information about changes in or disagreements with accountants in the annual report? Are there any types of disagreements that funds should not have to include in their annual report? Which ones and why? 101. Is there any other information about the fund’s accountants or the fund’s financial statements that we should require funds to disclose in the annual report? h. Statement Regarding Liquidity Risk Management Program In 2016 and 2018, the Commission adopted a series of reforms designed to promote effective liquidity risk management across the open-end fund industry and enhance disclosure regarding fund liquidity and redemption practices.300 As part of these reforms, if a fund’s board of directors has reviewed the fund’s liquidity risk management program as required by 17 CFR 270.22e– 4 [rule 22e–4 under the Act] during the fund’s most recent fiscal half-year, the fund is required to briefly discuss the operation and effectiveness of the liquidity risk management program in its most recent shareholder report.301 In adopting this requirement, the Commission stated that it had considered commenters’ suggestions that shareholder report disclosure would have the benefit of allowing funds to produce tailored disclosure suited to the particular liquidity risks and management practices of the specific fund.302 We continue to believe that requiring funds to provide shareholders with information about the operation and effectiveness of the fund’s liquidity risk management program (along with appropriate prospectus risk disclosure and MDFP disclosure) may help provide investors a comprehensive picture of the fund’s liquidity risks and their 300 Investment Company Liquidity Risk Management Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)]; Investment Company Swing Pricing, Investment Company Act Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016) (‘‘2016 Liquidity Rule Release’’); Investment Company Liquidity Disclosure, Investment Company Act of 1940 Release No. 33142 (June 28, 2018) [83 FR 31859 (Jul. 10, 2018)] (‘‘2018 Liquidity Disclosure Release’’). 301 See Item 27(d)(6)(ii) of Form N–1A; see also 2018 Liquidity Disclosure Release, supra footnote 300. The compliance date for larger entities was December 1, 2019 and for smaller entities was June 1, 2020. 302 See 2018 Liquidity Disclosure Release, supra footnote 300, at n.47 and accompanying text. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules management. However, having reviewed shareholder report disclosures responsive to this requirement, we preliminarily believe that the disclosure in its current form is not well-suited to a concise shareholder report. The staff has observed that the shareholder report liquidity risk management disclosure often appears as a lengthy recitation of the requirements of rule 22e–4 and is not tailored to a particular fund. This disclosure does not lend itself to the type of focused disclosure that the proposed shareholder report is designed to include. Therefore, we propose to revise the disclosure requirements to emphasize that the disclosure must be tailored to each fund and be concise.303 Given the nature and quality of the disclosure we have seen, we believe the statement regarding the fund’s liquidity risk management program (‘‘liquidity risk management disclosure’’) should be more tailored, concise, and informative to help shareholders better understand how the fund is managing its liquidity risks, which in turn could inform the shareholders’ ability to monitor their investments in the fund. Therefore, we propose replacing the current disclosure with a brief summary of: • The key factors or market events that materially affected the fund’s liquidity risk during the reporting period; • The key features of the fund’s liquidity risk management program; and • The effectiveness of the fund’s liquidity risk management program over the past year.304 We are also proposing an instruction that a fund should, where appropriate, tailor the disclosure responsive to this requirement to the fund rather than rely on generic, standard disclosures.305 The disclosure should not include a recitation of all the elements of the fund’s liquidity risk management program. Instead, it should include the key features of the program as they relate to the fund.306 For example, a loan fund may briefly describe any expedited settlement agreements, or an international fund may describe the availability of a line of credit or 303 See proposed Item 27A(i) of Form N–1A. proposed Item 27A(i) of Form N–1A. 305 See Instruction 1 to proposed Item 27A(i) of Form N–1A. For example, using the same disclosure for all funds in a fund group may not be appropriate in light of this proposed instruction. However, we generally believe it would be appropriate for funds in a fund group with similar investments, and that are subject to the same liquidity risks, to use the same disclosure. 306 Appendix A to this release contains a hypothetical annual report that was created solely for illustrative purposes and includes an example of the type of disclosure Item 27A(i) intends to elicit. khammond on DSKJM1Z7X2PROD with PROPOSALS2 304 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 increasing its investments in highly liquid assets ahead of extended holidays (e.g., Chinese New Year). We believe this disclosure would help inform investors about the sources of the liquidity risk for the fund, the key steps fund management takes to ameliorate those risks, and a statement explaining whether those steps have been effective. We believe that requiring tailored disclosure would better inform investors, which is a benefit we considered in assessing any incremental additional burden. Finally, we propose to keep the timing requirements for the liquidity risk management disclosure consistent with the current requirements. We continue to believe it is appropriate to require a fund to include the liquidity risk management disclosure in the annual or semi-annual report following the period when the fund performed its required annual review of the liquidity risk management program, which may reduce costs and allow funds to provide more effective and timely disclosure.307 We request comment on the proposed approach of including the liquidity risk management disclosure in the shareholder report: 102. Should we require the liquidity risk management disclosure be included in the shareholder report, as proposed? Should we instead require it to be included in another disclosure document such as the fund’s Form N– CSR, statutory prospectus or summary prospectus, or on the fund’s website? If so, where should it be included? 103. Would the proposed disclosure requirements provide shareholders the appropriate information to help them understand the fund’s liquidity and liquidity risks and make more-informed investment decisions? Is the disclosure an improvement over the current disclosure requirements? Is the requirement to tailor the disclosure to each fund appropriate? If not, why not? How could the proposed disclosure requirements be improved? 104. Should we continue to require the liquidity risk management disclosure to be included in the most recent shareholder report following the board’s review of the program or, for consistency, should we only require the disclosure in the annual report? 307 See 2018 Liquidity Disclosure Release, supra footnote 300, at Section II.B.2. If the board were to review the liquidity risk management program more frequently than annually, a fund could choose to include the discussion of the program’s operation and effectiveness over the past year in the fund’s annual and/or semi-annual report, but this discussion would not be required to be included in both reports. See infra footnote 369 and accompanying text. PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 70755 105. Rather than requiring all funds to include the liquidity risk management disclosure in their shareholder reports as proposed, should we instead require only a subset of funds to include this disclosure? For example, should we only require this disclosure for funds that hold less than 50% of their net assets in highly liquid investments? Alternatively, should all funds that have a highly liquid investment minimum be required to include this disclosure? Are there any concerns about funds identifying themselves through this disclosure as holding a certain percentage of assets that are not primarily highly liquid investments? If so, what are those concerns and how can they be addressed? 106. Is there any other liquidityrelated information that may be relevant to shareholders that funds should be required to disclose in the shareholder report or on Form N–CSR? Are there alternative approaches to providing relevant liquidity information to shareholders? If so, what are they, and why should we use them? i. Availability of Additional Information We are proposing to require funds to include a statement in the annual report that informs investors about additional information that is available on the fund’s website.308 Specifically, funds would have to provide a brief, plain English statement that certain additional fund information is available on the fund’s website. This 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 a 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).309 Under current shareholder report requirements, funds must include statements regarding the availability of the fund’s: (1) Quarterly portfolio schedule, (2) proxy voting policies and procedures, and (3) proxy voting record.310 We believe that this information may be important to certain investors, and they may not know this information is available or how to find it.311 Because of the importance of this 308 See proposed Item 27A(j) of Form N–1A. Instruction 9 to proposed Item 27A(a) of Form N–1A; see also infra Section II.B.4. 310 See Items 27(d)(3) through (5) of Form N–1A. 311 See, e.g., 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26 (reports on investor preferences for shareholder report items); Investor Preferences Report, supra footnote 31 309 See E:\FR\FM\05NOP2.SGM Continued 05NOP2 70756 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 information to some investors and consistent with a layered approach to fund disclosure that makes more– detailed or technical information available to those investors who find the information valuable, we believe it is important to continue to inform investors that this information is available and how to find it. The proposed new statement would consolidate several currently required statements about the availability of information (including the quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record) with a single statement that covers this same information. We are also proposing to require funds to refer in the statement to other information that would not itself be included in the annual report under the proposal.312 First, because the annual report would no longer include financial statements, we believe it is appropriate to inform investors that this information is available. In addition, because the annual report briefly describes certain changes to the fund’s prospectus, we believe it is important to remind investors about the availability of the current fund prospectus, which may provide additional context to the changes described in the report. We also propose to provide a fund with the flexibility to refer to other information available on the fund’s website, if it reasonably believes that shareholders would likely view the information as important.313 For example, a fund may wish to refer investors to a document describing the benefits of certain types of investments, a description of credit ratings, additional performance presentations, or additional commentary about how the fund performed. We believe this flexibility is appropriate because funds may wish to provide additional information to investors that may be more tailored or relevant to a given fund. We also believe this flexibility is appropriate given the content limitations imposed on the proposed annual report.314 This additional (reports on investor preferences with respect to fund disclosure items); Scott Comment Letter; Wilhelm Comment Letter; Stiles Comment Letter; McRitchie Comment Letter. 312 See Instruction 1 to proposed Item 27A(a) and proposed Item 27A(j); see also infra Section II.B.3. If the annual report appears on a website or is otherwise provided electronically, funds must provide a means of facilitating access to this information, such as including a hyperlink to this information. 313 See Instruction 3 to proposed Item 27A(a) of Form N–1A. 314 The proposed annual report may only include information that Item 27A of Form N–1A specifically permits or requires. See Instruction 3 to VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 information referred to in the annual report would have the same status under the Federal securities laws as any other website or other electronic content that the fund produces or disseminates. The fact that a shareholder report references other information available on a fund’s website does not change the legal status of the referenced information. For instance, a performance presentation or description of credit ratings on a fund’s website would be subject to the same legal requirements and have the same legal status regardless of whether the information was referenced in a shareholder report.315 We request comment on the proposed amendments to include disclosure about additional information that is available to investors outside of the annual report, including: 107. Would this proposed disclosure requirement be useful to investors? Instead of requiring a statement that certain items are available online, should we require a statement that more generally indicates that additional information is available on the fund’s website without listing particular items? Are there any other changes we should make to the proposed statement about the availability of additional information? Are there other information items that funds should be required to include in the statement? Why? Are there any information items that should be excluded? If so, why? Instead of one statement that certain items are available online, should we require shareholder reports to include hyperlinks throughout the report linking to additional related content that is available online (e.g., require a hyperlink in the ‘‘Graphical Representation of Holdings’’ section to the fund’s portfolio schedule)? If so, what specific additional references and hyperlinks should we require and why? 108. As proposed, funds would have the flexibility to refer investors to additional information that is available on the fund’s website if the fund reasonably believes that shareholders would likely view the information as important. Should any limits be placed on this additional information? If so, why? For example, should it be limited to content that the fund has prepared? 109. Should we permit or require funds to refer investors to information at Investor.gov, such as information about proposed Item 27A(a) of Form N–1A; see also discussion at supra Section II.B.1.b. 315 See discussion at infra Section II.B.4. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 how to read a shareholder report? 316 If not, why not? 110. Are there any other changes that should be made to the disclosure requirement about the availability of additional information? j. Householding We are proposing to retain the provision that permits funds to explain how to revoke consent to the householding of the annual report.317 Investors often invest in funds through a variety of individual and family accounts and, as a result, sometimes receive multiple copies of the same documents from those funds. To avoid duplication, Commission rules allow funds to deliver a single copy of a prospectus, proxy materials, and a shareholder report to investors who share the same address and meet certain other requirements.318 This practice is known as ‘‘householding.’’ Rule 30e–1 permits and we propose to continue permitting the householding of fund shareholder reports if, in addition to the other conditions set forth in the rule, the fund has obtained from each investor written or implied consent to the householding of shareholder reports at such address.319 The rule requires funds that wish to household shareholder reports based on implied consent to send a notice to each investor stating, among other things, that the investors in the household will receive one report in the future unless the investors provide contrary instructions. In addition, at least once a year, funds relying on the householding provision must explain to investors who have provided written or implied consent 316 The Commission’s Office of Investor Education and Advocacy maintains the website as an online resource to help investors make sound investment decisions and avoid fraud. The website includes investment bulletins, alerts, guidance and tools designed to assist investors, including those owning funds, in obtaining additional information and resources on understanding and managing their investments. See, e.g., Investor Bulletin: How to Read a Mutual Fund Shareholder Report (Apr. 3, 2013) (‘‘How to Read a Mutual Fund Shareholder Report’’), available at https://www.investor.gov/ additional-resources/news-alerts/alerts-bulletins/ investor-bulletin-how-read-mutual-fundshareholder; How to Read a Mutual Fund Prospectus (June 13, 2016), available at https:// www.investor.gov/news-alerts/investor-bulletins/ how-read-mutual-fund-prospectus-part-1-3investment-objective-strateg. 317 See current rule 30e–1(f) and proposed rule 30e–1(e) and proposed Item 27A(k) of Form N–1A. 318 See 17 CFR 230.154 [rule 154 under the Securities Act] (permitting the householding of prospectuses); 17 CFR 240.14a–3(e)(1) [rule 14a– 3(e)(1) under the Exchange Act] (permitting the householding of proxy materials other than the proxy card); and rule 30e–1 under the Investment Company Act (permitting the householding of shareholder reports). 319 See rule 30e–1(f); proposed rule 30e–1(b)(2). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules how they can revoke their consent. If relying on the householding provision, one way to satisfy this last requirement (to provide an annual notice) is to include a statement in the annual report. We propose to continue permitting funds to include this statement in the annual report.320 We request comment on the proposed permitted inclusion of householdingrelated language in the annual report: 111. Should funds be permitted to include language about how an investor can revoke consent to householding in the annual report? If not, why not? Should we prescribe specific householding-related language that funds could include in their annual reports? If so, why, and what should that language be? 112. Should we consider any change to the householding disclosure requirements or to the rule provision that permits householding of shareholder reports? If so, why? 3. Format and Presentation of Annual Report In addition to the proposed content requirements for the annual report, we are proposing general instructions related to the format and presentation of the report. These proposed general instructions are designed to improve and simplify the presentation of shareholder reports and encourage funds to use plain-English, investorfriendly principles when drafting their reports. First, we are proposing an instruction specifying that the information in the annual reports would be required to appear in the same order as would be required under the proposed amendments to Form N–1A.321 We are requiring that information appear in a specific order so that the information that we believe to be most salient to shareholders, such as expenses, would appear first in the report, and to promote consistency and comparison across funds.322 The proposed ordering khammond on DSKJM1Z7X2PROD with PROPOSALS2 320 Because the proposed annual report may only include information that Item 27A of Form N–1A specifically permits or requires, the proposed householding provision is necessary to permit funds to include a householding statement in the report. See Instruction 3 to proposed Item 27A(a) of Form N–1A; see also discussion at supra Section II.B.1.b. 321 See Instruction 1 to proposed Item 27A(a) of Form N–1A. This proposed instruction would also include provisions that are applicable to an annual report that appears on a website or is otherwise provided electronically. See infra footnote 331 and accompanying text. 322 While investors may be more likely to compare prospective investments using a prospectus, an investor may use the proposed annual report to compare funds he or she already owns and assess how the investor’s mix of funds VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 requirements also would place related content close together to help investors better understand the topics being discussed. For example, fund statistics and graphical representation of holdings both provide information about the fund’s portfolio and therefore would be placed adjacent to one another. In addition, the proposed general instructions to the shareholder report requirements are designed to promote effective communication between the fund and its investors. Therefore, we propose new requirements that funds use ‘‘plain English’’ principles for the organization, wording, and design of the annual report, taking into consideration fund shareholders’ level of financial experience.323 Specifically, the proposed instructions would direct funds to be concise and direct and to use short sentences, active voice, and definite, concrete, everyday words. Funds would be instructed not to use legal jargon, highly technical business terms (unless they are clearly explained) or multiple negatives. Funds also would be instructed to write their annual report as if addressing the investor, using terms such as ‘‘you’’ or ‘‘we.’’ The proposed instructions also would direct funds to avoid the use of vague or imprecise boilerplate, as we believe this type of language would be unlikely to inform an investor effectively. The proposed instructions also direct funds to use white space, and implement other design features to make the annual report easy to read. Further, the proposed instructions would encourage funds to consider using, as appropriate, a question-andanswer format, charts, graphs, tables, bullet lists, and other graphics or text features as a way to help provide context for the information presented.324 We believe that these alternative ways of presenting information could increase readability and that this proposed instruction could encourage funds to use these fits into his or her overall investment portfolio. A consistent presentation would assist in this analysis. 323 See Instruction 6 to proposed Item 27A(a) of Form N–1A. 324 See Instruction 8 to proposed Item 27A(a) of Form N–1A; see also, e.g., Susan Kleimann, Making Disclosures Work for Consumers, Presentation to the SEC’s Investor Advisory Committee (June 14, 2018) (‘‘Kleimann’’), available at https:// www.sec.gov/spotlight/investor-advisorycommittee-2012/iac061418-slides-by-susankleimann.pdf (encouraging, for example, using question-and-answer format, the using headings to make structure clear, using a strong design grid to organize elements, making line length readable, and using common words and sentence constructions as ways of designing disclosure to promote readability). PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 70757 presentation options, where appropriate. In addition, the proposed instructions would include legibility requirements for the body of every printed annual or semi-annual shareholder report and other tabular data.325 Those requirements would be consistent with the legibility requirements that apply to prospectuses.326 We believe that the proposed legibility requirements would help ensure that shareholder reports are easily readable by investors. We request comment on the proposed general instructions regarding the format and presentation of the annual report, including: 113. Would the proposed general instructions provide clear guidance to funds when preparing an annual report? Should any of the proposed instructions be modified or not be included? If so, which ones, how should they be modified (if applicable), and why? 114. The proposed general instructions prescribe the order of information in the annual report. Is requiring a specific order for that information appropriate? Should the order be changed? If so, how? For instance, are there certain items that funds should disclose earlier (or later) in the report to be more consistent with shareholders’ general areas of interest? Should we, for example, require disclosure of material fund changes earlier in the report? Does the proposed order of disclosure items appropriately place related items close together, or are there changes we could make to improve a shareholder’s ability to understand how different disclosure items relate to one another? 115. Would the proposed general instruction that directs funds to comply with legibility requirements assist investors by helping to promote the readability of shareholder reports? Are there other requirements that we should include to assist investors with the readability of shareholder reports? 325 See Instruction 13 to proposed Item 27A(a) of Form N–1A. In an annual or semi-annual shareholder report posted on a website or otherwise provided electronically, the proposed instructions would provide that a fund may satisfy legibility requirements applicable to printed documents by presenting all required information in a format that promotes effective communication as described in Instruction 8 to proposed Item 27A(a). 326 17 CFR 230.430 [Rule 420 under the Securities Act] generally provides that the body of all printed prospectuses and all notes to financial statements and other tabular data included therein be in roman type at least as large as legible 10-point modern type. However, where a prospectus is distributed through an electronic medium, rule 420 provides, in part, that issuers may satisfy legibility requirements applicable to all printed documents, by presenting all required information in a format readily communicated to investors. E:\FR\FM\05NOP2.SGM 05NOP2 70758 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 116. Are there other alternative ways of presenting information that we should encourage funds to consider using? khammond on DSKJM1Z7X2PROD with PROPOSALS2 4. Electronic Annual Reports We recognize that fund shareholders may access their annual reports and other regulatory documents online, rather than (or in addition to) receiving the reports in paper format. Shareholders could elect to receive their annual reports through electronic delivery.327 Additionally, under our proposal, funds that rely either on rule 498 or on proposed rule 498B would have to make the most recent annual report available online.328 We also recognize that investors are increasingly relying on mobile applications for financial information, and we anticipate that funds may wish to make annual reports available in a format that these applications support (for example, electronic presentations other than a static email or PDF file). Presenting fund information—including annual reports—electronically has the potential advantage of permitting greater innovation and information-tailoring than the use of a static paper document. For example, funds could overlay electronic tools onto online disclosure, such as calculators, hover-over or popup information, and interactive features. Presenting information electronically could also improve the content of fund disclosures by, for example, allowing investors to customize certain fund disclosures, such as fees, expenses, and performance, based on an investor’s individual circumstances. However, we appreciate that the use of electronic channels, and the overlay of electronic tools onto required regulatory documents, may present both practical and legal questions for fund registrants and other market participants.329 In light of this, we are proposing instructions that are designed to clarify requirements for electronic annual reports and to promote the use of interactive, user-friendly design features that may be tailored to meet individual investors’ needs and improve investor engagement. We are tailoring certain 327 Under this proposal, shareholder reports must be delivered in paper unless, consistent with Commission guidance, a shareholder elects electronic delivery. See supra footnote 21 and accompanying text. 328 See infra Sections II.F.3.a and II.J. 329 For example, the legal requirements associated with a particular online tool may vary based on what information is present and how it is presented. We discuss these issues in more detail below. In addition, it may be costly to produce, maintain and update electronic tools and produce tools that function well on a variety of devices (such as phones, tablets and computers). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 proposed instructions to reflect that annual reports may be electronic as well as paper-based. First, the proposed requirements for the annual report’s ‘‘cover page’’ are also applicable to the ‘‘beginning’’ of the report, which is designed to reflect that electronic reports may not have a physical page at their beginning.330 Similarly, the proposed instruction that would provide an ordering requirement for the contents of an annual report also includes a provision for annual reports that appear on a website or are otherwise provided electronically.331 This proposed instruction specifies that information should be organized in a manner that gives each item similar prominence, and presents the information in the same order, as that provided by the order the proposed instruction prescribes. For instance, an annual report available on a website could satisfy this requirement if each required disclosure item is presented with equal prominence in a separate tab and the order of the tabs follows the prescribed order, such as from left-toright or top-to-bottom. Similarly, a mobile application could satisfy this requirement if the shareholder report navigation screen presents each shareholder report item with equal prominence and follows the prescribed order of information.332 We are also proposing instructions that would provide additional flexibility for funds to add additional tools and features to annual reports that appear on a website or are otherwise provided electronically.333 The proposed instructions would encourage funds to use online tools designed to enhance an investor’s understanding of material in the annual reports. This could include, for example: Video or audio messages, mouse-over windows, pop-up definitions or explanations of difficult concepts, chat functionality, and expense calculators. It also includes other forms of electronic media, communications, or tools designed to enhance an investor’s understanding of material in the annual report. For example, this could include the ability to customize expense, performance or holdings information, or to make performance information more 330 See supra footnote 136. Instruction 1 to proposed Item 27A(a) of Form N–1A. 332 See infra footnotes 338–340 and related discussion regarding the recordkeeping and record retention requirements associated with such electronic tools. 333 See Instruction 8 to proposed Item 27A(a) of Form N–1A. 331 See PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 interactive.334 We believe that permitting and encouraging these design features would allow for a more interactive and user-friendly experience and would improve investor engagement. When using interactive graphics or tools, funds are permitted to include instructions on their use and interpretation.335 In addition, the proposed general instructions clarify that any explanatory or supplemental information that funds provide as online tools may not obscure or impede understanding of the required disclosures.336 The default presentation of the content of any electronically presented annual report must use the value that the applicable requirement under Item 27A prescribes.337 For example, while the default presentation in the expense example and performance line graph must be on a $10,000 assumed investment, a feature may permit an investor to enter a different amount but the investor must, as a default, be able to view the assumed amount.338 One result of this instruction would be that when the contents of a fund’s annual reports are derived from the fund’s audited financial statements, the default online presentation would be the audited figures. Under the general instructions we are proposing, any information that is included in online tools that the fund uses, but that is not included in the annual report that the fund files on Form N–CSR, would have the same status under the Federal securities laws as any other website or other electronic content that the fund produces or disseminates.339 For example, if a fund includes a video providing more detail about the fund’s investments and performance, the video may, based on the facts and circumstances, be an advertisement subject to rule 482.340 334 For example, one feature may be the ability to hover over a point on the performance line graph to see the date and dollar value associated with that point. 335 See Instruction 10 to proposed Item 27A(a) of Form N–1A. 336 See id. (providing that any supplemental information may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included). 337 See Instruction 8 to proposed Item 27A(a) of Form N–1A. 338 See Item 27A(c) and (d) of Form N–1A. 339 See Instruction 8 to proposed Item 27A(a) of Form N–1A. That instruction would provide, in part: ‘‘Any information that is not included in the annual or semi-annual shareholder report filed on Form N–CSR shall have the same status, under the Federal securities laws, as any other website or electronic content that the Fund produces or disseminates.’’ 340 17 CFR 230.482. An investment company advertisement that complies with rule 482 is E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Under these circumstances, the fund would be subject to the same liability standard and filing requirements that attach to any other rule 482 advertisement. This proposed instruction is designed to remind funds about liability and any filing requirements associated with any additional information that a fund chooses to include with the online version of its annual report (other than the shareholder report information that it files with the Commission on Form N–CSR). This supplemental information would also be subject to a record retention requirement.341 Finally, we are proposing an instruction providing that if the shareholder report references other information that is available online, the report should include a link or some other means of immediately accessing that information.342 The proposed instruction states that, for example, the fund should provide hyperlinks to the fund’s prospectus and financial statements if the information is available online. The proposed instruction also states that, in an annual report that is delivered in paper format, funds may include website addresses, QR codes, or other means of providing access to such information.343 We believe these approaches are consistent with a layered approach to disclosure, and that providing ready access to the information that a shareholder report deemed to be a section 10(b) prospectus for purpose of section 5(b)(1) of the Securities Act. As a section 10(b) prospectus, an investment company advertisement is subject to liability under section 12(a)(2) of the Securities Act and the antifraud provisions of the Federal securities laws. 341 Section 31(a) of the Investment Company Act imposes recordkeeping obligations on registered investment companies, and also requires that each investment adviser (that is not a majority-owned subsidiary), depositor, and principal underwriter for a registered investment company maintain and preserve such records as the Commission shall prescribe to record that person’s transactions with the registered investment company. The Commission prescribes those recordkeeping requirements under 17 CFR 270.31a–1 [rule 31a–1] and rule 31a–2. Specifically, rule 31a–1 provides the records that a registered investment company must maintain; rule 31a–2 provides the retention period for those records. To address funds’ retention of any supplemental information that a fund chooses to include in its online version of its annual report (other than the shareholder report information that the fund files with the Commission on Form N–CSR), we are proposing a conforming change to rule 31a–2 that would require that every investment company preserve for a period not less than six years, the first two years in an easily accessible place, any shareholder report required by § 270.30e–1 (including any version posted on a website or otherwise provided electronically) that is not filed with the Commission in the exact form in which it was used. See proposed rule 31a–2(a)(7). 342 See Instruction 9 to proposed Item 27A(a) of Form N–1A. 343 See id. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 references (but does not directly include) would be a convenient feature for investors. Under these requirements, a fund must include a link specific enough to lead investors directly to a specific item or alternatively to a central site with prominent links to the referenced information. For example, a reference to a fund’s prospectus could include a direct link to the prospectus or might include a link to the landing page that includes prominent links to several fund documents, such as the summary prospectus, prospectus, SAI and annual reports. However, the link cannot lead investors to a home page or section of the fund’s website other than on which the specified item is posted. This proposed requirement is designed to permit the investor easily to locate (i.e., without numerous clicks) the information in which he or she is interested. We request comment on the proposed general instructions regarding electronic annual reports, including: 117. Are the proposed instructions that are designed to reflect that annual reports may be electronic as well as paper-based appropriate? Specifically, would the requirements for the ‘‘beginning’’ of the shareholder report clarify the contents that the Commission would require to appear first in electronically presented annual reports? Similarly, is the proposed instruction permitting an ‘‘equivalent’’ order (to that prescribed in Form N–1A) for annual reports that appear on a website or are otherwise provided electronically (such as a mobile application) appropriate, and is this instruction clear? If not, why not? Are there any other instructions that would help clarify content and format requirements for electronic annual reports? 118. The proposed general instructions would encourage a fund to use online tools for annual reports that are available electronically. Would this proposed instruction help to explain the content required to be included in the annual report? Is permitting the additional information conveyed by these tools appropriate? Should there be any limits on the types of additional information that funds present along with electronic versions of their annual reports, in addition to the limits prescribed by the proposed instructions (e.g., that explanatory or supplemental information be responsive to the proposed shareholder report content requirements, that it not be misleading or impede understanding of the required disclosures, and that the default presentation contents in electronically presented shareholder reports be based on the same assumptions required by PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 70759 Item 27A)? For instance, should we permit a fund’s expense presentation to include an explanation that compares a fund’s expenses to its peer group? 119. The federal securities laws generally do not prohibit a fund from posting a version of its annual or semiannual shareholder report translated into a foreign language on its website.344 Further, we understand that funds occasionally will include online tools, such as translators, on their websites to assist non-English speaking investors and investors with disabilities to assess information about the fund. Should the Commission address the translation of a shareholder report or other documents filed with the Commission (such as a prospectus) into a foreign language and the transmission of those documents to shareholders? If so, what factors should the Commission consider? Should the Commission address foreign language shareholder reports (and foreign language versions of other fund regulatory materials) not only for openend funds, but also other types of funds? If the Commission were to amend its rules to address the transmission of foreign language shareholder reports, should it also require foreign language versions of shareholder reports to be filed with the Commission? 120. As proposed, any additional information that a fund presents in connection with an electronic version of its annual report that is not included in the annual report filed on Form N–CSR would have the same status under the Federal securities laws as any other website or electronic content that the fund produces or disseminates. Is this approach appropriate? Notwithstanding this proposed instruction, should we require a fund to file this additional information with the Commission? If so, why, and through what channels should funds be required to file the additional information (e.g., on Form N–CSR)? Is it appropriate to provide investors additional information online that would not have to be provided in paper to investors who request paper documents? If not, why not? 121. Is it appropriate to require that any electronic version of an annual report provide a means of facilitating access (such as a hyperlink) to any information that is referenced in the annual report that is available online? If not, why not? Similarly, is it appropriate to permit an annual report that is delivered in paper to include website addresses, QR codes, or other 344 See supra paragraph accompanying footnotes 339 through 341 and accompanying text (discussing the status under the Federal securities laws of information that funds include on their websites). E:\FR\FM\05NOP2.SGM 05NOP2 70760 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules means of facilitating access to such information? Should the use of website addresses and QR codes be required for annual reports delivered in paper? 122. As proposed, the additional explanatory or supplemental information permitted in an electronic annual report may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. Are these restrictions appropriate? If not, why not? Should this instruction also specify that any explanatory or supplemental information that funds provide as online tools be responsive to the proposed content requirements for shareholder reports? Could this additional restriction prevent funds from providing information that some shareholders might find useful? Or would it be helpful in furthering the goal of ensuring that explanatory or supplemental information not obscure understanding of the required disclosures? 123. Rather than what we are proposing, should funds be able to transmit multiple-series annual reports to shareholders but be required to provide tools for tailoring the online presentation of the disclosure to an individual series? Should we require multi-class funds to provide tools for tailoring the online presentation of the disclosure to an individual class? Why or why not? 124. When a fund’s annual report is available on a website or otherwise available electronically, should the investor be warned when he or she leaves the annual report content and moves to other fund content? If so, why? Should all annual report content (particularly when shown on multiple pages or tabs), be clearly identified as being part of the annual report? If not, why not? 125. Do the proposed general instructions sufficiently encourage electronic design and delivery of the annual report? Are the general instructions sufficiently flexible to permit delivery on phones, tablets, and other devices and to accommodate information conveyed via videos, interactive graphics, or tools and calculators? How can the Commission encourage funds to make fuller use of innovative technology to enable more interactive, user-friendly annual reports? F. Semi-Annual Shareholder Report We are proposing to specify the design and content of funds’ semiannual reports through new Item 27A of Form N–1A. These design and content specifications are similar to those we are proposing for funds’ annual reports.345 The table below summarizes the proposed content that funds would include in their semi-annual reports and compares the proposal to current semiannual report disclosure requirements. TABLE 3—OUTLINE OF PROPOSED SEMI-ANNUAL REPORT Proposed item of form N–1A Description Cover Page or Beginning of Report. Content ..................................... Fund/Class Name(s) ......................................................... Ticker Symbol(s) ............................................................... Principal U.S. Market(s) for ETFs .................................... Statement Identifying as ‘‘Semi-Annual Shareholder Report’’. Legend .............................................................................. Expense Example ............................................................. Management’s Discussion of Fund Performance (optional). Fund Statistics .................................................................. Graphical Representation of Holdings ............................. Material Fund Changes (optional) .................................... Changes in and Disagreements with Accountants .......... Statement Regarding Liquidity Risk Management Program. Availability of Additional Information ................................ khammond on DSKJM1Z7X2PROD with PROPOSALS2 1. Scope and Contents of the Proposed Semi-Annual Report As with the proposed annual report, we propose to limit the scope of funds’ semi-annual reports in several respects to reduce the overall length and complexity of these reports. First, we propose to require a fund registrant to prepare separate semi-annual reports for each series of the fund.346 Second, we propose generally to limit the content a fund may include in its semi-annual 345 See supra section II.B. Instruction 4 to proposed Item 27A of Form N–1A. 347 See Instruction 3 to proposed Item 27A of Form N–1A. 346 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Item Item Item Item 27A(b). 27A(b). 27A(b). 27A(b). Item 27A(b). Item 27A(c) ................. Item 27A(d) ................. Item Item Item Item Item Current item of form N–1A containing similar requirements 27A(e). 27A(f) .................. 27A(g). 27A(h) ................. 27A(i) .................. Item 27A(j) .................. Item 27(d)(1). Item 27(b)(7). Item 27(d)(2). Item 27(b)(4). Item 27(d)(6)(ii) Item 27(d)(3) through (5). report to the information that Item 27A of Form N–1A specifically permits or requires.347 However, if a fund’s particular circumstances may cause the required disclosures to be misleading, the fund may add additional information that is necessary to make the required disclosure items not misleading. Finally, the proposed amendments to Form N–1A would not permit a fund to incorporate by reference any information into its semiannual report.348 Collectively, these restrictions parallel our proposed scope and content limitations for annual reports.349 As is the case today, the proposed semi-annual report would not be subject to page or word limits. As noted above, we believe a set limit could constrain appropriate disclosure or lead funds to omit material information. However, we believe that the proposed limits on the contents of shareholder reports should nonetheless limit their length in support of our goal of concise, readable disclosure.350 348 See Instruction 5 to proposed Item 27A of Form N–1A. 349 See supra Section II.B.1.a and II.B.1.b; see also Instructions 3, 4, and 5 to proposed Item 27A of Form N–1A. 350 Because we estimate that the proposed annual report would be approximately 3 to 4 pages in length, we similarly estimate that the proposed semi-annual report (which would include fewer required disclosure items than the proposed annual report) would be approximately 3 to 4 pages in length or shorter. In the case of paper delivery, this PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 The cover page or beginning of the proposed semi-annual report would essentially contain the same content as the annual report (with the only difference being references to a ‘‘semiannual report’’ instead of an ‘‘annual report’’).351 Semi-annual reports currently include an expense example.352 The proposed semi-annual report would retain an expense example, which would be subject to the same content requirements as the expense example in the proposed annual report.353 We do not currently require MDFP in semi-annual reports. Under our proposal, semi-annual reports similarly would not require MDFP, but funds could include this disclosure on an optional basis.354 We understand that it is currently common for funds to include MDFP in their semi-annual reports, and we believe that continuing to allow this disclosure would enable funds to identify factors that could help investors better contextualize other information disclosed in the semiannual report. However, any such disclosure would have to comply with the proposed content requirements for MDFP in annual reports.355 Under our proposal, semi-annual reports, like annual reports, would have to include certain fund statistics, including the fund’s: (1) Net assets, (2) total number of portfolio holdings, and (3) portfolio turnover rate.356 This new disclosure requirement for semi-annual reports would parallel proposed required disclosures in annual reports.357 As in annual reports, this proposed disclosure requirement is intended to provide succinct fund disclosures in a format that investors may be more likely to review than long narratives, and is designed to help contextualize other disclosures required in semi-annual reports.358 In addition, a fund could disclose any additional may allow funds to deliver semi-annual reports using a trifold self-mailer (or a similarly concise mailing). See supra footnote 134 and accompanying text. 351 See proposed Item 27A(b) of Form N–1A; see also supra Section II.B.2.a. 352 See Item 27(d)(1) of Form N–1A. 353 See proposed Item 27A(c) of Form N–1A; see also supra Section II.B.2.b. The expense example in the semi-annual report would cover a 6-month reporting period. 354 See proposed Item 27A(d) of Form N–1A. 355 See supra Section II.B.2.c. 356 See proposed Item 27A(e) of Form N–1A. 357 We note, however, that semi-annual reports currently must disclose net assets and portfolio turnover rate as part of the requirement to disclose condensed financial information. See Item 27(c)(2) of Form N–1A; see also supra footnotes 243 and 249 and Section II.B.2.d. 358 See supra text accompanying footnotes 243 through 250. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 statistics that it believes would help shareholders better understand the fund’s activities and operation during its most recent fiscal half-year.359 Semi-annual reports currently include a graphical representation of holdings.360 For the same reasons that we propose to retain the current requirements for the graphical representation of holdings in the annual report (with revisions designed to improve the presentation), we propose to retain the current requirements for the graphical representation of holdings in funds’ semi-annual reports.361 The graphical representation of holdings in the proposed semi-annual report would be subject to the same content requirements as in the proposed annual report.362 We do not currently require a discussion of material changes to the fund in semi-annual reports. Under our proposal, such disclosure would still not be required, but funds could include this disclosure on an optional basis.363 We believe that permitting, but not requiring, this disclosure is appropriate because we anticipate that it would be common under the proposed rules for fund shareholders to receive notices of material changes as they occur throughout the year (i.e., the notices that proposed rule 498B would require, or as prospectus ‘‘stickers’’ for those funds that do not rely on proposed rule 498B).364 Requiring a discussion of material changes in the semi-annual report could be duplicative in light of these other notices. However, we are permitting funds to include this disclosure in their semi-annual reports because we anticipate that there could be circumstances in which discussing material changes could help investors better contextualize other information in the semi-annual report. Any such disclosure would have to comply with the proposed content requirements for the discussion of material changes in annual reports.365 As discussed above, we are proposing to require funds to include, under 359 See proposed Item 27A(e) of Form N–1A; see also supra text accompanying and following footnote 251. 360 See Item 27(d)(2) of Form N–1A. 361 See supra footnotes 260–262 and accompanying text. 362 See proposed Item 27A(f) of Form N–1A; see also supra Section II.B.2.e. 363 See proposed Item 27A(g) of Form N–1A. 364 See infra Section II.F.3.b (discussing the notices of material changes that the proposal would require, for funds relying on proposed rule 498B); see also infra footnote 870 and accompanying text (estimating that 90 percent of funds would rely on proposed rule 498B instead of sending annual prospectus updates to existing shareholders). 365 See supra Section II.B.2.f. PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 70761 certain conditions, a statement in their semi-annual or annual reports regarding their liquidity risk management program.366 This statement would include a brief summary of: (1) The key factors or market events that materially affected the fund’s liquidity risk during the reporting period, (2) the key features of the fund’s liquidity risk management program, and (3) the effectiveness of the fund’s liquidity risk management program over the past year.367 Depending on the timing of the fund’s board’s review of the fund’s liquidity risk management program, the fund would include the statement in either its annual or semi-annual report.368 If the board were to review the liquidity risk management program more frequently than annually, a fund could choose to include the discussion of the program’s operation and effectiveness over the past year in the fund’s annual and/or semi-annual report, but this discussion would not be required to be included in both reports.369 Under current shareholder report requirements, funds must include statements regarding the availability of certain information not included in the semi-annual report, namely the fund’s: (1) Quarterly portfolio schedule; (2) proxy voting policies and procedures; and (3) proxy voting record.370 Under our proposal, the semi-annual report would have to similarly include a brief, plain English statement that certain additional fund information is available on the fund’s website, including, as applicable, the fund’s prospectus, financial statements, quarterly portfolio schedule, and proxy voting record.371 The statement could also reference other information on the fund’s website that the fund reasonably believes shareholders would view as important.372 In addition, if the shareholder report appears on a fund’s website or otherwise is provided electronically, the fund must provide a means of facilitating access to that additional information (such as a 366 See supra Section II.B.2.g. proposed Item 27A(i) of Form N–1A. 368 See supra footnote 307 and accompanying text. 369 See Instruction 3 to proposed Item 27A(i) of Form N–1A. Current Form N–1A includes the same instruction providing flexibility for a fund whose board reviews the liquidity risk management program more frequently than annually to include the discussion of the program in either the semiannual report or the annual report, but not both. See Instruction to Item 27(d)(6)(ii) of Form N–1A. 370 See Items 27(d)(3) through (5) of Form N–1A. 371 See proposed Item 27A(j) of Form N–1A. 372 Id. 367 See E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70762 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules hyperlink).373 Collectively, these requirements would be the same as the proposed requirements with regard to the availability of additional information in annual reports.374 We request comment generally on the proposed scope and content requirements for funds’ semi-annual reports, and specifically on the following issues: 126. Is the proposed scope for semiannual reports appropriate? To the extent the Commission changes the proposed scope of annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique scope considerations for semi-annual reports, as opposed to annual reports? 127. Are the proposed content requirements for semi-annual reports appropriate? To the extent that the Commission adopts changes to the proposed content requirements for annual reports, should the Commission adopt those same changes for semiannual reports? In contrast, are there any unique content considerations for semi-annual reports, as opposed to annual reports? For example, are there any amendments we should make to the proposed MDFP requirement to clarify disclosure obligations in the context of a semi-annual reporting period, as opposed to an annual reporting period? As another example, should we require the statement regarding the fund’s liquidity risk management program in both the annual and the semi-annual reports, instead of providing the flexibility to include this disclosure in either report (depending on the timing of the board’s review of the program)? 128. Is it appropriate to permit, but not require, funds to include MDFP and a discussion of material fund changes in their semi-annual reports? Why or why not? Would funds include this optional disclosure in their semi-annual reports, and if so, why? Should we permit any additional flexibility with regard to the content requirements of semi-annual reports and, if so, are there any corresponding changes that we should make to the proposed form amendments to implement such flexibility? 129. Should the Commission make any changes to the frequency of fund shareholder reports? For example, should the Commission require the transmittal of fund shareholder reports more or less frequently than on a semiannual basis? 375 To what extent would 373 See Instruction 1 to proposed Item 27A(j) of Form N–1A. 374 See id.; see also supra Section II.B.2.g. 375 See infra Section II.C.3.b (seeking comment on, among other things, an alternative approach in VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 changes in the frequency of shareholder reports impact investors and their investment decision-making? 2. Format and Presentation of SemiAnnual Report Under our proposal, as discussed below, the semi-annual report would be generally subject to the same format and presentation requirements as the annual report.376 Information in semi-annual reports would be required to appear in the same order as the corresponding form items appear in the proposed amendments to Form N–1A.377 Any information that a fund could choose to include in the semi-annual report would also be subject to this proposed ordering requirement (that is, it would have to be presented in the same order as the parallel mandatory disclosures in annual reports).378 Like the parallel requirement for annual reports, this proposed ordering requirement for semiannual reports is designed to ensure that information we believe is most salient to shareholders would appear first in the report. The proposed ordering requirement also is designed to promote consistency and comparison across funds and would place related report contents close together. The other proposed instructions for annual reports’ format and presentation discussed above also would apply to semi-annual reports. These include the proposed ‘‘plain English’’ instructions for the organization, wording, and design of the report.379 They also include the proposed instructions encouraging funds to consider using, as appropriate, a question-and-answer format, charts, graphs, tables, bullet lists, and other graphics or text features as a way to help provide context for the information presented.380 We request comment generally on the proposed format and presentation requirements for funds’ semi-annual reports, and specifically on the following issues: which the requirement to transmit a semi-annual report could be satisfied instead by updating certain information that appears on a fund website either semi-annually or on some more-frequent basis). 376 See Section II.B.3. 377 See Instruction 2 to proposed Item 27A(a) of Form N–1A. This proposed instruction would also include provisions that are applicable to a semiannual report that appears on a website or is otherwise provided electronically. See infra Section II.C.3. 378 Id. 379 See Instruction 6 to proposed Item 27A(a) of Form N–1A; see also supra footnote 323 and accompanying paragraph. 380 See Instruction 8 to proposed Item 27A(a) of Form N–1A; see also supra footnote 324 and accompanying paragraph. PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 130. Are the proposed format and presentation requirements for semiannual reports appropriate? To the extent that the Commission adopts rules that include changes to these requirements for annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique considerations with regard to the format and presentation requirements for semiannual reports, as opposed to annual reports? 131. Under our proposal, semi-annual reports may optionally include certain disclosures that would be required to be included in annual reports.381 Is it appropriate to require any such optional disclosures to be presented in the same order as the information would be presented in annual reports? To what extent could this cause confusion for investors reading semi-annual reports, given that some semi-annual reports might contain additional optional disclosures interspersed between required disclosures? In contrast, to what extent would it be confusing to require these optional disclosures to be presented in a different order (e.g., following all required disclosures)? 3. Electronic Semi-Annual Reports a. Proposed Instructions and Requirements Our proposed 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.382 Among other things, these proposed instructions would (1) provide ordering and presentation requirements for semiannual reports that appear on a website or are otherwise provided electronically, (2) 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 (3) 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.383 We request comment generally on the proposed instructions regarding funds’ electronic semi-annual reports, and specifically on the following issues: 381 See supra footnotes 354 and 355 and accompanying text (discussing the proposal to permit, but not require, MDFP to be included in semi-annual reports) and supra footnotes 363 through 365 (discussing the proposal to permit, but not require, a discussion of material fund changes to be included in semi-annual reports). 382 See supra Section II.B.4. 383 Id. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 132. Are the proposed instructions regarding funds’ electronic semi-annual reports appropriate? Should any of those instructions be modified or should any other revisions be made to the Commission’s proposal with regard to electronic shareholder reports, in order to better reflect investor preferences or to encourage the use of electronic shareholder reports by funds? khammond on DSKJM1Z7X2PROD with PROPOSALS2 b. Alternatives Involving Electronic Semi-Annual Reports Currently, funds are required to transmit semi-annual reports to shareholders, and—as with annual reports—they will be able to satisfy this requirement in certain cases under rule 30e–3 by posting the report (and certain other required materials) online and providing a notice of the reports’ online availability.384 We considered proposing alternative requirements for transmitting semi-annual reports. For example, we considered allowing funds to satisfy the requirement to transmit semi-annual reports by filing certain information on Form N–CSR. Also, in light of current internet use trends, we considered allowing funds to satisfy the requirement to transmit a semi-annual report by updating certain information on a fund website either semi-annually or on some more-frequent basis. For example, we understand that many funds currently publish monthly or quarterly fact sheets online.385 These fact sheets tend to include much of the information that would appear in the proposed requirements for funds’ semiannual reports, and often present such information in a concise format that may be appealing to investors. We understand that some shareholders or financial professionals may use fact sheets to monitor fund investments because, among other reasons, fact sheets include more up-to-date performance information than shareholder reports or prospectuses. While we are not proposing an approach in which a fund’s obligation to transmit semi-annual reports would be deemed to be satisfied if the fund were to merely post updated fact sheets (or similar documents) online on a semi-annual or more-frequent basis, we are soliciting comment on potential disclosure alternatives that would leverage information that many funds already provide on their websites. 384 See supra footnote 22 and accompanying text. The Commission has previously interpreted the meaning of ‘‘transmit’’ in this context. See discussion of previous Commission guidance on the use of electronic media for delivery purposes, supra footnote 21. 385 See generally supra text following footnote 23. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 An approach that would leverage frequently updated website content, such as fund fact sheets, raises the consideration of how frequently required regulatory disclosures should ideally be provided to fund shareholders. Our proposed semiannual report requirement parallels current requirements with regard to the frequency of shareholder reports, which are statutorily mandated to be transmitted on a semi-annual basis.386 We are currently unaware of any evidence indicating that fund investors specifically desire shareholder reports to be provided less frequently.387 The proposed approach also reflects our view that the proposed amendments to the contents of annual and semi-annual reports represent the information that would be most useful and salient to investors in assessing and monitoring their fund investments. More generally, we considered the effects and benefits of a disclosure framework in which fund shareholders have regulatory information ‘‘pushed’’ to them on a semi-annual basis (e.g., the required direct transmission of shareholder reports twice a year) versus a hypothetical disclosure framework in which fund shareholders would have the onus to periodically ‘‘pull’’ regulatory disclosures from various sources (e.g., information that is periodically updated on a fund website).388 We are concerned that such a hypothetical disclosure framework would represent a significant change in current practices. We are also concerned that a ‘‘pull’’-only disclosure framework may not be aligned with investor preferences. Although we understand that some investors prefer receiving fund disclosure electronically (e.g., through email, mobile application, or website availability), we do not have evidence that these investors would prefer a disclosure approach in which they would receive no notification that updated disclosures are available.389 We 386 See section 30(e) of the Investment Company Act. 387 See, e.g., Broadridge Comment Letter II. See also ICI Comment Letter I (asserting that a streamlined shareholder report should be required on the same semi-annual frequency as the current shareholder report). But see supra footnotes 54 to 55 and accompanying text (discussing some investors’ concerns about the volume and frequency of fund disclosure materials they currently receive). 388 For example, rule 30e–3 could be understood as a hybrid ‘‘push/pull’’ disclosure framework in which notices are pushed out to investors to notify them that shareholders reports have been posted online and are available to be pulled down. See rule 30e–3(c). In addition, rule 30e–3 allows shareholders to elect to remain in a pure ‘‘push’’ disclosure framework in which those shareholders will continue to have shareholder reports directly delivered to them. See rule 30e–3(f). 389 See supra footnote 70 and accompanying text. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 70763 recognize that a hypothetical disclosure framework could require funds to ‘‘push’’ to investors a short notice that updated information is available online, similar to the current approach under rule 30e–3. However, rule 30e–3 contemplates notices being provided semi-annually. To the extent that, under the hypothetical disclosure framework, funds would update their online materials more frequently than semiannually, providing notices each time that online materials were updated could be costly and could dissuade funds from updating these materials. Moreover, we understand that some investors generally prefer to receive at least certain fund information in paper format.390 We recognize that there are other possible permutations of these disclosure approaches (for example, providing a notice of updated online information only semi-annually or permitting a fund to rely on rule 30e– 3 with respect to the requirement to provide semi-annual reports, while continuing to require funds to provide annual reports directly to shareholders), and we request comment on these possible approaches below. In addition, potential regulatory challenges and unintended consequences could result from such a hypothetical disclosure framework. For example, as discussed below, we seek comment regarding the extent to which this hypothetical framework could result in a bifurcated disclosure system. That is, we ask about the effects on fund investors if certain funds would no longer transmit semi-annual reports directly and instead would update information posted online, while other funds would continue to transmit semiannual reports directly. We request comment generally on the alternatives to the proposed semiannual report transmission requirement that we considered, and specifically on the following issues: 133. Should the Commission require the direct transmission of semi-annual reports, as proposed? Alternatively, should the Commission adopt different conditions for satisfying this transmission requirement? For example, should funds be permitted to satisfy this requirement by filing certain information on Form N–CSR, pursuant to certain conditions? If so, what information should be filed, and what conditions would be appropriate? As another example, under the proposal, funds registered on Form N–1A would no longer be permitted to rely on rule 30e–3 to satisfy annual and semi-annual 390 See supra footnotes 71 and 72 and accompanying text. E:\FR\FM\05NOP2.SGM 05NOP2 70764 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules report transmission requirements.391 Should we instead continue to permit these funds to rely on rule 30e–3 as an alternative method of transmitting their semi-annual reports (while, as proposed, no longer permitting them to rely on the rule with respect to annual reports)? What evidence is there (for example, of investor preferences) to support different transmission requirements for semi-annual reports versus annual reports? 134. As a further alternative, would it be appropriate for the Commission to permit funds to satisfy their obligations to transmit semi-annual reports by updating certain information that appears on their websites (for example, updating a fund fact sheet), either semiannually or on some more frequent basis? If so, what frequency and which information would be appropriate? Would it be appropriate to require a fund’s website to include all of the information that we are proposing that funds include in their semi-annual reports, a subset of this information, or different information? To what extent should the Commission specify the content, presentation, and/or accessibility requirements for such information, and what should these requirements be? How, if at all, should funds be required to inform shareholders that updated information is available on their websites? Should there be any other conditions for a fund to be able to satisfy its semi-annual report transmission obligations in this way, and if so what should they be? To what extent should the Commission consider or address the fact that, pursuant to rule 482 under the Securities Act, fact sheets and other information that funds make available online are generally considered to be omitting prospectuses, and are thus subject to prospectus liability that does not apply to shareholder reports? Should information that funds make available online under this alternative be required to be filed with the Commission? To what extent would this alternative approach result in a bifurcated disclosure system, as 391 See khammond on DSKJM1Z7X2PROD with PROPOSALS2 392 See infra Section II.G. proposed Items 7 through 11 of Form N– CSR. 393 See Investment Company Act sections 30(a), 30(e); see also infra Table 4. 394 See 17 CFR 270.0–4 [rule 0–4 under the Investment Company Act] (additional rules on incorporation by reference for funds); 17 CFR 230.411 [rule 411 under the Securities Act] (general rules on incorporation by reference in a prospectus); 17 CFR 232.303 [rule 303 of Regulation S–T] (specific requirements for electronically filed documents); General Instruction D to Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 described above? What would be the effects on investors and those who wish to review semi-annual reports, if semiannual reports were only prepared by some, but not all, funds? Would this alternative be aligned with investor preferences for fund shareholder report disclosure? Would it otherwise raise any investor protection concerns, and if so, what concerns? 135. Are there any further alternatives the Commission should consider with regard to semi-annual reports specifically, or reports that the fund would transmit on an other-than-annual basis generally? To what extent should any of these alternatives provide special consideration for electronic shareholder reports? We are proposing to amend Form N– CSR and rule 30e–1 to implement our proposed layered disclosure framework. We are proposing to require funds to continue to file certain information, which is currently included in fund shareholder reports, on Form N–CSR.392 Section 30 of the Investment Company Act requires funds to file their shareholder reports, including certain information that must appear in their reports, with the Commission.393 Because we are proposing a framework in which certain information would no longer appear in funds’ shareholder reports, we are proposing amendments to Form N–CSR that would create new filing requirements for this information in order to continue to require funds to file the information with the Commission. This Form N–CSR filing requirement would further the proposed layered disclosure framework by making available a broader set of fund information than the information that appears in funds’ annual and semiannual reports. The information that would be filed on Form N–CSR is less retail-focused than the information that would appear in funds’ annual and semi-annual reports, but as detailed below we believe that retaining the availability of this information would be important for investors who desire more in-depth information, financial professionals, and other market participants. The information included on Form N–CSR also would continue to provide shareholders and other market participants with access to historical, immutable data regarding the fund on EDGAR. This historical information also would facilitate the Commission’s fund monitoring responsibilities and could create significant efficiencies in the location of information for data gathering, search, and alert functions used in those monitoring activities. For example, filing on EDGAR facilitates the financial statement reviews that section 408 of the Sarbanes-Oxley Act of 2002 mandates. Additionally, because Form N–CSR is filed with the Commission on EDGAR, a fund can incorporate by reference information that is disclosed on Form N–CSR, including the fund’s financial statements, into a fund’s registration statement, subject to certain limitations.394 Finally, a fund’s principal executive and financial officer(s) are required to certify the financial and other information included on Form N–CSR, and are subject to liability for material misstatements or omissions on Form N– CSR.395 The amendments that we are proposing to rule 30e–1 would require funds to make available on their website the information that they would newly have to file on Form N–CSR, and to deliver such information upon request, free of charge.396 These proposed website availability requirements are designed to provide ready access to this information for shareholders who find this information pertinent. The proposed requirements also would assist those investors who find it most convenient to locate fund materials on a website that is not EDGAR. The following table outlines the content that we propose to require funds to include in their Form N–CSR filings and make available online. This content is currently included in a fund’s annual and semi-annual reports. 395 See 17 CFR 270.30a–2 [rule 30a–2 under the Investment Company Act] and Item 13(a)(2) of Form N–CSR; see also Certification of Disclosure in Companies’ Quarterly and Annual Reports, Investment Company Act Release No. 25722 (Aug. 28, 2002) [67 FR 57275 (Sept. 09, 2002)]. The Sarbanes-Oxley Act of 2002, Public Law 107– 204, 116 Stat. 745 (2002) (the ‘‘Sarbanes-Oxley Act’’) requires the principal executive and principal financial officer of most management investment companies to provide two different certifications in their periodic reports. Section 302 of the SarbanesOxley Act requires a certification that, among other things, relates to the accuracy of the information included in the N–CSR filing. Section 906 of the Sarbanes-Oxley Act added new Section 1350 to Title 18 of the United States Code, which requires a certification that, among other things, represents that the N–CSR filing fairly presents, in all material respects, the fund’s financial condition and results of operations, and is subject to specific Federal criminal provisions. 396 See proposed rule 30e–1(b)(2) (funds would be required to post online Items 7 through 11 of Form N–CSR as well as the fund’s complete portfolio holdings, if any, as of the close of the company’s most recent first and third fiscal quarters). G. New Form N–CSR and Website Availability Requirements PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 70765 TABLE 4—OUTLINE OF PROPOSED NEW FORM N–CSR AND WEBSITE AVAILABILITY REQUIREMENTS Description (and related statutory requirement) Current rule and form requirement(s) for shareholder report disclosure (if any) Proposed new disclosure items for filing on SEC forms Financial statements for funds (required by section 30(e) of the Investment Company Act). Financial highlights for funds ................. Items 27(b)(1) and 27(c)(1) of Form N–1A. Proposed Item 7(a) of Form N–CSR. Proposed rule 30e–1(b)(2)(i). Items 27(b)(2) and 27(c)(2) of Form N–1A. Items 27(b)(3) and 27(c)(3) of Form N–1A. Proposed Item 7(b) of Form N–CSR. Proposed Item 10 of Form N–CSR. Proposed rule 30e–1(b)(2)(i). Items 27(b)(4) and 27(c)(4) of Form N–1A; Item 304 of Regulation S–K. Rule 30e–1(b) ...................................... Proposed Item 8 of Form N– CSR. Proposed Item 9 of Form N– CSR. Proposed Item 11 of Form N–CSR. Proposed rule 30e–1(b)(2)(i). N/A ....................................... Proposed rule 30e–1(b)(2)(ii). Remuneration paid to directors, officers and others of funds (required by section 30(e) of the Investment Company Act). Changes in and disagreement with accountants for funds. Matters submitted to fund shareholders for a vote. Statement regarding the basis for the board’s approval of investment advisory contract. Complete portfolio holdings as of the close of the fund’s most recent first and third fiscal quarters. Item 27(d)(6) of Form N–1A ................ Currently required in Part F of Form N–PORT. Also website availability of this information currently required for funds relying on rule 30e–3.. 1. Proposed Form N–CSR Filing Requirements khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Financial Statements We are proposing to require a fund to file its most recent complete annual or semi-annual financial statements on Form N–CSR, and provide certain data points from the financial statements in its annual and semi-annual reports, in lieu of including the fund’s complete financial statements in its shareholder reports.397 Consistent with current requirements, the fund’s annual financial statements would be audited and accompanied by any associated accountant’s report, while the semiannual financial statements need not be audited. Currently, funds are required to include audited financial statements in their annual reports and unaudited financial statements in their semiannual reports.398 Section 30(e) of the Investment Company Act provides that funds’ annual and semi-annual reports include the fund’s financial statements, 397 See proposed Item 7(a) of Form N–CSR; see also supra footnotes 198 through 211 and accompanying text (discussing the proposed requirement to include a graphical representation of a fund’s holdings in the shareholder report). 398 See Item 27(b)(1) and 27(c)(1) of Form N–1A. A fund’s audited financial statements must include, among other items: (1) An audited balance sheet, or statement of assets and liabilities, as of the end of the most recent fiscal year; (2) an audited statement of operations for the most recent fiscal year; (3) an audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles (‘‘GAAP’’); (4) audited changes in net assets for the two most recent fiscal years; and (5) a schedule of investments in securities of unaffiliated issuers. See 17 CFR 210.3–18 and 210.6–10 [rules 3–18 and 6– 10 of Regulation S–X]. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 which in turn must include a statement of assets and liabilities, a schedule of investments that shows the amount and value of each security owned by the fund on that date, a statement of operations, and a statement of changes in net assets.399 The annual report must include audited financial statements accompanied by a certificate of an independent public accountant.400 The financial statements (including the fund’s schedule of portfolio investments) provide data regarding the values of the fund’s portfolio investments as of the end of the reporting period. This provides a ‘‘snapshot’’ of data at a particular point in time, or, for example in the case of the statement of operations, historical data over a specified time period.401 The rules under Regulation S–X establish general requirements for portfolio holdings disclosures in fund financial statements. Information regarding a fund’s schedule of portfolio investments is designed to enable shareholders to make more informed asset allocation decisions by allowing them to better monitor the extent to which their investment portfolios overlap. In addition, this information may provide shareholders—particularly those with facility in analyzing funds’ 399 See sections 30(e)(1) through (4) of the Investment Company Act [15 U.S.C. 80a–29(e)(1) through (4)], and section 30(e)(6) of the Investment Company Act [15 U.S.C. 80a–29(e)(6)]. 400 See section 30(g) of the Investment Company Act [15 U.S.C. 80a–29(g)]. 401 See Investment Company Reporting Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 2015)] (‘‘Reporting Modernization Proposing Release’’), at text following n.55. PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 Proposed website availability requirements Proposed rule 30e–1(b)(2)(i). Proposed rule 30e–1(b)(2)(i). Proposed rule 30e–1(b)(2)(i). individual portfolio holdings—with information about how a fund is complying with its stated investment objective and expose any deviation from the fund’s investment objective (i.e., style drift).402 In lieu of providing a complete schedule of portfolio investments as part of the financial statements included in its shareholder report, a fund may provide a summary schedule of portfolio investments (‘‘summary schedule’’).403 The summary schedule must list, separately, the 50 largest issues and any other issue exceeding one percent of the net asset value of the fund at the close of the period.404 Much of the length of funds’ current annual and semi-annual reports is due to the inclusion of the complete financial statements.405 Commenters on the Fund Investor Experience RFC, as well as information from prior investor testing and surveys, suggest that some investors generally believe the financial statements, or information derived from 402 See February 2004 Shareholder Report Adopting Release, supra footnote 83, at text accompanying n.32. 403 See Instruction 1 to Item 27(b)(1) of Form N– 1A (permitting the inclusion of Schedule VI– summary schedule of investments in securities of unaffiliated issuers under 17 CFR 210.12–12C [Rule 12–12C of Regulation S–X] in lieu of Schedule 1— Investments of securities of unaffiliated issuers under 17 CFR 210.12–12 (Rule 12–12 of Regulation S–X)). 404 See rule 12–12C, n.3 of Regulation S–X [17 CFR 210.12–12C]. 405 See supra footnote 19 and accompanying text (discussing the typical length of funds’ annual reports today). E:\FR\FM\05NOP2.SGM 05NOP2 70766 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 financial statements, is important.406 However, we understand that many shareholders may find the current shareholder report financial statement disclosure to be complex and difficult to understand. For example, the 2012 Report on Investor Testing of Fund Annual Reports noted that while about a quarter of investors surveyed expressed the view that financial statement information is important, the majority of investors did not find the financial statement section of the shareholder report easy to understand, and investor comprehension of the section was low.407 Similarly, one commenter on the Fund Investor Experience RFC stated that much of the information included in financial statements is of a technical nature with little importance to the average retail investor, and recommended that this information be included online.408 We are proposing to require funds to provide the complete financial statements on Form N–CSR, while retaining the graphical representation of holdings in the annual and semi-annual reports.409 We believe that this layered approach to disclosure will help shareholders understand how the fund invests its assets. This approach is also designed to permit all shareholders, including retail shareholders, to monitor and assess their ongoing investment in the fund in a concise, easy-tounderstand pictorial format, while preserving access to the more complete financial statements for shareholders that find this broader information useful. The graphical representation of holdings in funds’ shareholder reports is also in line with the preferences investors have expressed for including more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor.410 We also are proposing amendments to Form N–1A that would eliminate a fund’s ability to provide a summary schedule in lieu of providing a complete 406 See supra footnotes 51 and 52 and accompanying text (summarizing research findings regarding the level of investor interest in financial statement information). 407 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 15. The results of the 2012 Report on Investor Testing of Fund Annual Reports found that 24% of shareholders that were surveyed ranked the financial statements within the top three items of importance. 408 See ICI Comment Letter I. 409 See proposed Item 7 of Form N–CSR (requiring funds to provide the complete financial statements on Form N–CSR); see also Item 27A(f) of Form N–1A (requiring shareholder reports to include the graphical representation of holdings). 410 See Kleimann, supra footnote 324; see also supra footnote 34. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 schedule of portfolio investments as part of the financial statements. We believe that this is appropriate because the proposed annual and semi-annual reports would no longer include the complete financial statements (which includes the schedule of portfolio investments). Therefore, because a fund’s full schedule of investments would only be included on Form N– CSR and on the fund website, we believe that allowing funds to use the summary schedule would be unnecessary and could potentially be confusing to shareholders. This proposed change would also reduce costs to the extent funds need not print and mail a complete schedule of portfolio investments as part of the financial statements unless a shareholder requests this information.411 Furthermore, because the proposed annual and semi-annual reports are designed to help investors focus on the most salient features of the fund to better evaluate their investment, we do not believe it would be useful to shareholders, and may even be confusing, to allow funds to provide a summary schedule alongside the complete schedule of portfolio investments online. We seek comment on our proposal to require funds to file their annual and semi-annual financial statements on Form N–CSR and make them available online rather than in a fund’s shareholder reports, and specifically on the following issues: 136. Would our proposed layered approach to disclosure of financial statement information—by providing the graphical representation of holdings in the annual and semi-annual report and the complete financial statements on Form N–CSR—help tailor 411 Under the proposal, this information would also appear online. As part of its proposal and adoption of rule 30e–3, the Commission similarly proposed to eliminate the ability of a fund relying on rule 30e–3 to provide a summary schedule in its shareholder report because the shareholder report would only be filed online and, therefore, the fund would not bear additional printing and mailing costs associated with providing the full schedule of investments. See Reporting Modernization Proposing Release at Section II.D. The Commission ultimately determined to retain the ability for a fund that relies on rule 30e–3 to provide a summary schedule in the Rule 30e–3 Adopting Release, and acknowledged that a fund may choose to use a summary schedule for cost considerations or otherwise. See Rule 30e–3 Adopting Release, supra footnote 14, at n.120. We believe the considerations underlying this proposal’s treatment of the summary schedule are different because, unlike under rule 30e–3, no fund investors would have a shareholder report that includes the fund’s financial statements directly transmitted to them. Under rule 30e–3, funds would still have to deliver shareholder reports that include full financial statements to any shareholder who so requests. PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 information to shareholders based on their informational needs? Are there any other data elements from funds’ financial statements that should be included in funds’ annual and semiannual reports, and if so, what elements and why would they be useful for retail shareholders? 137. Is the direct transmission of audited financial statements, or a portion of them, important to fund investors, and if so, why? If important, would it be helpful to investors for any information in the annual report to be replicated verbatim from the audited financial statements, and for the report to make clear that certain information was audited? What information and why? 138. Should we, as proposed, eliminate a fund’s ability to provide a summary schedule in lieu of providing a complete schedule of portfolio investments as part of the financial statements? Should we instead either permit funds to continue providing a summary schedule as part of their financial statements, or require funds to include a summary schedule in their shareholder reports? Would the latter alternative provide an appropriate complement to the graphical representation of holdings, or would including the summary schedule in funds’ shareholder reports be duplicative and/or confusing in light of the proposed requirement to include the graphical representation of holdings in funds’ annual and semi-annual reports? If we were to continue to permit funds to provide a summary schedule as part of their financial statements, should we also require these funds to make their complete portfolio holdings, as of the close of the fund’s most recent second and fourth fiscal quarters, available on a website (in addition to the proposed requirement discussed below that funds make their first and third fiscal quarters’ complete portfolio holdings available online)? 412 Should we permit a fund to make the summary schedule available online instead of the complete schedule of portfolio holdings? Why or why not? 139. Other than complete financial statements, is there any other financial information that funds should be required to file on N–CSR? Do investors and other market participants currently use the financial statement information that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? b. Financial Highlights We are proposing to require funds to file their financial highlights 412 See E:\FR\FM\05NOP2.SGM infra Section II.D.2.a. 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules information on Form N–CSR.413 This information is identical to the information currently required in fund shareholder reports. We are proposing that funds would not include financial highlights information in their annual or semi-annual reports, with the exception of certain specific data points as discussed below. Currently, funds are required to disclose the condensed financial information that Item 13(a) of Form N– 1A requires (i.e., financial highlights) in their annual and semi-annual reports.414 The financial highlights include a summary table of financial information covering the preceding five years (or since the fund’s inception, if less than five years).415 Under certain circumstances, a fund may incorporate by reference its financial highlights from a report to shareholders into its prospectus.416 The information contained in a fund’s financial highlights is generally designed to help investors evaluate the fund’s historical performance and fund manager’s investment management expertise.417 For example, disclosure of changes in a fund’s total return over a five-year period is designed to give a shareholder information regarding the fund’s performance trends over time (i.e., volatile vs. steady returns).418 Similarly, a higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes 413 See proposed Item 7(b) of Form N–CSR. Items 27(b)(2) and 27(c)(2) of Form N–1A. See also Item 13(a) of Form N–1A. 415 The summary table contains information regarding changes in a fund’s net asset value, total returns, portfolio turnover rate, and capital distributions, among other things, during the preceding five years. See Item 13(a) of Form N–1A. 416 See Instruction 4(e) to Item 13 of Form N–1A. A fund currently may incorporate the financial highlights from a shareholder report into the prospectus if the fund delivers the shareholder report simultaneously with the prospectus or if the shareholder report has been previously delivered to shareholders. A fund that incorporates the financial highlights by reference must include a statement in its prospectus explaining that: (1) Additional information about the fund’s investments is available in the annual and semi-annual reports to shareholders; (2) the fund’s annual report provides a discussion of the market conditions and investment strategies that significantly affected the fund’s performance during its last fiscal year; and (3) the fund’s annual and semi-annual reports are available, without charge, upon request. A fund must also explain how shareholders may make inquiries to the fund, provide a telephone number for shareholders to call to request the annual or semi-annual report, and state whether the fund makes available its annual and semi-annual reports, free of charge, on the fund’s website. See Item 1(b)(1) of Form N–1A. 417 See Improving Descriptions of Risk by Mutual Funds and Other Investment Companies, Investment Company Act Release No. 20974 (Mar. 29, 1995) [60 FR 17172 (Apr. 4, 1995)]. 418 See How to Read a Mutual Fund Shareholder Report, supra footnote 316. khammond on DSKJM1Z7X2PROD with PROPOSALS2 414 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 when fund shares are held in a taxable account.419 While we would require funds to file the entirety of their financial highlights on Form N–CSR, we are also proposing to retain certain elements of the financial highlight information in funds’ annual and semi-annual reports. These retained elements are those that we understand may be particularly helpful for shareholders to evaluate a fund’s performance. This layered disclosure approach is designed to retain the financial highlight information that we believe would be most salient to retail shareholders in funds’ shareholder reports, while preserving the entirety of this information on Form N–CSR for those shareholders to whom the broader information would be useful.420 While one industry survey found that the average retail shareholder finds most of the items from the financial highlights section difficult to understand, this survey also concluded that a majority of shareholders found the total return and expense ratio information important for shareholders to monitor and assess their investments in a fund.421 Accordingly, we are proposing that a fund would have to disclose its expense ratio in the ‘‘Fund Expenses’’ section of the proposed annual and semi-annual reports.422 Also, while funds’ shareholder reports would no longer include annual total returns for each of the preceding five years, the MDFP section of the annual report would continue to include certain information regarding a fund’s annual total returns.423 Shareholders also would continue to be able to assess 419 Id. 420 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 138 (noting that a few of the investors who were surveyed indicated that they saw value in the financial highlights information and stated that financial highlights provided them with a snapshot of the fund and important fund performance trend data that is easy to digest). 421 See ICI Comment Letter I (noting that shareholders from all age and income groups supported the inclusion of total return and expense ratio information in a summary shareholder report and indicated that it was important to include a graphical representation of these key measures. The survey also noted that two-thirds of mutual fund investors who read very little of the current shareholder report and found it difficult to understand, still indicated the total return and expense ratio chart was very important and needed to be kept in the summary shareholder report). 422 See proposed Item 27A(c) of Form N–1A. The expense ratio would be based on the fund’s net expenses under GAAP and would reflect any interest or dividend expense. 423 See proposed Item 27A(d)(2)(B) of Form N– 1A. Our proposal would require a fund to continue to disclose its average annual total returns for the 1-, 5-, and 10-year periods as of the end of the last day of the most recent fiscal year (or for the life of the fund, if shorter) in its annual report, as funds do today. PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 70767 performance trends over time using the performance line graph and performance table that would appear in the annual report.424 Finally, we would require annual and semi-annual reports to include funds’ disclosure of their net assets and portfolio turnover rate (which are also data elements from the fund’s financial highlights) as of the end of the period covered by the report.425 We believe that all of these data elements that would appear in the proposed annual and semi-annual reports would together serve as a snapshot—of both period-end data and data over time— that would provide retail shareholders with the financial highlights data that they have indicated they find most useful. Investors who want to continue to have access to all of the information that currently appears in funds’ financial highlights would continue to be able to access this information on Form N–CSR and online.426 Item 13 of Form N–1A currently requires a fund to include financial highlights information in its prospectus, and an instruction to this item permits a fund to incorporate this information from a shareholder report under rule 30e–1 by reference into its prospectus.427 Because, under the proposal, funds’ shareholder reports would no longer include financial highlights, we are proposing to amend the current instruction to allow a fund to incorporate by reference into its prospectus its financial highlights from Form N–CSR.428 For existing shareholders that have received the fund’s shareholder report, a fund would be required to include a legend stating that additional information about the Fund’s annual and semi-annual financial statements is available in Form N–CSR.429 For new investors in the 424 See supra Sections II.B.2.c.ii, II.B.2.c.iii. supra Section II.B.2.d. 426 The information that would be available online includes detailed year-over-year comparisons over the past five years of per-share information associated with net investment income, net gains or losses on securities and distributions, as well as expense ratio, portfolio turnover and return information. 427 A fund may incorporate this information by reference if the fund delivers the shareholder report with the prospectus or, if the report has been previously delivered (e.g., to a current shareholder), the fund includes the statement that Item 1(b)(1) of Form N–1A requires (i.e., a statement that additional information about the fund’s investments is available in the fund’s annual and semi-annual reports to shareholders). See Instruction (4)(e) to Item 13 of Form N–1A. 428 See proposed amendments to Instruction (4)(e) to Item 13 of Form N–1A. 429 See proposed amendments to Item 1(b)(1) of Form N–1A. The required statement would state (among other things) that: (1) Additional information about the fund’s investments is 425 See E:\FR\FM\05NOP2.SGM Continued 05NOP2 70768 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 fund, the fund would be required to provide the fund’s most recent shareholder report along with its prospectus.430 This provision parallels the current provision that allows a fund to incorporate by reference its financial highlights from the fund’s shareholder report. Finally, as discussed above, we also are proposing amendments to Item 13(a) of Form N–1A to require an ETF to disclose its total return based on the ETF’s per share market value return as of the end of the period.431 This would align the information provided in the financial highlights with the expense information included in the annual and semi-annual reports. We seek comment on our proposal to require financial highlights information to be disclosed on Form N–CSR, and specifically on the following issues: 140. Should we, as proposed, layer the information that appears in funds’ financial highlight information to preserve the most retail-focused disclosure in funds’ shareholder reports, while making the full financial highlights available on Form N–CSR and online? Would this proposed layered approach help tailor disclosure to shareholders based on their informational needs? If not, what changes should we make to the proposed approach? 141. Should we, as proposed, revise the Form N–1A instruction to permit funds to incorporate by reference their financial highlights from Form N–CSR into their prospectuses? Why or why not? If so, should we require funds to include a statement explaining that the fund’s financial statements are included on Form N–CSR, that Form N–CSR is available in the fund’s annual report to shareholders and in Form N–CSR; (2) the fund’s annual report and Form N–CSR are available, without charge, upon request. A fund must also explain how shareholders may make inquiries to the fund, provide a telephone number for shareholders to call to request the fund’s annual report and Form N–CSR, and state whether the fund makes available Form N–CSR, free of charge, on the fund’s website. See Item 1(b)(1) of Form N–1A. 430 See proposed amendments to Instruction 4(e) to Item 13 of Form N–1A, current Instruction 4(e) to Item 13 of Form N–1A (allowing a fund to incorporate by reference its financial highlights from its shareholder report into the prospectus so long as the fund delivers the shareholder report with the prospectus (i.e., for new shareholders)). If the shareholder report has been previously delivered (e.g., to a current shareholder), the fund must include a statement clarifying that the financial highlights are being incorporated by reference pursuant to the requirements of Item 1(b)(1) of Form N–1A). 431 See supra footnote 159. We are also proposing amendments to the instructions pertaining to total return calculations that would specify how an ETF should calculate its total return based on its per share market value. See proposed Instruction 3(a)(5) of Item 13(a) of Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 available, without charge, upon request, and how a shareholder may make inquiries to request Form N–CSR, and whether the fund makes available Form N–CSR on the fund’s website? 142. Should we, as proposed, require ETFs to disclose market value return in their financial highlights? Would shareholders find this information useful? Because we are proposing to require this information to be included in the fund expenses section of the shareholder report, is it useful for shareholders to have this information in both the financial highlights and in the shareholder report? 143. Rather than allowing funds to incorporate by reference their financial highlights from Form N–CSR, should we instead remove the current Form N–1A instruction permitting funds to incorporate their financial highlights by reference into their prospectuses (thereby requiring funds to include their financial highlights in their prospectuses instead of incorporating this information by reference)? If we were to require funds to include their financial highlights in their prospectuses, should it be necessary for them to also file this information on Form N–CSR? Would shareholders benefit from having access to this information on Form N–CSR in addition to the prospectus? How burdensome would it be for a fund to include financial highlights into their prospectuses and also file that information on Form N–CSR? 432 144. Rather than requiring the full financial highlights to be filed on Form N–CSR, should we require funds to file and post only certain data points from the financial highlights? If so, which ones? Do investors and other market participants currently use the financial highlights information that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? c. Changes in and Disagreement With Accountants for Funds We are proposing to require a fund to file on Form N–CSR the disclosures that Item 304 of Regulation S–K currently requires, concerning changes in and disagreements with accountants.433 As discussed above, funds must currently include this information in their shareholder reports.434 The proposed 432 Under section 10(a)(3) of the Securities Act, funds typically update their prospectuses within 120 days of the end of fiscal year-end, and, typically, updated prospectuses are delivered to existing shareholders soon thereafter. See supra footnotes 11 and 20 (discussing the transmittal requirements for fund prospectuses). 433 See proposed Item 8 of Form N–CSR. 434 See supra footnote 293 and accompanying text. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 Form N–CSR filing requirement would complement the proposed requirement for funds to include a high-level summary of changes in and disagreements with accountants in their annual reports. While the disclosure that we are proposing funds to include in their shareholder reports would be designed to put shareholders on notice of the dismissal or resignation of an accountant and the existence of a material disagreement with that accountant, the information that funds would report on Form N–CSR would provide additional, more nuanced and technical disclosure that may be informative to some shareholders and other market participants. For example, this disclosure could be meaningful as it indicates that the fund has especially challenging, subjective, and/or complex accounting policies and financial statement disclosures or the accountant could not resolve audit findings. Moreover, we believe that it is appropriate to retain this disclosure in a location that includes audited financial information (as proposed, Form N–CSR) to provide those investors, financial professionals, and other market participants who review and analyze this disclosure with appropriate contextual information. We seek comment on our proposal to require a fund to disclose on Form N– CSR the information required by Item 304 of Regulation S–K. We specifically request comment on the following issues: 145. Should we, as proposed, require a fund to file the information required by Item 304 of Regulation S–K on Form N–CSR? Why or why not? 146. Would requiring the Item 304 information to be filed on Form N–CSR be useful to investors, financial professionals, or other market participants? If so, what types of audiences would find this information to be particularly useful, and why? If not, why not? 147. Is the proposed Form N–CSR disclosure requirement appropriate and necessary in light of the proposed summary information about changes in and disagreements with accountants that we propose funds to include in their shareholder reports? If not, why not? 148. Rather than the proposed approach, should we instead amend and/or streamline the requirement to disclose Item 304 information and retain the amended disclosure in the fund’s annual report? Why or why not? Do investors and other market participants currently use the Item 304 information that appears on EDGAR as part of funds’ E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules filed shareholder reports, and if so, how? khammond on DSKJM1Z7X2PROD with PROPOSALS2 d. Matters Submitted for a Shareholder Vote We are proposing to require funds to include information about matters submitted for a shareholder vote on Form N–CSR, rather than in their shareholder reports.435 This information is identical to the information currently required in fund shareholder reports. Currently, when a matter is submitted to a vote of shareholders, funds must disclose information regarding the substance of these matters, along with the results of such votes, in several ways. First, shareholders receive proxy statements that include detailed descriptions of issues brought before shareholders for their vote.436 If a matter is submitted to a vote of fund shareholders during the period covered by an annual or semi-annual report, the fund must include certain information regarding the vote results in that report.437 Furthermore, funds are required to disclose on Form N–CEN whether the fund submitted any matters for a shareholder vote during the reporting period.438 Shareholder voting plays a valuable role in fund regulation, and providing information regarding shareholder votes keeps shareholders informed and may operate as a deterrent to self-dealing by the fund’s adviser.439 The proposed amendments to the disclosure requirements for matters submitted for a shareholder vote are designed to further our proposed 435 See proposed Item 9 of Form N–CSR (requiring a fund to file on Form N–CSR the information that the fund currently provides in its shareholder reports pursuant to rule 30e–1(b)). See also infra footnote 437 (detailing the disclosure requirements with respect to matters submitted for a shareholder vote). The information regarding matters submitted for a shareholder vote that would be disclosed on Form N–CSR is identical to the information currently included in fund shareholder reports. 436 See e.g. Schedule 14A [17 CFR 240.14a–101] under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (providing the content requirements for investment company proxy statements). 437 See rule 30e–1(b). This disclosure must include: (1) The date of the meeting and whether it was an annual or special meeting; (2) if the meeting involved the election of directors, the name of each director elected at the meeting and the name of each other director whose term of office as a director continued after the meeting; and (3) a brief description of each matter voted upon at the meeting and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each such matter, including a separate tabulation with respect to each matter or nominee for office. 438 See Item B.10 of Form N–CEN. 439 See e.g., Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 19957 (Dec. 16, 1993) [58 FR 67729 (Dec. 22, 1993)] at text following n.6. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 layered approach to shareholder report disclosure. The approach we are proposing also reflects our understanding that many retail shareholders tend not to review the information regarding vote results currently required in the shareholder report.440 Under our proposal, funds’ annual and semi-annual reports would no longer include information about the results of shareholder votes, but shareholders would continue to receive information about these matters through other channels. Shareholders would continue to receive a detailed description of matters submitted for a shareholder vote in fund proxy statements. Furthermore, because the proposed annual report would require funds to describe certain material changes that have occurred in the fiscal year, shareholders would receive disclosure of certain material changes that have resulted from shareholder votes.441 If it would be valuable to a shareholder to review additional information about the outcome of matters submitted for a shareholder vote, the shareholder would continue to have access to this more-detailed information, which the fund would file on Form N–CSR. For example, we anticipate that certain shareholders, particularly investors who desire more in-depth information, and other market participants would want to continue to have ready access to information about shareholder votes, to the extent they express investor preferences on matters such as changes in the fund’s fundamental policies, investment advisory agreements, board of directors, and organizational documents. We seek comment on our proposal to require funds to disclose the matters submitted to a vote of shareholders on Form N–CSR rather than the fund’s shareholder reports, and specifically on the following issues: 149. Should we, as proposed, require funds to file the information regarding matters submitted for a shareholder vote on Form N–CSR? Why or why not? Alternatively, should we only require funds to disclose the information regarding matters submitted for a shareholder vote on the fund’s website, and not also require funds to file this information with the Commission on Form N–CSR? Why or why not? Do investors and other market participants currently use the information regarding 440 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 50 (stating that only 4% of investors say they review the discussion of the results of shareholder votes included in their annual and semi-annual reports). 441 See supra Section II.B.2.f. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 70769 matters submitted for a shareholder vote that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? 150. Would requiring this information to be filed on Form N–CSR be useful to investors, financial professionals, or other market participants? If so what types of audiences would find this information to be particularly useful, and why? If not, why not? If so, should we include information regarding matters submitted for a shareholder vote, or any summary of this information, in the proposed annual report? Why or why not? 151. Are there certain types of matters submitted for a shareholder vote that shareholders find more important than others? If so, what are they? Should we require funds to include in their annual and semi-annual reports the results of only certain matters submitted to a shareholder vote that retail shareholders find most pertinent? What matters would those be? 152. Rather than the proposed approach to disclosure regarding matters submitted for a shareholder vote, should we instead amend and/or simplify the current shareholder report disclosure requirement? If so, should we retain the amended disclosure in funds’ annual and semi-annual reports? Why or why not? e. Remuneration Paid to Directors, Officers, and Others We are proposing to require funds to file the aggregate remuneration the fund paid to its directors, officers, and certain affiliated persons on Form N–CSR.442 This information is identical to the information currently required in fund shareholder reports. Funds currently provide this information in their annual reports under section 30(e) of the Investment Company Act.443 As the Commission has noted, because of the substantial influence a fund’s investment adviser has in determining its own remuneration, as well as the remuneration paid to directors and officers of the fund, 442 See proposed Item 10 of Form N–CSR. section 30(e)(5) of the Investment Company Act [15 U.S.C. 80a–30(e)(5)] (permitting the Commission to require that funds transmit to shareholders, at least semi-annually, reports containing, among other things, a statement of aggregate remuneration paid by the fund during the period covered by the report to officers, directors, and certain affiliated persons); see also Items 27(b)(3) and 27(c)(3) of Form N–1A. Funds are required to disclose aggregate remuneration paid to: (1) All directors and all members of any advisory board for regular compensation; (2) each director and each member of an advisory board for special compensation; (3) all officers; and (4) each person of whom any officer or director of the fund is an affiliated person. 443 See E:\FR\FM\05NOP2.SGM 05NOP2 70770 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 availability of information about remuneration paid to the fund’s directors and officers may help shareholders to analyze the use of corporate funds and assets, and to assess the value the fund’s directors and officers bring to the fund.444 In addition to the aggregate remuneration disclosure in a fund’s shareholder report, a fund is currently required to provide detailed disclosures regarding compensation paid to each of the directors, members of any advisory board, and certain officers and affiliates in the fund’s SAI.445 Based on the comments the Commission received on the Fund Investor Experience RFC, as well as information from prior investor testing and surveys, we understand that retail shareholders generally do not find remuneration information useful in the shareholder report and seldom review this section of the current shareholder report.446 One commenter also stated that information regarding the remuneration of directors is technical, and recommended that this information instead be included online.447 Because we believe that this type of information is not directly pertinent to a retail shareholder’s understanding of the fund’s operation and performance, and because similar information is available in the fund’s SAI, we are proposing to remove the current remuneration disclosure from the shareholder reports. Investors who desire more in-depth information, financial professionals, and other market participants who would find remuneration-related information valuable (for example, in monitoring fund management) would continue to be able to find it in the fund’s SAI (where compensation information is disclosed 444 See Disclosure of Management Remuneration, Investment Company Act Release No. 9900 (Aug. 18, 1977) [42 FR 43058 (Aug. 26, 1977)] at text accompanying nn.15 and 16 (noting that full public disclosure of remuneration paid to officers, directors and other persons is necessary for shareholders to make ‘‘informed voting and investment decisions, regardless of whether the [fund’s] board of directors or its security holders have approved the remuneration package received by management because of the substantial influence of management in determining its remuneration’’). 445 See Item 17(c) of Form N–1A (requiring a fund to disclose certain compensation information for each of the fund’s directors and for each member of any advisory board who receives compensation from the fund, and for each of the three highest paid officers or any affiliated person of the fund who received aggregate compensation from the fund for the most recently completed fiscal year exceeding $60,000). 446 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 50 (stating that only 7% of investors say they review the discussion regarding fund directors and officers included in their annual and semi-annual reports); see also Broadridge Comment Letter I. 447 See ICI Comment Letter I. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 for each director), as well as in Form N– CSR filings (where compensation information is aggregated, as it is in shareholder reports today). We seek comment on our proposal to require funds to disclose information about remuneration paid to directors, officers and others on Form N–CSR rather than the fund’s annual reports, and specifically on the following issues: 153. Should we require funds to include information concerning remuneration paid to directors, officers and others in the proposed annual report? If so, why? 154. Is this remuneration information useful to investors, financial professionals, or other market participants? If so what types of audiences would find this information to be particularly useful, and why? If not, why not? 155. Rather than removing this disclosure entirely from the annual report, should we require funds to provide certain data points regarding remuneration paid to directors, officers and others in their annual reports? For example, should we require disclosure of remuneration paid to directors in the fund’s shareholder report if it exceeds a certain threshold? Or, should we require a fund to disclose in its annual report any changes to director or officer remuneration during the reporting period? 156. Because more detailed information regarding compensation paid to directors and officers already must appear in a fund’s SAI, would the proposed aggregated remuneration information filed on Form N–CSR meaningfully and usefully supplement this current SAI disclosure? If so, how? Or would the proposed aggregated remuneration information be duplicative of existing SAI disclosures? Do investors and other market participants currently use the information regarding compensation paid to directors and officers that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? f. Statement Regarding Basis for Approval of Investment Advisory Contract Currently, funds are required to provide a statement, in the annual and semi-annual reports, regarding the basis for the board’s approval of the fund’s investment advisory contract.448 We are proposing to require funds to provide this information on Form N–CSR, rather than in the fund’s shareholder 448 See PO 00000 Item 27(d)(6) of Form N–1A. Frm 00056 Fmt 4701 Sfmt 4702 reports.449 This information is identical to the information currently required in fund shareholder reports. Under current shareholder report disclosure requirements, if the board of directors approved any investment advisory contract during the fund’s most recent fiscal half-year, the fund is required to discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board’s approval. When the Commission adopted these requirements in 2004, it stated that the purpose of this requirement was to ‘‘encourage funds to provide a meaningful explanation of the board’s basis for approving an investment advisory contract,’’ which, in turn, the Commission hoped would encourage boards to ‘‘consider investment advisory contracts more carefully and investors to consider more carefully the costs and value of the services rendered by the fund’s investment adviser.’’ 450 We continue to believe that requiring funds to provide shareholders with information regarding the board’s review of investment advisory contracts preserves transparency with respect to those contracts, and fees paid for advisory services, assists investors in making informed investment decisions, and encourages fund boards to engage in vigorous and independent oversight of advisory contracts.451 However, we preliminarily believe that this disclosure is not well suited to the fund’s shareholder report because it pertains less directly to a retail shareholder’s understanding of the operations and performance of the fund and does not lend itself to the type of focused disclosure that the proposed annual report is designed to include. Because of the nature and quantity of information in this disclosure, we therefore believe that it may be better suited to appear in a different location that would continue to permit access to fund shareholders and other market participants who find this information to be particularly useful and 449 See proposed Item 11 of Form N–CSR. We are also proposing to eliminate Item 10(a)(1)(iii) of Form N–1A which requires funds to include, in the SAI, a statement noting that a discussion regarding the basis for the board’s approval of any investment advisory contract is available in the fund’s annual or semi-annual report, as applicable, and providing the period covered by the relevant report. 450 See Disclosure Regarding Approval Of Investment Advisory Contracts By Directors Of Investment Companies, Investment Company Act Release No. 26486 (June 23, 2004) [69 FR 39798 (June 30, 2004)] (‘‘Disclosure Regarding Approval of Advisory Contracts Release’’), at text following n.23. 451 See id. at n.18. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules meaningful.452 We believe that providing this information on Form N– CSR would continue to allow these persons effectively to consider the costs and value of the services that the fund’s investment adviser renders.453 We seek comment on our proposal to require funds to disclose the basis for the board’s approval of the fund’s investment advisory contract on Form N–CSR rather than in the fund’s shareholder reports, including the following specific issues: 157. Should we, as proposed, remove the information regarding the basis for the board’s approval of a fund’s advisory contract from shareholder reports? Should we instead amend and/ or simplify this disclosure requirement and/or retain the amended disclosure in funds’ annual and semi-annual reports? Would this amended disclosure be useful for retail shareholders to use to monitor and assess their ongoing investment in a fund? 158. Should we, as proposed, require funds to file the information regarding the board’s approval of a fund’s advisory contract on Form N–CSR? Why or why not? Do investors and other market participants currently use the information regarding the board’s approval of a fund’s advisory contract that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? 2. Proposed Website Availability Requirements khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Website Content Requirements We are proposing to require a fund to post online all of the information that the proposal would newly require on Form N–CSR.454 The fund would have to make this information available from 70 days after the end of the relevant fiscal period until 70 days following the next respective fiscal period.455 452 See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (noting that only 5% of investors surveyed ranked the discussion of board approvals of advisory contracts within the top three most important areas of information provided in shareholder reports). 453 Fund shareholders also would receive disclosure about the factors that form the basis for the board’s approval of the advisory contract if a fund’s advisory contract were to require a shareholder vote. In this case, the fund would be required to include in its proxy statement a discussion of the material factors the board considered as part of its decision to approve the fund’s investment advisory contract. See Item 22(c)(11) of Schedule 14A. 454 See infra sentence accompanying footnote 470 (under our proposal, funds would have the option to satisfy this website availability by posting online its most recent report on Form N–CSR). 455 See proposed rule 30e–1(b)(2)(i) (requiring a fund to disclose Items 7 through 11 of Form N–CSR on a website no later than 70 days after the end of the fiscal half-year or fiscal year of the fund until VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Currently, funds are required to file reports on Form N–CSR not later than 70 days after the close of the fund’s fiscal half-year.456 Therefore, our proposal would align the timing of the availability of the information provided online with when reports on Form N– CSR are filed. In addition, we are also proposing to require a fund (other than a money market fund) to make its complete portfolio holdings, as of the close of the fund’s most recent first and third fiscal quarters, available on a website.457 A fund would have to make this information available within 70 days after the close of each such quarter.458 A fund’s portfolio holdings information for its first and third fiscal quarters would have to remain publicly accessible online for a full fiscal year.459 This portfolio holdings information would complement the second and fourth fiscal quarter portfolio holdings information that we also are proposing to require funds to make available on a website (as part of the proposed requirement to make their financial statements available online).460 The proposed requirement to post first and third quarter portfolio holdings online is therefore designed to provide investors and other market participants with easy access to a full year of complete portfolio holdings information in one location. Funds are currently required to disclose their holdings as of the end of each fiscal quarter in reports on Form N–PORT filed with the Commission (which are available on EDGAR). However, all open-end funds are not currently required to send holdings 70 days after the end of the next fiscal half-year or fiscal year of the fund, respectively). 456 While rule 30e–1(c) requires a shareholder report to be transmitted to shareholders within 60 days after the close of the relevant period, we believe it is appropriate to align the availability of information online with the filing of Form N–CSR, because the online information would be filed on Form N–CSR. 457 See proposed rule 30e–1(b)(2)(ii). 458 Under this proposed requirement, the portfolio holdings for each of the first and third fiscal quarters would be required to appear on a website no later than 70 days after the close of each of the first and third fiscal quarters, respectively. For example, a fund with a December 31 fiscal year end would be required to make its complete portfolio holdings for the first quarter ending March 31 of the next year available within 70 days after the end of the first quarter. 459 Proposed rule 30e–1(b)(2)(ii). 460 See supra Section II.D.1.a. To conform the format and content of the portfolio holdings schedules for the first and third quarters to those schedules presented in the fund’s financial statements for the second and fourth quarters, the proposed rule would require the schedules for the first and third quarters to be presented in accordance with §§ 210.12–12 through 210.12–14 of Regulation S–X, which need not be audited. See proposed rule 30e–1(b)(2)(ii). PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 70771 information as of the end of the firstand third-quarters to shareholders or to make that information accessible on a website other than EDGAR.461 The proposed requirement would provide centralized access to this information, rather than requiring investors to access the fund’s reports on Form N–PORT for each of those periods separately.462 Also, we anticipate that the portfolio holdings information that funds would make available online would be available in a more user-friendly presentation than the information that funds report on N–PORT in structured data format. We seek comment on the proposed requirements for website content that funds would have to make available under the proposals, including the following specific issues: 159. Should we, as proposed, require a fund to post online all of the information that would newly be filed on Form N–CSR? 160. How often should funds be required to update the information that appears online? For example, should we require a fund to update its online financial statement information more or less frequently than semi-annually or its online portfolio holdings information more or less frequently than quarterly? Should we instead, for example, require funds to update all information that appears online monthly or as soon as it becomes available? Why or why not? 161. What is the appropriate time period for a fund to have to make the newly required Form N–CSR information available online? Should we, as proposed, allow funds to delay the availability of materials online by 70 days after the end of the relevant fiscal period? Because funds send their annual and semi-annual reports 60 days after the end of the fiscal period, should we similarly adopt a 60-day delay for the online accessibility of information that funds would file on Form N–CSR? 162. How long should each of the newly required Form N–CSR materials have to remain accessible online? Should we, as proposed, require funds to maintain the required information on their websites for a full fiscal year? Is it useful for investors to have this 461 But see rule 30e–3(b)(1)(iv) (requiring funds that rely on rule 30e–3 to make holdings information as of the end of the first and third quarters available on the fund’s website). Our proposal would ensure that all investors have convenient access to the most recent four quarters of portfolio holdings in a central location. 462 See Part F of Form N–PORT (requiring N– PORT filers to provide, as exhibits to Form N– PORT, the fund’s complete portfolio holdings for the end of the first and third quarters of the fund’s fiscal year, as of the close of the period, no later than 60 days after the end of the reporting period). E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70772 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules information available for a full fiscal year? Should we require the information to be available for a period longer or shorter than a full fiscal year (such as two years, or six months)? 163. Should we require only certain Form N–CSR items to be available for a full fiscal year? If so, which items should we require funds to make available for a full year and why? For example, how long should funds be required to maintain the portfolio holdings information that appears online? Should we, as proposed, require a fund to maintain its holdings information as of the close of each fiscal quarter for a full fiscal year? Would shareholders find this useful? As another example, should we require funds to maintain only their financial statements and portfolio holdings information for a full fiscal year, while permitting funds to remove the remainder of Form N–CSR information from their websites on a semi-annual basis? 164. Should we, as proposed, require the portfolio holdings information for the first and third quarters to be presented in accordance with the schedules set forth in §§ 210.12–12 through 210.12–14 of Regulation S–X? 165. Should we require any additional disclosure on fund websites to clarify to investors that portfolio holdings information for the fund’s second and fourth quarters is available online as part of the fund’s financial statements? 166. Should we adopt a specific format for how a fund should present its first and third fiscal quarter information online? If so, what should it be? For example, should we require this information be posted in XML format or a PDF form? 167. Rather than requiring funds to maintain all four most recent fiscal quarters of portfolio holdings information on fund websites, should we instead require funds to only provide portfolio holdings information for their most recent fiscal quarter (or some other period, such as the fund’s most recent two fiscal quarters)? Alternatively, should we require funds to maintain additional portfolio holdings information on their websites, such as the past two or five years of information? 168. As funds would be required to file their portfolio holdings information as of the close of their second and fourth fiscal quarters on Form N–CSR as part of their financial statements, should we also require funds to file the portfolio holdings information as of the close of their first and third fiscal quarters on Form N–CSR? Would it be useful for investors or any other market VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 participants—for example, data aggregators—to have historical holdings data for all of a fund’s fiscal quarters filed on a single Commission form (as opposed to having to aggregate this information either from information filed on Form N–CSR and the portfolio holdings filed as exhibits to Form N– PORT, or from information that funds would otherwise be required to make available online on websites other than EDGAR)? Is it easier for data aggregators to collect information from a single Commission form? Does easier access to information by data aggregators increase the flow of information to investors? 169. Instead of requiring complete portfolio holdings information, should we require funds only to disclose a subset of holdings, such as the top ten largest holdings, for each quarter on their websites and/or in the proposed annual report? b. Accessibility and Presentation Requirements Under our proposal, funds also would have to comply with certain conditions designed to ensure the accessibility of information that is required to appear online.463 First, the website address where the required information appears must be specified on the cover page or beginning of the shareholder report and could not be the address of the Commission’s electronic filing system.464 Second, the materials required to appear online would have to be presented in a format convenient for both reading online and printing on paper, and persons accessing the materials would have to be able to retain permanently (free of charge) an electronic copy of the materials in this format.465 These conditions are designed to ensure that information appearing online pursuant to the proposed rule is user-friendly and allows shareholders the same ease of reference and retention abilities they 463 Proposed rule 30e–1(b)(2). These requirements are similar to the accessibility requirements of rule 30e–3 and rule 498 under the Securities Act (permitting funds to use a summary prospectus to satisfy prospectus delivery obligations) and rule 14a–16 under the Securities Exchange Act (requiring issuers and other soliciting persons to furnish proxy materials by posting these materials on a public website and notifying shareholders of the availability of these materials and how to access them). 464 Proposed rule 30e–1(b)(2)(i) through (iii). The Commission’s electronic filing system for fund documents is EDGAR. Rule 498 under the Securities Act includes a similar requirement. See 17 CFR 230.498(b)(1)(v)(A). 465 Proposed rules 30e–1(b)(2)(iv) and (v); see also infra footnote 529 (discussing similar provisions in proposed rule 498B(e)(2)(ii) and parallel provisions in current rule 498(f)(3)(ii)). PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 would have with paper copies of the information. The rule as proposed also would include a safe harbor provision providing that a fund shall have satisfied its obligations to transmit shareholder reports even if it did not meet the posting requirements of the rule for a temporary period of time.466 In order to rely on this safe harbor, a fund would have to have reasonable procedures in place to help ensure that the required materials appear on its website in the manner required by the rule and take prompt action to correct noncompliance with these website availability requirements.467 The proposed rule would require prompt action as soon as practicable following the earlier of the time at which the fund knows, or reasonably should have known, that the required documents are not available in the manner prescribed by the proposed rule. We are proposing this safe harbor because we recognize that there may be times when, due to events beyond a fund’s control, such as system outages or other technological issues or natural disasters, a fund may temporarily not be in compliance with the web posting requirements of the proposed rule.468 Providing for this safe harbor by rule may obviate the need to provide exemptive relief from the proposed rule’s conditions under these very limited and extenuating circumstances, as we have done from time to time.469 Finally, we are proposing to provide funds with some flexibility on how online information is presented. Under our proposal, funds would have the option to satisfy the website availability requirement for the information that the fund would newly have to file on Form N–CSR by posting its most recent report 466 See proposed rule 30e–1(b)(2)(vi). The rule provides that the requirements in paragraphs (b)(2)(i) through (v) of the rule (i.e., the posting requirements) shall be deemed to be met, notwithstanding the fact that the materials required by paragraphs (b)(2)(i) and (ii) of the rule are not available for a period of time in the manner required by the posting requirements, so long as certain conditions are met. See id. 467 See proposed rule 30e–1(b)(2)(vi)(A) and (B). 468 Compare rule 30e–3 (providing a similar safe harbor provision for funds that rely on rule 30e–3 for the same reasons) and rule 498(e)(4) of the Securities Act (providing a similar safe harbor under the summary prospectus rule for the same reasons) with proposed rule 30e–1(b)(2)(vi). 469 See, e.g., Exchange Act Release No. 81760 (Sept. 28, 2017) [82 FR 46335 (Oct. 4, 2017)] (exemptive relief for individuals and entities affected by Hurricanes Harvey, Irma, or Maria); Securities Act Release No. 10416 (Sept. 27, 2017) [82 FR 45722 (Oct. 2, 2017)] (Regulation Crowdfunding and Regulation A relief and assistance for individuals and entities affected by Hurricanes Harvey, Irma, or Maria); see also Rule 30e–3 Adopting Release, supra footnote 14, at n.135. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules on Form N–CSR, free of charge, on the website specified on the cover page or beginning of the shareholder report.470 The proposed rule also provides funds flexibility to post the online information separately for each series of the fund or grouped by types of materials and/or by series.471 If a fund were to group the information on its website by type of materials and/or by series, the grouped information would have to meet certain presentation requirements, including that the grouped information: (1) Is presented in a format designed to communicate the information effectively, (2) clearly distinguishes the different types of materials and/or each series (as applicable), and (3) provides a means of easily locating the relevant information (including, for example, a table of contents that includes hyperlinks to the specified materials and series).472 This proposed provision is designed to allow funds to tailor the presentation of information on their websites to the unique aspects of their funds, while presenting the information in a manner that facilitates shareholder access. For example, for a fund complex that includes several funds, each with multiple classes, the fund complex’s website could include a master table of contents that contains hyperlinks to the specific materials for each fund and each class. We seek comments on the proposed website availability requirements, including: 170. The rule as proposed would require that the materials required to be accessible online be publicly accessible, free of charge, at the website specified at the cover page or beginning of the shareholder report, and does not expressly require that the website be the fund’s website. Should the rule require that the materials be accessible at the fund’s website? Why or why not? 171. The rule as proposed would require that the website information be presented in a format or formats that are convenient for both reading online and printing on paper. Are these proposed format requirements appropriate? Should we instead require that the materials be presented in a format or formats that are human-readable and capable of being printed on paper in human-readable format? Why or why not? 172. Are there any additional presentation or formatting requirements that we should adopt to facilitate investor access to the information that would appear online? For example, 470 See proposed rule 30e–1(b)(2)(i). proposed rule 30e–1(b)(2)(vii). 472 See id. 471 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 should we require that each item appear separately on the fund’s website under a relevant header instead of permitting, as proposed, a fund to post its Form N– CSR to satisfy the requirement to make certain information that the fund would file on Form N–CSR available online? 173. The proposed rule would contain a safe harbor for instances in which the online materials are not available for a temporary period of time. Is the safe harbor as proposed appropriate, or should we modify it in any way? For example, should the rule be more prescriptive as to the period of time in which a fund must take action to resolve any issues? 174. Should we, as proposed, provide funds the flexibility to either post the online information separately for each series of the fund or to group the information by types of materials? Why or why not? Should we, as proposed, allow funds to group the material by type or by series? Are there other type of groupings that we should allow? If we allow funds to group the information posted online, should we require the grouped information to meet the presentation requirements discussed above? Are there any additional presentation requirements that we should consider? 3. Proposed Delivery Upon Request Requirements We are proposing to require funds to send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of any of the materials discussed above to any person requesting such a copy within three business days 473 after receiving a request for a paper copy.474 A fund must also send, at no cost to the requestor by email or other reasonably prompt means, an electronic copy of any of the materials discussed above within three business days after receiving a request 473 The three-business-day timeframe also appears in similar existing conditions with respect to requests for copies of other similar documents. Based on staff experience in these other contexts, we believe that three business days generally is an appropriate time frame to send shareholders paper copies of information. See, e.g., rule 498(f)(1) (parallel delivery upon request requirements for funds and intermediaries relying on rule 498); see also Instruction 3 to Item 1 of Form N–1A (requiring the SAI and shareholder reports to be sent within three business days of receipt of a request). 474 See proposed rule 30e–1(b)(3)(i); see also supra Section II.C. This information includes: The fund’s most recent financial statements and financial highlights; changes in and disagreements with fund accountants; matters submitted for a shareholder vote; remuneration paid to directors, officers, and others; a statement regarding the basis for the board’s approval of the fund’s investment advisory contract; and portfolio holdings information as of the close of the most recent first and third fiscal quarters. PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 70773 for an electronic copy.475 These requirements would apply also to any financial intermediary through which shares of the fund may be purchased or sold. We understand that some investors continue to prefer to receive information in paper format, and therefore our proposal is designed to allow shareholders to have ready access to the fund information that appears online in print format, if they so prefer, or to receive electronic copies of this same information.476 We seek comment on our proposal to require funds to provide shareholders, upon request, paper or electronic copies of the information that the proposed rule would require to appear online, including the following issues: 175. Are the proposed delivery upon request provisions appropriate? Is the delivery time frame that the provisions would require appropriate? For example, would a fund experience challenges sending a paper copy of the information to a requesting shareholder within three business days, and if so what would these challenges be? Would other time frames for sending a paper copy be more appropriate, and if so, what should these time frames be? 176. Do funds require additional clarity regarding what would qualify as a ‘‘reasonably prompt means’’ of delivering an electronic copy of any of the materials discussed above? If so, what type of guidance should the Commission provide? 177. Should we incorporate a provision in rule 30e–1 that would permit investors the option to notify the fund (or the shareholder’s financial intermediary) that the investor wishes to receive paper copies of reports on a going forward basis? Why or why not? H. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N–CSR In general, we are proposing that the disclosure items that funds currently have to include in their annual and 475 See proposed rule 30e–1(b)(3)(ii). The proposed requirement to send an electronic copy of materials may be satisfied by sending a direct link to the online materials; provided that a current version of the materials is directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent and the email explains both how long the link will remain useable and that, if the recipient desires to retain a copy of the materials, he or she should access and save the materials. 476 See supra footnote 71 (discussing the 2012 Report on Investing Testing of Fund Annual Reports, which stated that there was a lack of consensus among shareholders who participated in the survey regarding their preferences for receiving information about their fund investments in print or electronically). E:\FR\FM\05NOP2.SGM 05NOP2 70774 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 semi-annual reports would either be retained in those reports (some items in a simplified form, and some items only in the annual report), or instead filed on Form N–CSR and made available online. However, with respect to the management information table that currently appears in funds’ annual reports, we are proposing to remove this disclosure item from the shareholder report without requiring its disclosure elsewhere.477 Currently, a fund is required to disclose certain information about each of the fund’s directors and officers in the annual report (‘‘management information table’’).478 This information is also included in the fund’s SAI.479 The Commission adopted these requirements in order to provide shareholders with basic information about the identity and experience of the fund’s directors and to highlight for shareholders any potential conflicts of interests that the fund’s directors and officers may have that would be relevant to shareholders.480 While we continue to believe that shareholders should have access to information regarding fund directors, we believe it is unnecessary to include this disclosure in multiple disclosure documents. We also preliminarily believe that the management information table is not well suited to the fund’s shareholder report because it pertains less directly to retail shareholders’ understanding of the operations and performance of the fund and does not lend itself to the type of focused disclosure that the proposed 477 We are also proposing to remove the requirement that a fund provide a statement in the annual report that the SAI includes additional information about fund directors. This requirement would be replaced by a more general statement on the cover page of the proposed shareholder report that describes how a shareholder can obtain additional information about the fund. See supra footnote 137 (discussing this proposed requirement) and proposed Item 27A(b)(4) of Form N–1A. 478 See Item 27(b)(5) of Form N–1A. For each director and officer, a fund must disclose: (1) Name, address, and age; (2) position(s) held with the fund; (3) term of office and length of time served with the fund; (4) principal occupation(s) during the past five years; (5) number of portfolios in the fund complex overseen by the director; and (6) other directorships held by the director. 479 See Item 17(a)(1) of Form N–1A (requiring the inclusion of the management information table in the fund’s SAI). In addition, when a fund solicits a shareholder vote with respect to the election of directors or executive officers, the fund must provide shareholders with a proxy statement that includes information regarding the candidates for election similar to the management information table. See Item 22(b) of Schedule 14A. 480 See Independent Directors Release, supra footnote 86 at text following n.69. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 annual and semi-annual reports are designed to include.481 We considered whether we should propose to require funds to file the management information table on Form N–CSR or to post it online. We determined, however, not to propose such a requirement because the information included in the management information table does not frequently, or significantly, change from year to year. The most significant changes to this information usually occur when the fund has an election of directors, which would require disclosure of this information for the candidates standing for election in the relevant fund proxy statement. The results of such an election would be reflected in the fund’s SAI, which is updated annually. Therefore, we believe that it would be unnecessarily duplicative for funds to also include this information on Form N–CSR. We seek comment on our proposal to remove the management information table from the annual report, and specifically on the following issues: 178. Should we require funds to include the management information table in the proposed annual report? If so, why? Should this information also be included in the proposed semiannual report? Is the management information table useful to shareholders to monitor and assess their ongoing investment in a fund? Why or why not? 179. Rather than removing this disclosure entirely from the shareholder report, should we require funds to provide certain data points regarding fund management (for example, any subset of the disclosure about directors and officers that funds currently have to include in the management information table) in their shareholder reports? If so, what information and why, and should it be included in the semi-annual report as well as the annual report? For example, should we require disclosure of other directorships held by the director? Should we require disclosure of information in the management information table only with respect to interested directors? Or should we require a fund to disclose in its shareholder reports only if any changes have occurred during the reporting period with respect to management information (other than changes that the proposed rules already would require funds to disclose in the annual report’s discussion of fund changes)? 180. Should we require funds to file the management information table on 481 See ICI Comment Letter I (recommending that the management information table not be included in the annual report because it is technical in nature). PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 Form N–CSR? Should we require funds to post this table online? Should we require funds to do both? Would shareholders benefit from having the information in one or both locations? What benefit would this provide to shareholders and other market participants, in light of the fact that this disclosure already appears in the SAI and in proxy statements for the election of directors? I. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework 1. Overview In addition to the changes we are proposing to the requirements for fund shareholder reports, we are also proposing new rule 498B, which would address shareholders’ continued receipt of annual prospectus updates following their initial investment in an open-end fund. Like the proposed new requirements for funds’ shareholder reports, proposed rule 498B uses layered disclosure concepts to tailor funds’ required disclosures to the informational needs of different types of investors. Under the proposed rule, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the fund’s current prospectus would be available online, and the shareholder would be receiving (1) tailored shareholder reports (which would include a summary of material fund changes in annual reports), and (2) timely notifications regarding material fund changes as they occur. This new rule is designed to further the disclosure goals discussed above, including improving fund disclosure by tailoring it to the needs of new versus existing investors, addressing concerns about duplicative and overlapping disclosure materials, and responding to investors’ expressed preferences for simplified, layered disclosure that highlights key information.482 Legal Operation of Proposed Rule 498B Specifically, proposed rule 498B would allow a fund to satisfy any obligations under section 5(b)(2) of the Securities Act to have a statutory prospectus precede or accompany the carrying or delivery of a security to the fund’s existing shareholders to be satisfied under specific conditions. Those conditions would be: (1) The existing shareholders have been 482 See E:\FR\FM\05NOP2.SGM generally supra Section II.A. 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules previously sent or given a prospectus in order to satisfy any obligation under section 5(b)(2) of the Securities Act, such as in connection with their initial investment in the fund; (2) certain specified disclosure materials (including, among other things, current summary and statutory prospectuses) appear online; and (3) existing shareholders receive notices of certain material changes to the fund when those changes occur.483 The proposed rule also includes delivery upon request and website presentation requirements (which are not conditions of reliance on the proposed rule to satisfy prospectus delivery obligations), including that a fund must: (1) Deliver, in a manner consistent with the requester’s delivery preference, a copy of any of the fund documents that the rule would require to be made available online, at no charge to the requester, subject to certain additional conditions; and (2) ensure that those fund documents required to appear online are presented in a format convenient for both reading online and printing on paper, and can be permanently retained in such a format by persons accessing those materials, free of charge.484 Proposed Rule 498B and the Legal Responsibility for Misleading Disclosures khammond on DSKJM1Z7X2PROD with PROPOSALS2 The proposed rule would not relieve funds of any legal responsibility for misleading disclosures with regard to the fund documents required to be made available online. In particular, a fund that relies upon the layered disclosure framework in proposed rule 498B would be subject to the same prospectus and registration statement liability and antifraud provisions as if the fund had sent or given those prospectuses to existing shareholders.485 Those liability 483 See proposed rule 498B(b) and (c). Under our proposal, existing shareholders would also receive annual and semi-annual reports pursuant to proposed rule 30e–1 and proposed Item 27A of Form N–1A. 484 See proposed rule 498B(d). 485 See, e.g., sections 11, 12(a)(2), and 17(a)(2) of the Securities Act. Under section 11 of the Securities Act, purchasers of an issuer’s securities have private rights of action for untrue statements of material facts or omissions of material facts required to be included in the registration statement or necessary to make the statements in the registration statement not misleading. Under section 12(a)(2) of the Securities Act, sellers have liability to purchasers for offers or sales by means of a prospectus or oral communication that includes an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading. Section 17(a)(2) of the Securities Act is a general antifraud provision which makes it unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 provisions would apply to the summary and statutory prospectuses required to appear online, together with information incorporated therein by reference. 2. Scope of Proposed New Rule 498B Delivery Obligations for New Investors and Existing Shareholders The proposed new rule is designed to tailor delivery obligations for new investors and existing shareholders in open-end funds registered on Form N– 1A, to match their respective informational needs. For this reason, proposed rule 498B would continue to require that investors receive a fund prospectus in connection with their initial fund investment, and would affect funds’ prospectus delivery obligations only as they apply to existing shareholders. The prospectus provides forward-looking information and acts as the principal selling document for potential investors. It provides certain key information, including disclosures regarding the fund’s: (1) Investment objectives; (2) costs; (3) principal investment strategies, principal risks, and performance; (4) investment advisers and portfolio managers; (5) purchase and sale of fund shares; (6) tax information; and (7) financial intermediary compensation.486 We believe it is important for new investors making an initial investment decision to receive a prospectus that includes this information to inform their investment decisions and facilitate fund comparisons. The proposed shareholder reports would contain similar information to some of those prospectus disclosures where we believe that both new investors and existing shareholders would benefit from receiving this information to make informed decisions about whether to buy, sell, or hold fund shares.487 or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. See also infra footnotes 514 and 658. 486 See Items 2 through 8 of Form N–1A; see also proposed rule 498(b)(2) (requiring a summary prospectus to contain disclosures required by Items 2 through 8 of Form N–1A); 2009 Summary Prospectus Adopting Release, supra footnote 10 (stating that the information required in the summary prospectus is key information that is important to an investment decision). 487 For example, both the proposed annual and semi-annual reports and the prospectus would include fund fee information (the shareholder reports in the form of the expense example, and the prospectus in the form of the fee table). See supra Section II.B.2.b and infra Section II.H.1. PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 70775 Definition of ‘‘Existing Shareholder’’ Under Proposed Rule 498B For the purposes of proposed rule 498B, an ‘‘existing shareholder’’ would generally be a shareholder to whom a summary or statutory fund prospectus was sent or given to satisfy any obligation under section 5(b)(2) of the Securities Act and who has held fund shares continuously since that time.488 This definition is designed to ensure that after an investor has received a prospectus, that investor would have received notice regarding all subsequent material changes to the fund. The investor would have received notice of these changes either through prospectus amendments or supplements that would be sent or given per current practice to investors that hold fund shares (before the fund relies on proposed rule 498B), or via notices of material changes that proposed rule 498B would require (after the fund relies on proposed rule 498B). We believe that the definition’s requirement that the shareholder continuously hold the fund shares is necessary because, if the investor purchased fund shares and then subsequently sold these shares, that investor would not receive notification of material fund changes that occurred when he or she did not hold fund shares. In this case, we believe it would be appropriate for such an investor to once again receive a fund prospectus before falling under a disclosure framework that provides information tailored to continuously existing investors. For purposes of the proposed rule 498B, an ‘‘existing shareholder’’ of a money market fund also would generally be a shareholder to whom a summary or statutory fund prospectus was sent or given to satisfy any obligation under section 5(b)(2) of the Securities Act. However, the requirement that the shareholder must have continuously held fund shares since that time would differ under the proposed rule with respect to shareholders in a money market fund. This difference would recognize the manner in which money market funds are used by investors and practices that we understand are generally common with money market funds. Money market funds are often used as cash vehicles with frequent withdrawals and deposits, and thus a money market fund investor who has sold all shares may often purchase additional shares shortly thereafter. For this reason, we understand that money market funds generally send or give prospectus 488 See E:\FR\FM\05NOP2.SGM proposed rule 498B(a)(2). 05NOP2 70776 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules supplements and amendments to former shareholders who maintain accounts in those funds. Similarly, we understand that money market funds generally apply the same treatment to beneficial owners of such accounts opened through financial intermediaries, such as brokerage clients who have their cash deposited in a money market fund sweep account maintained in the name of the broker but for which the brokerage client is a beneficial owner. Therefore the definition of ‘‘existing shareholder’’ would also include a shareholder in a money market fund who has continuously maintained (or been a beneficial owner of) an account with that fund because a fund prospectus has been sent or given to that shareholder.489 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Scope Excludes Variable Annuity and Variable Life Insurance Contracts Proposed rule 498B would be available only with respect to funds registered on Form N–1A.490 Proposed rule 498B would not apply to investors that hold the fund through a separate account funding a variable annuity contract offered on Form N–4 or a variable life insurance contract offered on Form N–6.491 The Commission recently adopted 17 CFR 230.498A [rule 498A], which provides that prospectus delivery requirements under section 5(b)(2) of the Securities Act are satisfied with respect to those investors if the fund’s current prospectuses and certain other documents appear online and certain other conditions are met.492 Rule 498A, like the disclosure framework for funds that we are proposing, relies on a layered disclosure approach that tailors the disclosure that investors receive to the informational needs of both new and ongoing investors in variable contracts. The conditions associated with the satisfaction of prospectus delivery requirements pursuant to rule 498A are tailored to the unique nature of variable annuity and variable life insurance contracts, and provide disclosures and protections that we believe are more appropriate for investors in those 489 See proposed rule 498B(a)(2). The proposed rule would further define ‘‘account’’ as any contractual or other business relationship between a person and a fund to effect transactions in securities issued by the fund, including the purchase or sale of securities. 490 See proposed rule 498B(a)(2) and (3). 491 See proposed rule 498B(a)(2); see also generally Form N–4 [17 CFR 239.17b and 274.11c] and Form N–6 [17 CFR 239.17c and 274.11d]. 492 See Variable Contract Summary Prospectus Adopting Release, supra footnote 27 (adopting rule 498A under the Securities Act); rule 498A(j) (providing a new option to satisfy prospectus delivery requirements for mutual funds available through separate accounts funding a variable contract). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 contracts (compared to disclosures and protections associated with the satisfaction of prospectus delivery requirements pursuant to proposed rule 498B).493 Accordingly, we are not proposing to make proposed rule 498B available for those products. We seek comment on the scope of our proposed new rule 498B and specifically on the following issues: 181. Is the way that the proposed new rule would address existing fund shareholders’ continued receipt of annual prospectus updates appropriate, in light of the other aspects of the rules and rule amendments we are proposing? Would existing shareholders be receiving the right set of information under the proposal, and would such information be delivered or made available in an appropriate manner? 182. Should we make proposed rule 498B mandatory for all funds (instead of a permissive rule, as proposed)? If so, why? Would a permissive rule result in confusion for fund shareholders (because existing shareholders in funds that choose not to rely on the rule would continue to receive annual prospectus updates year over year), or produce any other detrimental effects? What would be funds’ primary considerations in determining whether to rely on proposed rule 498B? 183. Would the proposed rule’s layered disclosure approach adequately protect existing shareholders who have no or limited internet access or who prefer not to receive information about their investments over the internet? 184. Should we modify the proposed scope of the rule in any way? For example, should the scope be extended to include new investors, or investors that hold the fund through a separate account funding a variable insurance contract? Why or why not? 185. Is the definition for ‘‘existing shareholder’’ under the proposed rule appropriate? If not, how should we revise this definition? Is it appropriate that, as proposed, the definition of ‘‘existing shareholder’’ includes a shareholder in a money market fund who has continuously maintained (or been a beneficial owner of) an account 493 For example, rule 498A permits prospectus delivery requirements for funds serving as underlying investment options under a variable contract to be satisfied if, among other things, an initial summary prospectus is used that provides investors with certain key summary information about those funds. See rule 498A(j)(1)(i). This condition is designed to further the use of initial summary prospectuses for variable contracts, and is tailored to enhance the ability of variable contract investors to make informed investment decisions regarding how to allocate their investments in the variable contract. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at Section II.B.2. PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 with that fund because a fund prospectus has been sent or given to that shareholder? Do commenters agree that money market funds generally continue to send or give prospectus supplements to former shareholders, so long as those shareholders maintain (or are beneficial owners of) an account with the money market fund? Are there any general limitations on this industry practice or other limitations that we should add with regard to this provision in the proposed rule? Should the proposed definition of ‘‘existing shareholder’’ also include specific provisions for certain types of funds other than money market funds, and if so, what types of funds, and what should these provisions be, and why? For example, should the rule generally reference funds used for cash management purposes, as opposed to (or in addition to) simply referencing money market funds? 186. Proposed rule 498B’s layered disclosure framework for existing shareholders would only apply to openend management investment companies. To what extent, if any, should we extend this aspect of our proposal to other types of investment companies? If we were to do this, should we modify any of the conditions to rely on proposed rule 498B, and if so, how? For example, proposed rule 498B is designed to work in conjunction with our proposed amendments to funds’ shareholder reports. How should we modify the rule to apply in contexts where other types of investment companies (for example, registered closed-end funds and BDCs, and ETFs that are organized as unit investment trusts) have different shareholder report requirements than those we propose for open-end management investment companies? Please address the utility and policy implications of implementing a layered disclosure framework for existing shareholders, similar to that which proposed rule 498B would create, in the context of other types of investment companies. 187. If we were to adopt proposed rule 498B, how should we evaluate the effectiveness of the new framework? What methods or approaches should we use to evaluate it, and what areas of the new framework should we focus on in any such review? 3. Conditions To Rely Upon Proposed New Rule 498B A fund would have to satisfy certain conditions in order to rely on the proposed new layered disclosure framework for existing shareholders, as outlined below. Failure to satisfy any of these conditions would mean that the fund could not rely on proposed rule E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 498B to satisfy prospectus delivery obligations to existing shareholders. khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Website Availability of Certain Fund Documents To rely on rule 498B, a fund would have to make certain materials publicly accessible, free of charge, at the website address specified on the cover page or at the beginning of the fund’s annual and semi-annual reports.494 These materials would include: The fund’s current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports (collectively, the ‘‘rule 498B online fund documents’’).495 This set of documents would be identical to the set of documents that are publicly accessible online for funds currently relying on rule 498. This proposed condition is designed to implement the contemplated layered disclosure approach by ensuring that current versions of the fund’s summary prospectus, statutory prospectus, and SAI would be available online so that existing shareholders who did not receive those documents would have ready access to them in a convenient, centralized location, together with other relevant documents for existing shareholders such as the most recent annual and semi-annual shareholder reports. The reference to ‘‘current’’ versions is designed to ensure that amendments or supplements to those documents are included in the rule 498B online fund documents as a condition of reliance on proposed rule 498B. Because funds generally continuously offer and sell shares, funds effectively must continuously maintain a current prospectus to satisfy their ongoing obligations to deliver the fund’s prospectus to new investors.496 Thus, a fund relying on proposed rule 498B would be required to maintain current versions of the rule 498B online fund documents so long as the fund is engaged in a continuous offering. 494 See proposed rule 498B(c)(1); see also proposed rule 498(e) (providing requirements regarding website availability of certain fund documents). 495 The rule 498B online fund documents would not include information required to be filed on Form N–CSR and made available online on a semiannual basis, as discussed above. See supra Section II.D.2. However, this and other information (including information provided in Form N–CSR) that the proposed amendments to rule 30e–1 would require a fund to make available online would have to be made available at the same website address where the rule 498B online fund documents would appear (e.g., the website specified on the cover page or at the beginning of the fund’s annual and semiannual shareholder reports). See supra footnote 464 and accompanying text. 496 See generally supra footnotes 11 through 13. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Proposed rule 498B would not specify a time frame for maintaining current versions of these documents online, but when the document is no longer ‘‘current,’’ a fund would have to replace it with the current version.497 Under the proposal, a fund would be required to include a summary prospectus as one of the rule 498B online fund documents.498 While funds’ use of a summary prospectus is optional under rule 498, we estimate that currently 93% of all funds use a summary prospectus.499 Without requiring a summary prospectus, proposed rule 498B’s new layered disclosure framework for existing shareholders could result in funds having less incentive to use a summary prospectus.500 We believe it is important to make available both a summary prospectus and the statutory prospectus to continue the current approach for funds, which gives investors the option to choose the amount and type of information to review.501 To the extent that existing shareholders might find it useful to review a fund prospectus (for example, in connection with a prospective additional investment in the fund), this condition would continue to make summary information about the fund 497 But see rule 498(e) (specifying the time frame for posting current versions of the documents it requires to appear online (i.e., on or before the time that the summary prospectus is sent or given and until 90 days after the date the fund security is carried or delivered (in the case of reliance on rule 498(c)) or the date that the communication is sent or given (in the case of reliance on rule 498(d))). 498 The proposed rule specifies that the current summary prospectus that the fund makes available online must comply with the requirements described in rule 498(b). See proposed rule 498B(a)(7). 499 See supra footnote 82. 500 For example, the option that proposed rule 498B would provide would reduce—or possibly fully eliminate—the cost savings currently associated with printing and mailing a summary prospectus as opposed to the statutory prospectus, because those summary prospectuses would be made available online instead of being printed and mailed. See also 2009 Summary Prospectus Adopting Release, supra footnote 10, at nn.400 and 401 (discussing the cost savings associated with printing and mailing a mutual fund summary prospectus). 501 The layered disclosure framework represented by the summary prospectus was designed to provide investors with ‘‘ready access to the information that investors need, want, and choose to review in connection with a mutual fund purchase decision.’’ See 2009 Summary Prospectus Adopting Release, supra footnote 10, at Section III.B.1. In adopting the summary prospectus framework, the Commission stated: ‘‘We believe that the new rule will result in funds providing investors with more useable information than they receive today in a format that investors are more likely to use and understand.’’ Id. Further, commenters have expressed an overall preference for concise, layered summary disclosure. See supra footnotes 27 through 30 and accompanying text. PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 70777 available online, which we believe investors may be more likely to use and understand than the lengthier statutory prospectus.502 Although funds would be required to prepare a summary prospectus to comply with the conditions of rule 498B, a statutory prospectus could still be used to satisfy prospectus delivery obligations under section 5(b)(2) of the Securities Act. We understand that some funds that prepare summary prospectuses still choose to deliver a statutory prospectus under certain circumstances. For example, we understand that certain funds that prepare summary prospectuses still choose to send or give a statutory prospectus when investors are invested in multiple series covered by a single statutory prospectus. Likewise, certain funds may choose to send or give a statutory prospectus for certain product lines where the fund believes it would be helpful for investors to see the full suite of fund options (e.g., target date funds, sector funds, or target risk funds), to the extent that multiple series of the fund are described in a single statutory prospectus.503 The proposed rule would include additional conditions regarding the format, or formats, in which the rule 498B online fund documents would be presented on the website. First, the format must be human-readable and capable of being printed on paper in human-readable format.504 This requirement is designed to help ensure that the information provided will be user-friendly, both online and when printed. This would impose a standard of usability on the online information that is comparable to the readability of a paper document. Second, the format must provide persons with the ability to move back and forth within documents and between certain documents. Specifically, the format must permit persons accessing the statutory prospectus or SAI to move directly back and forth between each section heading in a table of contents of such document and the corresponding section of the document.505 Similarly, the format must permit persons accessing the summary prospectus to move directly back and forth between: (1) Each section of the 502 See 2009 Summary Prospectus Adopting Release, supra footnote 10, at paragraph accompanying n.195; Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at text accompanying and following n.1038. 503 See rule 498(a)(3) and (b)(4) under the Securities Act (collectively limiting the scope of a summary prospectus to a single fund, or series). 504 Proposed rule 498B(c)(1)(ii)(A). 505 Proposed rule 498B(c)(1)(ii)(B). E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70778 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules summary prospectus and any section of the statutory prospectus and the SAI that provides additional detail concerning that section of the summary prospectus; or (2) links located at both the beginning and end of the summary prospectus, or that remain continuously visible to persons accessing the summary prospectus, and tables of contents of the prospectuses and the SAI.506 These requirements are designed to result in online information that is in a better and more usable format than the same information when provided in paper. Being able to move directly within and between documents would be more efficient than the equivalent task in a paper document (i.e., flipping through multiple pages). Additionally, documents required to appear online would be subject to retention requirements that would require that persons accessing the rule 498B online fund documents would have to be able permanently to retain, free of charge, an electronic version of such materials in a format that is human-readable and permits persons accessing the statutory prospectus or SAI to move directly back and forth between each section heading in a table of contents and the corresponding section of the document.507 This condition would provide shareholders with the same retention capabilities they would have with paper copies of the information, while still maintaining the technological enhancements associated with the electronic versions of the materials. Further, there would be a safe harbor available if the rule 498B online fund documents were temporarily unavailable at the specified website, provided that the fund meets certain conditions.508 Those conditions would be substantially similar to the conditions associated with the proposed safe harbor provision addressing the website availability of the materials that the fund files on Form N–CSR.509 As with that safe harbor, we recognize that there may be times when, due to events beyond a fund’s control, a fund may temporarily not be in compliance with the web posting requirements of proposed rule 498B. Providing for this safe harbor by rule may obviate the need to provide exemptive relief from the proposed rule’s conditions under rule 498B(c)(1)(ii)(C). rule 498B(c)(1)(iii). 508 Proposed rule 498B(c)(1)(iv). 509 See proposed rule 30e–1(b)(2)(vi); see supra footnotes 479 through 481 and accompanying text. extenuating circumstances, as we have done from time to time.510 These website availability conditions are modeled on the parallel conditions that rule 498 includes, requiring funds that wish to rely on that rule’s summary prospectus option to make certain materials available online.511 We believe that this would create efficiencies for funds that wish to rely on proposed rule 498B, because many of these funds would likely be familiar with these conditions and would already have compliance processes in place pursuant to rule 498 to the extent that these funds choose to send or give summary prospectuses to new shareholders. We generally seek comment on the proposed website availability requirements, and specifically on the following issues: 188. Are the proposed website availability requirements an appropriate condition to rely on proposed rule 498B? Why or why not? 189. Are the proposed rule 498B online fund documents—the fund’s current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports— an appropriate set of materials for funds to have to make available online in order to rely on the proposed rule? Why or why not? Should this set of materials include any additional materials? Should we modify the proposed rule to reduce in any way the set of materials funds would have to make available online? Are there any revisions or simplifications that we should make to account for the information that the proposed amendments to rule 30e–1 would require a fund to post online? If so, should we make any conforming changes to proposed rule 30e–1? In addition to requiring the fund’s most recent annual and semi-annual shareholder report to appear online, should we also include a requirement that the fund (or a financial intermediary through which shares of the fund may be purchased or sold) must have provided existing shareholders with a paper or electronic copy of the fund’s most recent annual and semi-annual report as a condition of reliance on the proposed rule? Alternatively, should we include as a condition of reliance that the fund must adopt policies and procedures reasonably designed to ensure delivery of the fund’s most recent annual and semi-annual shareholder reports? 506 Proposed 507 Proposed VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 510 See also supra footnote 469 (discussing similar safe harbor in the context of proposed rule 30e–1). 511 See rule 498(e). PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 190. Is it appropriate effectively to require funds that wish to rely on proposed rule 498B to prepare a summary prospectus that complies with the requirements outlined in rule 498(b)? To what extent is it important to make summary prospectuses available to investors? Should we, as proposed, include a summary prospectus among the list of rule 498B online fund documents? If we do not require a summary prospectus to be included, what would be the effects on investors? Would funds continue to prepare summary prospectuses, and if not, what would be the effects on investors? Under proposed rule 498B, updated prospectuses would generally be posted online instead of being printed and mailed to existing shareholders, and therefore there would be fewer economic incentives for funds to prepare and use a shorter summary prospectus in addition to the required statutory prospectus. If funds cease to prepare summary prospectuses, should we rescind rule 498 since that rule would essentially be moot? If so, what would be the effects on investors? 512 191. The website availability conditions in proposed rule 498B are modeled on the parallel conditions in rule 498. If we modify any of the website availability conditions in proposed rule 498B that have parallel conditions in rule 498 (and rule 498A), should we similarly modify the parallel conditions of rule 498 and/or rule 498A? Should proposed rule 498B include parallel provisions to any other conditions in rule 498 and, if so, which ones and why? For example, should proposed rule 498B include a provision similar to that in rule 498(b)(3)(iii) specifying when information is conveyed to a person for purposes of 17 CFR 230.159 [rule 159 under the Securities Act]? Are there provisions not included in current rule 498 that we should include in rule 498B? 192. Although we estimate that 93% of funds currently use a summary prospectus, are there significant issues that could prevent a fund from preparing a summary prospectus and that would therefore prevent the fund from relying on the proposed prospectus delivery option? If not, and to the extent that a summary prospectus would provide investors with summary information that they might be more likely to use and understand relative to the broader (and potentially more complex) disclosures in a statutory prospectus, should we require funds relying upon proposed rule 498B to use 512 See, e.g., supra footnote 501 and accompanying text. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules a summary prospectus to satisfy prospectus delivery obligations (as opposed to allowing satisfaction of such obligations via a statutory prospectus)? 193. Are there any aspects of the proposed website availability provisions of proposed rule 498B that should be harmonized, modified or clarified to reflect the different purposes of or interactions between rule 498 and proposed rule 498B? For example, to the extent that proposed rule 498B(c)(1) largely restates the web posting framework reflected in proposed rule 498(e), should proposed rule 498B instead reference, in whole or in part, the requirements of proposed rule 498(e)? If so, how should we address the fact that the website availability requirements of rule 498 are based upon the assumption that a summary prospectus will be sent or given to shareholders, which would not necessarily be the case under proposed rule 498B (because the rules would operate independently of one another, and a fund relying on rule 498B would not also have to rely on rule 498)? For example, rule 498 provides that the documents required to be made available online must appear at the website address specified in the summary prospectus sent or given to investors, whereas under proposed rule 498B existing shareholders would not be sent or given a summary prospectus. 194. Rule 498 specifies the time frame for posting current versions of the documents it requires to appear online.513 Proposed rule 498B, on the other hand, specifies that ‘‘current’’ versions of the required online materials must appear online, and we envision that this requirement would in effect dictate the required time frame for posting (i.e., when the prospectus, SAI, or annual or semi-annual shareholder report is no longer current, it would be replaced online with a current version). Should we revise proposed rule 498B to parallel the provisions in rule 498(e) regarding when the required online materials must be accessible and when they must be removed? If so, how should we address the fact that no prospectuses would be delivered to existing investors under proposed rule 498B (whereas under rule 498, the time frame for web posting is triggered by the delivery of a summary prospectus)? 195. Are there alternate website posting frameworks that would be more 513 The time frame for posting current versions of the documents is on or before the time that the summary prospectus is sent or given and until 90 days after the date the fund security is carried or delivered (in the case of reliance on rule 498(c)) or the date that the communication is sent or given (in the case of reliance on rule 498(d)). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 appropriate for us to incorporate into rule 498B, rather than—as proposed—a framework that reflects the website posting requirement of rule 498? b. Notice of Material Changes Funds generally maintain current prospectuses by filing annual posteffective amendments to their registration statement and, as necessary, supplementing or ‘‘stickering’’ the prospectus or SAI to reflect material or other changes to the information disclosed.514 Rather than bearing the expense of sending a prospectus with each confirmation of an investor’s purchase of additional shares, which often occurs on a periodic basis (e.g., monthly), most registrants instead send copies of the new prospectus (or prospectus supplement or sticker) to all investors each time it is updated (or whenever the supplement or sticker is issued). Under the layered disclosure framework that proposed rule 498B would create, existing shareholders would receive shareholder reports to keep them informed about their ongoing fund investments in lieu of receiving annual prospectus updates. Consequently, existing shareholders would no longer be required to have prospectus supplements or amended prospectuses delivered to them. Therefore, proposed rule 498B includes a requirement that is designed to help ensure that existing shareholders would continue to be informed in a timely manner regarding material changes to the fund (which, for shareholders in funds that are not relying on rule 498B, would otherwise be disclosed in updates to the prospectus). Absent this condition, existing shareholders potentially would not receive notice of a material change to the fund until the next annual shareholder report.515 514 See section 10(a)(3) of the Securities Act (requiring, among other things, that a prospectus used more than nine months after the effective date of a registration statement be updated so that the information contained therein shall not be more than 16 months old); see also section 11 of the Securities Act (providing a civil remedy for a registration statement that contains ‘‘an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading.’’); rule 408 under the Securities Act [17 CFR 230.408(a)] (requiring registrants to include, in addition to the information expressly required to be included in a registration statement, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading). Additionally, funds may supplement or ‘‘sticker’’ their prospectus or SAI. See generally rule 497 under the Securities Act. 515 As discussed above, the proposed annual shareholder report would include a discussion of PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 70779 Specifically, if there is a material change with respect to certain topics that the proposed rule specifies, a fund relying on proposed rule 498B would have to send or give existing shareholders notice of that change.516 This provision would not apply to changes previously disclosed in the fund’s most recent annual report to shareholders. The particular topics would be the same types of material changes in the proposed annual report.517 We believe this approach would have certain benefits over a more principles-based approach, such as a more general requirement that a fund must send notice of ‘‘any material change’’ to the fund. Specifically, we believe that the proposed approach would provide more certainty to funds about the types of changes that would necessitate notice to shareholders, and would enhance consistency of such disclosures across funds and across disclosure documents. These types of material changes also generally align with the prospectus disclosure items the Commission requires in summary prospectuses (and in the summary section of statutory prospectuses) and that we understand investors typically use to make investment decisions.518 any material changes that have occurred since the beginning of the fund’s last fiscal year, or that the fund plans to make in connection with updating its prospectus under section 10(a)(3) of the Securities Act for the current fiscal year, with regard to certain topics. See supra Section II.B.2.f. Under our proposal, such disclosure of material changes could be optionally included in semi-annual shareholder reports, but would not be required. See supra text accompanying footnote 365. 516 The fund also would have to file a posteffective amendment to its prospectus or a prospectus supplement with the Commission. See rules 485 and 497 under the Securities Act (providing requirements for filing post-effective amendments and prospectus supplements). 517 See proposed rule 498B(c)(2) (referencing Item 27A(g) of Form N–1A with regard to the scope of topics for which notice of material changes would be required (and permitted) to be provided to existing shareholders); see also Item 27A(g) of proposed Form N–1A, which would require disclosure of any material changes with regard to: (1) The fund’s name; (2) The fund’s investment objectives or goals; (3) With respect to material increases, the fund’s ongoing annual fees, transaction fees, or maximum account fee; (4) The fund’s principal investment strategies; (5) The principal risks of investing in the fund; (6) The fund’s investment adviser(s); and (7) The fund’s portfolio manager(s). The fund also may describe other material changes that it would like to disclose to its shareholders under Item 27A(g) of proposed Form N–1A. 518 For example, among other things, the proposed notice would require disclosure of changes in the fund’s investment objectives or goals, ongoing annual fees, principal investment strategies, and principal risks of investing in the fund, which generally align with summary and E:\FR\FM\05NOP2.SGM Continued 05NOP2 70780 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 We understand that investors often use information about these topics to inform initial investment decisions, and similarly we believe that material changes to these items may affect an existing shareholder’s assessment of whether to continue to hold, buy, or sell fund shares. In addition funds could disclose other material changes on a discretionary basis, which we believe would provide flexibility to funds to highlight changes that they believe would be of significance to existing shareholders. To help ensure shareholders receive notice in a timely manner, the proposed rule would require the notice to be provided within three business days of either the effective date of the fund’s post-effective amendment filing or the filing date of the prospectus supplement filing, by first-class mail or other means designed to ensure equally prompt receipt.519 Further, the proposed rule would not specify the form of this notice. Therefore, a fund could satisfy this requirement, for example, by sending existing shareholders the prospectus supplement filed with the Commission, an amended prospectus which reflects the material change, or another form of notice that discusses the change.520 Proposed rule 498B would allow ‘‘householding’’ of notices of material changes if the notice satisfies rule 154 under the Securities Act.521 Rule 154 generally provides that funds may deliver a single copy of a prospectus to investors who share the same address, pursuant to certain other requirements.522 Accordingly, funds statutory prospectus disclosures required by Items 2, 3, and 4 respectively of Form N–1A. Compare Item 27A(g) of proposed Form N–1A with Items 2 through 8 of proposed Form N–1A. 519 See proposed rule 498B(c)(2). If the shareholder does not specify a delivery preference, the proposed rule would require that the notice be provided in paper. However, notices of material changes could also be delivered electronically, consistent with current Commission guidance, if a shareholder elects electronic delivery. See, e.g., supra footnote 21. 520 If a fund sends a separate notice to existing shareholders, the fund must file that notice with the Commission as an attachment to the post-effective amendment or prospectus supplement filed with the Commission regarding that change. See rules 485 and 497 under the Securities Act (providing requirements for filing post-effective amendments and prospectus supplements). 521 See proposed rule 498B(c)(2). 522 Rule 154 provides, among other things, that prospectus delivery obligations may be satisfied if a person delivers a prospectus to investors at the same address, the prospectus is delivered to the investors as a group, and the investors consent to such group delivery. Rule 154 provides certain conditions under which consent may be implied, and further provides that the investors must receive annual notice regarding how they may revoke their consent. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 that wish to household notices of material changes, based on implied consent, would send a notice to each investor at a shared address stating, among other things, that the investors at the shared address would receive one notice of material change(s) in the future unless the investors provide contrary instructions. In addition, at least once a year, funds relying on the householding provision would be required to explain to investors who have provided written or implied consent how they can revoke their consent, and this explanation must be reasonably designed to reach these investors. We anticipate that a fund would generally choose to provide this explanation in the notices of material changes that it provides under proposed rule 498B, and/or in the annual shareholder report. We generally seek comment on the proposed condition regarding notice of material changes, and specifically seek comment on the following issues: 196. Is the proposed requirement regarding notices of material changes to the fund an appropriate condition to rely on proposed rule 498B? Why or why not? 197. Are the conditions that would necessitate a notice of material changes appropriate? For example, are the categories of topics identified in proposed rule 498B for which material changes would require notice to existing shareholders appropriate? Are those the topics that are most relevant to fund shareholders and their investment decisions? Does the proposed provision allowing funds to disclose additional material changes on a discretionary basis provide funds with appropriate flexibility to address their individual facts and circumstances? To the extent that the Commission adopts rules that include changes to the conditions that would necessitate disclosure of fund changes in shareholder reports, should the Commission adopt those same changes to the corresponding notice of fund changes that would be required pursuant to proposed rule 498B? In contrast, are there any considerations with regard to the disclosure of fund changes that apply uniquely to the notice contemplated by proposed rule 498B, as opposed to the proposed disclosure of fund changes in shareholder reports? 198. Are the requirements for sending the notice of material changes appropriate? Should the rule, as proposed, require the notice to be provided within three business days of either the effective date of the fund’s post-effective amendment filing or the filing date of the prospectus supplement filing? Would a longer or shorter period PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 be appropriate? Should the rule, as proposed, require the notice be provided by first-class mail or other means designed to ensure equally prompt receipt? Is this requirement sufficiently clear, or should additional delivery methods be specified in the rule? Would these requirements, together with the requirements to post online updated prospectuses and other additional information, provide sufficient notice to investors of material fund changes? As an alternative to the proposed requirements for sending the notice of material changes, should the rule instead require a fund to post notices of material changes on its website? Would this approach provide investors with sufficient notice of material fund changes, if notice were not sent (either in paper or electronically) directly to investors? 199. Are there any revisions the Commission should make to this aspect of the proposal? For example, instead of allowing flexibility regarding the form of this notice, should the Commission specify a particular format or presentation? If so, what format and why? Likewise, instead of identifying specific topics that would necessitate notice of material changes to existing shareholders, should the Commission adopt a more principles-based approach (that, for example, only requires a fund to send notices of ‘‘material changes’’)? If so, why, and what should the alternative approach require? 4. Other Requirements a. Delivery Upon Request of Certain Fund Documents We are proposing to require a fund (or financial intermediary through which shares of the fund may be purchased or sold) to deliver, in a manner consistent with the person’s delivery preference, a copy of the rule 498B online fund documents to any person requesting such a copy. The fund or intermediary must send requested paper documents at no cost to the requestor, by U.S. first class mail or other reasonably prompt means, within three business days after receiving the request for a paper copy.523 The proposed rule would also require a fund or intermediary to send electronic copies of these documents upon request within three business 523 Proposed rule 498B(d)(1)(i); see also rule 498(f)(1) (parallel requirements for funds and intermediaries relying on rule 498). The threebusiness-day timeframe also appears in similar existing conditions with respect to requests for copies of other similar documents. See, e.g., Instruction 3 to Item 1 of Form N–1A (requiring the SAI and shareholder reports to be sent within three business days of receipt of a request). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 days.524 The proposed rule would provide that the requirement to send an electronic copy of a document may be satisfied by sending a direct link to the online document, so long as certain conditions are met.525 First, a current version of the document would have to be directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent. Second, the email would have to explain both how long the link will remain useable and that, if the recipient desires to retain a copy of the document, he or she should access and save the document. Collectively, these requirements are designed to help ensure that an investor has prompt access to the required information in a format that he or she prefers. Under our proposal, an existing shareholder would no longer receive annual prospectus updates, or supplements or updates to the prospectus that the fund makes between annual updates, but would be able to review those and other relevant documents online and also receive those documents directly, in paper or electronic format, upon request. Rule 498 would continue to require a fund to send specified fund documents to shareholders upon request, if the fund relies upon rule 498 to satisfy its prospectus delivery obligations or to send communications after the effective date of the fund’s registration statement.526 However, the delivery upon request obligations of rule 498 would not apply with respect to existing shareholders if the fund were to rely on proposed rule 498B.527 Thus, under our proposal, we are including delivery upon request provisions as conditions of proposed rule 498B that are parallel to the delivery upon request provisions of rule 498. We seek comment on the delivery upon request provisions of proposed rule 498B, and specifically on the following issues: 200. Are the delivery upon request provisions of proposed rule 498B appropriate? Are they necessary in light of the parallel provisions in rule 498? Is it necessary to have delivery upon request provisions in proposed rule 524 Proposed rule 498B(d)(1)(ii); see also rule 498(f)(2) (parallel requirements for funds and intermediaries relying on rule 498). 525 Proposed rule 498B(d)(1)(ii); see also rule 498(f)(1) (parallel requirements for funds and intermediaries relying on rule 498). 526 The delivery upon request provisions in proposed rule 498 would be essentially identical to the parallel provisions in proposed rule 498B, including the scope of the documents that would be subject to those provisions. Compare proposed rule 498(f)(1) with proposed rule 498B(d). 527 See proposed rule 498(f)(1). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 498B, in light of the fact that the materials subject to these provisions would be required to be available online? Why or why not? Are these considerations different than in rule 498 and/or rule 498A, and should the delivery upon request provisions be retained in rule 498 and/or rule 498A? Why or why not? 201. Should we modify the delivery upon request provisions of proposed rule 498B in any way, and if so, how? For example, should any of the terminology or concepts in the proposed requirement to deliver an electronic copy of a requested document be revised to reflect technological developments or to ensure that they are consistent with the goal of technological neutrality (e.g., email, direct link)? Should persons relying on proposed rule 498B be required to send the rule 498B online fund documents to any requestor within three business days of such request, as proposed? Likewise, if persons relying on proposed rule 498B send a direct link to an online document in response to a request for electronic delivery of that document, should we require a current version of that document to be directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent, as proposed? In either case, would a different time period be appropriate? If we do modify any of the delivery upon request provisions of proposed rule 498B, should we similarly modify the parallel provisions in rule 498 and/ or rule 498A? 202. How does the proposed rule affect shareholders’ ability to request paper copies of the rule 498B online fund documents? Are there any changes to the proposed rule that we should consider to make the process for requesting paper copies more convenient for shareholders? Should we require funds to make available to shareholders a way to opt into automatic annual delivery of future summary or statutory prospectuses in a paper format without having to specifically request them each year? What would the operational challenges of this approach be? Should we allow funds to give shareholders the option of automatic delivery in paper? 203. The delivery upon request provisions of proposed rule 498B would not apply to the information funds must post online pursuant to proposed rule 30e–1, because proposed rule 30e–1 has its own delivery upon request provisions. Should we revise proposed rule 498B’s delivery upon request provisions in any way to account for the information that proposed rule 30e–1 PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 70781 would address, and if so, are there any conforming changes that we should make to proposed rule 30e–1? b. Convenient for Reading and Printing In addition, the proposed rule would require the rule 498B online fund documents to be presented in a format that is convenient for both reading online and printing on paper.528 This requirement is designed to ensure that the information appearing online would be user-friendly, both online and when printed. In addition, the proposed rule would require persons accessing the rule 498B online fund documents to be able to retain electronic versions permanently, free of charge, in a format that is convenient for both reading online and printing on paper.529 Collectively, these requirements impose on the online information a standard of usability that is comparable to the readability and retention of a paper document. We seek comment on these ‘‘convenient for reading and printing’’ provisions of proposed rule 498B and specifically on the following issues: 204. Are the ‘‘convenient for reading and printing’’ provisions of proposed rule 498B appropriate? Are they necessary in light of parallel provisions in rule 498? Should we modify these provisions in any way? If so, how, and should we also modify the parallel provisions of rule 498 and/or rule 498A? Is the phrase ‘‘convenient for reading and printing’’ sufficiently clear or should we provide additional guidance or rule text? 205. How would the proposed rule affect shareholders’ ability to read and print rule 498B online fund documents? Are there any changes to the proposed rule that we should consider to make reading and printing such documents more convenient for shareholders? 206. The ‘‘convenient for reading and printing’’ provisions of proposed rule 498B would not encompass the information funds would be required to post online pursuant to proposed rule 528 Proposed rule 498B(d)(2)(i); see also rule 498(f)(3)(i) (parallel provision in the rule governing the use of mutual fund summary prospectuses). We recognize that a format that is convenient for reading online might not be the same format that is convenient for printing on paper. A fund could comply with the proposed requirement by presenting the online fund documents on a website in a format that is convenient for reading online, and, separately, making these same documents available on the website in a format that is convenient for printing on paper (e.g., by making a ‘‘printer-friendly version’’ available). We understand that funds commonly use this approach in complying with rule 498. 529 Proposed rule 498B(d)(2)(ii); see also rule 498(f)(3)(ii) (parallel provision in the rule governing the use of mutual fund summary prospectuses). E:\FR\FM\05NOP2.SGM 05NOP2 70782 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 30e–1, because proposed rule 30e–1 contains similar ‘‘convenient for reading and printing’’ provisions that would cover that information. Should we revise proposed rule 498B’s ‘‘convenient for reading and printing’’ provisions in any way to account for the information that proposed rule 30e–1 would require funds to make available online and, if so, are there any conforming changes that we should make to proposed rule 30e–1? khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. Compliance With Other Requirements The delivery upon request and ‘‘convenient for reading and printing’’ requirements would not be conditions of reliance on proposed rule 498B. We are proposing that failure to comply with these requirements would not negate a person’s ability to rely on proposed rule 498B to satisfy its delivery obligations under section 5(b)(2) of the Securities Act.530 Such failure would, however, constitute a violation of proposed rule 498B. We recognize that a fund could inadvertently violate the delivery upon request and ‘‘convenient for reading and printing’’ requirements of the rule. For example, weather issues or other forces outside of the fund’s control could present challenges for compliance with the three-business-day deadline. Likewise, whether a particular format is convenient for reading online and printing depends on a number of factors and must be decided on a case-by-case basis.531 In order to provide greater certainty to market participants and funds who seek to rely upon the rule, these requirements would not be conditions to rely upon proposed rule 498B, as discussed in the paragraph above. We seek comment on this provision of proposed rule 498B and specifically on the following issues: 207. Should compliance with any or all of the proposed delivery upon request or ‘‘convenient for reading and printing’’ requirements be a condition of reliance on proposed rule 498B? That is, should failure to comply with these requirements result in a violation of section 5(b)(2) of the Securities Act? Alternatively, should the failure to 530 See proposed rule 498B(d)(3); see also rule 498(f)(5) (parallel provision in the rule governing the use of mutual fund summary prospectuses). 531 See 2009 Summary Prospectus Adopting Release, supra footnote 10, at nn.272 and 273 and accompanying text (relevant factors include the manner in which the online version renders charts, tables, and other graphics; the extent to which the online materials include search and other capabilities of the internet to enhance investors’ access to information and include access to any software necessary to view the online version; and the time required to download the online materials). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 comply with these requirements be a violation of Commission rules that does not result in an inability to rely on the rule or a violation of section 5(b)(2)? J. Amendments Narrowing Scope of Rule 30e–3 Subject to conditions, rule 30e–3 generally permits investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of that availability instead of directly mailing the report (or emailing an electronic version of the report) to shareholders.532 We are proposing to amend the scope of rule 30e–3 to exclude investment companies registered on Form N–1A, which would be sending tailored annual and semiannual reports under the proposal. We are also proposing conforming amendments to Form N–1A that would remove the current statement that rule 30e–3 requires to appear on a fund’s summary and statutory prospectus and annual and semi-annual reports informing investors of the change in delivery format options if the fund intends to rely on rule 30e–3 prior to January 1, 2022.533 When the Commission adopted rule 30e–3 in 2018, it stated that the rule’s new ‘‘notice and access’’ option for transmitting shareholder reports was intended to modernize the manner in which funds deliver periodic information to investors.534 The Commission also stated that it believed that the new rule would improve investors’ ability to access and use this information (for example, by providing investors with access to at least a full year of complete portfolio holdings information in one location), while reducing expenses associated with printing and mailing that are borne by funds, and ultimately, by their investors.535 Furthermore, the Commission stated that it continues to search for better ways of providing investors with the disclosure that they need to evaluate funds in which they are considering investing or currently hold shares.536 As part of these general efforts, the Commission noted that it was issuing—at the same time that it adopted rule 30e–3—the Fund Investor 532 Rule 30e–3 Adopting Release, supra footnote 14. 533 See proposed Form N–1A; see rule 498(b)(1)(vi) and (vii); paragraph (a)(5) to Item 1 of Form N–1A; paragraph (d)(8) to Item 27 of Form N– 1A. 534 See Rule 30e–3 Adopting Release, supra footnote 14, at paragraph accompanying n.18. 535 Id. 536 Id. at paragraph accompanying nn.20 and 21. PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 Experience RFC, which was directed at investors regarding ways in which fund disclosure, including shareholder reports, may be improved.537 As discussed above, the new proposed disclosure framework considers feedback that commenters provided in response to the Fund Investor Experience RFC and reflects the Commission’s continuing efforts to search for better ways of providing investors with the disclosure that they need. The proposed movement away from a notice and access model for open-end fund shareholder report transmission—and towards a model that contemplates direct transmission of concise shareholder reports—reflects our understanding based on responses to the Fund Investor Experience RFC, prior investor testing and surveys, and other disclosure reform initiatives that shareholders strongly prefer layered disclosure.538 It also reflects a model that certain commenters to the Fund Investor Experience RFC specifically suggested fund investors would find to be useful.539 Furthermore, the proposed approach reflects the Commission’s recent experience with tailoring investment company disclosure requirements to the needs of new versus existing investors.540 In light of all of these considerations, we preliminarily believe that the proposed disclosure approach represents a more-effective means of improving investors’ ability to access and use fund information, and of reducing expenses associated with printing and mailing, than continuing to permit open-end funds to rely on rule 30e–3.541 Although funds can generally begin relying on rule 30e–3 on January 1, 2022, funds may rely on rule 30e–3 prior to that date if they include certain legends on fund prospectuses and shareholder reports stating that shareholder reports will eventually be available online and no longer will be sent to shareholders.542 We required an extended transition period and related disclosures in connection with implementation of rule 30e–3 to alert 537 Id. at n.20 and accompanying text; see also Fund Investor Experience RFC, supra footnote 8. 538 See supra Section I.B.1. 539 See supra footnote 44 and accompanying text; see also supra footnote 100 and accompanying and following text (discussing Investor Advisory Committee recommendation that the Commission develop an approach to funds’ shareholder reports that would rely on summary disclosure and layered disclosure principles). 540 See supra footnote 99 and accompanying text. 541 See infra Section III.C.2.d (discussing the estimated reduction of printing and mailing costs under the proposed approach). 542 See Rule 30e–3 Adopting Release, supra footnote 14, at text following n.257. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules investors that they would no longer be receiving reports in the mail and to provide time for affected investors to tell their fund or financial intermediary that they wished to continue receiving reports in paper, if that was their preference. Under this proposal, in contrast, investors would be receiving this information directly, and so there would not be a need to provide time for investors to express a different preference. Shareholders receiving the annual and semi-annual reports that this proposal contemplates would be receiving tailored information more directly than they would via the rule 30e–3 notice. However, if this proposal is adopted, a fund that has previously relied on rule 30e–3 might wish to communicate to investors the change and could, for example, do so in an annual report sent to investors.543 We generally seek comment on the proposed amendments to rule 30e–3, and specifically seek comment on the following issues: 208. The proposed amendments would exclude investment companies registered on Form N–1A from relying on rule 30e–3. Is such exclusion appropriate, in light of our goals of ensuring that all investors in these funds experience the anticipated benefits of the new tailored disclosure framework? Is the proposed approach to the transmission of shareholder reports preferable to the optional shareholder report transmission method that rule 30e–3 currently provides, in terms of the goal of improving investors’ ability to access and use fund information, and reducing expenses associated with printing and mailing? Does the proposed approach more closely align with shareholders’ preferences than the approach under rule 30e–3? Does the proposed approach represent a better way of providing investors with the disclosure they need to monitor their fund investments and make informed investment decisions? Are there any other considerations we should take into account in evaluating whether to adopt the proposed approach in lieu of continuing to permit open-end funds to rely on rule 30e–3’s notice and access model? 209. If we were to adopt the proposed rules and amendments for tailored shareholder reports, should we also allow open-end funds to continue to rely on rule 30e–3? 544 Why or why not? If we were to permit funds to continue relying on rule 30e–3, are there any 543 See supra footnote 275 and accompanying text. 544 See generally Sections II.B through II.D and requests for comment in supra Section II.C.3.b. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 changes we should make to the proposed rules and amendments in light of this? For example, should we prohibit funds that are relying on rule 30e–3 from also relying on proposed rule 498B? 210. To what extent, if any, should the scope of these amendments be extended to exclude other types of investment companies from relying on rule 30e–3? If we were to do this, how should we modify the rule to apply (or not) in contexts where other types of investment companies (for example, registered closed-end funds and BDCs, and ETFs that are organized as unit investment trusts) have different shareholder report requirements and would not have the layered disclosure framework for existing investors that we propose for open-end management investment companies? 211. Under our proposal, funds planning to rely or currently relying on rule 30e–3 would not be required to provide notice to investors of the proposed amendments to rule 30e–3 because the amendments would result in those investors directly receiving information tailored to their informational needs. Should we require such notice to investors and, if so, to what extent should we specify the form, timing, and substance of such notice? 212. Are there any difficulties that funds that have already begun to rely on rule 30e–3 would encounter in complying with the proposed changes to the scope of rule 30e–3? What difficulties would these be, and what Commission actions could help mitigate these difficulties? Should the Commission, for example, provide a longer compliance period in connection with any adoption of the proposed amendments to rule 30e–3? If so, should we delay the effectiveness of rule 498B for the same period of time to avoid a period where existing shareholders do not directly receive either a shareholder report or an annual prospectus update? K. Proposed Amendments To Fund Prospectus Disclosure Requirements We are also proposing several amendments to the content of funds’ prospectuses. Specifically, two of the critical elements in prospectus disclosure relate to (1) fees and (2) risks, and we are proposing certain changes that we believe will improve disclosure regarding these topics. Our goal is to provide greater clarity and more comparable information with regard to fees and risks and by doing so, improve investor comprehension and facilitate PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 70783 investors’ ability to make informed investment decisions.545 1. Improved Prospectus Fee Disclosures In addition to proposing amendments to fee presentation in shareholder reports, we are proposing improvements to prospectus disclosure about fund fees. These fee presentations are different because the annual report expense presentation is designed to help fund shareholders assess and monitor their ongoing fund investments looking back over the prior period, while the prospectus disclosure helps investors assess a prospective fund investment and is based on the fund’s current estimated fees. When considering investing in a fund, fees and expenses are an important factor investors should consider. Fees and expenses can significantly affect a fund’s returns. For example, a fund with higher costs must have higher returns than a fund with lower costs to generate the same performance. In addition, differences in costs that appear to be small, for example on an annual basis, may have a large impact when comparing returns of funds over time. Funds disclose their fees in the prospectus and the annual and semiannual reports. The presentations in each of these contexts disclose information about fees and expenses in a standardized format to help investors compare that information across funds. Despite these existing disclosure requirements and educational efforts, the degree to which investors understand fund fees and expenses remains a significant source of focus and attention, and the Commission and staff have continually sought to improve investors’ understanding in this area.546 We are proposing revisions to simplify the presentation of fees and expenses in the prospectus and help increase investor comprehension.547 These proposed amendments respond to feedback that commenters provided in response to the Fund Investor Experience RFC.548 We are proposing to 545 See supra Section II.A. e.g., Investor Bulletin: Mutual Fund Fees and Expenses (May 12, 2014), available at https:// www.investor.gov/additional-resources/news-alerts/ alerts-bulletins/investor-bulletin-mutual-fund-feesexpenses; How to Read a Mutual Fund Shareholder Report, supra footnote 316. 547 See Items 3, 8A, and 27A of proposed Form N–1A. Similarly, we are proposing revisions to simplify fee and expense presentations in annual and semi-annual reports. See supra Sections II.B.2.b and II.C.1. 548 The Fund Investor Experience RFC Feedback Flier solicited feedback on the presentation of fees. In response to the question, ‘‘Do you think funds clearly disclose their fees and expenses?’’ 21 of 34 commenters (or 62%) responded that fund fees are 546 See, E:\FR\FM\05NOP2.SGM Continued 05NOP2 70784 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules replace the current fee table in the summary section of the statutory prospectus with a ‘‘fee summary.’’ 549 The goal of this simplified fee summary would be to streamline the presentation of fees and provide an easier-tounderstand presentation that includes fewer data points to help provide a clearer picture of the total costs of investing in a fund. The current fee table, which includes additional detail, would be moved to the statutory prospectus, where it could be used by investors who want additional details about fund fees to supplement the fee summary.550 In addition, we are proposing to replace certain terms in the current fee table with terms that we believe investors would more easily understand (these terms would also be used in the fee summary, as applicable). We are also proposing to permit funds that make limited investments in other funds to disclose AFFE, the fees and expenses associated with those investments, in a footnote to the fee table and fee summary instead of reflecting AFFE as a line item in the fee table and fee summary (as all funds do today).551 This proposed amendment is designed to enhance consistency of funds’ prospectus fee disclosure in recognition that, for funds whose investments in other funds are limited, the fees and expenses of the underlying funds may more closely resemble other costs of investment that are not currently reflected in the prospectus fee table. khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Current Prospectus Fee Disclosure Currently, funds must provide two separate presentations of fee information in the prospectus: (1) A table under the heading ‘‘Fees and Expenses of the Fund,’’ (the ‘‘fee table’’) which shows shareholder transaction fees and annual fund operating expenses, generally in terms of a percentage of the amount invested in not clearly disclosed. In response to the question ‘‘How could funds improve the disclosure of fees and expenses?’’ 21 of 27 commenters (or 78%) responded that fund fee presentations should be simplified. See also Recommendation of the Investor Advisory Committee Regarding Mutual Fund Disclosure (Apr. 14, 2016), available at https:// www.sec.gov/spotlight/investor-advisorycommittee-2012/recommendation-mf-feedisclosure-041916.pdf (‘‘Through testing, the Commission could identify ways to simplify and clarify the fee table’’). 549 See proposed Item 3 to Form N–1A. 550 See proposed Item 8A of Form N–1A. 551 See supra footnote 148 and accompanying text (noting that a fund’s shareholder expense presentation does not reflect AFFE because this is not included in a fund’s financial statements); see also infra footnotes 605 and 606 and accompanying text (discussing current AFFE disclosure requirements). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 the fund; and (2) an example, which is a hypothetical calculation that shows the estimated expenses, in dollars, that an investor will pay for investing in a fund over different time periods.552 The fee table currently includes two categories of fees: ‘‘shareholder fees’’ and ‘‘annual fund operating expenses.’’ Shareholder fees are charges that investors pay directly—they are deducted from the amount that an investor invests in the fund. These charges typically appear as a percentage of the amount invested, and include: • Sales charges (also known as ‘‘loads’’), which generally pay investment professionals compensation for selling shares of a fund to an investor; and • Other applicable fees related to redemptions, exchanges, and account fees. Some shareholder transaction fees appear as a dollar amount in the fee table. Annual fund operating expenses are charges that an investor pays indirectly, because these charges are deducted from fund assets. Annual fund operating expenses appear as a percentage of net assets and generally include: • ‘‘Management fees,’’ which a fund pays to its investment adviser for deciding which investments the fund buys and sells and for providing other related services; • ‘‘Rule 12b–1 fees,’’ which pay for marketing and selling fund shares; • ‘‘Other expenses,’’ which represent various categories, such as auditing, legal, custodial, transfer agency fees, and interest expense; and • For funds that invest in other funds, AFFE (the fees and expenses of acquired funds).553 A fund may also reflect certain waivers that may reduce the fund’s total fees.554 The example is a hypothetical calculation that shows the estimated expenses that an investor will pay for investing in a fund over different time periods. The goal of the example is to provide a means for investors to compare expense levels of funds with different fee structures over varying investment periods.555 The example appears in dollar amounts, based on a hypothetical investment of $10,000, and 552 See Item 3 of Form N–1A. see also 17 CFR 270.12b–1 [rule 12b–1 under the Investment Company Act]. 554 Instruction 3(e) to Item 3 Form N–1A. 555 See Consolidated Disclosure of Mutual Fund Expenses, Investment Company Act Release No. 16244 (Feb. 1, 1988) [53 FR 3192 (Feb. 4, 1988)]. 553 Id., PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 assumes a 5% annual return over the course of 1, 3, 5, and 10 years.556 Funds must also include brief disclosure regarding portfolio turnover immediately following the fee table example.557 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 when fund shares are held in a taxable account. The portfolio turnover rate will vary depending on the fund’s investment strategy. This disclosure is designed to help investors understand the effect of portfolio turnover, and the resulting transaction costs, on fund expenses and performance.558 b. Proposed Fee Summary We propose to require 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.559 The fee summary would be included in the summary section of the statutory prospectus (or, for funds that rely on rule 498, the summary prospectus), which funds provide investors at their initial purchase. The full fee table would be included in the statutory prospectus for those who want the additional level of detail. This is a layered disclosure approach designed to provide investors with concise, key information relating to the fund in the summary fee disclosure, with access to more detailed information elsewhere.560 The information in the fee summary would incorporate a subset of the information that appears in the fee table, and the fees that appear in the fee 556 The example does not reflect purchase charges on reinvested dividends and other distributions (as applicable). If a fund imposes a fee or other charge when an investor sells (redeems) his or her shares, the fund must disclose two expense examples. The first example shows the estimated expenses of investing in the fund if the investor continues to hold his or her shares throughout the 1-, 3-, 5- and 10-year periods. The second example shows an investor’s estimated investment expense if he or she sells (redeems) shares at the end of the 1-, 3-, 5- or 10year periods. 557 Item 3 of Form N–1A. 558 Summary Prospectus Adopting Release, supra footnote 10, at Section III.A.3.d. 559 Proposed Item 3 of Form N–1A; see also 2009 Summary Prospectus Adopting Release, supra footnote 10, at 41–42 (commenters suggest an abbreviated fee presentation and the Commission stated, ‘‘this idea deserves further consideration, and we will consider it for possible future rulemaking’’). 560 The statutory prospectus, which would include the full fee table, would be available online if the fund relies on rule 498 and delivers a standalone summary prospectus. In cases where the fund does not rely on 498, the investor would receive the statutory prospectus on paper and could flip from the fee summary to the full fee table. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 summary would be the same as any corresponding fees in the fee table. We are proposing that the fee summary begin with a narrative statement that the fee summary shows amounts the investor could pay to buy, hold, and sell shares of the fund and that these costs reduce the value of the investment. The narrative statement also would state that the investor may pay other fees, such as brokerage commissions and other fees to financial intermediaries. This would occur, for example, in the case of ETFs or ‘‘clean VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 shares.’’ 561 The narrative must state that these charges are not reflected in the fee summary and example. We are not proposing to require that the fee summary and example include these fees, because we understand that financial intermediaries that distribute the fund typically determine such fees, and that the amount may vary across financial intermediaries and distribution channels. 561 Clean shares are share classes offered without sales loads or any asset-based distribution or sales fees. Investors purchasing and selling clean shares may be required to pay a commission to a broker. PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 70785 The body of the fee summary would consist of two sections: (1) A summary fee table showing the fund’s transaction fees, maximum account fee (if applicable), and ongoing annual fees, and (2) a simplified version of the example. The proposed requirements for the fee summary are shown in the following chart, with current fee table line items shown on the left and corresponding items in the fee summary on the right. We discuss the proposed changes in more detail below. BILLING CODE 8011–01–P E:\FR\FM\05NOP2.SGM 05NOP2 VerDate Sep<11>2014 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4725 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.001</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 70786 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules We seek comment on the proposed new fee summary, and specifically on the following issues: 213. Is the proposed new fee summary appropriate? If so, is it also appropriate for the current full fee table to appear in the fund’s prospectus outside the summary section of the prospectus (or, for funds that rely on rule 498, outside of the fund’s summary prospectus)? Is this ‘‘layered’’ format appropriate for fee disclosure? khammond on DSKJM1Z7X2PROD with PROPOSALS2 c. Proposed Summary Fee Table We propose to require a simplified fee summary in the summary section of the prospectus that is designed to improve investor understanding of fees and expenses. The proposed summary fee table would change the current fee table heading ‘‘Shareholder Fees’’ to ‘‘Transaction Fees,’’ which we believe is a more plain-English term to describe fees paid each time an investor buys or sells shares of the fund. The line items under the heading ‘‘Transaction Fees’’ VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 would generally encompass the same types of fees that currently appear as line items under the ‘‘Shareholder Fees’’ heading. However, we propose to re-title the line items with more plain-English descriptions, to increase investor comprehension. The proposed line items under the heading ‘‘Transaction Fees’’ that are parallel to line items currently appearing under the heading ‘‘Shareholder Fees’’ include: • Any ‘‘Purchase Charge’’ to purchase shares, and any ‘‘Exit Charge’’ to sell shares; 562 • The ‘‘Maximum Purchase Charge Imposed on Reinvested Dividends [and Other Distributions]’’; 563 • Any ‘‘Early Exit Fee,’’ which would show the redemption fee charged for 562 These line items are currently titled ‘‘Maximum Sales Charge (Load) Imposed on Purchases’’ and ‘‘Maximum Deferred Sales Charge (Load),’’ respectively. See Item 3 of Form N–1A; see also supra Table 5. 563 This line item is currently titled ‘‘Maximum Sales Charge (Load) Imposed on Reinvested Dividends [and Other Distributions].’’ See Item 3 of Form N–1A; see also supra Table 5. PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 exiting the fund early (and is distinguished from sales charges, which are covered under the ‘‘Exit Charge’’ line item); 564 • Any ‘‘Exchange Fee,’’ which is a charge that may be imposed on an investor who wishes to move assets from one fund in a fund group to another.565 The one line item that currently appears under the heading ‘‘Shareholder Fees’’ that would not appear under the proposed ‘‘Transaction Fees’’ heading is the ‘‘Maximum Account Fee.’’ This fee is not a transaction fee, so we are proposing to include it as its own separate heading in the summary fee table.566 564 This line item is currently titled ‘‘Redemption Fee.’’ See Item 3 of Form N–1A; see also supra Table 5. 565 This line item title is the same as the line item title that currently appears in Form N–1A under the heading ‘‘Shareholder Fees.’’ See Item 3 of Form N– 1A; see also supra Table 5. 566 Proposed Instruction 3 to Item 3 of Form N– 1A; see also supra Table 5. E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.002</GPH> BILLING CODE 8011–01–C 70787 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70788 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules The fee summary is designed to be a focused presentation of transaction costs and, consequently, we are proposing to instruct funds that any transaction fee equaling $0 should not be included in the summary fee table (and the applicable line item that would appear in Form N–1A should be omitted from the summary fee table).567 We understand that certain of these fees are not common in practice (e.g., account fees, and increasingly, exit charges). Therefore, even though there are a number of line items that would appear under ‘‘Transaction Fees’’ in Form N– 1A, we do not expect that most funds would have to include all of these line items in their fee disclosure. As a result, we do not anticipate that the proposed amendments to the form would detract from the focused nature of the fee summary. While we are proposing to consolidate the line items that currently appear under ‘‘Annual Fund Operating Expenses,’’ as we discuss in more detail below, we are not similarly proposing to consolidate the corresponding line items that would appear under ‘‘Transaction Fees.’’ The imposition of transaction fees depends on whether an investor buys or sells shares of a fund, and will therefore be different for each investor. Accordingly, consolidation of transaction fees would be confusing to an investor who would be unable to determine whether and when he or she would bear those fees. For each of the line items under the ‘‘Transaction Fees’’ heading, and the ‘‘Maximum Account Fee,’’ a fund would have to indicate the maximum amount that the fee could be (and state that the fee is ‘‘up to’’ the stated amount), if the fund offers sales charge discounts.568 This presentation would indicate to the reader that the actual sales charge may in fact be lower than the maximum fee disclosed in the fee summary. The proposed fee summary would change the current fee table heading ‘‘Annual Fund Operating Expenses’’ to ‘‘Ongoing Annual Fees.’’ This new heading is designed to convey, in plain English, that there are charges that an investor will have to pay each year. The ‘‘Ongoing Annual Fees’’ entry in the proposed summary fee table would consist of one line item showing the total amount that the investor would pay annually. Rather than an itemized list of Ongoing Annual Fees, this proposed fee presentation would show a total, ‘‘bottom line’’ figure that 567 Proposed Instruction 2 to Item 3 of Form N– 1A. However, a multiclass fund that shows a charge and line item because one class imposes a charge may show 0 as the charge for other classes. Id. 568 Proposed Instruction 2 to Item 3 of Form N– 1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 investors can expect to pay. This is a figure that investors could compare across funds in evaluating the ongoing annual fees associated with each fund. The proposed summary fee table would, like the current prospectus fee presentation, address expense reimbursements and fee waiver arrangements. If the fund’s full fee table in the statutory prospectus were to show an expense reimbursement or fee waiver arrangement (a ‘‘discount’’), our proposal would permit an additional line item in the proposed summary fee table: ‘‘Ongoing Annual Fees with Temporary Discount.’’ 569 This line item would reflect the amount of ongoing annual fees after any discount, which would more precisely reflect the fees that the investor will pay while the discount is in place.570 This line item would appear after the ‘‘Ongoing Annual Fees’’ line item that does not reflect the discount, because we believe that the ‘‘gross’’ figure should be the most prominent, given that expense reimbursement and fee waivers are generally only temporary. Further, we are proposing that this optional Ongoing Annual Fees line item be accompanied by a footnote stating the expected termination date of the discount.571 We propose to require that each line item in the summary fee table show the cost investors could pay in dollars assuming a $10,000 investment, as well as the same charge shown as a percentage of assets.572 Research suggests that investors may better appreciate the impact of costs when expressed as a dollar amount rather than a percentage of assets.573 While this 569 Proposed Instruction 4(b) to Item 3 of Form N– 1A. 570 See current Instruction 3(e) to Item 3 of Form N–1A. Based on XBRL data filed on the EDGAR system as of June 1, 2019, of the more than 32,000 fund classes, approximately 53% described a fee waiver in the prospectus fee table. The proposed line item would be permitted, not required, just as the current provision on expense reimbursements or fee waivers is also permissive. Id. We believe that, as a practical matter, a fund would likely choose to disclose the ongoing annual fees with the expense reimbursements or fee waivers because that would be a lower amount than ongoing annual fees without those reductions. 571 Instruction 4(b) to Item 3 of proposed Form N– 1A; see also supra Table 5. 572 Proposed Instruction 2, proposed Instruction 3, and proposed Instruction 4(c) to Item 3 of Form N–1A. 573 Cf. Numerical Information Format and Investment Decisions: Implications for the Disposition Effect and the Status Quo Bias, Rubaltelli et al., The Journal of Behavioral Finance, 2005, Vol. 6, No. 1, 19–26); see also Government Accountability Office, Statement of Richard J. Hillman, Director, Financial Markets and Community Investment before the U.S. Senate Committee on Governmental Affairs Subcommittee on Financial Management, the Budget and International Security, ‘‘Mutual Funds: Additional PO 00000 Frm 00074 Fmt 4701 Sfmt 4702 proposed addition would add some marginal length to the fee summary, we do not believe the length is inappropriate when balanced against the need to communicate the impact of costs to investors effectively. Also, we believe that the proposed tabular presentation of the fee summary is an efficient way to present fee information, including the new dollar-based presentation, in a manner that investors can easily read and understand.574 Under the proposal, the ‘‘Ongoing Annual Fee’’ amount generally would be the same figure that funds currently report as ‘‘Total Annual Fund Operating Expenses’’ (i.e., the fund’s expense ratio).575 In addition to direct and fixed fees, such as management fees, this expense ratio figure currently includes certain performance expenses that are not operating costs reflected in a fund’s statement of operations but rather are indirect expenses paid by the fund to generate performance and excludes other such expenses. Performance expenses currently reflected in a fund’s expense ratio include AFFE, interest expense, and dividends paid on short sales (although AFFE is not included in the fund’s statement of operations).576 However, the expense ratio does not currently reflect all or even most of the material performance expenses that similarly affect the fund’s performance. These include costs associated with the fund’s securities lending activities and transaction costs. For example, funds that lend securities generate income from securities lending that is included in the fund’s performance. To generate that income, the fund incurs certain expenses, such as fees to the securities lending agent. Further, it is our understanding that the income generated is used to offset the fund’s Disclosures Could Increase Transparency of Fees and Other Practices,’’ (Jan. 27, 2004), available at https://www.gao.gov/assets/120/110547.pdf; Justine S. Hastings & Lydia Tejeda-Ashton, Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico, NBER Working Paper 14538 (Dec. 2008), available at https://www.nber.org/papers/w14538 (finding that providing fee disclosures to Mexican investors in peso rather than percentage terms caused financially inexperienced investors to focus on fees). 574 See Variable Contract Summary Prospectus Adopting Release, supra footnote 27 (requiring a tabular presentation of fees in variable contract summary prospectuses). 575 The ‘‘Ongoing Annual Fee’’ amount may differ from the currently reported ‘‘Total Annual Fund Operating Expenses’’ figure to the extent that a fund discloses AFFE in a footnote instead of reflecting that amount in the ‘‘Ongoing Annual Fee’’ figure under the proposed amendments. See infra Section II.H.1.g. 576 See infra Section II.H.1.g (proposing certain amendments to the scope of AFFE disclosure). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 operating costs.577 Transaction costs are the costs a fund incurs when it buys or sells portfolio investments. These costs include commissions, spread costs, market impact costs, and opportunity costs.578 Although a fund’s fee table does not reflect securities lending costs and fund transaction costs, a fund’s prospectus and SAI include, in locations other than the fee table, other information about these costs. For example, a fund’s total return in the prospectus performance presentation reflects these costs.579 However, an investor reviewing a fund’s total return cannot identify whether the fund’s securities lending or trading activity had a positive or negative effect on the fund’s returns, or the overall costs associated with these activities. In fact, an investor would likewise not be able to ascertain the effect of the performance expenses currently included on the fund’s return. However, beyond inclusion in the total return, funds also provide certain information about securities lending income, expenses, and services in their SAIs.580 577 Funds typically engage a securities lending agent to administer their securities lending programs and compensate these agents with a share of the revenue generated by the lending program. Some funds use securities lending agents that are affiliated with the fund’s investment adviser and so this additional revenue may be used to defray some of the fund’s direct costs, such as advisory fees. The portion of securities lending revenue paid to the securities lending agent is not reflected in the fund’s fee table. Thus, using this revenue to reduce other costs of investing in the fund (where that reduction is reflected in the fee table) may make the fund appear to be less expensive. 578 Commissions generally refer to charges that a broker collects to act as agent for a customer when executing and clearing trades. Spread costs are incurred indirectly when a fund buys a security from a dealer at the ‘‘asked’’ price (which is above current value) or sells a security to a dealer at the ‘‘bid’’ price (which is below current value). Market impact costs are incurred when the price of a security changes as a result of the effort to purchase or sell the security. Opportunity cost is the cost of missed trades. For more information about these categories of costs, see Concept Release: Request for Comments on Measures to Improve Disclosure of Mutual Fund Transaction Costs, Investment Company Act Release No. 26313 (Dec. 18, 2003) [68 FR 74820 (Dec. 24, 2003)] (‘‘Transaction Costs Concept Release’’), at Section II. 579 Transaction costs are included in a fund’s total return because, under generally accepted accounting principles, they are either included as part of the cost basis of securities purchased or subtracted from the net proceeds of securities sold and ultimately are reflected as changes in the realized and unrealized gain or loss on portfolio securities in the fund’s financial statements. 580 See Item 19(i)(1) of Form N–1A. Among other things, this includes the dollar amount of fees or compensation paid by the fund for securities lending activities and related services, including fees paid to the securities lending agent from a revenue split, other fees that are not included in the revenue split (such as fees paid for cash collateral management services, administrative fees, and indemnification fees), and rebates paid to the borrower. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Funds also report information about their securities lending activities on Form N–CEN.581 On transaction costs, prospectuses provide a fund’s portfolio turnover rate, and SAIs include the amount of brokerage commissions the fund paid.582 This information can help investors understand how fund transaction costs may vary among different funds.583 While we require funds to provide some information related to their securities lending costs and transaction costs, we understand that there could be benefits in providing investors a more complete or focused disclosure in one location regarding performance expenses. Among other benefits, this could include more transparent cost information that would allow investors to better compare funds. At the same time, there are complexities associated with requiring funds to disclose this information in their prospectus fee tables and in the proposed summary fee table. For instance, what is the best way to include the information in a manner that reflects the corresponding income (or loss) to the fund from the particular activity? Moreover, there are some challenges associated with measuring certain performance expenses, such as transaction costs, including the potential for inconsistent or inaccurate measurements that may confuse or mislead investors.584 While we are not, at this time, proposing to modify fund prospectus disclosure to address these performance expenses, we are soliciting input on whether and how to include these performance expenses in the 581 See Item C.6 of Form N–CEN (requiring a fund to report certain information about its securities lending activity, including: (1) Whether it is authorized to engage in securities lending transactions; (2) whether it lent its securities during the relevant period; (3) certain information about its securities lending agent(s); (4) certain information about any cash collateral manager (who is not also the fund’s securities lending agent); (5) types of payments made to securities lending agents or cash collateral managers; (6) the monthly average of the value of the portfolio securities on loan during the relevant period; and (7) net income from securities lending activity). 582 See Item 3 of current Form N–1A; Items 3 and 8A of proposed Form N–1A; and Item 21(a) of Form N–1A. Money market funds are not required to provide annual portfolio turnover rates because many of their investments would already be excluded from the portfolio turnover rate calculation (which excludes securities whose maturities or expiration dates at the time of acquisition were one year or less). See, e.g., Instruction 4(d) to Item 13 of Form N–1A (providing calculation instructions for portfolio turnover rates); see also MDFP Adopting Release, supra footnote 180, at n.3. 583 See, e.g., Transaction Costs Concept Release, supra footnote 578, at paragraph accompanying n.4. 584 See supra footnote 157 (discussing commenters’ views on the challenges associated with transaction cost disclosure in certain jurisdictions). PO 00000 Frm 00075 Fmt 4701 Sfmt 4702 70789 fund’s prospectus. We note, in particular, our modifications of the shareholder report expense presentation that would take a new approach to the presentation of fees and expenses designed to reflect both the direct, fixed fees as well as the material performance expenses by requiring disclosure of the fund’s net performance together with qualitative disclosure on the material expenses to performance.585 We seek comment on the proposed summary fee table and on the scope of costs and performance expenses it would reflect, and specifically on the following issues: 214. Is it helpful to investors to require simplified, ‘‘bottom line’’ disclosure of the ongoing annual fees they will pay with their fund investment in the fee summary, and more-detailed disclosure about the components of the ongoing annual fees in the full fee table? Is it investorfriendly to provide for one total figure for ongoing annual fees and not permit a fund to include subcategories of such expenses in the fee summary? Should we also consolidate any or all of the transaction fees reported in the proposed fee summary? If so, how should Form N–1A instruct funds to consolidate this information? 215. Is it appropriate, as proposed, that the summary fee table show the fund’s transaction fees, maximum account fee, and ongoing annual fees? Are there any other general types of fees and charges that the summary fee table should include? If so, which ones? 216. Is it appropriate not to require in the proposed summary or full fee table or example disclosure of brokerage commissions and other fees to financial intermediaries? Do commenters agree with our approach not to require such fees because financial intermediaries that distribute the fund typically determine such fees, and the amount may vary among financial intermediaries and distribution channels? Are there reasons such fees should be disclosed? 217. Some investors commenting on the Fund Investor Experience RFC expressed interest in a single, ‘‘all-in’’ presentation of investment costs (or in personalized fee disclosure more generally) that would reflect both fund and intermediary costs.586 Other 585 See supra Section II.B.2.b. e.g., Waranowski Comment Letter: Wilhelm Comment Letter; Fowler Comment Letter; Balke Comment Letter; Hague Comment Letter; Woods Comment Letter; Lee Comment Letter. Some commenters did not want to receive more personalized information, including personalized fee information, with a few of these commenters 586 See, E:\FR\FM\05NOP2.SGM Continued 05NOP2 70790 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 commenters indicated that preparing combined or personalized expense information could present some challenges, including the potential need for coordination and informationsharing between funds and intermediaries.587 Should funds provide more comprehensive fee and expense presentations that account for both fund and intermediary costs? If so, how? For example, are there ways we could better integrate information an investor receives about fund costs in fund prospectuses and information an investor receives about intermediary costs in a Form CRS relationship summary? 588 If so, how? Should any integrated presentation of costs provide illustrative, standardized information about fund and intermediary costs, or should it provide investor-specific information? As another example, if a fund is only or primarily offered through one or more known wrap fee programs, should fund disclosure materials recognize the wrap fee program costs? 589 Would this approach present challenges to funds or intermediaries? If so, what are those challenges, and how could we address them? If we modify fee and expense presentations to account for both fund and intermediary costs, should we also require performance information that recognizes both sets of costs? Would the proposed presentation of fees in terms of dollar amounts, in addition to the currently required percentage amounts, be useful to investors? Should an investment amount other than $10,000 be used? If so, what would be the appropriate amount? 218. Is the narrative statement that we are proposing to precede the fee summary useful and appropriate? Is it helpful to note that fees reduce the value of an investment? Is it helpful to include the statement, as proposed, that investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the summary fee table or the expense example? What changes, if any, expressing particular concern about sharing personal information. See, e.g., Grano Comment Letter; Wilhelm Comment Letter. 587 See ICI Comment Letter I. 588 See, e.g., Item 3.A of Form CRS (requiring a relationship summary to include summary information about principal fees and costs, a description of other fees and costs, and specific references to more detailed information about fees and costs); Form CRS Adopting Release, supra footnote 27. 589 A wrap fee program generally involves an investment account where an investor is charged a single, bundled, or ‘‘wrap’’ fee for investment advice, brokerage services, administrative expenses, and other fees and expenses. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 should the Commission make to the proposed narrative statement? 219. As proposed, the ‘‘Transaction Fees’’ heading in the summary fee table would include specified line items: Purchase Charge, Exit Charge, Maximum Purchase Charge Imposed on Reinvested Dividends, Early Exit Fee, and Exchange Fee. Should the ‘‘Transaction Fees’’ heading include all of these line items, or should the Commission limit this fee presentation in any way (e.g., by only permitting a fund to include the purchase charge and exit fee in the summary fee table)? Would the proposed inclusion of all of these line items detract from a focused presentation of transaction costs? Do commenters agree with our expectation that most funds would not include all of these line items, given the proposed instruction that any transaction fee equaling $0 should not be included? 220. Is it appropriate to move the current ‘‘Maximum Account Fee’’ line item to its own section in the summary fee table in light of the proposed change of the headings in the fee table from ‘‘Shareholder Fees’’ to ‘‘Transaction Fees’’? 221. Is it appropriate to require a fund to indicate the highest amount that the fee could be (and to state in its disclosure, as proposed, that a particular fee is ‘‘up to’’ that amount if the fund offers fee discounts)? Is this an effective means of indicating that charges may be lower than the maximum fee that the fund discloses in the summary? 222. Is the proposed optional ‘‘Ongoing Annual Fees with Temporary Discount’’ line item appropriate? If so, is it also appropriate to require a fund to disclose the gross figure before any such waivers, as proposed? Should these two line items appear adjacent to one another in the summary fee table, as proposed? 223. Should we modify the types of fund costs that funds currently must include in their expense ratios, which funds would disclose in the proposed summary fee table and the full fee table? For example, should the reported expense ratio include any performance expenses—such as securities lending costs or fund transaction costs—that it does not currently include? If so, how should funds measure each newly disclosed category of performance expenses? For example, should securities lending costs be disclosed as a percentage of net assets in the prospectus, based on current disclosure of these costs in the SAI? Alternatively, should performance expenses that are currently included in the expense ratio, such as interest expense or dividends paid on short sales, not be included as PO 00000 Frm 00076 Fmt 4701 Sfmt 4702 a component of the expense ratio? 590 Should the presentation distinguish between direct fees and expenses (i.e., operating expenses) versus performance expenses associated with portfolio management activities that detract from fund performance (such as interest expenses, dividends paid on short sales, AFFE, securities lending costs, and fund transaction costs) and, if so, how? 224. Should a fund’s prospectus include additional disclosure about performance expenses, in lieu of including these expenses in the fund’s expense ratio? If so, should the disclosure be quantitative or qualitative? If quantitative, how should funds measure each newly disclosed category of fund cost? 591 If qualitative, how should funds concisely describe the fee or expense? Where should the additional information appear? For instance, should funds disclose these costs in a footnote accompanying the fee table and fee summary? As one example, should a fund that qualitatively or quantitatively discloses these costs, if material to the fund, in a footnote to its shareholder report expense presentation under the proposal also qualitatively or quantitatively disclose these costs in a footnote to its prospectus fee table and fee summary? 592 Why or why not? Alternatively, should funds disclose these costs in connection with the prospectus’s presentation of fund performance under Item 4 of Form N– 1A given they can detract from performance? If so, should they, for example, be required to disclose the top three—or some other number—types of costs that detracted from fund performance? 225. If funds were to provide additional disclosure of securities 590 See, e.g., ICI Comment Letter I; Comment Letter of Teachers Insurance and Annuity Association of America (Oct. 31, 2018). These two commenters suggested that funds should no longer be required to disclose interest expense and dividends paid on short sales in prospectus fee tables to: (1) Enhance consistency with the approach to other investing costs, such as transaction costs; (2) provide a more stable measure of ongoing operating expenses; and (3) address concerns that fee table disclosure may focus investors on these costs without explaining that the strategy leading to these costs may also lead to higher net returns. These commenters suggested that disclosure about these costs should appear in fund financial statements and the SAI. AFFE is another type of performance expense currently included in the expense ratio. We discuss and request comment on AFFE disclosure more specifically below. See infra Section II.H.1.g. 591 Unlike a fund’s direct costs, many performance expenses are not reported in a fund’s financial statements and therefore are not included in the fund’s expense ratio. 592 See supra paragraph accompanying footnote 164 (discussing the proposed shareholder report requirement). E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules lending costs, should they also be permitted and/or required to explain that these costs may improve a fund’s performance or, in certain cases, permit a fund to reduce its fees? If so, how could this information best be presented to help investors understand these potential considerations without adding unnecessary length or complexity to the prospectus? 226. If funds were to provide additional disclosure about securities lending costs or fund transaction costs in prospectuses, would this disclosure complement existing disclosure requirements in the prospectus, SAI, and Form N–CEN? Or should we remove or modify those existing disclosure requirements? 227. How would modifying prospectus disclosure to reflect securities lending costs, fund transaction costs, or other performance expenses of a fund’s portfolio management activities affect investors? What disclosure modifications would help investors better understand these costs, and conversely, are there any disclosure modifications that would contribute to investor confusion or potential misinterpretation? For example, how would reflecting additional costs in the proposed summary fee table or other quantitative presentation affect investment decisions? If we were to modify the fee presentation in a way that might change a fund’s fees, how should we inform investors of the changed requirements or transition to the new requirements in a way that minimizes investor confusion? For example, if a fund’s fee under current requirements is 0.50%, but under any new requirements that same fund, operating in the same manner, might have a fee of 0.75%. How can we help investors understand this change? 228. Do investors need more information about how a fund’s adviser and its affiliates may receive compensation from a fund, either to better understand fund costs or to understand potential conflicts of interest? For example, some funds use securities lending agents that are affiliated with the fund’s investment adviser, which can result in the adviser and its affiliates receiving compensation from a fund in a way that the prospectus fee table does not reflect.593 As another example, some funds use affiliated broker-dealers when transacting in portfolio investments, which can result in the costs associated with these transactions accruing to affiliated persons of the fund. However, affiliated 593 See supra footnote 577. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 parties also could be less expensive or provide better services than those provided by unaffiliated parties. If investors would benefit from additional information about compensation that the fund’s adviser and its affiliates may receive from the fund, where should this disclosure appear? Should it be quantitative or qualitative? For instance, should funds disclose any revenue paid to the fund’s adviser or its affiliates that the fee table does not reflect (e.g., outside of the management fee), as a percent of fund assets or a percent of the fund’s total expenses? If so, where should this disclosure appear (e.g., in the prospectus fee table, a discussion accompanying the table, or elsewhere)? Should a fund be permitted or required to disclose why it selected an affiliated service provider instead of an unaffiliated third party? 229. Do investors need additional information to help them compare the fees and expenses of different classes of a fund, or other aspects of a fund investment that differ between classes (e.g., fund performance)? For instance, do investors need more information to help them determine whether they are eligible to invest in a particular class or to compare fees, performance, or other aspects of different classes? If so, how should funds provide this information? How could we help investors better understand class eligibility, particularly when a prospectus (or shareholder report) could only cover a subset of a fund’s classes? 230. Are there ways we could reduce complexities associated with funds offering multiple share classes with different fee structures? For example, should funds more clearly present their classes based on investor eligibility? What are the challenges of such an approach? 231. Are there ways we could facilitate an investor’s ability to calculate costs and compare different funds? For instance, are there steps we could take to improve investors’ familiarity with, or access to, interactive calculators or fund comparison tools? 594 d. Proposed Simplified Example In addition, we propose to simplify the example in the fee summary. We are proposing to modify the current narrative that precedes the example slightly, to enhance clarity and brevity.595 We are also proposing to 594 For example, FINRA’s Fund Analyzer tool can help investors compare the costs of different fund investments. This tool is available at https:// tools.finra.org/fund_analyzer/. 595 The current narrative states, ‘‘This Example is intended to help you compare the cost of investing PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 70791 decrease the number of time periods that the expense example must show. While the current example shows expenses over 1, 3, 5, and 10-year periods, the proposed example would show costs over 1 year and 10 years (or 1 year and 3 years in the case of a new fund).596 We believe that having fewer time periods would help to simplify the example. At the same time, we believe that requiring a fund to present expenses over 1 and 10 years would provide meaningful disclosure regarding the effect of fees in both the short-term and long-term.597 We understand that investors typically hold mutual fund shares for a relatively long term. For example, one commenter estimated that two-thirds of fund investors have owned their funds for at least 10 years, and 80% of fund investors have held their fund investments for 5 years or more.598 The 10-year time frame is addressed to the long-term nature of many fund investments. Investors wishing information for the interim 3 and 5 year periods could find that information in the full fee table. We considered proposing to incorporate elements of the proposed shareholder report expense presentation into the prospectus in lieu of simplifying the current fee example. As discussed above, the proposed shareholder report expense presentation would disclose costs directly deducted from the fund’s assets alongside the fund’s return, which in turn would reflect direct costs as well as any performance expenses associated with the fund’s portfolio management in the Fund with the cost of investing in other mutual funds.’’ The proposed narrative states, more simply, ‘‘This example may help you understand the costs of investing in the Fund.’’ See supra Table 5. The assumptions in the proposed example relating to the amount invested in the fund, investment return, and the fund’s operating expenses are substantively identical to those in the current form, with slight changes designed to state them more simply. In addition, the current form shows, first, expenses if the investor redeems shares at the end of the period, and, second, expenses if the investor does not redeem. The proposal reverses this order because we believe that most investors treat these as long-term investments and so are less likely to redeem their shares. 596 Instruction 5(a) to Item 3 of proposed Form N– 1A; see also Item 3 of Form N–1A and Item 8A of proposed Form N–1A; supra Table 5. 597 We are not proposing similar changes for the performance presentation (average annual returns), see Items 4(b)(2) and 27(b)(7)(ii) of Form N–1A; Item 27A(d)(2) of proposed Form N–1A) which, in addition, presents information over an interim period (five years), because unlike the expense example where the fees reflected are consistent over the period shown, performance information changes from year-to-year, and we believe it is important to illustrate this variability of returns over an interim period. 598 See Broadridge Comment Letter II. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70792 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules activities.599 While the shareholder report expense presentation would not itemize these performance expenses, funds would be required to discuss them qualitatively if material to the fund, in a footnote to the expense presentation.600 In addition to helping investors understand that a fund has performance expenses that are in addition to a fund’s direct costs, the proposed shareholder report presentation has other benefits. For example, the shareholder report presents a fund’s fees alongside its performance to help shareholders understand how costs and performance each affect the value of his or her investment. However, unlike the shareholder report presentation, the prospectus fee table, fee summary, and example reflect hypothetical future expenses (i.e., forward-looking expenses). The prospectus fee presentation—while also based on a fund’s financial statements— reflects sales loads, the expenses associated with the fund’s investments in other funds, material changes to fund expenses, estimated expenses for new funds, and only certain fee waiver arrangements. These additional fee elements make it difficult to import a presentation similar to the backwardlooking shareholder report expense presentation into the prospectus. Also, a shareholder report-type approach based on backward-looking information would be difficult to implement for new funds with short or no performance history. Moreover, because the proposed shareholder report presentation shows expenses for the past fiscal year only, it would not illustrate the long-term effect of fund fees for investors. Given these considerations, we are not proposing to incorporate elements of the proposed shareholder report presentation into the prospectus. We seek comment on the proposed simplified example, and specifically on the following issues: 232. Is the proposed simplified example presentation appropriate, and would it be useful to investors? Would restricting the example to including expense information for 1- and 10-year periods accomplish the goal of streamlining the fee summary, while providing meaningful disclosure? Should the simplified example include different time periods, and if so, which ones? Is the proposal to require new funds to present expense information for 1- and 3-year periods appropriate? 599 See supra Section II.B.2.b. 600 See supra footnote 164 and accompanying text. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 233. Instead of providing an expense example in the prospectus that shows estimated costs over set intervals of time based on an assumed 5% annual return, should funds base their expense example on the fund’s actual historic performance? For example, should the expense example be based on the fund’s gross performance over the past 1, 5 and 10 years? If so, how should funds that do not have a long-enough performance history be treated? Would investors benefit from a presentation based on actual rather than hypothetical investment returns? If not, why not? 234. If we were to require using an assumed annual return, as is the case today, would the assumed 5% annual return continue to be appropriate? If not, what is a more appropriate assumption and why? Should the assumption be different for different fund types? For example, should a money market fund have a lower assumed investment return than an equity fund? What are the benefits and drawbacks of using a higher or lower assumed annual return? 235. Instead of the current fee table example and the proposed simplified example in the prospectus, should the examples more closely resemble the expense presentation in the proposed shareholder report? If so, how should the proposed annual report presentation be modified to show the impact of transaction fees (such as purchase and exit charges)? Should the presentation be based only on costs that are directly deducted from fund assets, or all of the fees reflected in the fee table (which may include AFFE)? How should the longer-term impact of fees be reflected? For example, certain fund share classes may be intended for investors with a short time horizon and have higher ongoing annual expenses while other classes may be intended for longer-term investors and have higher up-front charges but over the long run may be less expensive. How should the proposed annual report presentation be modified for use in the prospectus to help distinguish the differences in share classes over both the short and long term? How should new funds that do not have any performance history present an example? 236. Do the different presentations of fund fees and expenses in prospectuses and shareholder reports currently contribute to investor confusion? Would our proposed amendments to fee and expense presentations in both documents increase, reduce, or have minimal effect on the potential for investor confusion? How could we modify the presentations to reduce the potential for investor confusion? For PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 instance, one difference is that the prospectus fee table may reflect the costs associated with investments in other funds (i.e., AFFE) while the annual report does not directly reflect these expenses. For example, a fund of funds may show an expense ratio of 0.20% in its annual report but reflect expenses of 1.00% in its prospectus fee table because the prospectus presentation also reflects the costs associated with investment in other funds. How can we address these differences to minimize the potential for investor confusion? e. Proposed Fee Summary Formatting Requirements We are proposing that a fund generally would not be permitted to include footnotes and other extraneous disclosure in the fee summary. We believe this is consistent with the goal of the proposed simplified fee table, which is to streamline the presentation of fees and to provide an easier-tounderstand presentation with fewer data points and a clearer picture of the total costs of investing in the fund. We are proposing an exception if omitting a footnote would cause the disclosure to be materially misleading such that the fees borne by investors would be materially higher than presented in the fee summary.601 For example, if a fund charges a ‘‘fulcrum fee,’’ by which the advisory fee varies depending on the performance of the fund, the fee in the current year could be greater than the fee reflected in the fee summary. We seek comment on the proposed fee summary formatting requirements, and specifically on the following issues: 237. Is it appropriate to limit the use of footnotes in the fee summary, as proposed? Are there circumstances where footnotes would be useful to investors that the proposed instruction would not permit? f. New, Simplified Fee Terminology In addition to proposing to create the fee summary, we are also proposing changes in some terminology that funds would use to describe fees in the prospectus. These changes are designed to enhance the presentation of fees and investors’ understanding of these fees. The changes we are proposing in the terminology used in the fee table would flow through to the fee summary, as applicable. Plain language plays an important role in investors’ ability to use and understand fund disclosures.602 The terminology changes we propose 601 See proposed Instruction 1(c) to Item 3 of Form N–1A. 602 See Fund Investor Experience RFC, supra footnote 8, at Section II.C.1. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules are designed to be more consistent with everyday language and to effectively communicate the nature of the fees the fund charges. Unless otherwise discussed in this release, although we are proposing to substitute some terms that would appear in Form N–1A and funds’ prospectuses, we intend the meaning of these terms to remain unchanged. Below is a chart showing 70793 captions and terms that the current fee table references, along with their replacements.603 TABLE 6 Current caption or term, and Form N–1A location Proposed caption or term, and Form N–1A location Shareholder Fees (Item 3) ........................................................................ Annual Fund Operating Expenses (Item 3) .............................................. Maximum Sales Charge (Load) Imposed on Purchases (Item 3) ............ Maximum Deferred Sales Charge (Load) (Item 3) ................................... Redemption Fee (Item 3) .......................................................................... Total Annual Fund Operating Expenses (Item 3) ..................................... Distribution [and/or Service] (12b–1) Fees (Item 3) ................................. Fee Waiver [and/or Expense Reimbursement] (Item 3) ........................... Total Annual Fund Operating Expenses After Fee Waiver [and/or Expense Reimbursement] (Item 3). Transaction Fees (Items 3 and 8A). Ongoing Annual Fees (Items 3 and 8A). Purchase Charge (Items 3 and 8A). Exit Charge (Items 3 and 8A). Early Exit Fee (Items 3 and 8A). Ongoing Annual Fees (Items 3 and 8A). Selling Fees (Item 8A). Temporary Discount (Items 3 and 8A). [Total] Ongoing Annual Fees with Temporary Discount (Items 3 and 8A). We seek comment on the proposed fee terminology, and specifically on the following issues: 238. Are the proposed changes to the current terminology helpful? Are there other terms currently used in the form that could be simplified? Would our proposed changes in terminology contribute to more understandable disclosure? g. Acquired Fund Fees and Expenses khammond on DSKJM1Z7X2PROD with PROPOSALS2 We are also proposing to 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, the amendments we are proposing would permit funds that invest 10% or less of their 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. Funds that invest more than 10% of their total assets in acquired funds would continue to present AFFE as a line item in the prospectus fee table and include AFFE in the bottom-line expense figure, as they do today. 603 This chart shows proposed captions or terms for the fee tables in Items 3 and 8A of proposed Form N–1A. These changes in terminology flow through to other sections of the proposed form. See Items 4, 12, 13, 17, 23, 26, 27A. 604 The AFFE amount is composed of the following types of fees and expenses attributable to the fund’s investment in acquired funds over the relevant period: Each acquired fund’s total annual operating expense ratio, any transaction fees the fund paid to acquire or dispose of shares in any acquired fund (e.g., sales loads or redemption fees), and incentive allocations where the fund allocates capital to the adviser of the acquired fund (or its affiliate) based on a percentage of the fund’s income, capital gains, and/or appreciation in the acquired fund. Form N–1A provides calculation instructions for determining the AFFE amount. See Instruction 3(f) to Item 3 of current Form N–1A. Currently, any fund that invests in acquired funds—which include investments in other investment companies and in private funds that would be investment companies but for sections 3(c)(1) or 3(c)(7) of the Investment Company Act—must disclose the amount of fees and expenses the fund indirectly incurs from these investments in the fund’s fee table.604 This disclosure generally appears as a separate AFFE line item in the fee table, although a fund may reflect AFFE in the ‘‘other expenses’’ fee table line item (without separately identifying the AFFE amount) if AFFE does not exceed 0.01 percent, or one basis point, of the fund’s average net assets.605 As a result, regardless of the size of a fund’s investments in acquired funds, AFFE currently is a component of the line items that, summed together, produce the fund’s bottom-line annual fund operating expenses (which we propose to rename to ‘‘total ongoing annual fees’’) in its fee table. AFFE disclosure is designed to provide investors with a better understanding of the costs of investing in a fund that invests in other funds, which have their own expenses that may be as high as— 605 See id. Fund of Funds Investments, Investment Company Act Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)], at text accompanying n.67. 607 See supra Section II.H.1.c. 608 See Fund of Funds Arrangements, Investment Company Act Release No. 33329 (Dec. 19, 2018) [84 FR 1286 (Feb. 1, 2019)] (‘‘Fund of Funds Proposing Release’’), at nn.176–179 and accompanying text. Comments on the Fund of Funds Proposing Release cited in this release are available at https:// www.sec.gov/comments/s7-27-18/s72718.htm. 609 See, e.g., Comment Letter of Investment Company Institute (Apr. 30, 2019) on File No. S7– 27–18; Comment Letter of PIMCO (May 1, 2019) on File No. S7–27–18; Comment Letter of Invesco Ltd. (Apr. 30, 2019) on File No. S7–27–18 (‘‘Invesco Fund of Funds Comment Letter’’); Comment Letter 606 See or higher than—the acquiring fund’s expenses.606 As recognized above, AFFE is a performance expense that is not an operating cost reflected in a fund’s statement of operations. Instead, it is an indirect expense paid by the fund to generate performance.607 Some commenters on the Fund Investor Experience RFC and on the Commission’s 2018 proposal related to fund of funds arrangements have expressed certain concerns about current AFFE disclosure requirements.608 For example, several commenters have suggested that fee table disclosure should focus on a fund’s operating expenses and should not incorporate AFFE.609 Some of these commenters have expressed concern that combining operating expenses with indirect AFFE costs may confuse investors by over-emphasizing AFFE costs and that combining expenses in this way does not align with a fund’s financial statements.610 Several commenters have also expressed particular concern about treating BDCs as acquired fund investments and have recommended excluding BDC investments from AFFE.611 One of these of Chapman and Cutler LLP (May 2, 2019) on File No. S7–27–18 (‘‘Chapman and Cutler Fund of Funds Comment Letter’’); Comment Letter of SIFMA Asset Management Group (May 2, 2019) on File No. S7–27–18. 610 See, e.g., Chapman and Cutler Fund of Funds Comment Letter; Invesco Fund of Funds Comment Letter. 611 See, e.g., Comment Letter of Small Business Investor Alliance (Apr. 30, 2019) on File No. S7– 27–18 (stating that AFFE disclosure distorts an acquiring fund’s expense ratio and has disproportionately harmed BDCs because this disclosure requirement has led to funds no longer investing in BDCs and several index providers dropping BDCs from their indexes); Comment Letter of TPG Specialty Lending, Inc. (May 2, 2019) on File No. S7–27–18; Comment Letter of Coalition for Business Development (May 2, 2019) on File No. Continued VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 70794 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 commenters suggested that the Commission remove AFFE from the prospectus fee table and require funds to disclose AFFE amounts in an accompanying footnote to address these concerns.612 On the other hand, other commenters have expressed general support for AFFE disclosure.613 Two commenters stated that AFFE disclosure provides investors with necessary information to understand the layering of fees in a fund of funds arrangement and to compare similar funds.614 We agree that AFFE information is valuable and can help investors to understand the layered fees and expenses associated with a fund of funds arrangement and to compare similar funds. We believe this information is particularly important when a fund substantially invests in other funds such that the fund is, in essence, managed significantly at the acquired fund level. At the same time, we are sensitive to the concern that requiring every fund to include AFFE in its fee table as a component of the fund’s ongoing annual fees reduces consistency with the fund’s financial statements and may in some cases magnify the presentation of AFFE by requiring fee table disclosure of this discrete category of performance expenses even though the fund does not invest significantly in acquired funds and may incur other indirect costs that are not reflected in the fee table. We understand these factors may contribute to investor confusion. As a result of these considerations, we are proposing to permit funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table that is a component of the fund’s bottom line ongoing annual fees, and instead disclose the amount of the fund’s AFFE in footnotes to the fee table and fee summary. The proposed amendments are designed to maintain the benefits of transparent S7–27–18; Comment Letter of Alternative Credit Council (May 2, 2019) on File No. S7–27–18 (stating that AFFE disclosure overstates the costs of a fund investing in a BDC because it essentially requires double-counting of a BDC’s operating expenses and that because AFFE disclosure has effectively resulted in funds no longer investing in BDCs, it has restricted the market for BDCs, limited institutional ownership of BDCs, and reduced investor choice); ICI Comment Letter I. 612 See Comment Letter of Dechert LLP (May 2, 2019) on File No. S7–27–18. 613 See, e.g., Comment Letter of Anonymous (Dec. 28, 2018) on File No. S7–27–18; Comment Letter of Kauff Laton Miller LLP (May 13, 2019) on File No. S7–27–18 (‘‘Kauff Laton Fund of Funds Comment Letter’’); Comment Letter of Law Office of William Coudert Rand on File No. S7–27–18 (May 14, 2019) (‘‘Rand Fund of Funds Comment Letter’’). 614 See Kauff Laton Fund of Funds Comment Letter; Rand Fund of Funds Comment Letter. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 AFFE disclosure for investors and to provide more consistent disclosure of information related to indirect costs. Where a fund invests in other funds to a limited extent—10% or less of its total assets (consistent with statutory limits on funds’ investments in other funds)— the fees and expenses of the acquired funds may more closely resemble other indirect costs, such as transaction costs, and these types of indirect costs each would not be reflected in the prospectus fee table.615 Specifically, the proposal would provide for more consistent treatment with other indirect costs by removing AFFE as a line item that represents a component of the bottom line ongoing annual fees figure in such a fund’s fee table and fee summary, while retaining information about the amount of AFFE in footnotes accompanying the fee table and fee summary. Conversely, under the proposal, a fund that invests more than 10% of its total assets in acquired funds would continue to 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. We believe it is appropriate to retain the current AFFE disclosure requirement for this category of funds because, when investing in acquired funds is a significant component of a fund’s investment strategy, AFFE can represent a significant part of the fund’s ongoing annual fees and is more akin to an ongoing operating expense the fund would incur if it were managing the acquired fund’s underlying portfolio investments directly. For example, we understand that certain funds, such as certain target date funds, have no, or very low, management fees at the acquiring fund level, with the majority of fees borne at the acquired fund level. For these funds, a fee table with no AFFE line item has the potential to confuse investors in that it could show 0 or close to 0 ongoing annual fees. 615 See section 12(d)(1)(A)(iii) of the Investment Company Act [15 U.S.C. 80a–12(d)(1)(A)(iii) (10% limit on total assets of an acquiring fund that may be invested in all acquired funds); see also supra paragraph accompanying footnote 577 (discussing indirect costs that the prospectus fee table does not reflect). Congress established the 10% limit in part based on a concern about the potential for excessive fees when one fund invests in another. See Fund of Funds Proposing Release, supra footnote 608, at n.14 and accompanying text. While funds may under certain circumstances invest more than 10% of their total assets in acquired funds under other statutory provisions, Commission rules, or exemptive orders, we are proposing to use the 10% figure from section 12(d)(1)(A)(iii) as a threshold for determining when a fund’s investments in acquired funds is a significant component of its investment strategy such that fee table disclosure of AFFE is needed. PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 To determine whether a fund may omit AFFE from its prospectus fee table, the proposal would use a 10% threshold based on the average of the fund’s investments in acquired funds (excluding money market funds) divided by the fund’s total assets.616 To calculate the 10% threshold, a fund would: • Divide the fund’s investments in acquired funds (excluding money market funds) by the fund’s total assets at the end of each of the 12 months that make up the prior fiscal year. This will produce 12 data items (or fewer if the fund has not been in operation for a full fiscal year). • Calculate the average of the 12 data items. If this figure is 10% or less, the fund may omit AFFE from its prospectus fee table and instead include the prescribed footnote. 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. It also would help mitigate any gaming concerns by limiting funds’ ability to reduce their investments in other funds to stay below the 10% threshold only on a given date. The month-end calculation is also aligned with Form N–PORT requirements for month-end portfolio data, which may reduce the need for funds to collect new data under the proposal and facilitate verifications that a fund may disclose AFFE in a footnote.617 We also propose to omit all money market fund investments from the 10% calculation.618 We understand 616 See proposed Instruction 4(f)(ii) to proposed Item 8A of Form N–1A. We are also proposing to remove the language in current Instruction 3(f)(i) to Item 3 of Form N–1A that provides, ‘‘In the event the fees and expenses incurred indirectly by the Fund as a result of investment in shares of one or more Acquired Funds do not exceed 0.01 percent (one basis point) of average net assets of the Fund, the Fund may include these fees and expenses under the subcaption ‘Other Expenses’ in lieu of this disclosure requirement.’’ We believe that our proposal to permit funds that hold limited acquired fund investments to disclose AFFE in a footnote instead of the fee table would result in funds never, or very rarely, qualifying to disclose AFFE under the ‘‘other expenses’’ line item under this instruction. 617 Because a new fund would not have this monthly data, a new fund should base the 10% threshold on assumptions of the percent of acquired funds in which the new fund expects to invest. See proposed Instruction 4(f)(vii) to proposed Item 8A of Form N–1A. Currently, new funds make similar assumptions about expected acquired fund investments for purposes of disclosing the amount of AFFE. See Instruction 3(f)(vi) to Item 3 of current Form N–1A. 618 The Commission previously has determined that money market funds, which did not exist in 1940, do not raise the concerns underlying section 12(d)(1) of the Investment Company Act and has permitted funds to invest an unlimited amount of E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 that funds, including funds that invest significantly in other funds, typically invest in money market funds for cash management purposes rather than to pursue the fund’s investment objective through an investment in another fund.619 While the calculation of the 10% threshold would be based on monthly data, the proposal would not require a fund to assess whether it may disclose AFFE in a footnote to the fee table on a monthly basis or to update its prospectus fee table based solely on such monthly assessments. Instead, a fund would assess whether it is below the 10% threshold when it otherwise must update its prospectus fee table (e.g., at the time of its annual prospectus update) based on information as of its prior fiscal year.620 However, if there is a material change to the amount a fund invests in other funds (such as due to a change to the fund’s strategies) or its AFFE, we would expect the fund to update its prospectus to reflect the change just as it would for any other material changes to its annual ongoing fees.621 We propose to permit, rather than require, a fund with limited acquired fund investments to disclose AFFE in a footnote to limit burdens on funds that would prefer to consistently disclose AFFE in the fee table instead of monitoring the amount of acquired fund investments to determine eligibility for the footnote-based approach. Moreover, we recognize that a fund that tends to maintain acquired fund investments close to the 10% threshold may prefer to disclose AFFE in the fee table each year instead of moving the disclosure back and forth between the footnote and the fee table, which could lead to investor confusion. The footnote that a fund eligible to use the new AFFE presentation would be permitted to use would have to include: (1) The amount of the fund’s AFFE, and (2) a statement that the their uninvested cash in money market funds rather than directly in short-term instruments. See 17 CFR 270.12d1–1 (rule 12d1–1). This proposed instruction does not change the current treatment of money market funds with respect to the calculation of AFFE. 619 Some funds, such as target date funds, may hold money market funds consistent with stated asset allocation objectives (particularly when they reach or pass their stated target date). However, these same funds tend to invest significantly in other funds as well, making them ineligible to move AFFE disclosure to a footnote under the proposal. 620 This is consistent with the calculation of ongoing annual fees which is also based on amounts incurred during the fund’s most recent fiscal year. See proposed Instruction 4(d) to Item 3 of Form N–1A and proposed Instruction 4(d) to proposed Item 8A of Form N–1A. 621 See proposed Instruction 4(d)(ii) to Item 3 of Form N–1A and proposed Instruction 4(d)(ii) to proposed Item 8A of Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 fund’s total ongoing annual fees in the table and fee summary would be higher if these fees and expenses were included.622 We believe this requirement would provide investors with AFFE information they could use to compare funds and would help them understand the relevance of a fund’s AFFE amount. The footnote to the fee table would be tagged using XBRL, so the AFFE amount would continue to be available not only to investors viewing the prospectus and summary prospectus, but also to data aggregators and other market participants.623 In addition to amending the scope of funds that must disclose AFFE in the prospectus fee table and fee summary, we are proposing two technical amendments to AFFE disclosure requirements. First, we propose to correct the manner in which a fund that has been in operation for less than a full year calculates AFFE. Specifically, rather than calculating this figure using the number of days in the fund’s fiscal year, we propose to require such a fund to use the number of days since the date the fund made its first investment.624 We believe this would result in a more accurate calculation for new funds. For example, if a fund made its first investment six months ago and owned other funds for that entire period, the current AFFE calculation would provide a figure that is half of the actual fees attributable to the underlying funds. This is because the numerator would be based on the six-month holding period (e.g., 182 days) and the denominator would be based on the full fiscal year (i.e., 365 or 366 days). Under our proposed revision, both the numerator and denominator would be based on the same period of time. We understand that some new funds already use the number of days since the fund made its first investment in the denominator. Second, we propose to amend an optional footnote instruction. This instruction 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.625 We propose to amend this instruction to permit funds to explain that the total ongoing annual fees in the fee table do not correlate to the expense presentation 622 See proposed Instruction 4(d) to Item 3 and proposed Instruction 4(f)(ii) to proposed Item 8A of Form N–1A. 623 See infra Section II.H.1.i (discussing structured data requirements for the prospectus fee table). 624 See Instruction 4(f)(ii) to proposed Item 8A of Form N–1A. 625 See Instruction 3(f)(vii) to Item 3 of current Form N–1A. PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 70795 in the fund’s shareholder reports.626 We believe the shareholder report would be a better point of comparison under the proposal because shareholders would receive the shareholder report directly, while a fund’s financial highlights would be available online and delivered upon request. We request comment on the proposed amendments to AFFE disclosure, including the following: 239. Should we amend AFFE disclosure requirements to allow funds that invest 10% or less of total assets in acquired funds to omit the AFFE amount from the fee table and instead disclose the amount of a fund’s AFFE in a footnote to the fee summary and fee table, as proposed? If not, why not? Instead of permitting funds with limited acquired fund investments to disclose the amount of a fund’s AFFE in a footnote, should we require all such funds to disclose AFFE in a footnote? Would a mandatory approach reduce, increase, or have no effect on the potential for investor confusion relative to the proposed approach? Should we permit or require all funds, regardless of the magnitude of their acquired fund investments, to include AFFE in a footnote? 240. Should we modify the proposed method for determining whether a fund may disclose AFFE in a footnote instead of in its bottom line ongoing annual fees in the fee table and fee summary? If so, how? Should we modify the 10% threshold? For example, instead of requiring a fund to measure the monthly average of its investments in acquired funds (excluding money market funds) during the prior fiscal year, should we base the 10% calculation on the amount of acquired fund investments as of the end of the fiscal year, at the time of acquiring a security issued by an acquired fund, at the time the fund amends its prospectus, or on some other basis? What are the advantages and disadvantages of these different approaches? Is it appropriate to exclude money market funds from the 10% threshold? If not, why not? Should we reduce or increase the 10% threshold? For example, should the threshold be 5%, 25%, or 50% of total assets? Alternatively, instead of using a 626 See Instruction 4(f)(viii) to proposed Item 8A of Form N–1A. Under the proposal, funds could still refer to the financial highlights in this optional footnote if they chose to do so. See also discussion at supra footnote 430 and accompanying text (stating that Item 13 of Form N– 1A requires a fund to include financial highlights information in its prospectus, and discussing funds’ ability to incorporate this information into the prospectus by reference so long as the fund delivers the shareholder report with the prospectus (i.e., for new shareholders)). E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70796 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules threshold based on the percent of assets invested in acquired funds, should we use a different approach? Please explain. 241. Are there any gaming concerns associated with the proposed approach to AFFE disclosure that may potentially harm investors? For example, are there concerns that funds would hold large investments in acquired funds, but engineer their investments so that they are below the proposed 10% threshold at the time of calculation? If so, how would this harm investors, and how could we modify the proposed approach to mitigate gaming concerns? 242. Should we, as proposed, instruct new funds to base the 10% threshold on assumptions of the percent of acquired funds in which the new fund expects to invest? If not, what would be a more appropriate approach for new funds, and why? 243. Should the proposed footnote to the fee table and fee summary provide different or additional information than the amount of the fund’s AFFE and a statement that the fund’s total ongoing annual fees in the table and fee summary would be higher if these fees and expenses were included? If so, what information should the footnote provide? Should we require funds to provide quantitative or qualitative information about other performance costs, including securities lending costs and transaction costs of the fund buying and selling portfolio investments, in the same or similar footnotes (for example, taking an approach that is the same as or similar to the approach we are proposing for the shareholder report expense presentation)? Why or why not? 244. Should we amend the scope of acquired fund investments that AFFE reflects? Instead of requiring a fund to include fees and expenses from any investment in an investment company or a company that would be an investment company but for section 3(c)(1) or (c)(7) of the Investment Company Act, should we broaden or narrow the scope? For example, we understand that currently funds do not treat investments in the following vehicles that may rely on the exclusion in section 3(c)(7) as acquired fund investments: Structured finance vehicles, collateralized debt obligations, or other entities not traditionally considered pooled investment vehicles. Should some or all of these investment types be treated as acquired fund investments for purposes of AFFE disclosure requirements? Are there 627 See supra footnote 611. VerDate Sep<11>2014 23:41 Nov 04, 2020 other categories of investments that AFFE should or should not include? 245. Instead of permitting funds that invest 10% or less of their total assets in acquired funds to omit the AFFE amount in the fee table and replace it with a footnote, should we permit or require all funds to exclude 10% of their total assets in acquired funds from the AFFE calculation in order to treat all funds consistently? 246. As another alternative, should we permit a fund to disclose AFFE in a footnote to the fee table, instead of in the fee table itself, if the amount of the fund’s AFFE is below a certain threshold? If so, what threshold should we use for determining when a fund’s AFFE is sufficiently small, relative to its other expenses, such that the fund does not need to include AFFE in the fee table? For example, should we permit a fund to disclose AFFE in a footnote to the fee table if the amount of its AFFE was less than a specific percentage of its annual ongoing fees (excluding AFFE) or average net assets? If so, what specific threshold should we use, and why? Would this approach improve the utility of the disclosure for investors? How would this approach affect the consistency of the fee table disclosure, relative to the proposed approach? For example, would it result in AFFE amounts moving in and out of the fund’s ongoing annual fee figure at a greater or lesser frequency than the proposal? 247. Commenters have expressed particular concern about AFFE disclosure’s impact on BDC investments.627 Would our proposed amendments address these concerns? Why or why not? If not, how could we address these concerns? Should we, as some commenters suggested, allow funds to exclude fees and expenses from BDC investments in AFFE disclosure? If so, why should BDC fees and expenses be excluded when other types of acquired funds that may have similar strategies, nature of expenses, and portfolio holdings are included? 248. Should we amend AFFE disclosure requirements in Forms N–2, N–3, N–4, and N–6 for other types of investment companies? If so, should we modify these requirements in the same manner as the proposed amendments to Form N–1A, or are there changes we should make to recognize differences between registrant types? 249. As proposed, should we remove the current instruction allowing funds to disclose AFFE under the ‘‘other 628 See Jkt 253001 PO 00000 expenses’’ line item of the fee table if the fund’s AFFE does not exceed 0.01 percent of average net assets? If not, under what circumstances would this instruction be useful? 250. Would the proposed amendments to AFFE disclosure result in any unintended consequences for investors, funds, or other market participants? Please explain. 251. As proposed, should we modify the AFFE calculation for funds that have been in operation for less than a year to use the number of days since the date the fund made its first investment instead of the number of days in the fund’s fiscal year? Is there a different approach we should use to improve the accuracy of the AFFE calculation for these funds? Should we similarly amend the AFFE instructions in Forms N–2 and N–3? 252. As proposed, should we permit funds that disclose AFFE in their fee tables to include a footnote distinguishing the fund’s ongoing annual fees from its shareholder report expense presentation? Consistent with the proposal, should funds continue to be able to refer to differences between the prospectus fee table and financial highlights in this optional footnote as well? If not, why not? h. Portfolio Turnover In addition, we propose to include portfolio turnover disclosure in both the fee summary and the full fee table and to modify the narrative that accompanies the portfolio turnover rate to enhance clarity and provide for more concise disclosure.628 We believe that this disclosure helps investors understand the effect of portfolio turnover, and the resulting transaction costs, on fund expenses and performance. However, we believe the current disclosure is too lengthy, and that this length does not contribute to (and may detract from) investor understanding. Therefore, we propose to reduce the length of the prescribed disclosure without changing its meaning. We believe this change will make the portfolio turnover disclosure more inviting and usable by investors. We are including this disclosure in both the fee summary and the fee table because we continue to believe this information is necessary to understand the full context of fund fees and should therefore accompany any prospectus fee presentation. Below is a chart showing the current disclosure, along with its replacement. proposed Items 3 and 8A of Form N–1A. Frm 00082 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Current disclosure and Form N–1A location Proposed disclosure and Form N–1A location 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 ll%. (Items 3 and 8A). We seek comment on the proposed approach to portfolio turnover disclosure, and specifically on the following issues: 253. Are the proposed changes to the portfolio turnover disclosure helpful? If not, what improvements, if any, would commenters recommend? khammond on DSKJM1Z7X2PROD with PROPOSALS2 70797 i. Structured Data Requirements Finally, we are proposing minor amendments to the Form N–1A General Instructions regarding the requirements for funds to submit interactive data files (formatted XBRL) containing their risk/ return summary information, which includes objectives, fees, principal strategies, principal risks, and performance disclosures.629 Because, as discussed above, we are proposing to move the current full fee table from Item 3 of Form N–1A to new Item 8A of Form N–1A, we are proposing a conforming change requiring funds to tag the data elements in Item 8A instead of in Item 3 (as they currently do). We continue to believe that market participants should have access to the full fee table in structured data format. We are not proposing to require that funds tag the proposed fee summary in addition to the full fee table because the fee summary is derived from the full fee table, so requiring funds to tag both presentations would be redundant. We seek comment on the proposed amendments to the Form N–1A General Instructions regarding funds’ structured data requirements, and specifically on the following issues: 254. Are the proposed amendments to the Form N–1A General Instructions regarding the use of structured data appropriate? Given that the full fee table in the fund’s statutory prospectus would continue to be tagged, and the information included in the summary fee table would be the same as that in the statutory fee table, would it also be 629 See General Instruction C.3.g(i), (iv) to Form N–1A (requiring funds to submit an Interactive Data File for any registration statement or post-effective amendment thereto on Form N–1A that includes or amends information provided in response to Items 2, 3, or 4); see also General Instruction C.3.g to proposed Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 necessary to require a fund to tag the summary fee table? If so, why? 255. Funds must submit their prospectus fee tables in a structured format, but other fee information generally is not in a structured format. Is there any other fee-related information in fund disclosure, including in financial statements, that funds should submit in a structured format (such as in Form N–CEN)? If so, what are these items and what are the benefits of structured disclosure for these items? 2. Improved Prospectus Risk Disclosures We are proposing 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.630 Funds’ prospectus disclosure requirements are designed to help promote informed investment decisions by providing investors with information that is easy to use and readily accessible. The revisions and additions we are proposing are designed to further improve fund prospectus risk disclosure by making this disclosure clearer and more specifically tailored to a fund. Items 4 and 9 of Form N–1A address disclosure of the principal risks of investing in the fund. Both of these items are designed to provide userfriendly, clear and succinct disclosures. Item 4 requires that the fund summarize the principal risks in the summary section of the statutory prospectus (or the summary prospectus, to the extent the fund is relying on rule 498).631 The information that a fund currently provides in response to Item 4 must be based on the information that the fund provides in response to Item 9(c) of Form N–1A, which requires that the registrant disclose the principal risks of the fund. Item 9 was designed to allow 630 See Item 4(b)(1)(i) of Form N–1A; proposed Item 4(b)(1)(i) of Form N–1A; proposed Item 9(c) of Form N–1A. 631 For purposes of the discussion in this section, the term ‘‘summary prospectus’’ refers both to the summary section of the statutory prospectus, as well as a summary prospectus prepared by a fund in reliance on rule 498. See supra footnote 6. PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 for fuller information about fund risks, but still requires that a fund only disclose principal risks. We believe that some funds are providing risk information in their prospectuses and summary prospectuses that is often long, but does not achieve the policy goals of these current disclosure requirements.632 This length may not contribute to (and may sometimes detract from) investors’ understanding of the principal risks of an investment in a particular fund. Because of its length, this disclosure also may not be user-friendly, particularly to retail investors. Commission staff has recently published its observations regarding some of the issues that the staff has observed with respect to funds’ risk disclosures.633 The staff document would be withdrawn if the Commission’s proposal is adopted. The amendments that we are proposing are designed to respond to the issues that we have observed in some funds’ prospectus risk disclosure and to promulgate additional requirements that we believe would be beneficial to funds and investors. We are proposing to add to the General Instructions to Form N–1A a provision that would preclude a fund from disclosing non-principal risks in the prospectus.634 While Items 4 and 9 of Form N–1A currently specify that funds describe ‘‘principal risks,’’ there is not a requirement that risk disclosure appearing in the statutory prospectus be 632 For example, researchers have found that investment company risk disclosure in the summary prospectus has nearly doubled in length since 2010. These researchers state that the principal risk section accounted for 31% of the disclosure in 2010 and steadily climbed to 48% in 2018 (with more than double the average word count from 2010). Anne M. Tucker and Yusan Xia, Investing in the Dark: Investing Company Disclosure Qualities, Content and Compliance, 27– 28 (2019), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3436952. 633 See ADI 2019–08, supra footnote 67. This document encourages funds to order their risks by importance and better tailor their principal risk disclosure. 634 See General Instruction C.3.(a) to proposed Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 70798 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 limited to the fund’s principal risks.635 We believe that including this disclosure in the prospectus may overwhelm other important information. The proposed provision is designed to streamline risk disclosure in the prospectus, focus on essential information, and clarify current form requirements that emphasize the disclosure of ‘‘principal’’ risks. Funds would remain free to disclose nonprincipal risks in the SAI. We are proposing several new requirements for principal risk disclosure that appears in the summary prospectus. First, we are proposing to insert the term ‘‘briefly’’ before the current requirement that the fund summarize the principal risks.636 This proposed change is designed to address the concern that, for some funds, principal risk disclosure in the summary prospectus is overly lengthy. We have observed significant variations in funds’ approaches to principal risk disclosures in the summary. For example, some funds describe just a few principal risks in less than 200 words, while other funds in the same category list 20 or more principal risks using more than 2,500 words. Some of the longest disclosures the staff has seen in the summary section exceed 7,000 words. Indeed, the staff has observed that some funds simply repeat risk information that appears later in the statutory prospectus instead of summarizing it.637 The proposed change is designed to emphasize that principal risk disclosure that appears in the summary prospectus should be concise and succinct, with more detailed risk information to appear later in the statutory prospectus. We are proposing an additional new instruction to the summary prospectus principal risk disclosure requirement stating that funds should describe principal risks in order of importance, with the most significant risks appearing first.638 We believe that this presentation would highlight for 635 See ADI 2019–08, supra footnote 67. The Form N–1A General Instructions currently prohibit the disclosure of non-principal risks in the summary prospectus (or summary section of the statutory prospectus), but no instructions currently prohibit this disclosure from appearing in other parts of the statutory prospectus. See General Instruction C.3.(b) to Form N–1A (‘‘A Fund may include, except in response to Items 2 through 8, information in the prospectus or the SAI that is not otherwise required.’’). 636 See Item 4(b)(1)(i) of proposed Form N–1A. In both the current item and the proposed item, the summary of principal risks is based on information that the fund provides in response to Item (9). 637 See Fund Investor Experience RFC, supra footnote 8, at Section II.D.2. 638 See Instruction 2 to Item 4(b)(1) of proposed Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 investors the risks that they should consider most carefully. We have observed that it is currently common for funds to describe their principal risks in alphabetical order.639 However, we believe that this approach could obscure the importance of key risks, especially when a fund discloses many principal risks. For example, a real estate fund that describes principal risks alphabetically may describe a number of less-relevant risks before describing the key risks of real estate investments. In some extreme cases, this presentation format could result in a fund’s key risks being obscured to such an extent that it could render the disclosure potentially misleading. We understand that there are different ways of determining the relative significance of principal risks. The proposed new instruction therefore specifies that a fund may use any reasonable means of determining the significance of risks. For example, a fund could take an approach to ordering its principal risks in a way that considers the likelihood and possible severity of any loss resulting from each risk. This proposed new instruction would include an explicit statement that a fund should not describe principal risks in alphabetical order. Finally, we are proposing an additional instruction to the summary prospectus principal risk disclosure requirement that instructs a fund to, where appropriate, tailor its risk disclosures to how the fund operates rather than rely on generic, standard risk disclosures.640 We have observed that some prospectuses for funds within a fund group commonly include generic, standardized risk disclosures for every fund in the group. Such standardized disclosure may be appropriate under certain circumstances. For example, ‘‘market risk,’’ could be a principal risk for all funds in a complex. However, there are other circumstances in which generic, across-the-board risk disclosures for all funds in a fund complex may not be appropriate. For example, we do not believe it would be appropriate for a fund to include credit risk disclosure that discusses the heightened risks associated with below-investment-grade or distressed securities when the fund does not hold, or expect to hold, these types of investments. We are also proposing amendments that would affect funds’ principal risk disclosures in the statutory prospectus, as well as the summary prospectus. Specifically, we are proposing to add 639 See ADI 2019–08, supra footnote 67. Instruction 3 to Item 4(b)(1) of proposed Form N–1A. 640 See PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 three new instructions relating to Form N–1A Item 9(c), which requires a fund to disclose the principal risks of investing in the fund in its statutory prospectus.641 Because Item 4 of Form N–1A requires a fund to summarize the principal risks of investing in the fund, based on the information the fund provides in response to Item 9(c), the proposed new instructions to Item 9(c) would also affect the disclosure that a fund provides in the summary prospectus in response to Item 4. Proposed Instruction 1 states that in determining whether a risk is a principal risk, a fund should consider both whether the risk would place more than 10% of the fund’s assets at risk (‘‘10% standard’’) and whether it is reasonably likely that a risk will meet this 10% standard in the future. Today, funds may be using varying standards to determine whether a risk is a principal risk. This makes it difficult for an investor to compare risks among funds. This proposed instruction is designed to clarify the meaning of the term ‘‘principal risk’’ by providing quantitative guidance as to what a fund should consider when it determines whether a risk is a principal risk. For example, a fund that invests 10% or more of its assets in a particular sector, such as financial services or consumer staples, could determine that it should disclose a ‘‘principal risk’’ relating to its investments in that sector. A fund also could determine that it should disclose a ‘‘principal risk’’ in some circumstances when the fund uses less than 10% of its assets to make investments, when those investments may subject the fund to risk of loss of more than 10% of its assets, for example, a fund that engages in short sales or derivatives trading. The ‘‘reasonably likely’’ language is designed to reflect that a risk may not be a principal risk when first disclosed but may become a principal risk over time, due to changing conditions or the fund changing its strategies.642 For example, interest rate risk for a fixed income fund could increase depending on government action that affects interest rates. As another example, a fund investing in U.S. equities may change its strategy to include foreign investments and thus may introduce foreign investment risk. Therefore, if the fund considers it reasonably likely that a risk will become a principal risk in the future, it should consider whether to 641 See Instructions 1 through 3 to Item 9(c) of proposed Form N–1A. 642 The ‘‘reasonably likely’’ standard is a standard already used to describe principal risks in Items 4(b)(1)(i) and 9(c) of Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 include it in the prospectus to help ensure that when it becomes a principal risk, investors will be informed. On the other hand, the proposed ‘‘reasonably likely’’ language reflects our view that risks that are not likely to become principal risks should be excluded from a fund’s principal risk disclosure, consistent with the purpose of streamlining the prospectus. Proposed Instruction 2 is addressed to a fund investing in other funds (an ‘‘acquiring fund’’ and an ‘‘acquired fund,’’ respectively), commonly known as a ‘‘fund of funds.’’ 643 We have observed that many acquiring funds disclose all of the principal risks of each of their acquired funds as part of their principal risk disclosure. In some cases, acquiring funds list over 70 principal risks. The proposed instruction states that, in the case of acquiring funds, risks should be included only if they are principal risks of the acquiring fund, and that a principal risk of an acquired fund should not be included unless it is a principal risk of the acquiring fund. In the case of an acquiring fund, disclosing the risks of acquired funds could obscure information relating to principal risks of the acquiring fund. We believe that the key consideration for an investor relates to the principal risks of the fund in which the investor is actually buying shares, i.e., the acquiring fund, and the proposed instruction is therefore designed to help an investor focus on principal risks that are most applicable to his or her investment. A principal risk of an acquired fund might be a principal risk of the acquiring fund when, for example, the acquiring fund invests a substantial portion of its assets in an acquired fund (or the risk is shared by multiple acquired funds).644 Proposed Instruction 3 is addressed to funds whose strategy provides the freedom to invest in different types of assets at the manager’s discretion. This could occur if, for example, the manager has discretion to change the fund’s strategy. These funds are commonly known as ‘‘go anywhere’’ funds. This instruction would provide that, if the fund’s strategy permits the manager discretion to invest in different types of assets, such fund must disclose that an investor may not know—and has no 643 While the Commission recently proposed rules relating to fund of funds arrangements, this proposal did not address risk disclosure by funds investing in other funds. See Fund of Funds Proposing Release, supra footnote 608. 644 For example, if a particular risk of the acquired funds in the aggregate places more than 10% of the acquiring fund’s assets at risk, that risk is a principal risk of the acquiring fund. See also Instruction 1 to Item 9(c) of proposed Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 way to know—how the fund will invest in the future and the associated risks. This proposed instruction would make that principal risk explicit in the fund’s disclosure. We seek comment on the proposed amendments to prospectus disclosure requirements regarding funds’ principal risks, and specifically on the following issues: 256. Is the proposed amendment in the General Instructions to Form N–1A to preclude disclosure of non-principal risks in the statutory prospectus appropriate? Would the proposed amendment further the goal of streamlining risk disclosure in the prospectus and focusing on essential information? Should the proposed amendment to the General Instructions instead use another standard in precluding the disclosure of certain lesscentral risks in the fund’s prospectus, such as prohibiting the disclosure of ‘‘non-material’’ risks? If so, what should this alternative standard be and how should we define it? 257. Is the proposed amendment to Form N–1A Item 4(b)(1)(i), which specifies that a fund should ‘‘briefly’’ summarize principal risks, appropriate? Would this proposed amendment help emphasize the Commission’s goal of making the principal risk disclosure in the summary prospectus concise and succinct? 258. Is the proposed new instruction to Item 4(b)(1)(i), providing that a fund in a complex should describe principal risks in order of importance, appropriate? Is it helpful to expressly provide in the proposed instruction that a fund may use any reasonable means to determine the significance of the risk? Should the proposed instruction be more prescriptive as to how a fund should determine the significance of risk, and if so, what method for determining risks’ significance should the instruction specify (for example, should the proposed instruction specify ways in which a fund could—or must— quantify likelihood and severity of risk, and if so what methods for quantification should the instruction specify)? Should additional guidance be provided? Is it appropriate to expressly state in the proposed instruction that a fund should not list its principal risks in alphabetical order? Are there circumstances where an alphabetical order presentation may be appropriate and if so which ones? 259. Should the number of principal risks that funds disclose in the summary prospectus be subject to any limits? Should we require a minimum number of risks to be disclosed? For example, would five be sufficient? Should we PO 00000 Frm 00085 Fmt 4701 Sfmt 4702 70799 impose a maximum number of risks that may be disclosed in the summary? For example, would more than twenty-five be too many? 260. Is the proposed new instruction to Item 4(b)(1)(i), providing that a fund should tailor its risk disclosure to how each particular fund in the complex operates, appropriate? Does this proposed instruction provide adequate guidance as to tailoring risk disclosure? Should additional guidance be provided? 261. With regard to Form N–1A Item 9(c), is the proposed new instruction on the factors a fund should consider in determining whether a risk is a principal risk useful and appropriate? Would it give investors adequate information regarding the risks they should consider in determining whether to purchase shares of the fund? Is the proposed standard for considering whether a risk is a principal risk—that the risk is one that would place more than 10% of the fund’s assets at risk (or it is reasonably likely that it would place more than 10% of the fund’s assets at risk in the future)— appropriate? Should the proposed 10% be more or less? For example, should the standard be 5% or 20% of the fund’s assets at risk? If so, why? Should there be a numerical standard associated with the instruction for determining whether a risk is a principal risk, and if so, what quantitative or other criteria should inform this standard? Is the applicability of the 10% standard to the fund’s assets appropriate? Would a 10% standard help achieve the goal of providing user-friendly, clear and succinct disclosures? If not, why not? Is the ‘‘assets at risk’’ standard clear and appropriate? If not, why not? Would the proposed instruction providing that a fund should consider whether it is ‘‘reasonably likely’’ that a risk will become a principal risk in the future give adequate notice of future risks? Is this provision sufficiently clear? Is the term ‘‘reasonably likely’’ clear? Should we provide guidance or a definition regarding this term? Are there other means of determining principal risks that would be more effective? Should there be guidance regarding consideration of non-investment related risks, such as cybersecurity risk and new fund risk, as principal risks? 262. Is the proposed instruction that addresses risk disclosure in fund-offunds arrangements appropriate? Would this proposed instruction be effective in promoting the policy goal of helping investors focus on the principal risks of the fund in which the investor is purchasing shares? E:\FR\FM\05NOP2.SGM 05NOP2 70800 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 263. Is the proposed instruction addressing the principal risks of ‘‘goanywhere’’ funds appropriate? Would this instruction effectively convey the uncertainty of the fund’s investments and the associated principal risks? If not, what amendments would improve the instruction? 264. Are there other changes we can make to risk disclosure to make this information more investor-friendly, clear and succinct? 265. The Commission recently adopted amendments to rule 8b–16(b) under the Investment Company Act, which would require registered closedend funds that rely on this rule to include—among other things—new disclosure about their principal risks in their annual reports.645 Should we extend any of the proposed amendments to open-end funds’ prospectus risk disclosure to closed-end fund prospectus disclosures or the new annual report risk disclosures required for certain closed-end funds? If so, how should we amend the risk disclosure requirements for these closed-end funds? khammond on DSKJM1Z7X2PROD with PROPOSALS2 3. Prospectuses and SAIs Transmitted Under Rule 30e–1(d) We are proposing to rescind rule 30e– 1(d), which permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report, if it includes all of the information that would otherwise be required to be contained in the shareholder report.646 Shareholder report and prospectus disclosures have historically served different purposes, with each catering to the different informational needs of prospective fund investors and current shareholders.647 645 See Closed-End Fund Offering Reform Adopting Release, supra footnote 128, at Section II.I.5; see also supra footnote 132 and accompanying text. 646 See rule 30e–1(d). When the Commission initially adopted rule 30e–1(d), it allowed a fund to send a copy of its prospectus or SAI, or both, instead of a shareholder report, so long as such prospectus or SAI included certain financial information and information about director’s compensation. See Standardized Financial Statement Requirements in Management Investment Company Registration Statements and Reports to Shareholders, Investment Company Act Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 1980)]. However, when the Commission expanded the required shareholder report disclosures, it simultaneously amended rule 30e–1(d) to limit a fund’s ability to use a prospectus or SAI in place of a shareholder report by requiring that a fund include in such a prospectus or SAI all the information that would otherwise be required in the shareholder report. See Role of Independent Directors of Investment Companies, Investment Company Act Release No. 24082 (Oct. 14, 1999) [64 FR 59826 (Nov. 3, 1999)]. 647 See supra Section II.A.2 (discussing the differences between shareholder report and prospectus disclosures and noting that the VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 We understand that funds very rarely rely on rule 30e-1(d) to transmit a prospectus or SAI in place of a shareholder report. Additionally, we believe that allowing funds to consolidate their prospectus, SAI and shareholder report disclosures into a single document would result in shareholders receiving long, complex, and overlapping fund disclosures which could cause shareholder confusion and fatigue. This result would not be consistent with the goals of this rulemaking proposal. We seek comment on our proposal to rescind rule 30e–1(d): 266. Do funds currently rely on rule 30e–1(d)? If so, which funds, and why? 267. Would investors benefit from receiving in the fund’s prospectus or SAI the disclosure that would otherwise have to appear in the shareholder report? Would this cause investor confusion and/or overwhelm investors? If so, is there any way to preserve the ability of funds to rely on rule 30e-1(d) while mitigating these potential negative effects? L. Investment Company Advertising Rule Amendments As part of our proposed improvements to fund fee and expense information for investors, we are proposing to amend the Commission’s investment company advertising rules (for purposes of this release, Securities Act rules 482, 156, and 433 and Investment Company Act rule 34b–1) to promote transparent and balanced presentations of fees and expenses in investment company advertisements.648 As investment companies increasingly compete and market themselves on the basis of costs, we are concerned that investment company advertisements may mislead investors by creating an inaccurate impression of the costs associated with an investment.649 The proposed advertising rule amendments would generally apply to all investment companies, including mutual funds, shareholder report provides information to a fund’s current shareholders about the fund’s operations and performance during the past fiscal period, while the prospectus acts as the principal selling document for investors to inform investment decisions and facilitate fund comparisons). 648 For purposes of this release, we generally refer to the types of investment company communications covered by rules 482, 156, 433, and 34b–1 as ‘‘advertisements,’’ unless otherwise noted. Although the Commission recently proposed rule amendments relating to investment adviser advertisements, that proposal did not address investment company advertising rules. See Investment Adviser Advertisements; Compensation for Solicitations, Investment Advisers Act Release No. 5407 (Nov. 4, 2019) [84 FR 67518 (Dec. 10, 2019)]. 649 See supra Section I.C. PO 00000 Frm 00086 Fmt 4701 Sfmt 4702 ETFs, registered closed-end funds, and BDCs.650 Under the proposed amendments, investment company fee and expense presentations in advertisements would have to include timely and prominent information about a fund’s maximum sales load (or any other nonrecurring fee) and gross total annual expenses, based on the methods of computation that the company’s Investment Company Act or Securities Act registration statement form prescribes for a prospectus.651 We also are proposing to amend rule 156 to provide factors an investment company should consider to determine whether representations in its advertisements about the fees and expenses associated with an investment in the fund could be misleading.652 Investment company advertisements, including advertisements regarding registered investment companies and BDCs, typically are prospectuses for purposes of the Securities Act.653 These advertisements are typically subject to rule 482, which provides a framework in which investment company advertisements are deemed to be ‘‘omitting prospectuses’’ that may include information the substance of which is not included in a fund’s statutory or summary prospectus.654 Rule 482 establishes certain content, legend, and filing requirements for investment company advertisements. Many of the rule’s content requirements focus on advertisements that include performance data of certain types of funds, including mutual funds, ETFs, certain separate accounts, and money market funds.655 For example, the rule 650 As a result, for purposes of this Section II.I, the term ‘‘fund’’ is not limited to mutual funds and ETFs registered on Form N–1A. Instead, we use this term more broadly in this Section to refer to any investment company that is subject to the Commission’s investment company advertising rules, including registered closed-end funds and BDCs. 651 See proposed rule 482(i) and (j); proposed rule 34b–1(c); proposed rule 433(c). 652 See proposed rule 156(b)(4). 653 See section 2(a)(10) of the Securities Act (defining the term ‘‘prospectus’’ to mean any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security, subject to certain exceptions, including an exception for a communication that generally was accompanied or preceded by a statutory prospectus). 654 See section 10(b) of the Securities Act; rule 482(a) under the Securities Act (stating that the rule applies to an advertisement or other sales material with respect to securities of a registered investment company or BDC that is selling or proposing to sell its securities pursuant to a registration statement that has been filed under the Securities Act, unless the advertisement is excepted from the definition of prospectus by section 2(a)(10) of the Securities Act or rule 498(d), or is a summary prospectus under rule 498). 655 See rule 482(b)(3), (d), (e), and (g). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules provides a standardized formula for these funds to calculate performance data included in their advertisements.656 Instead of relying on rule 482, registered closed-end funds and BDCs may use free writing prospectuses in accordance with rule 433 and certain other Commission rules for advertising purposes.657 Because both rule 482 advertisements and free writing prospectuses are treated as prospectuses under section 10(b) of the Securities Act, they are subject to liability under section 12(a)(2) of the Securities Act—which imposes liability for materially false or misleading statements in a prospectus or oral communications—as well as the antifraud provisions of the Federal securities laws.658 Rule 34b–1 applies to supplemental sales literature (i.e., sales literature that is preceded or accompanied by a prospectus) by any registered open-end company, registered unit investment trust, or registered face-amount certificate company.659 Rule 34b–1 includes many of the same requirements as rule 482, including the same performance-related requirements.660 The Commission adopted rule 34b–1 to ensure that performance claims in supplemental sales literature would not be misleading and to promote comparability and uniformity among supplemental sales literature and rule 482 advertisements.661 Supplemental sales literature is subject to the general antifraud provisions of the Federal securities laws. Rule 156 states that whether or not a particular description, representation, illustration, or other statement involving a material fact is misleading depends on evaluation of the context in which it is made. The rule discusses several pertinent factors that should be weighed in considering whether a particular 656 See rule 482(d) and (e). Closed-End Fund Offering Reform Adopting Release, supra footnote 128, at Section II.F.1; 17 CFR 230.164 [rule 164 under the Securities Act] and rule 433 under the Securities Act [17 CFR 230.164 and 17 CFR 230.433]. 658 See, e.g., section 12(a)(2) of the Securities Act [77l]; section 17(a) of the Securities Act [15 U.S.C. 77q]; section 10(b) of the Exchange Act [15 U.S.C. 78j]; section 34(b) of the Investment Company Act [15 U.S.C. 80a–33]; section 206 of the Investment Advisers Act of 1940 [15 U.S.C. 80b–6]. 659 See rule 34b–1 under the Investment Company Act; section 24(b) of the Investment Company Act. 660 See rule 34b–1(b)(1)–(2) under the Investment Company Act. 661 See Advertising by Investment Companies, Investment Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868 (Feb. 10, 1988)], at Section III; Advertising by Investment Companies; Proposed Rules and Amendments to Rules, Forms, and Guidelines, Investment Company Act Release No. 15315 (Sept. 17, 1986) [51 FR 34384 (Sept. 26, 1986)], at nn.77 and 78 and accompanying text. khammond on DSKJM1Z7X2PROD with PROPOSALS2 657 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 statement involving a material fact is or might be misleading in investment company sales literature, including rule 482 advertisements and supplemental sales literature.662 Rule 156 applies to sales literature used by any person to offer to sell or induce the sale of securities of any investment company, including registered investment companies and BDCs.663 Currently, the investment company advertising rules largely focus on performance-related information.664 Among other things, the performancerelated provisions of these rules are designed to: (1) Address concerns that investors would be unable to compare fund performance when funds use different calculation methods in their advertisements; 665 and (2) highlight areas that, based on the Commission’s experience with investment company advertisements, have been particularly susceptible to misleading statements.666 The investment company advertising rules do not presently require information about an investment company’s fees and expenses or limit how fee and expense information is presented, with one exception. Under the current rules, if an advertisement provides performance data of an openend management investment company or a separate account registered as a unit investment trust offering variable annuity contracts, it also must include the maximum amount of the fund’s sales load (i.e., purchase charge or exit charge) or any other nonrecurring fee that it charges.667 Separately, FINRA rule 2210 requires fee and expense information in certain 662 See Mutual Fund Sales Literature Interpretive Rule, Investment Company Act Release No. 10915 (Oct. 26, 1979) [44 FR 64070 (Nov. 6, 1979)] (‘‘Rule 156 Adopting Release’’). 663 For purposes of rule 156, investment company sales literature includes any communication (whether in writing, by radio, or by television) used by any person to offer to sell or induce the sale of securities of any investment company. See rule 156(c) [17 CFR 230.156(c)]. Communications between issuers, underwriters and dealers are included in this definition of sales literature if such communications, or the information contained therein, can be reasonably expected to be communicated to prospective investors in the offer or sale of securities or are designed to be employed in either written or oral form in the offer or sale of securities. 664 Rule 433 does not include performance-related requirements for registered closed-end fund or BDC free writing prospectuses. Currently, most rule 482 content requirements, including the performancerelated requirements, do not apply to registered closed-end funds and BDCs. 665 See Rule 156 Adopting Release, supra footnote 662, at Section I.2. 666 See Rule 156 Adopting Release, supra footnote 662; Investment Company Sales Literature Interpretive Rule, Investment Company Act Release No. 10621 (Mar. 8, 1979) [44 FR 16935 (Mar. 20, 1979)], at paragraph accompanying n.5. 667 See rule 482(b)(3)(ii); rule 34b–1(b)(1)(i). PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 70801 non-money market fund open-end management investment company advertisements that provide performance information.668 This includes: (1) The fund’s maximum sales charge (i.e., purchase charge or exit charge); and (2) the total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements (i.e., ongoing annual fees). Under FINRA’s rule, a fund’s standardized performance information, sales charge, and total annual fund operating expense ratio (gross of any fee waiver or expense reimbursement) must be set forth prominently. To promote more consistent and transparent presentations of investment costs in investment company advertisements, we are proposing to amend rules 482, 433, and 34b–1 to require that investment company advertisements providing fee or expense figures for the company include certain standardized fee and expense figures.669 The proposed amendments would apply to advertisements of any registered investment company or BDC. We are not proposing to limit the scope of the proposed amendments to a subset of investment companies because we believe investors in any registered investment company or BDC would benefit from advertisements that provide consistent, standardized fee and expense information that is generally aligned with prospectus fee and expense information. With respect to rule 482, we are proposing to amend the rule to require that investment company advertisements providing fee and expense figures include: (1) The maximum amount of any sales load, or any other nonrecurring fee; and (2) the total annual expenses without any fee waiver or expense reimbursement arrangement (collectively, the ‘‘required fee and expense figures’’).670 Because we believe that these are important figures for assessing the fees and expenses of a fund investment, the proposal would require any advertisement presenting fee and expense figures to include these items. This proposed requirement would only apply if an investment company advertisement includes fee or expense figures, and therefore an advertisement 668 FINRA rule 2210(d)(5). This provision only applies to retail communications and correspondence that present non-money market fund open-end management investment company data as permitted by rule 482 and rule 34b–1. 669 See proposed rule 482(i)(1). 670 In an expense reimbursement arrangement, the adviser reimburses the fund for expenses incurred. In a fee waiver arrangement, the adviser agrees to waive a portion of its fee in order to limit fund expenses. E:\FR\FM\05NOP2.SGM 05NOP2 70802 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 would not need to include the required fee and expense figures if it only included general, narrative information about fee and expense considerations and did not include any numerical fee or expense amounts.671 The proposed required fee and expense figures would be based on the methods of computation that the fund’s Investment Company Act or Securities Act registration statement form prescribes for a prospectus. This proposed requirement is designed to promote consistent fee and expense computations across investment company advertisements, particularly within the same fund category, and to facilitate investor comparisons. We are proposing to require consistency with prospectus requirements because, like a fund’s summary or statutory prospectus, advertisements are often designed for prospective investors and may influence an investment decision. Further, similar to associated prospectus requirements, if an advertisement covers only a subset of a fund’s share classes, the advertisement could provide the required fee and expense information for those classes only.672 While investment company advertisements could include other figures regarding a fund’s fees and expenses, the advertisement would have to present the required fee and expense figures at least as prominently as any other included fee and expense figures. For example, under the proposed amendments, an advertisement could include a fund’s fees and expenses net of certain amounts, such as a fee waiver or expense reimbursement arrangement, as we understand some fund advertisements do today. However, an advertisement could not present the net figure more prominently than the required fee and expense figures. In addition to meeting the proposed content and presentation requirements, advertisements that include a fund’s total annual expenses net of fee waiver or expense reimbursement arrangement amounts would also need to include the expected termination date of the arrangement.673 We believe this proposed requirement would help investors better understand how a fee waiver or expense reimbursement 671 This might be the case if, for example, the advertisement only refers to the fund’s fees and expenses in the context of the disclosure required by rule 482(b)(1), which requires a statement advising an investor to consider the investment objectives, risks, and charges and expenses of the fund carefully before investing. 672 See, e.g., Instruction 1(d)(ii) to Item 3 of current Form N–1A; Instruction 1(e) to proposed Item 3 of Form N–1A; Instruction 1(d)(ii) to proposed Item 8A of Form N–1A. 673 See proposed rule 482(i)(2). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 arrangement may affect their investment costs by providing information about how long the arrangement would likely be in place (including that it may be terminated at any time).674 The proposed amendments would also include timeliness requirements for fee and expense information in investment company advertisements.675 The proposed timeliness requirement would apply to fee and expense information and, thus, it would apply to fee and expense figures as well as relevant narrative information. Under the proposal, fee and expense information would need to be as of the date of the fund’s most recent prospectus or, if the fund no longer has an effective registration statement under the Securities Act, as of its most recent annual report.676 A fund would, however, be able to provide more current information, if available. The proposed timeliness requirement is designed to prevent investment company advertisements from including stale, outdated information about a fund’s fees and expenses. For instance, a registered open-end fund that maintains an effective Securities Act registration statement on Form N–1A would need to provide its maximum sales load (or other nonrecurring fee) and gross total annual expenses, as of the date of the fund’s most recent prospectus.677 As another example, a registered closed-end fund that includes fee and expense figures in a rule 482 advertisement and that does not maintain an effective Securities Act registration statement would need to provide its gross total annual expenses, as of the date of the fund’s most recent annual report.678 674 This also is similar to information that funds generally must include in their prospectuses when including total annual expenses net of a fee waiver or expense reimbursement arrangement. See Instruction 3(e) to Item 3 of Form N–1A; Instruction 4(b) to proposed Item 3 of Form N–1A; Instruction 4(e) to proposed Item 8A of Form N–1A; Instruction 15(f) to Item 4 of Form N–3; Instruction 17 to Item 4 of Form N–4. 675 See proposed rule 482(j). 676 In the case of a new fund that does not yet have an effective registration statement, fee and expense information would need to be as of the date of the fund’s most recent prospectus filed with the Commission. 677 The registered open-end fund’s maximum sales load (or other nonrecurring fee) and gross total annual expenses would be computed using the method in proposed Item 8A of Form N–1A. Proposed Item 3 of Form N–1A also requires these figures in a fund’s prospectus, but proposed Item 8A contains more complete computational instructions for these figures. 678 Under these circumstances, the registered closed-end fund would not have a maximum sales load to report in its advertisement because it does not have an effective Securities Act registration statement and cannot presently sell the fund’s securities. The registered closed-end fund’s gross PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 We also are proposing to amend rules 34b–1 and 433 so that those rules incorporate rule 482’s proposed content, presentation, and timeliness requirements for fees and expenses. This would help ensure that the same fee and expense-related requirements are applied consistently across all registered investment company and BDC advertisements and sales literature. The proposed amendments to rule 34b– 1 would provide that any sales literature of a registered investment company or BDC would have omitted to state a fact necessary in order to make the statements therein not materially misleading unless the sales literature meets rule 482’s proposed content, presentation, and timeliness requirements for investment company fees and expenses.679 That is, sales literature that would not otherwise be subject to rule 482 would have to meet rule 482’s fee and expense requirements. The proposed amendments to rule 34b–1 would, for example, apply to sales literature that is excluded from the definition of ‘‘prospectus’’ in section 2(a)(10) of the Securities Act and thus is not subject to rule 482.680 Additionally, we propose to total annual expenses would be computed using the method in Item 3 of Form N–2. 679 See proposed rule 34b–1(c). The proposed amendments would apply to any registered investment company or BDC advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors in connection with a public offering (collectively, ‘‘sales literature’’). The current provisions of rule 34b–1, which largely relate to performance information, would continue to apply only to sales literature that is required to be filed with the Commission by section 24(b) of the Investment Company Act. 680 Like the current scope of rules 34b–1 and 482, the proposed fee and expense requirements in these rules and in rule 433 would not apply to any quarterly, semi-annual, or annual shareholder report under section 30 of the Investment Company Act. We also propose to provide similar treatment to other reports pursuant to section 13 of section 15(d) of the Exchange Act (e.g., Form 10–K, 10–Q, and 8–K reports filed by BDCs). See proposed rule 34b–1(c)(2). Consistent with the current provision in rule 34b–1, the amendments are designed to provide that shareholder reports and similar periodic reports that might otherwise constitute sales literature or advertisements under the rules are not covered by the proposed amendments to rules 482, 34b–1, and 433 because those reports serve to inform shareholders of recent developments relating to their investment. See 1988 Advertising Rules Release, supra footnote 88, at n.40 and accompanying text (explaining that the current provision is necessary because of the breadth of the definition of ‘‘sales literature’’). We believe the proposed expansion of this provision to cover fee and expense information in fund advertisements is warranted because, among other things: (1) Investors are likely to understand that the fee and expense information in an annual or other periodic report is only as current as the report; and (2) the proposed content requirements for funds’ annual and semi-annual reports are designed to E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules amend rule 433, which establishes conditions for the use of post-filing free writing prospectuses, to require a registered closed-end fund or BDC free writing prospectus to comply with the proposed content, presentation, and timeliness requirements of proposed rule 482, as applicable, if the free writing prospectus includes fee and expense information.681 As a result, regardless of whether a registered closed-end fund or BDC advertisement uses rule 482 or rule 433, the advertisement would be subject to the same requirements regarding fee and expense information. While the proposed amendments to rules 482, 34b–1, and 433 are similar to requirements that currently apply to a subset of fund advertisements under FINRA rule 2210 (i.e., certain nonmoney market fund open-end management investment company advertisements that provide performance information), our proposed amendments would apply more broadly to all investment company advertisements and supplemental sales literature. In addition, we are proposing to amend rule 156 to address statements and representations about a fund’s fees and expenses that could be materially misleading. Specifically, we would provide that, when considering whether a particular statement involving a material fact is or might be misleading, weight should be given to representations about the fees or expenses associated with an investment in the fund that could be misleading because of statements or omissions involving a material fact. As funds are increasingly marketed on the basis of costs, we are concerned that investment companies and intermediaries may in some cases understate or obscure the costs associated with a fund investment. The new proposed factor in rule 156 would provide that representations about the fees or expenses associated with an investment in the fund could be misleading because of statements or omissions involving a material fact, including situations where portrayals of such fees and expenses omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading.682 Consistent with the current framework in rule 156, whether a particular description, representation, illustration, or other statement involving a fund’s fees and expenses is materially independently recognize the types of fee and expense information a fund shareholder may need. 681 See proposed rule 433(c)(3). 682 See proposed rule 156(b)(4). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 misleading depends on evaluation of the context in which it is made.683 In addition, like current rule 156, the proposed amendments would apply to all investment company sales literature.684 We are not proposing to limit the scope of these amendments to a subset of investment companies because our concerns regarding materially misleading statements about fees and expenses are not limited to certain types of investment companies. The proposed amendments to rule 156 are designed to address concerns that investment company advertisements may present a fund’s fees and expenses in a way that materially misleads an investor to believe that the costs associated with a fund investment are lower than the actual investment costs. For example, we understand that it has become increasingly common for funds to market themselves, or attempt to market themselves, as ‘‘zero expense’’ or ‘‘no expense’’ funds based solely on information in their prospectus fee tables and without also disclosing that investors or the fund may incur other costs. However, in some cases a fund’s prospectus fee table shows no transaction fees and no ongoing charges only because its adviser, the adviser’s affiliates, or others are collecting fees elsewhere from these investors.685 For instance, an investor in a so-called ‘‘zero expense’’ fund may encounter other investment costs that can effectively reduce the value of his or her investment in a fund. For example, an investor may incur intermediary costs, such as wrap fees that an investor pays to the sponsor of a wrap fee program (which may be the fund’s adviser or its affiliates) for investment advice, brokerage services, administrative expenses, or other fees and expenses. As another example, if a fund engages in securities lending, it generally pays certain fees or compensation to a securities lending agent (which may be affiliated with the fund’s adviser), including through revenue sharing arrangements. Additionally, a fund may appear to be a ‘‘zero expense’’ fund 683 See rule 156(b). rule 156(c) (defining ‘‘sales literature’’ for purposes of the rule). 685 In addition to considering whether statements in fund sales literature about fees and expenses associated with a fund investment are materially misleading, a fund should also consider whether the fee table in its prospectus may be materially misleading unless the fund includes additional material information as may be necessary to make the information and statements expressly required to be in the registration statement, in light of the circumstances under which they are made, not misleading. See rule 8b–20 under the Investment Company Act [17 CFR 270.8b–20]. 684 See PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 70803 because its adviser is waiving fees or reimbursing expenses for a period of time, but the fund will incur fees and expenses once that arrangement expires. In these and other cases where an investor may encounter other investment costs, we are concerned that, absent appropriate explanations or limitations, investors in these cases may believe incorrectly that there are no expenses associated with investing in the fund. Similar issues can arise with respect to investment company advertisements that advertise low investment costs, based solely on a fund’s prospectus fee table, and that do not reflect or recognize other categories of costs that may, for instance, be supplementing or replacing a more traditional management fee (e.g., intermediary costs, securities lending costs). As another example, an advertisement might be materially misleading if it presents one component of a fund’s total operating expenses, such as the fund’s management fee, without stating that there are other costs associated with a fund investment or providing the total operating expense figure. Under certain circumstances, statements in advertisements about a fund’s fees and expenses that would be materially misleading on their own may not be misleading if the advertisement includes appropriate explanations, qualifications, limitations, or other statements. To use this approach effectively to avoid materially misleading statements, we believe it would be appropriate for funds to avoid using lengthy and technical disclaimers in small font sizes. These proposed content-related restrictions in rules 482, 433, and 34b– 1 and the proposed amendments to rule 156 are designed to work together to promote balanced and transparent presentations of fee and expense information in investment company sales literature. We request comment on the proposed amendments to the Commission’s investment company advertising rules, including the following: 268. Should the advertising rule amendments apply to all investment companies, as proposed? If not, what types of investment companies should the amendments cover? Are there fee and expense-related issues that are specific to certain types of investment company advertisements that we should take into account? 269. Should we amend rule 482 to require that an advertisement providing fee or expense figures for an investment company also include the maximum sales load (or any other nonrecurring E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70804 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules fee) and the total annual expenses without any fee waiver or expense reimbursement arrangement, as proposed? If not, why not? Should we require investment company advertisements to include other fee and expense information, such as the fund’s management fee? If so, what information should we require, and why? Should we, for example, require the same fee and expense information as the fund’s prospectus fee table (or, in the case of mutual funds and ETFs, the proposed fee summary)? 270. As proposed, should we require that investment company advertisements present the required fee and expense figures using the methods of computation that the fund’s Investment Company Act or Securities Act registration statement form prescribes for a prospectus? Should we allow some or all funds to use different computational methods? As another example, should registered closed-end funds that do not maintain an effective registration statement be able to show expense figures from their shareholder reports (e.g., financial highlights expense ratios) rather than computing total annual expenses in the manner required for a prospectus fee table? Why or why not? Are the shareholder report figures, which represent backwardlooking information for the last fiscal year and do not include AFFE, appropriate for advertising materials absent other information? Instead should the required expense figure reflect estimated expenses for the current fiscal year and AFFE (as required in prospectus fee tables)? If we permit different computational methods among investment company advertisements, are there other ways we could promote more consistent fee and expense presentations and facilitate investor comparisons? 271. Beyond the required fee and expense figures, should we require an investment company advertisement to present any other fees or expenses the advertisement may include using the same computational method identified in a Commission form or rule, such as the relevant Investment Company Act or Securities Act registration statement form (e.g., for a prospectus or shareholder report), where available? If so, should this apply to particular fee or expense figures, or should it apply to all fee and expense figures that have identified computations in Commission forms or rules? Do funds already use standardized computational methods in advertisements that include fee information (e.g., for administrative ease or due to antifraud concerns)? VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 272. Should we require an investment company advertisement to present the required fee and expense figures at least as prominently as any other fee and expense figures, as proposed? If not, why not? Are there circumstances in which it would be appropriate for an advertisement to present a different fee or expense figure more prominently than the required fee and expense figures? Please explain. 273. Beyond the proposed prominence requirements, should we impose other presentation standards for fee and expense information in fund advertisements? For example, should we require advertisements to present fee and expense information in a format that aligns with the fee table (or fee summary) presentation the fund’s registration form requires for prospectuses? 274. Should we require investment company advertisements to use specified terms to describe the required fee and expense figures? For example, should we require advertisements to use the same terms as those prescribed for prospectus fee tables in the fund’s registration form? Alternatively, should we require all fund advertisements to use consistent, plain English terminology (such as ‘‘ongoing annual fees’’)? 275. As proposed, should we allow investment company advertisements to include other fee and expense figures, beyond the required fee and expense figures? If not, why not? Alternatively, should we require advertisements that include fee and expense figures to include only figures that appear in the fee table of the fund’s prospectus (or, additionally, in the fund’s shareholder reports)? If so, how should we address the fact that these presentations do not reflect all potential investment costs, including intermediary costs, transaction costs, and securities lending costs? Should we, for instance, require that a legend or footnote accompany the presentation to explain that it may not reflect all costs associated with an investment? 276. As proposed, should we require an investment company advertisement to include the expected termination date of a fee waiver or expense reimbursement arrangement if the advertisement provides a fund’s total annual expenses net of fee waiver or expense reimbursement arrangements? Is there other information we should require about a fee waiver or expense reimbursement arrangement, such as who can terminate the arrangement? Should we permit an advertisement to reflect any fee waiver or expense reimbursement arrangement, or should PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 the arrangement have to meet certain conditions to appear in an advertisement? For example, should we allow such arrangements to appear in investment company advertisements only if they can appear in a fund’s prospectus fee table (e.g., in the case of a registered open-end fund registered on Form N–1A, if the fee waiver or expense reimbursement arrangement would be in place for at least 1 year from the effective date of the fund’s registration statement)? As another alternative, because prospectus-related requirements currently vary among different types of funds, should we require an arrangement to be in place for the same period of time for any fund that wishes to disclose its total annual expenses net of a fee waiver or expense reimbursement in an advertisement? If so, what period of time (e.g., 1 year), and how should we measure it (e.g., from the date the advertisement is first submitted for publication, published, or used; from the effective date of the fund’s registration statement; or from the date of the fund’s most recent annual report)? What are the advantages and disadvantages of any such approach? Are there other conditions that should determine when a fund may include fee waiver or expense reimbursement amounts in investment company advertisements and if so, what should these be? 277. Should we, as proposed, include timeliness requirements in rule 482 for fee and expense information in an investment company advertisement? Should fee and expense information be as of the fund’s most recent prospectus or, if the fund no longer has an effective Securities Act registration statement, as of its most recent annual report, as proposed? If not, what baselines should we use to measure the timeliness of fee and expense information? Should the baseline differ among different types of funds, or is there a single baseline that would work for all funds? Should we allow advertisements to include fees and expenses that are more current than the fund’s most recent prospectus (or as of the fund’s most recent annual report), as proposed? Alternatively, should we require a fund with a current prospectus to always present the same fees and expenses in its advertisements as those shown in its current prospectus? Should the proposed timeliness requirement apply to any fee and expense information, as proposed, or should it apply more narrowly to particular subsets of fee and expense information (e.g., fee and expense figures)? 278. Should rule 34b–1 include the same fee and expense-related requirements as rule 482, as proposed? E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules If not, why should different fee-related requirements apply to rule 482 advertisements and rule 34b–1 sales literature? What fee and expense-related requirements should rule 34b–1 include? 279. As proposed, given the breadth of the definition of ‘‘sales literature’’ in proposed rule 34b–1, should we amend rule 34b–1 to provide that the proposed fee and expense-related requirements for investment company advertisements in rules 34b–1, 482, and 433 do not apply to shareholder reports under section 30 of the Investment Company Act or to other reports pursuant to section 13 or 15(d) of the Exchange Act? 686 If not, why not? Are there circumstances in which the proposed fee and expense-related content or timeliness requirements should apply to these reports? 280. As proposed, should we amend rule 433 to require registered closed-end fund or BDC free writing prospectuses that include fee and expense information to comply with applicable fee and expense-related requirements in rule 482? If not, why should we treat free writing prospectuses differently from rule 482 advertisements? Are there other amendments we should make to the free writing prospectus rules to more effectively implement the proposed requirements? For example, should we amend Securities Act rule 164 to provide that an immaterial or unintentional failure to comply with the proposed fee and expense requirements would not result in a violation of section 5(b)(1) of the Securities Act or the loss of the ability to rely on the free writing prospectus rules, similar to the provision that currently applies to the legend condition in rule 433? 687 If so, why should we treat the substantive requirements regarding fee and expense information in the same manner as the required legend? Are the proposed amendments to rule 34b–1—which apply to any registered investment company or BDC advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors—sufficiently broad such that the proposed amendments to rule 433 would not be necessary? 281. Should we amend Securities Act rule 163 to apply fee and expenserelated requirements to free writing prospectuses that a registered closedend fund or BDC that is a well-known seasoned issuer may use before filing a Securities Act registration statement? If 686 See supra footnote 680. rule 164(c) under the Securities Act [17 CFR 230.164(c)]. 687 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 so, what requirements should apply to these pre-filing communications? Should we require such a fund to compute the required fee and expense figures in the manner required for a prospectus fee table before the fund has filed a registration statement? What are the advantages and disadvantages of such an approach? 282. Should the content requirements of rule 482, rule 34b–1, and rule 433 apply differently based on the audience for the advertisement (e.g., retail versus institutional investors)? 688 For example, after filing a registration statement, do new funds or existing funds that are planning to conduct a new offering of securities need flexibility to rely on rule 482, rule 34b–1, or rule 433 to communicate with certain parties, such as intermediaries or institutional investors, about potential fee or expense amounts to determine the appropriate fee structure for a new fund or security? If so, why would a fund need to rely on rule 482, rule 34b–1, or rule 433 for these purposes instead of the Commission’s new rule allowing testthe-water communications with certain institutional investors? 689 If the content requirement should differ based on the audience, how should they differ, and what is the basis for these differences? How should we define the different categories of investors? 283. Should the amendments to rule 482, rule 34b–1, and rule 433 apply equally to new and existing funds? If not, why not? For example, do any of the proposed amendments present particular challenges for a new fund that has filed a registration statement but that does not have an effective registration statement? If so, what are those challenges, and how could we address them? 284. Should we amend rule 156 to address statements and representations about a fund’s fees and expenses that could be materially misleading, as proposed? If not, why not? Are the proposed amendments overly broad or overly narrow? What impact would the proposed amendments have on current 688 See, e.g., Investment Adviser Advertisements; Compensation for Solicitations, Investment Advisers Act Release No. 5407 (Nov. 4, 2019) [84 FR 67518 (Dec. 10, 2019)], at Section II.A.5; FINRA rule 2210. 689 Securities Act rule 163B allows funds to engage in test-the-waters communications with qualified institutional buyers and institutional accredited investors to determine whether such investors might have an interest in a contemplated registered securities offering. These communications may occur either before or after a fund has filed a Securities Act registration statement. See 17 CFR 230.163B; Solicitations of Interest Prior to a Registered Public Offering, Securities Act Release No. 10699 (Sep. 25, 2019) [84 FR 53011 (Oct. 4, 2019)]. PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 70805 investment company marketing practices? Should the proposed amendments be requirements rather than a factor for consideration? 285. Is the proposed factor in rule 156 appropriately tailored to address potential materially misleading statements or representations regarding a fund’s fees and expenses? 690 If not, how could we modify the proposed factor to address potential materially misleading statements or representations without negatively affecting a fund’s ability to provide the types of fee and expense information that investors want in fund advertisements? 286. Should we provide additional factors an investment company should consider to avoid potentially materially misleading statements regarding a fund’s fees and expenses? If so, what factors and why? For instance, are there circumstances in which a fund might include statements in its advertisements that suggest or imply present or future levels of fees and expenses that would not be justified under the circumstances and that might be materially misleading to investors? Could this potentially occur, for example, if a fund that has performance fees or fulcrum fees advertises its current fees and expenses in a manner that suggests or implies that the fund’s fees and expenses would remain the same in the future, even though the fund’s fee and expenses could be significantly higher if the fund’s future performance triggers the performance fee or fulcrum fee? What are the advantages or disadvantages of including a new factor in rule 156 related to statements that suggest or imply present or future levels of fees and expenses that would not be justified under the circumstances? Would the proposed amendments to rule 156 already appropriately address this concern? 287. Should we provide additional guidance on the types of explanations, qualifications, limitations, or other statements that funds that have zeroexpenses (or close to zero expenses) based solely on information in their prospectus fee tables could include in their advertisements to address concerns about materially misleading statements or provide standardized statements for advertisements or prospectuses? For example, should such a statement provide that the fund, its adviser, or its affiliates may receive compensation from the fund that is not disclosed? Should the statement instead provide that there are other costs that will reduce the value of an investment 690 See E:\FR\FM\05NOP2.SGM proposed rule 156(b)(4). 05NOP2 70806 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 in the fund? Are there other statements that would explain the issue more clearly to investors or that would be more accurate for different types of funds? Would standardized language be appropriate for different types of funds with zero expenses (or close to zero expenses) based solely on information in their prospectus fee tables, or should funds have discretion to tailor the language to address a particular fund’s facts and circumstances? Would guidance of the type that this request for comment describes be appropriate for other scenarios related to the presentation of fees and expenses in fund advertisements, and if so, what other types of scenarios should the guidance address? 288. Would the proposed amendments to the investment company advertising rules create unintended incentives or results, such as an incentive for funds to no longer include fee and expense information in fund advertisements? If so, how could we reduce the impact of those unintended incentives or results while still promoting more balanced and transparent presentations of fund fees and expenses in advertisements? M. Technical and Conforming Amendments We are proposing technical and conforming amendments to various rules and forms. As discussed above, our proposal would revise rule 30e–3 to exclude investment companies registered on Form N–1A from the scope of the rule. As a conforming amendment, we propose to revise Form N–1A and rule 498 under the Securities Act to remove legends required by rule 30e–3.691 Likewise, as another conforming amendment, we propose to withdraw previously adopted amendments to Form N–1A and rule 498 that are scheduled to become effective on January 1, 2021 and that would reference requirements of rule 30e–3.692 As technical amendments, we also propose to update certain terminology in Form N–1A to reflect modern usage and presentation and to remove references to collect phone calls. As discussed above, we are also proposing new rule 498B to address shareholders’ continued receipt of annual prospectus updates in the years following their initial investment in a fund. As a conforming amendment, we propose to amend 17 CFR 200.800 to display control numbers assigned to 691 See Item 1(a)(5) and Item 27(d)(7) of Form N– 1A; rule 498(b)(1)(vii). 692 See Rule 30e–3 Adopting Release, supra footnote 14, at amendatory instructions 5, 6, and 16. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 information collection requirements for rule 498B by the Office of Management and Budget pursuant to the Paperwork Reduction Act. As discussed further below, an agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number.693 Our proposal would also simplify the fee table currently included in Form N– 1A and move the full fee table to a different location in Form N–1A.694 To ensure that forms cross-referencing the current fee table in Form N–1A continue to reference that same table, we propose to update cross-references in Schedule 14A and Form N–14.695 Finally, as technical amendments, we also propose to update the current SAI requirement to provide the age and length of service for a fund’s officers and directors to allow funds to instead disclose for each officer and director the birth year and the year their service began.696 We also are proposing a similar instruction for the length of service for portfolio managers that must be disclosed in the prospectus to permit a fund to disclose the year the portfolio manager’s service began.697 We believe that permitting a fund to use a static date rather than updating this information annually will reduce a burden on funds that can arise in updating a previously disclosed age, for example, while providing investors equivalent information. We also have observed that some funds already disclose each officer and director’s year of birth and the date the services of the officers, directors and portfolio managers began. We request comment generally on these technical and conforming amendments, and specifically on the following issues: 269. Are these technical and conforming amendments appropriate in light of the other changes contemplated by our proposal? 270. Are there any additional technical or conforming amendments that should be made in order to fully implement the proposed changes in this rulemaking? For example, should we update cross-references in Forms N–4 and N–6 to the current fee table in Form N–1A (which would be revised under our proposal to become a summary table), even though those cross693 See infra Section IV. proposed Item 3 (Risk/Return Summary: Fee Summary) with proposed Item 8A (Fee Table). 695 See proposed Schedule 14A [14a–101 under the Securities Act] and Form N–14 [17 CFR 239.23]. 696 See proposed Item 17(a)(1) of Form N–1A. 697 See proposed Item 5(b) of Form N–1A. references are with regard to the lineitem ‘‘Total Annual Fund Operating Expenses’’ which would not be changed under our proposal and thus would be identical in both the summary fee table and the full fee table? If so, why? 271. Are there any proposed technical or conforming amendments that we should not make, or should modify? For example, should forms cross-referencing the current fee table in Form N–1A continue to reference that same fee table, even though that fee table would be revised under our proposal to become a summary fee table? If so, why? N. Compliance Date We propose to provide a transition period after the effective date of the amendments to give funds sufficient time to adjust their prospectus and shareholder report disclosure practices and to provide sufficient time to comply with the new fee and expense requirements for investment company advertisements, as described below. We are proposing generally a compliance date of 18 months after the amendments’ effective date. Based on our experience, we believe the proposed compliance dates would provide an appropriate amount of time for funds to comply with the proposed rules.698 • Shareholder reports and related requirements. All shareholder reports for funds registered on Form N–1A would have to comply with Item 27A of Form N–1A if they are transmitted to shareholders 18 months or more after the effective date. These funds also would have to comply with the amendments to rule 30e–1 and Form N– CSR no later than 18 months after the effective date by, among other things, meeting the website availability requirements for the new Form N–CSR items. • Rule 30e–3 and related amendments. We propose that the amendments to the scope of rule 30e– 3, and conforming amendments to Form N–1A and rule 498 to remove legends required by rule 30e–3, would be effective 18 months after final rules are adopted to provide time for funds relying on rule 30e–3 to transition to the proposed disclosure framework. • Rule 498B. Funds could rely on rule 498B to satisfy prospectus delivery requirements for existing shareholders beginning on the effective date of the rule, provided the fund is also in compliance with the amendments to 694 Compare PO 00000 Frm 00092 Fmt 4701 Sfmt 4702 698 For example, the proposed compliance dates are generally consistent with the compliance dates the Commission has provided for similar disclosure-based amendments. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at section II.G. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Item 27A of Form N–1A, rule 30e–1, and Form N–CSR. • Amended prospectus disclosure. We propose that funds would have 18 months after the effective date to comply with the amendments to prospectus disclosure in Form N–1A, including the fee summary and revised principal risk disclosure. • Amended advertising rules. We propose to provide 18 months after the effective date for investment company advertisements to comply with the amendments to rules 482, 433, and 34b– 1. We do not propose to provide an additional compliance period for the amendments to rule 156 after the amended rule is effective. We request comment on the proposed compliance and effective dates, including the following: 272. Are the proposed compliance dates appropriate? If not, why not? Is a longer or shorter period necessary to allow registrants to comply with one or more of these particular amendments? If so, which proposed amendments, and what would be an appropriate compliance date? 273. Is the proposed effective date for the rule 30e–3 amendments appropriate? Should the effective date of the rule 30e–3 amendments align with the proposed compliance date for the other shareholder report-related amendments, as proposed? If not, why not? 274. Should we allow funds to begin to rely on proposed rule 498B as soon as the rule is effective, provided they comply with the amendments to Item 27A of Form N–1A, rule 30e–1, and Form N–CSR? If not, why not? III. Economic Analysis khammond on DSKJM1Z7X2PROD with PROPOSALS2 O. Introduction We are mindful of the costs imposed by, and the benefits obtained from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the Securities Act, and section 2(c) of the Investment Company Act state that when the Commission is engaging in rulemaking under such titles and is required to consider or determine whether the action is necessary or appropriate in (or, with respect to the Investment Company Act, consistent with) the public interest, the Commission shall consider whether the action will promote efficiency, competition, and capital formation, in addition to the protection of investors. Further, section 23(a)(2) of the Exchange Act requires the Commission to consider, among other matters, the impact such rules would have on competition and states that the Commission shall not adopt any rule VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The following analysis considers, in detail, the potential economic effects that may result from the proposed rule and amendments, including the benefits and costs to investors and other market participants as well as the broader implications of the proposal for efficiency, competition, and capital formation. The proposed rule would affect the provision of information by funds to investors, including existing fund shareholders and new or prospective fund investors.699 For example, under the proposal funds would provide existing shareholders with more concise and visually engaging shareholder reports that highlight key information, including fund expenses, performance, and holdings.700 The proposed rule would also affect how funds transmit shareholder reports. Under the proposal, funds would not be permitted to deliver paper notices regarding the online availability of shareholder reports in reliance on rule 30e–3. Instead, funds would deliver the more concise shareholder report in full.701 Through a layered disclosure framework, additional information that may be of interest to market professionals and some shareholders, such as fund financial statements, would be available online and delivered in paper or electronic format upon request, free of charge.702 Further, instead of delivering annual prospectus updates to existing shareholders, funds would have the option to notify shareholders promptly of certain material changes to the fund, provided the prospectus is available online and delivered upon request, free of charge.703 In addition to amendments that would primarily affect existing fund shareholders, the proposed rule would amend prospectus disclosure regarding fees and expenses and principal risk, which we expect to primarily affect new or prospective investors in a fund.704 Finally, to improve fee and expense information that is available to investors more generally, we propose to amend the investment company advertising rules to require that investors receive 699 The term ‘‘fund’ in this proposal includes all Form N–1A filers, except where otherwise indicated. 700 See supra Sections II.B and II.C. 701 See supra Section II.G. 702 See supra Section II.D. 703 See supra Section II.F. 704 See supra Section II.H. PO 00000 Frm 00093 Fmt 4701 Sfmt 4702 70807 more transparent and consistent fee and expense information.705 We expect the proposed rule to benefit investors by permitting them to make more efficient use of their time and attention, and by facilitating informed investment decisions and choice among financial products. We expect some funds to experience lower costs of delivering materials under the proposal, which may be passed on to investors as a further benefit of the proposal, while other funds may experience increased delivery costs that would be a cost of the proposal to the shareholders of those funds. P. Economic Baseline and Affected Parties 1. Descriptive Industry Statistics The proposed rule would affect funds and investors who receive fund disclosure under the current rules.706 Approximately 101.6 million individuals own shares of registered investment companies, representing 57.2 million (or 44.8%) of U.S. households. An estimated 99.5 million individuals own shares of mutual funds in particular, representing 56.0 million (or 43.9%) of U.S. households.707 The assets of all registered investment companies exceeded $21 trillion at yearend 2018, having grown from about $5.8 trillion at the end of 1998.708 Based on staff analysis of Form N–CEN filings, we estimate that, as of March 2020, the number of funds that could be affected by the proposed amendments to disclosure and delivery requirements for prospectuses and shareholder reports is 12,410, including 10,310 mutual funds and 2,100 ETFs that register on Form N– 705 See supra Section II.I. vast majority (89%) of mutual fund shares are estimated to be held through retail accounts. See 2019 ICI Fact Book, available at https:// www.ici.org/pdf/2019_factbook.pdf. Based on staff analysis of Form 13F data, the mean institutional holding is estimated to be approximately 48% for exchange-traded funds. We calculated ‘‘institutional holding’’ as the sum of shares held by institutions (as reported on Form 13F filings) divided by shares outstanding (as reported in CRSP). Year-end 2018 Form 13F filings were used to estimate institutional ownership. We note that there are long-standing questions around the reliability of data obtained from Form 13F filings. See Covered Investment Fund Research Reports, Investment Company Act Release No. 33311 (Nov. 30, 2018) [83 FR 64180, 64199 (Dec. 13, 2018)], at n.223; see also Reporting Threshold for Institutional Investment Managers, Exchange Act Release No. 89290 (July 10, 2020) [85 FR 46016] (July 31, 2020), at n.63 (proposing certain technical amendments to Form 13F that the Commission believes may reduce filer mistakes and data inaccuracies). 707 See 2019 ICI Fact Book, supra footnote 706. Among mutual fund-owning households, 63% held funds outside employer-sponsored retirement accounts, with 20% owning funds only outside such plans. 708 See id. 706 The E:\FR\FM\05NOP2.SGM 05NOP2 70808 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 1A.709 As of March 2020, the 10,310 mutual funds (i.e., series of trusts registered on Form N–1A) had average total net assets of $25 trillion and 33,785 authorized share classes.710 The 2,100 ETFs (i.e., series, or classes of series, of trusts registered on Form N–1A) had average total net assets of $3.2 trillion as of March 2020. Funds may invest in other funds under section 12(d)(1) of the Act and the rules thereunder.711 We estimate that approximately 30% of funds invest in such acquired funds.712 Most acquiring funds invest 10% or less of their total assets in acquired funds (excluding money market funds).713 For funds with more than 10% of their total assets in acquired funds, the majority invest more than 20% of their total assets in the acquired funds. We estimate that approximately 32% of funds that invest in acquired funds invest more than 10% of their total assets in acquired funds, and that approximately 28% invest more than 20% of their total assets in acquired funds. Thus, a large share (88%) of the funds with more than 10% invested have more than 20% of their total assets invested in acquired funds.714 The scope of the proposed advertising rule amendments is broader than that of the other elements of the proposal. The advertising rule amendments would apply to other registered investment companies and to BDCs, in addition to mutual funds and ETFs. As of March 2020, there were 1,388 other registered investment companies, including 665 registered closed-end funds, 14 funds that could file registration statements or amendments to registration statements on Form N–3, and 709 UITs.715 As of 709 These estimates are based on staff analysis of Form N–CEN filings received through March 2020 and Bloomberg data. 710 The estimate of the number of authorized share classes is based on responses to Form N–CEN, Item C.2.a., and includes non-ETF share classes of multi-class ETFs. 711 15 U.S.C. 80a–12(d)(1); see also 17 CFR 270.12d1–1 through 270.12d1–3. 712 See Fund of Funds Proposing Release, supra footnote 608, at paragraph accompanying n.242. 713 This analysis excludes money market fund holdings from acquired fund investments because the proposed amendments to prospectus AFFE disclosure exclude money market fund holdings from the calculation of a fund’s investments in acquired funds. Thus, for purposes of this discussion, an ‘‘acquired fund’’ does not include a money market fund. See also supra footnote 619. The estimates of acquired fund holdings are based on staff’s analysis of Form N–PORT filings received through early June 2020. 714 0.28 = 0.32 × 0.88. We further estimate that approximately 4% of acquiring funds invest between 10% and 20% of their total assets in acquired funds (0.04 = 0.32¥0.28). 715 We estimate that all registered investment companies would be affected by the advertising rule amendments. Based on staff analysis of Form N– VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 March 2020, there were 87 BDCs with $139 billion in total assets.716 The proposal would also affect financial intermediaries and other third parties that are involved in the distribution and use of the prospectus and shareholder reports, such as brokerdealers and third-party information providers. We understand that most fund investors are not direct shareholders of record, but instead engage an investment professional and hold their fund investments as beneficial owners through accounts with intermediaries such as brokerdealers.717 As a result, intermediaries commonly distribute fund materials to beneficial owners, including shareholder reports and annual prospectus updates. In the case of broker-dealers, self-regulatory organization (‘‘SRO’’) rules provide that broker-dealer member firms are required to distribute annual reports, as well as ‘‘interim reports,’’ to beneficial owners on behalf of issuers, so long as an issuer (i.e., the fund) provides satisfactory assurance that the broker-dealer will be reimbursed for expenses (as defined in SRO rules) incurred by the broker-dealer for distributing the materials.718 Based on information reported on Form BD, we estimate that 2,016 broker-dealers sell registered investment companies’ shares and may deliver prospectuses or shareholder reports that would be affected by the proposal. 2. Fund Prospectuses The prospectus is the main selling document of the fund and is designed to provide forward-looking information and certain historical information to new shareholders and prospective shareholders with no existing investment in the fund. Funds deliver a prospectus to new shareholders in connection with the initial purchase, and prospectuses are designed to inform CEN filings received through March 2020, this includes all mutual funds and ETFs; 665 closed-end funds registered on Form N–2, with average total net assets of $335 billion; 14 variable annuity separate accounts registered as management investment companies on Form N–3, with total assets of $234 billion; and 709 UITs, with total assets of $2.0 trillion (including 5 ETFs that are registered as UITs with total assets of $338 billion). 716 To estimate the number of BDCs, we use data from Form 10–K and Form 10–Q filings from the first quarter of 2020. Our estimates exclude BDCs that may be delinquent, wholly owned subsidiaries of other BDCs, and BDCs in master-feeder structures. 717 By one estimate, approximately 75% of accounts are held through brokers and other intermediaries, excluding positions held in employer-sponsored plans. See Rule 30e–3 Adopting Release, supra footnote 14, at n.275. 718 See NYSE rule 465(2); NYSE rules 451(a)(1) and (2); FINRA rule 2251(e)(1)(C); FINRA rule 2251.01. PO 00000 Frm 00094 Fmt 4701 Sfmt 4702 investment decisions and help investors compare funds. Funds typically update their prospectuses annually within 120 days of fiscal year-end.719 Funds also may supplement or ‘‘sticker’’ their prospectuses to update the disclosure at other times during the year when material or other changes occur.720 Funds (or intermediaries) are generally required to deliver a fund prospectus to an investor in connection with a purchase of fund shares. Rule 498 enables funds to deliver the summary prospectus rather than the statutory prospectus if they meet certain conditions.721 We estimate that 93 percent of funds deliver a summary prospectus in reliance on rule 498, and the remaining seven percent of funds deliver the statutory prospectus. According to one academic study, the average summary prospectus is 6.77 pages.722 Based on a review of fund websites, the staff has found similar page lengths in summary prospectuses. In a sample from 2020, for example, the staff found that summary prospectus page lengths varied around an average of 8 pages at the mean and median, and that summary prospectuses were shorter than statutory prospectuses, which varied in length around a mean of 128 pages and median of 75 pages. We estimate that currently the average summary prospectus length is 8 pages and the average statutory prospectus length is 128 pages. In addition to sending prospectuses to new investors, funds typically send an annual prospectus update to ongoing shareholders each year, and may deliver prospectus stickers to shareholders to update the disclosure at other times.723 The form (i.e., summary prospectus or statutory prospectus) and length of the annual prospectus update a fund delivers to ongoing shareholders is the same as that of the prospectus it delivers to new investors. The annual prospectus update provides continuing shareholders with access to information about material fund changes, such as in the fund’s fees or principal investment strategy.724 The disclosure format of the 719 See supra footnote 20 and accompanying text. supra footnote 13 and accompanying text. 721 Rule 498 has been in place since 2009. Funds delivered the statutory prospectus to all investors before that time. 722 See Anne M. Tucker & Yusen Xia, Investing in the Dark: Investment Company Disclosure Qualities, Content & Compliance (SSRN, Sept. 1, 2019) (‘‘Tucker and Xia’’), available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3436952 (estimating that, in 2018, the summary prospectus was 6.77 pages, based on estimated page number lengths from mean and median counts by year). 723 See supra footnote 11 and accompanying text. 724 Funds are required to update the prospectus at or before the time their financials are 16 months 720 See E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 prospectus, however, does not highlight or explain the material changes. We estimate that funds, on average, deliver one annual prospectus update each year and one prospectus sticker every other year to disclose material changes to the fund.725 Funds also are required to file their prospectuses on EDGAR. In addition, funds often provide their prospectuses on their websites. The extent to which funds currently publish prospectuses to their public websites is influenced by Commission rules. If a fund delivers a summary prospectus under rule 498 (which an estimated 93 percent of funds do), then its summary and statutory prospectuses and its SAI must be available on the website identified at the beginning of the summary prospectus.726 As for the SAI, in addition to its typical availability online, funds must file it on EDGAR. Funds generally do not deliver SAIs to investors (although a fund must deliver it to an investor on request). Among other things, prospectuses include information about a fund’s investment objective, principal investment strategy, fees and expenses, principal risks, performance, investment adviser, and portfolio managers. Funds must provide certain of this information—including investment objectives, fees and expenses, principal investment strategies, principal risks, and performance—in a structured data format.727 With respect to principal risk disclosure in particular, the length of this disclosure has been growing over time, and funds sometimes order their risks alphabetically instead of by importance. One academic study found that fund risk disclosure in the summary prospectus had nearly doubled in length between 2010 and 2018.728 Based on staff analysis, the median number of principal risks listed in fund prospectuses grew from 11 in 2016 to 13 in 2018, and almost half of old under section 10(a)(3) of the Securities Act. In addition, Investment Company Act rule 8b–16(a) requires funds to amend their Investment Company Act registration statements within 120 days after the close of each fiscal year. 725 This estimate is based on the average number of summary prospectuses funds filed in 2018 and 2019, excluding multiple summary prospectuses filed on the same day and adjusted to recognize that funds may not deliver prospectus stickers to notify shareholders of certain changes. See, e.g., ICI Comment Letter II; Fidelity Comment Letter. This estimate is an average, and funds may deliver more or fewer prospectus-related disclosures to shareholders in a given year. 726 See supra footnote 12. 727 See General Instruction C.3(g) of current Form N–1A. 728 See Tucker and Xia, supra footnote 722, at 27 and 28. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 the principal risk disclosures generally were in alphabetical order.729 Funds disclose their fees and expenses in the prospectus fee table. Some fees and expenses are directly attributed to the fund’s operations, while others are indirect. For example, some fees and expenses are attributable to the fund only through its investments in other funds). These indirect fund expenses generally appear in a separate AFFE line item in the fee table.730 Currently, regardless of the size of a fund’s investments in the acquired funds, AFFE is a component of the line items that, summed together, produce the fund’s bottom-line annual fund operating expenses in its fee table. Differences in the operating expense disclosures of different funds may thus reflect differences in their operations or differences in the operations of their acquired funds. 3. Fund Shareholder Reports Funds provide information about their past operations and activities to investors through periodic shareholder reports. Funds send shareholder reports to ongoing shareholders twice-annually. Thus, shareholders receive both a semiannual and an annual report from the fund. Shareholder reports provide backward-looking information about a fund’s performance (in the case of an annual report), expenses, holdings, and other matters (e.g., statements about the fund’s liquidity management program, the basis for approval of an investment advisory contract, and the availability of additional information about the fund). These reports also include financial statements, which include audited financials in the annual report. Shareholder reports can be quite long. The average length of a shareholder report exceeds 100 pages. Based on staff analysis of shareholder reports available on fund websites, we estimate that the average annual report length is 134 pages and the average semi-annual report length is 116 pages, or 86% of the average length of a fund’s annual report.731 The length and complexity of these materials can make them difficult 729 These figures are based on staff analysis of a sample of 485BPOS, 485APOS, and 497 filings on EDGAR in XBRL format. Analysis of whether funds tend to list principal risks in alphabetical order is based on normalized inversion counts. We recognize that the length and the ordering of risks varies across funds. The average number of principal risks for funds in this sample is 12.7 in 2016 and 13.9 in 2018. 730 See supra Section II.H.1.g. 731 According to one estimate, the annual report was 114 pages long on average in 2016. See Comment Letter of Investment Company Institute (Mar. 14, 2016) on File No. S7–08–15, at n.49, available at https://www.sec.gov/comments/s7-0815/s70815-581.pdf. PO 00000 Frm 00095 Fmt 4701 Sfmt 4702 70809 for some shareholders to use and understand. Funds must deliver the shareholder reports to shareholders. Funds also must file the shareholder reports on EDGAR on Form N–CSR. In addition, funds often provide their shareholder reports on their websites. The extent to which funds currently publish shareholder reports on public websites is influenced by Commission rules. All funds that rely on rule 498 to deliver summary prospectuses are required to make their shareholder reports available online at the website address identified at the beginning of the summary prospectus; as a result, we estimate that at least 93% of funds currently provide their shareholder reports on websites.732 Form N–CSR filings include information other than shareholder reports. This information is filed on EDGAR but is not required to be delivered or otherwise available online. 4. Delivery of Fund Prospectuses and Shareholder Reports Under Commission rules and guidance, delivery of fund prospectuses and shareholder reports occurs by paper or email, depending on the investor’s expressed preference. The Commission has provided guidance permitting electronic delivery of required disclosure materials under certain circumstances.733 Under this guidance, funds can transmit shareholder reports, prospectuses, or other materials electronically in lieu of paper delivery if they satisfy certain conditions relating to investor notice, access, and evidence of delivery. Funds (or intermediaries) relying on this guidance typically obtain an investor’s informed consent to electronic delivery to satisfy the ‘‘evidence of delivery’’ condition. Fund investors that have elected electronic delivery typically receive an email that contains a link to where the materials are available online. The proportion of shareholders who elect to receive fund disclosure by email varies among funds. By one estimate, the average enrollment rate for electronic delivery is 19.35% for direct-held positions (i.e., shares purchased directly through an account 732 In addition, a fund relying on rule 30e–3 would be required to make its shareholder reports publicly accessible on a website. In the case of rule 30e–3, the shareholder report must be available at the website address specified in the notice the fund would send to shareholders under the rule. Funds that rely on rule 30e–3 would also be required to make their complete portfolio holdings for each quarter available online. To the extent that any funds not currently relying on rule 498 to deliver summary prospectuses start to rely on rule 30e–3 beginning as early as January 1, 2021, the number of funds providing their shareholder reports on websites would be greater than 93%. 733 See supra footnote 21. E:\FR\FM\05NOP2.SGM 05NOP2 70810 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules with the fund) and 55% for beneficial positions (i.e., shares purchased through an account with an intermediary).734 With respect to shareholder reports, there is also an alternative means of delivery. On June 5, 2018, the Commission adopted rule 30e–3 to provide an optional method for satisfying obligations to transmit shareholder reports by making them accessible online. Starting in 2021, under rule 30e–3, fund shareholders who would otherwise receive shareholder reports in paper may instead receive a short paper notice that a semi-annual or annual report is available online. Rule 30e–3 does not modify the delivery method for shareholders who request to receive reports in paper or elect to receive reports electronically.735 Funds that intend to rely on rule 30e–3 before 2022 must provide notice to shareholders in their prospectuses and shareholder reports. Under rule 30e–3, what shareholders see when they access the report does not vary in substance or length according to whether they view the report online or request a paper copy of the report.736 Yet delivery of the report tends to be less costly for funds that choose to rely on rule 30e–3 than funds that do not choose to rely on rule 30e–3 because printing and mailing costs are lower for a short paper notice as opposed to a full-length report.737 We estimate that 86 percent of funds registered on Form N–1A plan to rely on 734 See Putnam Comment Letter. 30e–3 requires the fund to deliver shareholder reports in paper to those shareholders who expressly opt in to paper delivery. For funds that rely on rule 30e–3, other shareholders who have not consented to electronic delivery would receive a link to the shareholder report in a paper notice from the fund. 736 See supra Section III.B.3. 737 Shareholders of funds that rely on rule 30e– 3 may request paper copies of the full report, which may reduce the cost savings associated with rule 30e–3 if many shareholders make these requests. We previously estimated that registered investment companies relying on rule 30e–3 would incur approximately $70.6 million per year to print and mail notices and approximately $5.7 million per year to print and mail shareholder reports upon request. See Rule 30e–3 Adopting Release, supra footnote 14, at nn.414 and 415 and accompanying text. khammond on DSKJM1Z7X2PROD with PROPOSALS2 735 Rule VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 rule 30e–3 before 2022.738 We understand that the number could increase or decrease over time, depending on fund and investor experience with the new practice. The Commission previously estimated aggregated costs of $11 million during the transition period for funds to add statements to their shareholder reports and prospectuses notifying shareholders of the fund’s intent to rely on rule 30e– 3. This includes costs of approximately $7.1 million in the first year and approximately $4.3 million in the second year.739 In addition, funds may have incurred costs in anticipation of relying on rule 30e–3 that include costs of tracking how many investors request continued delivery by paper mail under rule 30e–3. This is because rule 30e–3 allows shareholders to elect—at any time—to receive all future reports in paper, or request particular reports in paper on an ad hoc basis. In adopting rule 30e–3, the Commission understood that it would reduce the allocation of resources to printing and mailing of reports, depending on how many funds choose to rely on the rule. At that time, the Commission estimated that annual printing and mailing costs (inclusive of processing fees) for shareholder reports were approximately $20,707.33 per fund absent rule 30e–3.740 Based on the current number of funds, the aggregate costs would be approximately $257.0 million.741 At the time of adoption, the 738 Our estimate reflects the percent of open-end funds registered on Form N–1A that included a statement notifying investors of their intent to rely on rule 30e–3 in annual or semi-annual reports filed on Form N–CSR in 2019. The estimate excludes any funds that may plan to rely on rule 30e–3 after the rule’s extended transition period ends on January 1, 2022 and, thus, are not required to provide this notice to investors. In a June 2019 survey, ICI found that 97 percent of member funds responding to the survey planned to rely on rule 30e–3. See ICI Comment Letter II. 739 See Rule 30e–3 Adopting Release, supra footnote 14, at nn.419 and 420 and accompanying text (estimating costs of $7,144,872 associated with amendments to rule 498 and Form N–1A in the first year and costs of $4,286,980 associated with amendments to rule 498 and Form N–1A in the second year). 740 See id. at n.353. 741 $20,707.33 × 12,410 funds = $256,977,965 = $257.0 million. PO 00000 Frm 00096 Fmt 4701 Sfmt 4702 Commission estimated that 90 percent of funds would choose to rely on rule 30e–3. Based on the current number of funds, this would result in reduced printing and mailing costs for funds of approximately $231.3 million.742 Under our current estimate of the proportion of funds relying on rule 30e–3, which is 86%, the annual savings in printing and mailing costs for funds will decline from approximately $231.3 million to $221.0 million.743 The estimated aggregate printing and mailing costs for funds’ shareholder reports in 2021 depends on whether and how fully funds achieve the projected savings for rule 30e–1 by that year. We expect the aggregate printing and mailing costs (inclusive of processing fees) to range between $36.0 million and $257.0 million in 2021, without the proposal, depending on how fully funds have realized the projected savings from reliance on rule 30e–3.744 For example, we would expect the costs to be closer to the lower end of the range if most or all of the 86% of funds are able to rely on the rule to transmit annual and semiannual reports in 2021, while we would expect the costs to be closer to the higher end of the range if many of these funds are still subject to rule 30e–3’s transition period for some or all of 2021.745 A summary of the delivery scenarios that would occur without the proposal, along with typical delivery outcomes, appears in table 7 below. As indicated, the baseline delivery outcomes vary across funds and shareholders, according to their expressed preferences and circumstances: BILLING CODE 8011–01–P 742 See Rule 30e–3 Adopting Release, supra footnote 14, at n.372 and accompanying text (using an approach to estimate gross aggregate annual savings of printing and mailing costs as the aggregate annual printing and mailing costs multiplied by the percentage of funds expected to rely on rule 30e–3). $256,977,965 × 90% = $231.3 million. 743 $256,977,965 × 86% = $221,001,050. 744 $256,977,965¥$221,001,050 = $35,976,915. 745 See rule 30e–3(i) (generally requiring funds to include required statements about rule 30e–3 in their prospectuses and shareholder reports for a period of two years prior to relying on the rule). E:\FR\FM\05NOP2.SGM 05NOP2 70811 BILLING CODE 8011–01–C VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00097 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.003</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 70812 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 5. Investor Use of Fund Disclosure Based on responses to the Fund Investor Experience RFC and results of prior investor testing and surveys,746 the Commission understands that investors find that the information currently provided to them is overly long and difficult to understand. Investors have expressed concern about the length of the materials.747 Many investors have also suggested that fund disclosure is too complex or technical.748 For example, one survey reported that 67% of surveyed investors found shareholder reports difficult to understand, and another found the number to be higher, 72%.749 Some investor surveys suggest that many investors review little, if any, of funds’ shareholder reports.750 In addition, some investors have expressed concern about the fee information that funds disclose.751 Many investors responding to the Fund Investor Experience RFC expressed the view that funds do not clearly disclose their fees and expenses. This may indicate that they do not make effective use of the fee information that is provided under the current requirements. Several of these investors expressed support for simplifying fee presentations by, for example, reducing the number of line items in the prospectus fee table or providing only one ‘‘bottom-line’’ number showing the fees associated with an investment in the fund. Some commenters suggested that funds should disclose fees in terms of dollars rather than percentages to make the disclosure more understandable to investors.752 Some commenters have suggested that disclosing AFFE in the fee table may confuse investors because the fee table does not reflect similar indirect expenses of the fund and combining the fund’s operating expenses with indirect AFFE does not align with the fund’s financial statements.753 746 See supra Section I.B. e.g., Rojas Comment Letter (‘‘I receive too much information. It is too long and too complex.); Franco Comment Letter; Nevin Comment Letter; Woods Comment Letter; David Comment Letter (stating that fund disclosures are too overwhelming to be useful). 748 See supra footnotes 32 through 36 and accompanying text. 749 See Broadridge Comment Letter I (stating that 72% of surveyed investors that review mutual fund or ETF disclosures do not find them easy to understand); ICI Investor Testing (stating that 67% of surveyed mutual fund investors who recalled receiving fund shareholder reports indicated that the reports are difficult to understand). 750 See supra footnote 40 and accompanying text. 751 See supra Section I.B.2. 752 See supra footnote 63 and accompanying text. 753 See, e.g., Chapman and Cutler Fund of Funds Comment Letter; Invesco Fund of Funds Comment Letter. khammond on DSKJM1Z7X2PROD with PROPOSALS2 747 See, VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Investors also indicate that prospectus risk disclosures are difficult to understand,754 and this may mean that such disclosures currently are difficult to incorporate into investment decisions. For example, many investors responding to the Fund Investor Experience RFC suggested that disclosure about a fund’s risks is too long. Some investors suggested that funds should order risks by importance or otherwise better focus their risk disclosures. 6. Fund Advertisements The Commission rules on investment company advertising apply to all registered investment companies and BDCs. These rules largely focus on how certain types of funds present their performance in advertisements. This focus reflects the Commission’s acknowledgement that investors use information about performance to choose among funds and concern that, absent requirements to standardize how funds present performance in advertisements, investors may be susceptible to basing their investment decisions on information that is inaccurate or creates an inaccurate impression of the fund’s performance.755 In recent years, many funds have reduced their fees they impose on investors. The staff has observed that some funds have highlighted low fees in their advertising materials as a salient factor for investors to consider when choosing among funds. For example, we understand that some funds are advertised as ‘‘zero expense’’ or ‘‘no expense’’ funds based on the information included in their prospectus fee tables, potentially leading investors to believe these funds impose no costs even though the adviser or an affiliate may be collecting fees (e.g., securities lending costs) from the investor’s fund investment. As a result, investors may be more likely today to consider a fund’s fees when making their investment choices than they were when the Commission last updated the investment company advertising rules.756 Also as a result, funds may face 754 See supra Section I.B.2. Rule 156 Adopting Release, supra footnote 662; Investment Company Sales Literature Interpretive Rule, Investment Company Act Release No. 10621 (Mar. 8, 1979) [44 FR 16935 (Mar. 20, 1979)], at paragraph accompanying n.5. 756 See, e.g.,Michael Goldstein, Issues Facing the U.S. Money Management Industry: Presentation to SEC Asset Management Advisory Committee, at 27– 28, available at https://www.sec.gov/files/EmpiricalResearch-Issues-Facing-US-MM.pdf; Ben Phillips, ≤ Remarks and Discussion: U.S. Securities and Exchange Commission, Asset Management Advisory Committee, at 2, 8, and 15 (Jan. 14, 2020), 755 See PO 00000 Frm 00098 Fmt 4701 Sfmt 4702 increased incentives to understate or obscure fees in their advertising materials. Advertising can reduce information asymmetries with implications for investor search costs and effects on investor choices and investment outcomes. Lower search costs can lead to more efficient matches between investor preferences and choices. Advertising can also make investors worse off, however.757 It depends on the abilities of investors to make effective use of the information that the advertising conveys. On the one hand, a fund advertisement can convey information that reduces information asymmetry between the fund and the investor. The effects can be lower search costs for the investor and a lesser chance of a mismatch between the investor’s preferences and the fund that is ultimately chosen. However, investors may respond to advertising in ways that are not consistent with their own interests. The effectiveness of the advertising in lowering search costs and improving match efficiency depends on the investor’s ability to understand the information. For example, a positive relation between funds’ marketing efforts and investor flows (cash investment from investors) is welldocumented among mutual funds.758 In that context, the adviser to the fund bears marketing expenses as part of its total operating cost, and fund shareholders are found to bear some of that cost in the form of fund expenses— unless shareholders react by switching to a similar fund that has lower expenses. One study observed that funds charge higher fees to cover the marketing cost as they engage in an ‘‘arms race’’ for similar pools of available athttps://www.sec.gov/files/BenPhillipsCaseyQuirk-Deloitte.pdf. 757 See, e.g., Nikolai Roussanov, Hongxun Ruan, & Yanhao Wei, Marketing Mutual Funds, Nat’l Bureau of Econ. Research, Working Paper No. 25056 (2018) (developing and estimating a structural model of the effects of mutual fund marketing with costly investor search). 758 See, e.g., Prem Jain & Joanna Wu, Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows, 2 J. FIN 937 (2000) (finding that advertising in funds increases flows (comparing advertised funds with non-advertised funds closest in returns and with the same investment objective)); Gallaher, Kaniel & Starks (2006) and Kaniel & Parham (2016) (finding a significant and positive impact of advertising expenditures and the resulting media prominence of the funds on fund inflows). Steven Gallaher, Ron Kaniel & Laura T. Starks, Madison Avenue Meets Wall Street: Mutual Fund Families, Competition and Advertising (SSRN, Jan. 2006) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=879775; Ron Kaniel & Robert Parham, WSJ Category Kings—The Impact of Media Attention on Consumer and Mutual Fund Investment Decisions, 123 J. Fin. Econ. 1 (2016). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 investors.759 Some of this cost is passed on to investors according to their abilities to distinguish among funds. The authors suggest that as fees increase, investors with a high search cost would be more likely to be made worse off by the increase in fees and related marketing expenditures than those with low search costs. This is because the investors with the high search costs would be more likely to match with asset managers of poor ability, and because the higher fees would reduce returns. Under current rules, fund advertising may influence investor choice in ways that depend on the ability of the investor to make effective use of the information in the advertisement. When the investor is able to make effective use of the information, advertising can reduce the investor’s search cost and thereby improve the efficiency of the match between the investor’s choices and preferences. Q. Costs and Benefits Where possible, we have attempted to quantify the costs, benefits, and effects on efficiency, competition, and capital formation expected to result from the proposed rule. We are providing both a qualitative assessment and quantified estimates of the potential economic effects of the proposed amendments where feasible. As explained in more detail below, because we do not have, and in certain cases do not believe we can reasonably obtain reliable quantitative evidence to use as a basis for our analysis, we are unable to quantify certain economic effects. For example, because the proposed rule would provide fund investors with more tailored, concise disclosure than they currently receive, it is possible that readership of fund disclosure may increase. We do not have reliable quantitative estimates of the extent to which the use of more concise disclosure would enhance readership compared to the baseline scenario in which funds continue to deliver the materials that investors now receive. Similarly, the format and content of the proposed annual and semi-annual reports could reduce the amount of time and effort shareholders require to monitor their fund investments and make portfolio decisions (that is, whether to buy additional shares, continue to hold, or sell a fund investment). We also do not have reliable quantitative estimates of the extent to which the delivery of these more concise, tailored reports would 759 See Roussanov, Ruan, & Wei, supra footnote 757. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 70813 reduce the amount of time and effort investors require to make portfolio decisions, or the value of that time and effort to investors. Nor do we have such estimates for the baseline conditions without the proposed rule. In those circumstances in which we do not have the requisite quantitative evidence, we have qualitatively analyzed the economic impact of the proposed rule and the baseline environment. Our inability to quantify these costs, benefits, or other effects does not imply these effects are less significant from an economic perspective. We request that commenters provide any information, including relevant data or supporting quantitative evidence, that may help inform our analysis and understanding of the economic consequences of the proposed rule and amendments. findings, other empirical evidence suggests that disclosure simplification may benefit consumers of disclosed information.763 In general, academic research appears to support the notion that shorter and more focused disclosures could be more effective at increasing investors understanding than longer, more complex disclosures. For example, a concise shareholder report or a prospectus fee summary could more effectively communicate information to investors than current shareholder reports or prospectus fee tables. Another characteristic of effective disclosures documented in academic research is disclosure salience. Salience detection is a key feature of human cognition allowing individuals to focus their limited time and attention on a subset of the available information and 1. Broad Economic Considerations causing them to over-weight this In addition to the comments we information in their decision-making received in response to the Fund processes.764 Within the context of Investor Experience RFC, discussed in disclosures, information disclosed more Section I.B, academic studies have saliently, such as information presented documented potential benefits of in bold text, or at the top of a page, providing more concise and tailored would be more effective in attracting disclosure. While some of these studies attention than less saliently disclosed apply only to certain elements of our information, such as information proposal, others apply broadly to the presented in a footnote. Limited framing of our analysis of the economic impacts of the proposed rule. In attention also increases the importance particular, some of this research has of an individual’s focusing on salient identified characteristics that may disclosure signals. Some research finds increase the effectiveness of a disclosure that more visible disclosure signals are document to consumers, as discussed associated with stronger stakeholder below.760 response to these signals.765 Moreover, Research suggests that, because research suggests that increasing signal individuals can exhibit limited ability to salience is particularly helpful to absorb and understand the implications consumers with lower education levels of the disclosed information, for 766 There is also example due to limited attention or low and financial literacy. level of financial sophistication,761 more empirical evidence that visualization targeted and simpler disclosures may be improves individual perception of more effective in communicating Bond Ratings and the Cost of Debt, 22 Rev. Acct. information to investors than more Stud. 608 (2017) and Alistair Lawrence, Individual complex disclosures. Academic studies Investors and Financial Disclosure, 56 J. Acct. & suggest that costs, such as from Econ. 130 (2013). increased investor confusion or reduced 763 See, e.g., Sumit Agarwal, et al., Regulating understanding of the key elements of Consumer Financial Products: Evidence from Credit Cards, Nat’l Bureau of Econ. Research, Working the disclosure, are likely to increase as Paper No. 19484 (Jun. 2014), available at https:// disclosure documents become longer, www.nber.org/papers/w19484 (finding that a series more complex, or more reliant on of requirements in the Credit Card Accountability 762 narrative text. Consistent with such Responsibility and Disclosure Act (CARD Act), 760 See George Loewenstein, Cass R. Sunstein, & Russell Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ. 391 (2014) (‘‘Lowenstein Paper’’). The paper provides a comprehensive survey of the literature relevant to disclosure regulation. 761 See, e.g., David Hirshleifer & Siew Hong Teoh, Limited attention, information disclosure, and financial reporting, 36 J. Acct. & Econ. 337 (2003) (‘‘Hirshleifer & Teoh Study’’) and L.E. Willis, Decision making and the limits of disclosure: The problem of predatory lending: Price, 65 Md. L. Rev. 707 (2006). 762 See, e.g., Samuel B. Bonsall & Brian P. Miller, The Impact of Narrative Disclosure Readability on PO 00000 Frm 00099 Fmt 4701 Sfmt 4702 including several provisions designed to promote simplified disclosure, has produced substantial decreases in both over-limit fees and late fees, thus saving U.S. credit card users $12.6 billion annually). 764 See Daniel Kahneman, Thinking, Fast and Slow (2013); Susan Fiske & Shelley E. Taylor, Social Cognition: From Brains to Culture (3rd ed. 2017). 765 See Hirshleifer and Teoh Study, supra footnote 761. 766 See, e.g., Victor Stango & Jonathan Zinman, Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees, 27 Rev. Fin. Stud. 990 (2014). E:\FR\FM\05NOP2.SGM 05NOP2 70814 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 information.767 For example, one experimental study shows that tabular reports lead to better decision making and graphical reports lead to faster decision making (when people are subject to time constraints).768 Overall these findings suggest that problems such as limited attention may be alleviated if key information in shareholder reports is emphasized, is reported closer to the beginning of the document, and is visualized in some manner (e.g., tables, graphs, bullet lists). However, it is also important to note that given a choice, registrants may opt to emphasize elements of the disclosure that are most beneficial to themselves rather than investors, while deemphasizing elements of the disclosure that are least beneficial to them. The proposed instructions for shareholder reports include requirements that are designed to mitigate this risk. For example, the proposed instructions require disclosure items to appear in a prescribed order, which mitigates funds’ ability to provide disclosure opportunistically.769 There is also a trade-off between allowing more disclosure flexibility and ensuring disclosure comparability (e.g., through standardization). Greater disclosure flexibility potentially allows the disclosure to reflect more relevant information, as disclosure providers can tailor the information to firms’ own specific circumstances. Although disclosure flexibility allows for disclosure of more decision-relevant information, it also allows registrants to emphasize information that is most beneficial to themselves rather than investors, while deemphasizing information that is least beneficial to the registrants. Economic incentives to present one’s operations and performance in better light may drive funds to deemphasize information that may be relevant to retail investors. Moreover, although standardization makes it harder to tailor disclosed information to a firm’s specific circumstances, it also comes with some benefits. For example, people are generally able to make more coherent and rational decisions when they have comparative information that allows 767 See John Hattie, Visible Learning. A Synthesis of Over 800 Meta-Analyses Relating to Achievement (2008). 768 See Izak Benbasat & Albert Dexter, An Investigation of the Effectiveness of Color and Graphical Information Presentation Under Varying Time Constraints, 10–1 MIS Q. 59 (1986). 769 Funds are already required to provide certain disclosure in a required order in the summary section of the statutory prospectus, or in the summary prospectus. See General Instruction C.3 of Form N–1A. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 them to assess relevant trade-offs.770 The proposed rule is intended to strike a balance between the relative benefits and costs of disclosure standardization versus disclosure flexibility; for example, by requiring a prescribed order of disclosure topics and providing standardized instructions for each of those disclosures but allowing some flexibility for certain disclosure presentations (e.g., fund statistics, graphical representation of holdings) to account for different fund types. In addition, studies have found that the structure or format of disclosure may improve (or decrease) investor understanding of the disclosures being made. Every disclosure document not only presents new information to retail investors but also provides a particular structure or format for this information that affects investors’ evaluation of the disclosure.771 This ‘‘framing effect’’ could lead investors to draw different conclusions depending on how information is presented. For example, if the liquidity risk management program information is presented first in a shareholder report, it could affect the way investors perceive all subsequent disclosures in the shareholder report and, possibly, discount more heavily the information provided by funds that disclose issues regarding liquidity risk management over the period. If, instead, liquidity risk management information were provided near the end of the shareholder report, the effect of the information could be moderated because it would no longer frame the other information provided to investors. Because of such framing effects, it is important that the structure of a disclosure document supports the intended purpose of the disclosure. 2. Modified Disclosure Framework for Existing Fund Shareholders a. Summary of Economic Effects The proposal would provide fund shareholders with more concise 770 See, e.g., JR Kling, et al., Comparison Friction: Experimental Evidence from Medicare Drug Plans, 127 Q. J. Econ. 199 (2012) (finding that in a randomized field experiment, in which some senior citizens choosing between Medicare drug plans that were randomly selected to receive a letter with personalized, standardized, comparative cost information (‘‘the intervention group’’) while another group (‘‘the comparison group’’) received a general letter referring them to the Medicare website; plan switching was 28% in the intervention group, but only 17% in the comparison group, and the intervention caused an average decline in predicted consumer cost of about $100 a year among letter recipients); CK Hsee, et al., Preference Reversals Between Joint and Separate Evaluations of Options: A Review and Theoretical Analysis, 125 Psychol. Bull. 576 (1999). 771 See Amos Tversky & Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, 211 Sci. 453 (1981). PO 00000 Frm 00100 Fmt 4701 Sfmt 4702 disclosure that highlights information that is key to retail shareholders for the purpose of monitoring fund investments and informing portfolio decisions, while providing layered access to other information that shareholders now receive that may be of interest to market professionals and some fund shareholders. To promote disclosure that highlights key information for shareholders further, the proposal would permit funds to notify shareholders promptly if certain material changes occur to the fund (provided the summary prospectus, statutory prospectus, and additional information is available online and delivered upon request), instead of delivering annual prospectus updates and prospectus stickers each year. Funds (and intermediaries) would have the option to continue sending the annual prospectus update under the rule. The following sections discuss the potential costs and benefits of the proposed modifications to the disclosure framework. In summary, we expect the proposed rules to benefit retail shareholders by providing information that is easier to use and that highlights key information for purposes of monitoring fund investments and making informed portfolio decisions. As a result, the proposed amendments could result in shareholders making more informed investment decisions by reducing obstacles that the Commission believes have limited readership of fund shareholder reports—namely, that the reports are too lengthy and not sufficiently tailored for retail shareholders. The proposed rules are also likely to reduce expenses associated with delivering disclosures for some funds, and to the extent that funds pass these savings on to shareholders, fund shareholders would benefit from these cost savings. We discuss two principal types of costs associated with the proposed approach. First, we expect fund and fund shareholders to incur transition costs of adapting to the new disclosure framework. Second, we anticipate some shareholders may sustain costs beyond the transition period arising from the possibility of mismatch between the preferences of the shareholders and the design of the rule proposal. b. Benefits to Investors It is difficult to quantify the effects of the proposed modified disclosure framework on investors. The delivery of more concise disclosures by funds through the proposed layered framework may reduce the investor effort required to monitor existing fund E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 investments or to make subsequent portfolio decisions. Key information provided in a concise, user-friendly presentation could allow investors to understand information about a fund’s operations and activities or compare information across products more easily or efficiently, and as a result, may lead investors to make decisions that better align with their investment goals.772 For example, the proposed rule requires funds to distill certain key information—such as expenses, performance, and holdings—and use graphs, tables, and other more visually engaging presentations in their shareholder reports.773 As another example, because the proposal would require fund registrants to prepare separate shareholder reports for each series, a shareholder would be able to more quickly identify information about the fund in which she or he invests, instead of having to find his or her fund in a long report that covers multiple funds. Further, by providing additional flexibility for funds to use technology to provide interactive or user-friendly features in electronic versions of their shareholder reports, the proposal may provide shareholders with access to information that is more tailored to their individual needs and circumstances (e.g., performance or expense information based on their individual investment amounts), which may facilitate better monitoring of fund investments or more informed investment decisions. There is evidence to suggest that consumers benefit from disclosures that highlight key information.774 One study finds that the use of summary prospectuses helps investors spend less time and effort to make investment decisions without reduction in the quality of those decisions.775 This 772 Research suggests that individuals are generally able to make more efficient decisions when they have comparative information that allows them to assess relevant trade-offs. See, e.g., supra footnote 770. 773 See supra footnotes 767 and 768 and accompanying text (discussing studies suggesting that visualization improves an individual’s perception of information). 774 See, e.g., supra footnote 763; see also Robert Clark, Jennifer Maki & Melinda S. Morrill., Can simple informational nudges increase employee participation in a 401(k) plan?, Nat’l Bureau of Econ. Research, Working Paper 19591 (2013). The authors find that a flyer with simplified information about an employer’s 401(k) plan, and about the value of contributions compounding over a career, had a significant effect on participation rates. 775 Beshears Paper, supra footnote 81. We note, however, that while the authors find evidence that investors spend less time making their investment decision when they are able to use summary prospectuses, there is no evidence that the quality of their investment decisions is improved. In particular, ‘‘On the positive side, the Summary VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 research is consistent with the 2012 Financial Literacy Study, which showed that at least certain investors favor a layered approach to disclosure with the use, wherever possible, of tailored disclosures containing key information about an investment product or service.776 We understand that investors may prefer a layered approach simply to save time in reaching similar investment decisions, or to make better decisions, or both. Further, investors allocate their attention selectively,777 and the sheer volume of disclosure that investors receive about funds may discourage investors from reading the materials that are currently delivered to them. For example, in connection with the development of the summary prospectus, the observations of a 2008 telephone survey conducted on behalf of the Commission with respect to mutual fund statutory prospectuses are consistent with the view that the volume of disclosure may discourage investors from reading disclosures.778 That survey observed that many mutual fund investors did not read statutory prospectuses because they are long, complicated, and hard to understand. Investor surveys submitted by commenters on the Fund Investor Experience RFC similarly suggest that shareholders may be more likely to read more concise shareholder reports.779 To Prospectus reduces the amount of time spent on the investment decision without adversely affecting portfolio quality. On the negative side, the Summary Prospectus does not change, let alone improve, portfolio choices. Hence, simpler disclosure does not appear to be a useful channel for making mutual fund investors more sophisticated . . .’’ Id. at 13. 776 See 2012 Financial Literacy Study, supra footnote 26. 777 See, e.g., Loewenstein Paper, supra footnote 760; Hirshleifer and Teoh Study, supra footnote 761. 778 Prior to the Commission’s 2009 adoption of mutual fund summary prospectus rules, the Commission engaged a consultant to conduct focus group interviews and a telephone survey concerning investors’ views and opinions about various disclosure documents filed by companies, including mutual funds. During this process, investors participating in focus groups were asked questions about a hypothetical Summary Prospectus. Investors participating in the telephone survey were asked questions relating to several disclosure documents, including mutual fund prospectuses. See Abt SRBI, Inc., Final Report: Focus Groups on a Summary Mutual Fund Prospectus (May 2008), available at https:// www.sec.gov/comments/s7-28-07/s72807-142.pdf; see also supra footnote 10 and accompanying text. 779 See, e.g., Broadridge Comment Letter I (discussing the results of a quantitative survey related to fund disclosure in which approximately 39% of investors said they would be more likely to look at or review a summary format of a fund’s annual and semi-annual reports); ICI Comment Letter I (discussing an investor survey of a summary shareholder report prototype, in which more than 90% of participants indicated that they would be PO 00000 Frm 00101 Fmt 4701 Sfmt 4702 70815 the extent that the proposed rule would increase readership of fund shareholder reports, they could improve the efficiency of portfolio allocations made on the basis of disclosed information for those shareholders who otherwise would not have read the disclosures that the funds deliver currently. In addition, other information that shareholders currently receive under the baseline, including financial statements, financial highlights, and annual prospectus updates, would be available online and delivered upon request to those shareholders who are interested in more-detailed information. As a result, shareholders who use this information to monitor their fund investments or inform portfolio decisions could continue to access and use this information. Further, by allowing funds to deliver prompt notices of material funds changes to existing shareholders instead of annual prospectus updates, the proposed rule would help shareholders focus on information that is designed to meet their needs, rather than the needs of new or prospective investors. This aspect of the proposal would also reduce the amount of duplicative disclosure that fund shareholders currently receive. This is because annual prospectus updates include some of the same types of information as shareholder reports, including expense and performance information. Reducing duplicative disclosure could help shareholders more easily focus on salient information and could reduce the potential for shareholder confusion when a shareholder receives multiple disclosure materials close in time to one another and that include similar information, but with different presentations of that information. By tailoring the information that funds deliver to shareholders to meet the needs of retail shareholders, the proposed rule could facilitate better or more efficient monitoring of fund investments and overall investment decision-making. The magnitude of this effect will depend on the extent to which investors review the disclosures directly, as a basis for their choices. In addition, by excluding funds from rule 30e–3, fund shareholders may receive key information to monitor their fund investments or inform their investment decisions more directly as compared to the baseline. To the extent that direct delivery of a concise shareholder report that highlights key information for retail shareholders— more likely to read the summary prototype than a full-length shareholder report); Broadridge Comment Letter II. E:\FR\FM\05NOP2.SGM 05NOP2 70816 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 including annual report disclosure that better identifies material changes to the fund than current annual prospectus update disclosure—may increase how informed shareholders are about funds, this could potentially increase shareholders’ ability to allocate capital efficiently across funds and other investments.780 The proposed changes are intended to make the disclosures easier to use by highlighting key information for shareholders in a concise, visually appealing format. As described above, shareholders responding to the Fund Investor Experience RFC indicated that shareholder reports are currently too lengthy and technical, and expressed a preference for receiving summary disclosures, including visual tools such as tables and charts.781 Given this, we expect that the proposed rule could reduce obstacles limiting shareholder readership of fund shareholder reports. We note that the magnitude of the effect would depend on how many shareholders rely on the reports that are the subject of the proposal to monitor their funds. It would also depend on the extent to which those who use the reports would monitor differently in response to the tailored disclosures and, for other shareholders, how many would choose to rely on the reports under the rule that would not otherwise do so. We are requesting comment on this appraisal, and also comments on what sources might be available for consideration by the Commission of quantitative estimates of the likely future difference in shareholder use of the disclosure under the proposal relative to what would occur in the future under the current framework. c. Costs to Investors Fund shareholders could experience certain transition costs under the proposal, and some shareholders may experience other ongoing costs. Transition costs would include the costs of the inconvenience to some shareholders of adapting to the new materials and to the changes in the presentation of information. While the more concise shareholder reports required by the proposal would likely reduce investor comprehension costs, investors would nevertheless bear a onetime cost of the inconvenience of adjusting to the changes in the disclosures they receive. These costs are likely to be relatively lower for less experienced shareholders and relatively greater for the more seasoned 780 See supra Section I.B.1 (discussing investor preferences for concise, layered disclosure). 781 Id. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 shareholders who are accustomed to existing fund practices. Shareholders in funds that rely on rule 30e–3 to deliver paper notices to notify shareholders that a shareholder report is available online, or shareholders in funds that were planning to rely on rule 30e–3 and that included statements in their shareholder reports and prospectuses notifying shareholders of the upcoming change to shareholder report delivery, may experience greater transition costs. For example, those shareholders who were receiving rule 30e–3 notices or who expected to begin receiving rule 30e–3 paper notices in the future may experience some confusion when a fund begins to deliver concise shareholder reports. However, shareholders receiving the annual and semi-annual reports that this proposal contemplates would be receiving tailored information more directly than they would through the rule 30e–3 notice. We believe the benefit of making this tailored information more accessible to shareholders would justify any potential short-term confusion that may result from the transition. In addition, a fund that relied on rule 30e–3 would be able to communicate to investors about these shareholder report changes. Beyond transition costs, the proposal would also impose costs on shareholders who prefer to receive the baseline disclosure as opposed to the more concise and tailored disclosure they would receive under the proposal. These shareholders may experience costs associated with locating additional information online or requesting delivery of materials they would no longer automatically receive. Some shareholders may rely on information that is currently included in the annual and semi-annual report but would, under the proposed amendments, be located in other documents, such as Form N–CSR or the SAI. Those shareholders would incur the cost of reviewing multiple disclosure documents to locate the information that was previously located in a single document. The significance of this cost would likely depend on several factors, including the delivery method and relative importance of each piece of information to the individual shareholder. For those shareholders who prefer to receive disclosures in paper, the proposal provides an option for the shareholder to request the mailing of a paper copy of the new Form N–CSR items, such as financial statements, that would no longer appear in shareholder reports. In addition, for funds that rely on proposed rule 498B, shareholders who PO 00000 Frm 00102 Fmt 4701 Sfmt 4702 prefer paper delivery of the annual prospectus update would face the choice of adjusting to using the online version of the prospectus or making ad hoc requests for paper delivery. For those shareholders, the effect of either of these choices would be a cost of disutility or inconvenience from the loss of the automatic access to their preferred option that they have under the current framework but would not have under the proposal. To illustrate, we note that, for some shareholders, the cost of making requests for additional information would be small and therefore, the cost of losing their preferred option as the default under the proposal would be small. This is because those shareholders would likely react to the proposal by making the effort to request continued mailing of more-detailed semi-annual information or prospectuses. For those shareholders, the cost of the proposal would include the cost of the inconvenience from having to make the request. Shareholders who find it relatively burdensome to make a request for continued mailing, however, would be migrated over to the new delivery framework and face disutility from migrating to the new tailored disclosures. By providing a mechanism for shareholders to continue to receive the more-detailed information, the proposal would limit the extent to which shareholders who prefer the current disclosures would end up facing disutility from receiving the proposed disclosures instead. Thus, the overall cost of inconvenience or disutility to those shareholders who prefer the delivery framework under the current rules to the proposed framework would depend on how easy it is for shareholders to request continued mailings of more-detailed semi-annual information or prospectuses by funds after the rule goes into effect. We do not have access to reliable estimates of the opportunity cost to investors associated with this effect of the proposed rule; we are therefore requesting comment on this, as well as the effects on the use of investor time and attention, as further described at the end of this section. In addition to transition costs and information search or request costs, fund shareholders would bear the costs of the proposed modified disclosure framework through the increased expenses that funds would incur to implement the proposal. We discuss those expenses in the section on ‘‘other costs,’’ below. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules d. Other Benefits The proposal would reduce some of the costs to funds of delivering information to shareholders. As the owners of the fund assets, shareholders could benefit from this cost reduction in proportion to their holdings of those assets. The magnitude of this cost savings would be more significant to the extent that a fund would deliver shareholder reports or prospectus updates to investors by paper mail in the absence of the proposed rule. The amount of the cost savings would vary across funds, depending on the expressed preferences of the fund and its shareholders for paper versus electronic delivery under Commission guidance on electronic delivery (and, with respect to shareholder reports, rule 30e–3 notices) and on fund practices between delivery of the summary prospectus under rule 498 versus the statutory prospectus. The scenarios where delivery costs may decline significantly under the proposal, relative to the baseline scenario, are indicated in table 8 and discussed below. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Delivery Cost Savings for Shareholder Reports The proposal would reduce the cost of delivering a shareholder report by a larger per-fund amount for funds that do not rely on rule 30e–3 (deliver the full report) than for funds that rely on rule 30e–3 (deliver a notice) at the time any final rule goes into effect. Thus, we consider separately the delivery-cost savings from the proposed rule for funds under each of these two baseline delivery scenarios. For funds that do not rely on rule 30e–3, the proposal would reduce delivery costs by replacing the cost of sending current annual and semi-annual reports with the smaller cost of sending concise reports to those shareholders who do not request edelivery. This is because the cost of printing and mailing (including processing fees) would be lower for the concise reports. We estimate that funds could deliver annual and semi-annual reports as trifold mailings (3–4 pages) under the proposal instead of annual reports that are approximately 134 pages on average and semi-annual reports that are approximately 116 pages on average. One commenter on the Fund Investor Experience RFC estimated that delivering a concise shareholder report instead of current shareholder reports would reduce the per unit cost of delivery from $0.50 to $0.33 annually, which is a decline of $0.17 per unit or VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 34 percent.782 The commenter’s per unit delivery cost estimates assume that 3 out of 10 fund shareholders receive a shareholder report by mail.783 We understand that these costs may or may not be representative of the costs for all funds. For example, the commenter’s estimates are based on costs for delivering shareholder reports to shareholders who hold their shares in beneficial accounts and may not reflect any differences in costs for direct-held accounts.784 Nevertheless, we believe that the estimate of 34 percent is a reasonable estimate of the likely decline in the per unit cost of delivering the concise report for funds that do not rely on rule 30e–3 under the proposal.785 Thus, for these funds, we estimate that the proposed rule would reduce their current shareholder report delivery costs by 34 percent on average, resulting in an average annual cost savings of approximately $7,040 per fund that does not rely on rule 30e–3.786 For funds that rely on rule 30e–3, the proposal would reduce delivery costs because it would be less costly to deliver the concise report than the rule 30e–3 notice. That is, while the cost of printing the concise report may be greater than the cost of printing the notice (see table 8), the overall cost of delivery that includes the costs of printing, mailing, and processing fees would likely be lower for the concise report.787 One 782 See Broadridge Comment Letter II. id. We understand that the commenter’s cost estimates are not limited to shareholder reports that are delivered by mail and, instead, the cost per unit averages the costs of different delivery mechanisms (including paper and electronic delivery). See, e.g., Comment Letter of Broadridge Financial Solutions, Inc. (Oct. 31, 2018) on File No. S7–13–18, available at https://www.sec.gov/ comments/s7-13-18/s71318-4593946-176328.pdf (estimating that the average cost of paper, printing, and postage of a mailed shareholder report is $0.94). 784 For instance, we understand that the average enrollment rate for electronic delivery may be lower for direct-held accounts, which would result in higher per unit costs for delivering current shareholder reports than the commenter provided. See supra footnote 734 and accompanying text. In addition, the cost of delivering the current and proposed shareholder reports vary by individual funds based on a number of factors. For example, we understand that printing and mailing costs vary depending on the length of the fund’s shareholder reports and the number of reports it delivers by mail. 785 $0.17 estimated reduction in shareholder report delivery costs associated with summary shareholder reports/$0.50 estimated costs of delivering current shareholder reports = 34 percent. 786 See supra footnote 740 and accompanying text (noting that the Commission estimated annual printing and mailing costs (inclusive of processing fees) of $20,707.33 absent rule 30e–3). $20,707.33 × 34 percent = $7,040.49. 787 See, e.g., ICI Comment Letter I (stating that processing fees on average would be $0.20 for rule 30e–3 notices and $0.15 for concise shareholder reports); Broadridge Comment Letter II. 783 See PO 00000 Frm 00103 Fmt 4701 Sfmt 4702 70817 commenter estimated that delivering a concise shareholder report instead of a rule 30e–3 notice would reduce the delivery cost from $0.36 to $0.33 annually, which is a decrease of $0.03 per unit or approximately 8 percent.788 This is assuming that 3 out of 10 fund shareholders receive a shareholder report by mail and is based on the commenter’s experience processing shares held in beneficial accounts.789 We understand that this estimate may or may not be representative of the average costs for all funds. For example, the average enrollment rate for electronic delivery may be lower for direct-held accounts, which would result in higher per unit costs than the commenter provided.790 As another example, to the extent a fund would share a single, consolidated rule 30e–3 notice with other funds to notify a shareholder of the website address(es) for each fund’s report, and the fund has many shareholders who are invested in those other funds, the fund may not experience the same extent of cost savings under the proposal.791 Nevertheless, we believe that the estimate of approximately 8 percent is a reasonable estimate of the likely decline in the per-unit cost of delivering the concise report rather than rule 30e–3 notices.792 Specifically, for funds that rely on rule 30e–3, we estimate that the proposed rule would reduce their current shareholder report delivery costs by approximately 8 percent, on average, and that the average annual cost savings would be approximately $1,243 per fund that relies on rule 30e– 3.793 The total shareholder report delivery cost savings from the proposal would be a weighted combination of the savings in delivery costs for funds that rely on rule 30e–3 and the savings for funds that do not rely on rule 30e–3. For example, if 86 percent of funds deliver 788 See Broadridge Comment Letter II. id. 790 See supra footnote 734 and accompanying text. 791 See Rule 30e–3 Adopting Release, supra footnote 14, at paragraph accompanying n.211 (discussing consolidated rule 30e–3 notices). 792 $0.03 average reduction in delivery costs for summary shareholder reports/$0.36 average cost of delivering rule 30e–3 notices = 8.33 percent. 793 Based on one commenter’s estimate, delivering the concise report instead of the rule 30e–3 notice would reduce the per-unit delivery cost from $0.36 to $0.33, or $0.03 per unit. See Broadridge Comment Letter II. This is $0.03/$0.17 or approximately 17.65 percent of estimated perunit reduction in the shareholder report delivery costs for funds that do not rely on rule 30e–3. We thus estimate that the savings from delivering the concise report instead of the notice is 17.65 percent of the estimated $7,040.49 cost savings from delivering the concise report instead of the full report, or 17.65 percent × $7,040.49 = $1,242.65. 789 See E:\FR\FM\05NOP2.SGM 05NOP2 70818 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules rule 30e–3 notices before the proposal is in effect, the delivery cost savings from the proposal would be an estimated $13.26 million from those funds.794 In addition, if 14 percent of funds do not rely on rule 30e–3 before any final rules are in effect, the delivery cost savings would be $12.23 million from those funds.795 Thus, the aggregate delivery costs savings for shareholder reports from the rule would be $25.49 million.796 We understand that the estimated cost savings for shareholder reports would depend on factors in addition to those discussed above. These include the fraction of funds that would deliver notices under rule 30e–3 before any final rules are in effect and the extent to which those funds actually experience a delivery cost savings under the proposal. For example, if the cost of delivering a concise shareholder report were about the same as the cost of delivering a notice under rule 30e–3, then our estimated cost savings would decline from $25.49 million to $12.23 million. As another example, if fewer than 86 percent of funds began to deliver notices under rule 30e–3 before any final rules are in effect, then our estimated aggregate cost savings would be greater than $25.49 million. This is because a larger number of funds would experience higher delivery cost savings in that instance. Delivery Cost Savings for Prospectuses Funds that rely on rule 498B would experience cost savings from delivering prompt notices of certain material changes to existing shareholders instead of the annual prospectus updates and interim prospectus stickers that they delivery currently. The proposal would allow funds to consolidate some of their current disclosures so that they would generally deliver fewer disclosure materials to shareholders. We estimate that, on average, funds make 1.5 material changes per year that they currently disclose in annual prospectus updates and interim prospectus stickers and that the proposal would require them to disclose funds × 86 percent × $1,242.64 estimated savings in delivery costs per fund that delivers a rule 30e–3 notice = $13.26 million. 795 12,410 funds × 14 percent × $7,040.49 estimated savings per fund that delivers the full report (and does not rely on rule 30e–3) = $12.23 million. 796 The weighted average savings in delivery cost per fund is (86 percent × $1,242.64) + (14 percent × $7,040.49) = $1,068.67 + $985.67 = $2,054.34. Multiplying this across all 12,410 funds yields an estimated delivery cost savings from the proposal of 12,410 funds × $2,054.34 per fund = $25.49 million. That is, the aggregate cost savings is $13.26 million + $12.23 million = $25.49 million. khammond on DSKJM1Z7X2PROD with PROPOSALS2 794 12,410 VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 in their annual reports or through prompt notices under rule 498B.797 Of these material changes, we estimate that an average of 1 material change is made in the annual prospectus update. Under the proposal, a fund would disclose this material change in its annual report and generally would not need to send a separate notice under proposed rule 498B. We estimate that the remaining average of 0.5 material changes per year would be disclosed separately in rule 498B notices. As a result, we estimate that proposed rule 498B would reduce fund delivery costs by reducing the number of separate prospectus-related deliveries to existing shareholders from an average of 1.5 deliveries to an average of 0.5 deliveries per year. The total cost savings would depend on factors that include: (1) Whether a fund currently delivers annual prospectus updates to all shareholders or tracks which shareholders purchase additional shares during the year; (2) how many shareholders have elected electronic delivery and how many shareholders receive prospectus materials in paper; (3) how many material changes a fund makes each year; and (4) whether a fund delivers prospectus stickers separately or consolidates this delivery with delivery of other materials, such as semi-annual reports. We are unable to estimate the aggregate cost savings across all funds. However, we are able to estimate that the current costs of printing and mailing summary prospectus annual updates is approximately $0.55 per summary prospectus and that the proposal would eliminate at least part of this cost.798 That is, under proposed rule 498B, funds would no longer incur the costs of delivering annual prospectus updates by mail. Additionally, funds would no longer incur processing fees for delivering annual prospectus updates electronically such as by email currently.799 797 See supra footnote 725. Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at n.1077 and accompanying text (estimating that 9-page updating summary prospectus for variable insurance contracts would cost $0.55 to print and mail); see also supra paragraph accompanying footnote 721 (estimating that funds’ summary prospectuses are, on average, 8 pages long). 799 For example, a fund may pay a type of processing fee (referred to as a preference management fee and, formerly, as an incentive fee) of up to 10 cents per distribution per account where a shareholder holds shares in a fund through an account with an intermediary and the shareholder has elected to receive fund disclosures electronically. See NYSE rule 451.90(4); Supplementary Material .01(a)(5) to FINRA rule 2251. See also Comment Letter of Investment Company Institute (Oct. 31, 2018) on File No. S7– 798 See PO 00000 Frm 00104 Fmt 4701 Sfmt 4702 We understand funds that currently deliver statutory prospectuses to existing shareholders would likely experience greater delivery cost savings if they were to rely on proposed rule 498B because of higher printing and mailing costs for statutory prospectuses than for shorter summary prospectuses. However, we assume that only funds that deliver summary prospectuses would rely on proposed rule 498B. We believe that funds that deliver summary prospectuses are more familiar with using layered disclosure concepts to satisfy prospectus delivery obligations and would incur fewer transition costs to comply with proposed rule 498B, as discussed in Section III.C.2.e. Benefits of Proposed Form N–CSR Requirements Beyond delivery-related cost savings from the proposal, there are benefits associated with the proposed requirement that funds continue to file on Form N–CSR certain information, such as financial statements and financial highlights, that would no longer appear in shareholder reports, relative to the alternative of not continuing to require such filings. The continued availability of this information, including on a historical basis on EDGAR, would allow financial professionals and other market participants to continue to analyze this information over time. This historical information also may facilitate the Commission’s performance of fund monitoring responsibilities that benefit investors. Finally, a fund’s principal executive and financial officer(s) would continue to be required to certify the financial and other information included on Form N–CSR and would be subject to liability for material misstatements or omissions on Form N– CSR, so there would be no change in this contribution to the maintained accuracy and completeness of this information for investors, market professionals, and others who use this information. e. Other Costs Some of the proposed changes in delivery would cause fund shareholders to face greater fund expenses than without the proposal. The likelihood and extent of these increases would depend on the fund’s baseline delivery scenario, as follows. For funds that rely on rule 30e–3, the costs of printing and mailing shareholder reports would be 13–18, at 14, available at https://www.sec.gov/ comments/s7-13-18/s71318-4594882-176335.pdf. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules higher under the proposal.800 We generally believe these additional printing and mailing costs would be small. For example, we anticipate that funds may be able to deliver the proposed shareholder reports as a trifold mailing, which would only incrementally increase the printing and mailing costs of a rule 30e–3 notice. One commenter estimated that a concise shareholder report would be approximately $0.01 more expensive to print than a rule 30e–3 notice.801 We estimate that this cost increase would be less than the estimated decline in the cost of processing fees, as discussed in Section III.C.2.d, above. Moreover, to the extent a fund shareholder invests in multiple of a registrant’s funds and these funds would use a single shareholder report absent the proposal, the amendments may increase printing and mailing costs a negligible amount in some instances if certain disclosures across the funds otherwise are the same. In addition, some funds that choose to rely on proposed rule 498B may send more notices of material changes to 70819 certain prospectus items in some years than the number of annual prospectus updates and stickers they would deliver to shareholders without the proposal. Since funds would have the option to rely on proposed rule 498B, however, we expect that funds would likely rely on 498B where it would reduce their average annual costs. That is, we understand that cost is a consideration for funds and that the cost differences may be sufficient in this instance to influence their choice. TABLE 8—POTENTIAL EFFECTS ON DELIVERY OF SHAREHOLDER REPORTS AND PROSPECTUS UPDATES UNDER THE PROPOSAL VARY ACCORDING THE BASELINE PREFERENCES AND REQUESTS OF THE AFFECTED FUNDS AND FUND SHAREHOLDERS * Table 8.1—Semi-annual report. (Effect of proposal to modify the semi-annual report delivery) Fund relies on rule 30e–3? Shareholder requests electronic delivery Yes ............... Email (with link to 3–4 page trifold tailored report) replaces email (with link to 116 page report). No ................. Email (with link to 3–4 page report) replaces email (with link to 116 page report). Shareholder requests paper delivery under rule 30e–3 Shareholder makes no delivery election Paper mail (3–4 page) trifold tailored report replaces paper mail of 116 page semi-annual report (Printing and mailing cost decrease). N/A .......................................... Paper mail (3–4 page) trifold tailored report replaces paper (1 page) of notice with link to 116 page semi-annual report (Printing and mailing cost increase and processing fee decrease). Paper mail (3–4 page) trifold replaces paper mail (116 page) report (Printing and mailing cost decrease). Table 8.2—Annual report. (Effect of proposal to modify the annual report delivery) Fund relies on rule 30e–3? Shareholder requests electronic delivery Yes ............... Email (with link to 3–4 page report) replaces email (with link to 134 page report). No ................. Email (with link to 3–4 page report) replaces email (with link to 134 page report). Shareholder requests paper delivery under 30e–3 Shareholder makes no delivery election Paper mail (3–4 page) trifold replaces paper mail (134 page) report (Printing and mailing cost decrease). N/A .......................................... Paper mail (3–4 page) trifold replaces paper (1 page) notice with link to 134 page report (Printing and mailing cost increase and processing fee decrease). Paper mail (3–4 page) trifold replaces paper mail (134 page) report (Printing and mailing cost decrease). Table 8.3—Annual prospectus update. (Effect of proposal to permit funds to replace the delivery of annual prospectus updates and prospectus stickers with notices of certain material changes (proposed rule 498B), assuming that they exercise this option) Fund uses summary prospectus (rule 498)? Yes .............. No ............... Shareholder requests electronic delivery? Yes No Eliminate email (with link to 8 page summary prospectus update, annual) (Processing fee decrease). No change expected but, if a fund relies on rule 498B under these circumstances, it would eliminate email with link to statutory prospectus update (annual), which would decrease processing fees for the fund. Eliminate paper mail (8 page) summary prospectus update, annual (Printing and mailing cost decrease). No change expected but, if a fund relies on rule 498B under these circumstances, it would eliminate paper mail (128 page) statutory prospectus update, (annual), which would decrease printing and mailing costs for the fund. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Table 8.4—Other prospectus updates. (Effect of proposal to permit funds to replace the delivery of other prospectus updates or prospectus stickers, with notices of certain material changes (proposed rule 498B), assuming that they exercise this option) Is fund change material, as described in rule 498B? Yes .............. Shareholder requests electronic delivery? Yes No Email with notice of a material change delivered within 3 business days replaces potentially less timely email of prospectus update or sticker in some instances. Paper mail of notice of a material change delivered within 3 business days replaces potentially less timely paper mail of prospectus update or sticker in some instances. 800 As discussed below, funds that rely on rule 30e–3 or plan to rely on rule 30e–3 would also incur transition costs under the proposal. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 801 See PO 00000 Broadridge Comment Letter II. Frm 00105 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 70820 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Table 8.4—Other prospectus updates. (Effect of proposal to permit funds to replace the delivery of other prospectus updates or prospectus stickers, with notices of certain material changes (proposed rule 498B), assuming that they exercise this option) Is fund change material, as described in rule 498B? No ............... Shareholder requests electronic delivery? Yes No May eliminate email of prospectus update or sticker in some instances. May eliminate paper mail of prospectus update or sticker in some instances. Notes: The costs and benefits of the proposed modification to shareholder report and prospectus delivery under the proposed rules would vary across the baseline delivery scenarios—i.e., the scenario that would be in place at the time of the proposed rule implementation if the current rules were to remain in place—that are shown in the table. Some of the cost and benefits would be transitional and others would be sustained, and each would depend on factors beyond what appears in the table, as discussed in Sections III.C.2.c and III.C.2.e, below. In addition, under the proposal, shareholders may request delivery of paper or electronic copies of the documents that funds would be required to make available online. khammond on DSKJM1Z7X2PROD with PROPOSALS2 As a further delivery-related cost, funds would incur costs under the proposed requirements in rule 30e–1 and rule 498B to deliver certain materials to shareholders upon request. The extent of these costs would depend on how many shareholders prefer the current delivery framework in which they receive additional shareholder report information or annual prospectus updates, how many of these shareholders would prefer to request these materials directly (e.g., in paper) instead of accessing them online, and whether the shareholders request paper or electronic copies of these materials. We estimate that funds would incur average annual printing and mailing costs of $500 per fund to deliver materials upon request under the proposed amendments to rule 30e–1.802 For funds that choose to rely on proposed rule 498B, we estimate average annual printing and mailing costs of $500 per fund to deliver prospectuses and related materials upon request under that rule.803 In addition to delivery-related costs, fund would experience other costs under the proposal, including both transition costs and ongoing costs. These other costs would result from proposed changes to the scope and contents of shareholder reports, new Form N–CSR items, new website availability requirements, amendments to the scope of rule 30e–3, and preparation of notices of material changes under proposed rule 498B. The compliance costs associated with proposed rule 498B would only affect 802 See infra Section IV.C. Because we do not have specific data regarding the cost of printing and mailing the materials that must be provided on request, for purposes of our analysis we estimate $500 per year for each fund to collectively print and mail such materials upon request. Investors could also request to receive these materials electronically. We estimate that there will be negligible external costs associated with emailing electronic copies of these documents. 803 See infra Section IV.D; see also supra footnote 802. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 funds that choose to rely on that rule, and the compliance costs associated with the amendments to rule 30e–3 would only affect funds that rely on that rule or were planning to rely on that rule. The other categories of compliance costs would affect all funds. These different categories of costs could be reflected in fund expenditures that funds could pass on to shareholders, likely in proportion to their participation in the fund. The expenditures could be to procure the services of third parties for the purpose of implementing the changes to fund disclosure and delivery practices under the proposal, as we understand some funds utilize outside providers for these compliance responsibilities. Funds would experience transition costs to modify their current shareholder report disclosures. Specifically, funds would incur costs to modify their shareholder reports to comply with the proposed scope and content requirements. We estimate that the initial costs to funds of modifying their annual shareholder report disclosure would be $150,111,360 in aggregate costs and $41,697,600 annually thereafter.804 We estimate that the initial costs to funds of modifying their semi-annual shareholder report disclosure would be $75,055,680 in aggregate costs and $20,848,800 annually thereafter.805 Initial costs 804 The estimated initial cost for the proposed annual reports is based on the following calculations: 36 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $12,096 per fund. 12,410 funds × $12,096 = $150,111,360. The estimated annual cost for the proposed annual reports is based on the following calculations: 10 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $3,360 per fund. 12,410 funds × $3,360 = $41,697,600. See infra Section IV.C. 805 The estimated initial cost of the proposed semi-annual reports is based on the following calculation: 18 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $6,048 per fund. 12,410 funds × $6,048 = $75,055,680. The estimated annual cost for the proposed semi-annual reports is based on the PO 00000 Frm 00106 Fmt 4701 Sfmt 4702 would include costs associated with designing the concise shareholder reports, amending the scope of shareholder reports to cover a single fund series, implementing any operational changes needed to prepare and deliver separate shareholder reports for different fund series, revising existing disclosure practices for shareholder report items that the proposal would amend (e.g., management’s discussion of fund performance, including the proposed clarification of the term ‘‘appropriate broad-based securities market index,’’ as well as the expense presentation), and developing disclosures for the proposed new shareholder report items (i.e., fund statistics and material fund changes). The ongoing costs would largely be attributed to the costs of preparing new shareholder report disclosure items under the proposal, since funds already incur the costs of preparing the other shareholder report disclosures today. To the extent that the proposed clarification of the term ‘‘appropriate broad-based securities market index’’ causes funds to select a new index for this disclosure purpose, this could result in additional costs to funds in the form of index-licensing fees. Funds also would incur costs of complying with the new Form N–CSR disclosure items. As funds already prepare the disclosure that the proposed N–CSR items would cover for purposes of current shareholder reports and disclose that information on Form N–CSR as part of their shareholder reports, we do not believe the costs of the new N–CSR disclosure would be significant. However, we recognize that funds may face some costs of rearranging their disclosures within Form N–CSR. We estimate that the costs of the proposed new Form N–CSR items would initially following calculations: 5 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $1,680 per fund. 12,410 funds × $1,680 = $20,848,800. See infra Section IV.C. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules be $75,055,680 and $20,848,800 annually thereafter.806 In addition, funds would be required to provide additional information online under the proposed amendments to rule 30e–1 and under proposed rule 498B. With respect to rule 30e–1, this would include online availability of the disclosure that the proposal would remove from shareholder reports, including financial statements and financial highlights, as well as quarterly portfolio holdings. In addition, funds that rely on proposed rule 498B would be required to provide certain information online, including summary and statutory prospectuses, SAIs, and shareholder reports. While the vast majority of funds already provide fund information on websites, they may not currently provide the same information that the proposed rule would require.807 For instance, under the proposed amendments to rule 30e–1, funds would likely incur costs associated with providing online access to the new Form N–CSR disclosure items (i.e., the information that the proposal would remove from shareholder reports). Funds that do not rely on rule 30e–3 would also incur costs to provide their quarterly portfolio holdings online. We estimate that the initial costs of complying with the website availability requirements in rule 30e–1 would be $35,591,880, with ongoing annual costs of $11,863,960.808 With respect to the online information that proposed rule 498B would require, we estimate that funds generally would not incur additional transition or ongoing costs associated with these requirements. This is because we anticipate that only funds that rely on rule 498 to deliver summary khammond on DSKJM1Z7X2PROD with PROPOSALS2 806 The initial costs of the proposed Form N–CSR requirements are based on the following calculations: 18 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $6,048 per fund. 12,410 funds × $6,048 = $75,055,680. The annual cost of the proposed new Form N–CSR requirements are based on the following calculations: 5 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $1,680 per fund. 12,410 funds × $1,680 = $20,848,800. See infra Section IV.D. These PRA burden estimates do not account for the fact that funds are currently required to prepare the same general disclosure for purposes of their shareholder reports. Thus, these PRA-related estimates may over-estimate the costs of the proposed Form N–CSR disclosure items, particularly the transition costs. 807 See supra Section III.B.2 and III.B.3. 808 See infra Section IV.C. The estimated initial cost of complying with rule 30e–1’s website availability requirements is based on the following calculations: 12 hours × $239 (wage rate for webmaster) = $2,868 per fund. 12,410 funds × $2,868 = $35,591,880. The estimated ongoing annual cost is based on the following calculations: 4 hours × $239 (wage rate for webmaster) = $956 per fund. 12,410 funds × $956 = $11,863,960. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 prospectuses—and that are already required under that rule to provide the same information on websites—would rely on proposed rule 498B.809 Only these funds are likely to choose to rely on proposed rule 498B because, unlike other funds, they already deliver summary prospectuses under rule 498 and so have experience using layered disclosure. In addition, they are already subject to similar website availability requirements under rule 498. Therefore, they would be more likely than other funds to experience overall cost savings under rule 498B. However, if a fund that does not deliver summary prospectuses under rule 498 chose to rely on proposed rule 498B, the fund would be required to begin providing the relevant information on a website and to continue to update the website materials as needed. We estimate that the compliance costs of proposed rule 498B for funds that do not currently rely on rule 498 to deliver summary prospectuses initially would be $12,948 per fund to begin to comply with the relevant requirements in proposed rule 498B and would reduce to annual costs of $4,316 per fund thereafter.810 In addition to website availability requirements, funds that choose to rely on proposed rule 498B could incur costs to prepare prompt notices of material changes that the rule would require. The proposed rule does not specify the form of this notice. Therefore, a fund could satisfy this requirement, for example, by sending existing shareholders the prospectus supplement filed with the Commission, an amended prospectus which reflects the material change, or another form of notice that discusses the 809 Absent the proposed requirement in rule 498B to provide summary prospectuses online, we recognize some funds that currently use summary prospectuses may have less incentive to do so under rule 498B. This is because rule 498B would have the effect of reducing a fund’s delivery costs for the annual prospectus update, regardless of whether it uses a summary prospectus or statutory prospectus. Proposed rule 498B would require funds to provide summary prospectuses and other materials online because we believe investors benefit from concise summary prospectus disclosure, along with access to more detailed information, to help inform their investment decisions and compare fund investments. 810 See infra Section IV.D. The estimate of initial costs is based on the following calculation: (30 hours to begin to prepare summary prospectuses × $336 (blended wage rate for compliance attorney and senior programmer)) + (12 hours to begin to comply with website availability requirements × $239 (wage rate for webmaster)) = $12,948. The estimate of annual costs is based on the following calculation: (10 hours to prepare summary prospectuses × $336 (blended wage rate for compliance attorney and senior programmer)) + (4 hours to comply with website availability requirements × $239 (wage rate for webmaster)) = $4,316. PO 00000 Frm 00107 Fmt 4701 Sfmt 4702 70821 change. The costs of preparing a notice under proposed rule 498B would depend on the approach a particular fund uses. For example, we expect that preparation costs would be fairly minimal if a fund delivers a prospectus supplement or amended prospectus, which the fund would have already prepared for other purposes. However, funds that choose to prepare separate notices under the proposed rule would likely experience higher preparation costs. We estimate that the average annual costs of preparing notices of material changes under proposed rule 498B would be $1,344 per fund, after an initial compliance cost of $4,032 per fund.811 If 90 percent of funds rely on proposed rule 498B, this would result in aggregate ongoing annual costs of $15,011,136 and initial costs of $45,033,408.812 Further, to the extent that affected funds have changed their operations in anticipation of relying on rule 30e–3, those funds would bear the costs associated with the proposed amendment’s prohibition on open-end funds relying on rule 30e–3. These costs could include, among others, changes to internal systems and adjustments to agreements with third-party vendors contracted to provide relevant services. In addition, if the proposed amendments to rule 30e–3 are implemented by certain funds before January 1, 2022, funds that were planning to rely on rule 30e–3 would experience transition costs associated with removing statements in their shareholder reports and prospectuses indicating that the fund would be transitioning to the rule 30e–3 framework for transmitting shareholder reports. Moreover, funds that choose to take additional steps to inform their shareholders about the modified approach to delivering shareholder reports under the proposal would likely incur additional transition costs. We lack data to quantify these costs because we do not have information about how many funds would provide discretionary notices or other 811 See infra Section IV.D. The estimated annual cost of preparing notices under proposed rule 498B is based on the following calculation: 4 hour × $336 (blended wage rate for compliance attorney and senior programmer) = $1,344. The estimated initial cost of this proposed requirement is based on the following calculation: 12 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $4,032. 812 The estimated aggregate annual costs of preparing notices under proposed rule 498B is based on the following calculations: (12,410 funds × 90 percent) × $1,344 = $15,011,136. The estimated aggregate initial costs of preparing notices under proposed rule 498B is based on the following calculation: (12,410 funds × 90 percent) × $4,032 = $45,033,408. E:\FR\FM\05NOP2.SGM 05NOP2 70822 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules information to their shareholders to explain the proposed changes to shareholder report delivery. 3. Prospectus Disclosure Amendments a. Summary of Economic Effects The proposal would simplify the initial prospectus disclosure to investors in a layered approach where other information would continue to be available online and delivered upon request, free of charge. The proposal requires a new fee summary that includes bottom-line numbers from the current prospectus fee table, and would appear in the summary section of the prospectus (as well as in a summary prospectus if a fund uses that form of prospectus).813 The fee summary would also express the bottom-line numbers in dollar terms, in addition to the current presentation of an amount in terms of fund net assets, and describe fee and expense items in plain English.814 In addition, funds would simplify their disclosures of principal risk, ranking them by importance and highlighting those that are truly principal to the particular fund. The following sections discuss the potential costs and benefits of these proposed modifications to prospectus disclosures. In summary, the benefits of the proposal would accrue through better use of the prospectus disclosure materials by investors. The tailored disclosures would enable investors to make more efficient use of their scarce time and attention and, potentially, more informed investment decisions. The costs of the proposal would accrue to fund shareholders through a shortterm, transition-related increase in fund expenses required to prepare the new disclosures, and to fund investors in adapting to the new style of prospectus disclosure. b. Benefits to Investors khammond on DSKJM1Z7X2PROD with PROPOSALS2 The direct effect of the proposed amendments to fund prospectuses would be to simplify the presentation of fee- and risk-related information that funds deliver to investors. This would improve investors’ understanding of key information, and this improved understanding could result in more efficient investment decisions.815 Also 813 For example, instead of listing different expense types that comprise a fund’s total annual operating expenses and then providing the bottomline total annual operating expenses, the fee summary would only provide the bottom-line total. 814 For example, a fund would describe a charge an investor incurs when purchasing a fund’s shares as a ‘‘purchase charge’’ instead of as a ‘‘maximum sales charge (load) imposed on purchases.’’ 815 Existing research notes that individuals exhibit limited ability to absorb and process VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 the proposed amendments may improve investor understanding with respect to funds that invest 10% or less of total fund assets in acquired funds by reducing emphasis on AFFE as a discrete category of performance expenses where the fund does not invest significantly in acquired funds and by improving consistency between the fund’s prospectus fee table disclosures and financial statement disclosures under these circumstances, while also retaining investors’ access to information about the potential layering of fees through a fund’s investments in acquired funds.816 The proposal would enable investors to locate and use key information more easily, requiring less time and attention to process key available information than under current rules. For example, rather than listing different expense types that comprise a fund’s total annual operating expenses and then presenting the total annual figure, the fee summary would only provide the total. This would make it easier for retail investors to locate the total amount in the prospectus quickly. Similarly, the proposal would shorten the principal risk disclosure to focus on risks that are truly principal to the particular fund; this would make information about those risks easier to locate and use. We believe that making information easier to locate and use can make the information easier to understand. In addition, the proposed amendments would result in disclosure that is easier for investors to understand. By providing clearer descriptions of certain fee and expense concepts, the proposal would reduce the chance of retail investors misinterpreting this key information. For example, a fund would describe a charge an investor incurs when purchasing a fund’s shares as a ‘‘purchase charge’’ instead of as a ‘‘maximum sales charge (load) imposed on purchases.’’ Further, by providing fee and expense information in dollar terms, the effect of the fees and expenses may be more understandable to investors.817 In addition, providing principal risks in order of importance would help investors more readily information. See Richard E. Nisbett & Lee Ross, Human Inference: Strategies and Shortcomings of Social Judgment (1980) (‘‘Nisbett & Ross’’); Hirshleifer and Teoh Study, supra footnote 761. 816 Some commenters have suggested that the disclosure of AFFE in the fee table provides investors with the necessary information to understand the potential layering of fees in a fund of funds arrangements. See Kauff Laton Fund of Funds Comment Letter; Rand Fund of Funds Comment Letter. 817 See supra footnotes 63 and 573. PO 00000 Frm 00108 Fmt 4701 Sfmt 4702 identify and understand a fund’s principal risks relative to the baseline, where funds may order risks alphabetically or in other ways that do not show a risk’s relative importance. Providing more user-friendly and concise information in the prospectus can lower the cost to the investor of gathering key information needed to make choices among funds. The proposal may thus enable investors more easily to evaluate and monitor fund investments and make choices among competing funds than under the current requirements. Some investors may read disclosures that they would not otherwise have read. Others may consider the information they receive more carefully. In each instance, the consequence may be choices among investment alternatives that reflect a better alignment between the circumstances of the investor and the available products. The ultimate impact on investment outcomes depends on the extent to which investors find the amended disclosure easier to access and use and the extent to which they rely on the amended disclosure to inform their investment decisions and actions. As discussed above, there is evidence to suggest that consumers benefit from disclosure that highlights key information.818 The proposal to allow funds with limited investments in acquired funds to move the disclosure of AFFE into a footnote, and eliminate it from the bottom-line total expense disclosure in the prospectus fee table and fee summary, may benefit some investors by making it easier for them to compare and choose among funds to meet their investment objectives. That is, the proposal may enhance the salience of disclosures in the prospectus fee table and fee summary that reflect the fund’s main investment strategy relative to the disclosure of its AFFE. As the information on the AFFE amount would be retained in a footnote, investors’ access to AFFE information would not change under the proposal. In addition, investors would continue to see a bottom-line number that reflects AFFE where the fund substantially invests in other funds such that the fund is, in essence, managed significantly at the acquired fund level. Maintaining this requirement for these funds is designed to prevent investors from being confused by expense ratios that do not fully reflect the cost of the fund’s investments. 818 See supra footnotes 774 to 778 and accompanying text. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules c. Costs to Investors We understand that some investors may prefer the current level of detail about a fund’s fees or principal risks, and therefore, the advantages associated with tailored disclosure, as described in this section, may not apply to those investors. For example, if the fund uses a summary prospectus, and an investor would prefer to see the breakdown of fees and expenses among various line items (or wants longer narrative discussions about principal risks), the proposal would require the investor to take the additional step of finding the statutory prospectus online or requesting a copy of it. The rule would make it more difficult for the investor who prefers the more detailed information to obtain and use that information than under the current rule baseline. We recognize that, under these circumstances, the proposal would impose some costs of inconvenience to these investors in the form of requiring more time and attention to find the statutory prospectus online or to request a copy of the statutory prospectus. For investors who prefer the current disclosure format and are aware that a fund has moved the AFFE disclosure into a footnote, there may be some inconvenience even without any change in access to information. For example, the investor would need to take an extra step of obtaining the AFFE amount from the footnote and combining it with the expense information from the fee table to recover the same total expense information that is disclosed currently. However, investors would have access to the information necessary to recover this information under the proposal.819 We also recognize that some investors may not recognize that certain funds’ AFFE disclosures have moved into a footnote of the fee table under the proposal. If an investor does not realize that the expense disclosure in these funds’ prospectus fee tables (i.e., funds that have 10% or less of their total assets invested in acquired funds) no longer includes these indirect fund expenses, such an investor could underestimate the expenses of these funds. Such underestimation could lead to a distortion of some investors’ choices relative to their preferences and investment objectives. Relatedly, an investor may be less able to compare funds under the proposal to the extent that any funds continue to include AFFE amounts in their bottom line 819 For example, this could be done by simple addition (e.g., expense ratio of 0.50 + AFFE expense of 0.03 = total expenses of 0.53). The inputs to this addition would be readily available under the proposal to all investors, including in XBRL format. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 ongoing annual expenses even though they are eligible to disclose their AFFE in a footnote. Because reliance on the AFFE amendment would be optional, investors may receive expense disclosures from the same types of funds (i.e., those that have 10% or less of their total assets invested in acquired funds) that treat AFFE differently. This could make it more difficult for investors to compare these expenses between funds. The costs from any potential underestimation of AFFE would depend on how many funds rely on the AFFE amendment. This number would depend, in turn, on fund incentives and on whether funds believe that any benefit from relying on the AFFE amendment would outweigh any costs incurred in moving AFFE disclosure into a footnote. Funds that believe that relying on the amendment would be beneficial by, for example, providing a more consistent fee and expense presentation for investors, may have a greater incentive to rely on the amendment than other funds. In addition, some funds that are slightly above the 10% threshold may have an incentive to reduce their investments in acquired funds to the extent that they believe there would be sufficient benefit from providing AFFE disclosure in a footnote. We believe that few funds would do so. As discussed above, we estimate that approximately 88% of the funds with more than 10% of their total assets invested in acquired funds invest more than 20% of their total assets in acquired funds. Based on this estimate, we would expect that any incentive to reduce investments in acquired funds that is driven by the proposed AFFE amendment would be limited to the other 12% of funds, which is 4% of acquiring funds.820 In addition, fund investors could bear the costs of the prospectus amendments through the increased expenses that funds would incur to implement the proposal. We discuss those expenses in the section on ‘‘other costs,’’ below. d. Other Costs The proposed amendments would impose costs on funds (which they may pass on to their shareholders) to amend their disclosure practices. For example, the proposal would require funds to review their principal risk disclosure and assess whether the risks they are currently disclosing are principal to the fund under the proposed amendments. Among other things, this may require fund groups to modify their current 820 See supra footnote 714 and accompanying practices for principal risk disclosure, including where they use many of the same risk disclosures across various funds in the fund group. Funds also would need to determine an appropriate method for ordering a fund’s principal risks by importance and implement this approach. We estimate that the proposed amendments to principal risk disclosure would result in initial aggregate costs of $75,055,680 and $16,679,040 annually thereafter.821 In addition, funds would need to modify their disclosure templates to revise the terms they currently use in prospectus fee tables and to add fee summaries to their disclosure, although the content of the fee summary would largely consist of information that funds already disclose in their prospectus fee tables. We estimate that the costs of the proposed amendments to prospectus fee and expense disclosure would be $37,527,840 initially and $8,339,520 annually thereafter.822 Some of these costs would be incurred by funds that make limited investments in other funds as a result of our proposal to allow such funds to disclose AFFE in a footnote to the fee table and fee summary. While only funds that invest 10% or less of their total assets in acquired funds would be allowed to rely on this proposal, we believe that these costs would also be incurred by funds with investments slightly above 10% in other funds because such funds would likely spend time considering whether they would qualify for the proposal. Therefore, for purposes of our analysis, we assume that the bulk of the costs associated with this proposal would be incurred by funds that invest less than 20% of their total assets in other funds.823 These 821 See infra Section IV.B. The estimated initial cost of the proposed amendments to principal risk disclosure is based on the following calculations: 18 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $6,048 per fund. 12,410 funds × $6,048 = $75,055,680. The estimated ongoing annual cost of these proposed amendments is based on the following calculations: 4 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $1,344 per fund. 12,410 funds × $1,344 = $16,679,040. 822 See infra Section IV.B. The estimated initial cost of the proposed amendments to prospectus fee and expense disclosure is based on the following calculations: 9 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $3,024 per fund. 12,410 funds × $3,024 = $37,527,840. The estimated ongoing annual cost of these proposed amendments is based on the following calculations: 2 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $672 per fund. 12,410 funds × $672 = $8,339,520. 823 We believe that funds that invest more than 20% of their total assets in other funds would not choose to exert this effort because it is unlikely that text. PO 00000 70823 Continued Frm 00109 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 70824 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules funds would incur costs of (1) establishing and implementing procedures they may choose to adopt to monitor the percent of the fund’s acquired fund investments relative to total assets; (2) calculating their investments in acquired funds to determine whether they would be permitted to modify their disclosure pursuant to the proposal; and (3) updating their prospectus fee table to modify their AFFE disclosure if they choose to present AFFE in accordance with the proposal, and they are eligible to do so. We estimate that approximately 30%, or 3,723 open-end funds, have investments in other funds. Of those, we estimate that approximately 70%, or 2,606 open-end funds, invest less than 20% of their total assets in other funds (excluding money market funds).824 Therefore, we estimate that the transition costs associated with this proposed amendment would be $4,378,080.825 We understand that changes in the prospectus also could affect data aggregators that rely on the information in the prospectus fee table as a basis for the services they provide to investors and other parties. We have considered that changes in the prospectus can make it easier or more difficult for them to provide this service. In this instance, the proposal is unlikely to have an effect on data aggregators because the full fee table would still be structured.826 We believe that the information available to data aggregators about the current line items would not change under the proposal accordingly. 4. Advertising Rule Amendments khammond on DSKJM1Z7X2PROD with PROPOSALS2 a. Summary of Economic Effects The proposed advertising rule amendments would enhance the transparency of the fees and expenses that are associated with investing in a particular investment company. To obtain this improvement in transparency, the proposal would require specific changes to how mutual funds, ETFs, other registered investment companies, and BDCs present they would anticipate being able to rely on the proposal. 824 For funds that may be eligible for the proposed amendments to AFFE disclosure, we believe that approximately 50% of the burden hours they would incur to comply with all of the proposed fee disclosure amendments would be allocated to complying with these amendments. 825 5 hours × $336 (blended wage rate for compliance attorney and senior programmer) = $1,680 per fund. 2,606 funds × $1,680 = $4,378,080. 826 See supra Section II.H.1.i (discussing structured data requirements for fund fee and expense disclosures and proposed amendments to continue to require that funds provide the full fee table in a structured data format). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 information about fund fees and expenses in fund advertisements. That is, the proposed amendments would require that the fee and expense presentations prominently include timely information about a fund’s maximum sales load (or any other nonrecurring fee) and gross total annual expenses, computed in a manner that is consistent with relevant prospectus requirements. Further, if an advertisement included an investment company’s total annual expenses net of a fee waiver or expense reimbursement amount in addition to the required gross annual expense figure, the advertisement would need to disclose the expected termination date of that arrangement. We also propose to provide specific factors an investment company should consider as part of its determination of whether representations in its advertisements about the fees and expenses associated with an investment in the fund could be materially misleading. Below we discuss the likely effects of the proposed amendments to the advertising rules. We expect that the proposed amendments would lower investor search costs and reduce the risk of a mismatch between investor preferences and investor choice while also imposing certain costs on investors and third parties who participate in the production and delivery of fund advertising to investors. Additionally, we discuss how the effects of the proposed amendments to the advertising rules may vary across investors and funds according to the conditions of their participation in the market for financial products. b. Benefits to Investors The effect of the proposal would be to reduce the likelihood that investors misinterpret investment company advertisements. For example, the recent experience of the Commission is that funds sometimes market themselves as ‘‘zero expense’’ or ‘‘no expense’’ funds based solely on information in their prospectus fee tables. In some cases a fund’s prospectus fee table may show no transaction costs and no ongoing charges only because the fund adviser, the adviser’s affiliates, or others are collecting fees elsewhere from these investors. In such cases, an investor in a so-called ‘‘zero expense’’ fund may encounter other investment costs, including intermediary costs (e.g., through wrap account fees), securities lending costs (e.g., through revenue sharing with a securities lending agent), or future costs associated with the fund once an underlying fee waiver or expense reimbursement arrangement PO 00000 Frm 00110 Fmt 4701 Sfmt 4702 expires. These additional costs and expenses can reduce the value of a shareholder’s investment in a fund. As a result, absent appropriate explanations or limitations, referring to such a fund as a ‘‘zero expense’’ fund can materially mislead investors and cause them to believe incorrectly that there are no expenses associated with investing in the fund. More generally, the proposed rules would require more consistent fee and expense presentations across investment company advertisements, and thus facilitate investor comparisons of important fee and expense figures. By reducing the chance of misleading information being presented to investors—e.g., so that useful information faces less competition for investor attention with other information—the proposal may increase the salience of relevant fee and expense figures to investors and reduce the chance of a mismatch between the investor’s preferences and their choice of investment product among the various alternatives, thereby increasing the efficiency of investors’ investment decisions. The extent to which increasing the salience of fee and expense information in advertisements benefits an investor considering an investment in a fund depends on the importance of this information contained in fund advertising materials relative to the other information that is available to the investor for the purpose of monitoring fund investments and choosing between the fund and other financial products. To the extent that the advertising rule amendments reduce fund incentives to understate or obscure their fees, they may enable investors more easily to distinguish funds according to their actual fees. In this instance, the indirect effect would be that funds with lower (higher) fees would attract more (less) investor dollars and, in anticipation, the higher-fee funds would have a greater incentive to lower their fees than without the rule amendments. Thus, some funds may put even more effort into lowering their fees and expenses than they would do in the absence of the proposal, and otherwise find ways to differentiate themselves to attract and retain investment business. c. Costs to Investors Investment companies and third parties involved in preparing or disseminating investment company advertisements may incur costs to comply with the proposed advertising rule amendments. Investors could bear the costs of these amendments through increased expenses that funds would E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules incur to implement the proposal. We discuss those expenses below.827 In addition, if the cost of compliance with these proposed amendments were significant, some advertisers might cease advertising rather than incur the extra costs of compliance, which could affect investors. Investors who rely on advertisements to make investment decisions or compare funds might have less complete information for these purposes. However, we believe this is unlikely because, as discussed below, we do not anticipate that the compliance costs would be significant in general or significant enough relative to the benefit that most funds would expect from continuing to advertise.828 d. Other Costs The cost of our proposal to amend the advertising rules would include the direct cost of modifying advertising materials to bring them into compliance with the proposed advertising rule amendments. This may require internal review and approval of advertisements beyond what occurs under the current rule, particularly where an advertisement is not already required to present certain fee and expense figures under existing FINRA rules. For example, while many investment company advertisements are subject to timeliness requirements related to performance, they currently are not subject to similar timeliness requirements for fee and expense information. We expect some of these costs to be borne in the first year after the rule adoption. That is, they would be transition costs and not sustained beyond the first year. We estimate that the transition costs associated with the proposed advertising rule amendments would be $201,353,040.829 These costs would be borne by funds (including their shareholders), intermediaries, and other third parties who prepare investment company advertisements. The overall costs of the proposed advertising rule amendments would be 827 See infra Section III.C.4.d. infra Section III.C.4.d. 829 See infra Sections IV.F through IV.H. We estimate there are 39,951 investment company advertisements (or supplemental sales literature) each year that would be subject to the proposed amendments to rules 482, 34b–1, and 433. This includes 35,514 advertisements subject to rule 482, 337 supplemental sales literature subject to rule 34b–1, and 4,100 advertisements by registered closed-end funds or BDCs used in reliance on rule 433 instead of rule 482. For each of these rules, we estimate an initial burden of 15 hours for relevant advertisements. The estimated transition costs of the proposed advertising rule amendments is based on the following calculation: 15 hours × $336 (blended wage rate for compliance attorney and senior programmer) × 39,951 advertisements = $201,353,040. khammond on DSKJM1Z7X2PROD with PROPOSALS2 828 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 greater for some types of fund advertisements than others. For example, the proposed rule would require the fee and expense figures to be calculated in the manner the registrant’s Investment Company Act or Securities Act registration form prescribes for a prospectus. This proposed requirement could make it more burdensome to prepare advertisements for some types of registrants, such as closed-end funds that do not maintain updated prospectuses and, thus, may not currently calculate current fees and expenses in the manner the proposed amendments would require. As a result, it would be more costly to prepare these advertisements (if they include fee and expense information) because of the need to develop new procedures for annually calculating these registrants’ fees and expenses in accordance with prospectus fee table requirements. In addition, the cost of compliance would be greater for funds, intermediaries, or others that react to the proposed advertising rule amendments by initiating or enhancing a compliance program after previously having no such program or only a very limited program in place. It would be smaller for those who periodically obtain compliance advice and continually update their advertising materials in response to changing market conditions or changing investor demand. Overall, we estimate that the ongoing annual costs of the proposed advertising rule amendments would be $67,117,680.830 R. Effects on Efficiency, Competition, and Capital Formation This section describes the effects we expect the proposed rule to have on efficiency, competition, and capital formation. Key to this analysis are the concepts of efficiency in the use of investor time and attention and in the use of fund resources from the real economy to meet disclosure delivery obligations. We regard changes and amendments that reduce these costs as increasing economic efficiency, with changes and amendments that increase these costs having the opposite effect. Also key is the concept of ‘‘information asymmetry’’—in this case, the lack of information that investors may have about funds and other investment products—and the difficulties that some investors may face in using the 830 See infra Sections IV.F through IV.H; see also supra footnote 829. The estimated annual costs of the proposed advertising rule amendments is based on the following calculation: 5 hour × $336 (blended wage rate for compliance attorney and senior programmer) × 39,951 advertisements = $67,117,680. PO 00000 Frm 00111 Fmt 4701 Sfmt 4702 70825 information that is available to them in reducing that information asymmetry. Efficiency. The proposed rules and amendments would enable investors to use their time and attention more efficiently. To investors, the costs of investing in a fund are more than just the dollar cost, and include the value of an individual’s time and attention that is spent gaining an understanding of the fund and its fees, expenses, risks, and other characteristics, both before and after the initial fund investment. Further, for those investors who do not gain a full understanding of the fund and its risks, there could be a cost stemming from a potential mismatch between the investor’s goals and the fund risk profile and fee structure. Depending on the size of an individual’s position in a fund, certain of these additional costs could be considerable in comparison to the monetary costs associated with the investment and could discourage investors from gathering information about different investment alternatives and evaluating existing investments even in circumstances where reviewing prospectuses and available shareholder reports could be beneficial. The overall efficiency gains from the effect the proposal and amendments have on how investors allocate their time and attention would depend on the extent to which individual investors find it easy to transition from the current framework to the new framework and find disclosure and other materials under the new framework genuinely easier to use. Some individuals may prefer the current framework. Their time and attention may be used less efficiently under the proposed rules, which would require them to go to the trouble of requesting their preferred materials rather than receiving them automatically as would occur in the current framework, and these investors would indeed not find the new framework preferable to current practice. However, despite these potential limitations, we expect the efficiency gain and cost reduction from changes in the use of investor time and attention resulting from the proposed rule to be positive, because the proposed disclosure framework is specifically designed to make the disclosures easier for retail investors to use while continuing to provide access to more detailed information for the market professionals and other investors who wish to access them, as discussed in Section III.C.2.b.831 831 These provisions would thus not have efficiency effects for financial professionals and E:\FR\FM\05NOP2.SGM Continued 05NOP2 70826 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 While not the primary source of efficiency gain, changes in the delivery of disclosures to shareholders under the proposed rules would cause a decline in the real-resource costs of delivering disclosures to investors. This could be an efficiency gain from the proposal. Specifically, by effectively consolidating two deliveries—the annual report and the annual prospectus update—into a single delivery of a concise annual report, the proposal would promote efficiency by reducing the cost of printing and delivering disclosures to retail shareholders. Here, efficiency gains would depend on the preferences of individual shareholders, who would have the option of requesting that the two disclosures instead continue to be sent separately. They also would depend on the preferences of funds. We discuss these efficiency gains from reduced delivery costs as benefits of the proposal in Section III.C.2.d.832 In addition, efficiency gains may arise from the proposed improvements to prospectus disclosure about fund fees. For example, investors may find it easier to compare the fees and expenses of funds under the proposal. The proposal may therefore contribute to the efficient use of those investors’ time and attention, and lead to more efficient matches between investor preferences and the available investments. To the extent the proposed amendments would affect funds’ investment behavior, it could result in funds investing in acquired funds where the adviser believes this would contribute to the fund’s investment objective and would be in the interest of shareholders. This could result in the fund allocating its investments more efficiently because it would reduce a potential impediment to investments in acquired funds, even while it may result in other funds reducing their investments in acquired funds for the purpose of moving or staying below the proposed eligibility threshold. We discuss the efficiency gains from changes in the prospectus fee table as benefits of the proposal in Section III.C.3.b. In addition, the proposal may affect economic efficiency through changes in disclosure content. The proposed amendments to the content of shareholder report disclosure and the other investors who currently rely on more detailed information online that will continue to be accessible. 832 For example, as discussed above, greater investor understanding of a fund, including its fees and risks, could lead to a better match between investor goals and investor choice among alternative funds and other investment opportunities. In other words, investment efficiency could increase. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 presentation of advertising materials would increase the consistency of the presentation of their contents across funds (and, in the advertising rule change, across a wider range of investment opportunities) and thereby promote their comparability. This may make it easier for investors to make comparisons across funds, and between funds and other investment products. As a result, investors may face lower information asymmetry and lower search costs in choosing among funds, and among investment opportunities more generally. In addition, investors and other market participants may be more easily able to monitor their fund and other investments. Finally, investors may be more likely to react to actual differences in fund fees, expenses, principal risks, and other fund characteristics than under the current framework to the extent that those differences are more easily identified. Thus, the proposed rules and amendments that reduce information asymmetry and search costs may reduce barriers that funds and intermediaries face in supplying investment opportunities to investors, and that investors may face in comparing and evaluating the suitability of the investments initially and, as fund shareholders, over the period of the investment.833 The proposed advertising amendments would have similar effects, by deterring potentially misleading statements by funds. These increases in efficiency and related cost reductions could manifest as a higher likelihood that investors make use of the disclosures that funds provide through their prospectus and shareholder reports, and thus lead to investment decisions that are informationally efficient. First, it may increase the likelihood that investors choose a mix and level of fund investments that are consistent with their overall financial preferences and objectives—a level that may be higher or lower than would occur presently. The proposal may help promote investment in funds by investors who would benefit from them. Second, an increase in the informational efficiency of investor decisions could make it more likely that those investors who choose to invest in funds make choices that are consistent with their preferences and needs and 833 As noted above, there may be investors who would prefer the disclosure framework that is now in place and who would under the proposed framework need to take extra steps to continue to use the disclosures that they use in making investment decisions currently. To the extent this occurs, the proposal could lead to additional costs and reduced efficiency for such investors in their evaluation of fund investments. PO 00000 Frm 00112 Fmt 4701 Sfmt 4702 reject those that are not. Third, making it easier for investors to use the information that is disclosed under the rule provisions that require concise, tailored prospectus and shareholder report disclosures could facilitate more efficient investor allocation of assets across funds. These effects on efficiency would be limited, however, to the extent that investors rely on third parties for advice in selecting among financial products, where that third party uses more information than the proposed shareholder reports and amended prospectus disclosure.834 Competition. The proposed rules and amendments that affect information asymmetry between investors and funds may, by reducing investor search costs, affect competition. For example, the proposed rules and amendments make changes to shareholder reports, prospectus disclosures, and fund advertisements that would enable investors to compare fees and expenses and other information more easily across funds, and between funds and other financial products, could affect competition among funds by making it easier for lower-fee funds to distinguish themselves from other funds. This could lead investors to shift their assets from higher-fee funds to lower-fee funds. It also could lead funds, in anticipation of this, to lower their fees or otherwise take steps to draw investor flows away from competing funds or avoid outflows to competing funds under the modified disclosure framework. It could lead funds to exit that are not as easily able to compete on the basis of fees and expenses as a result of the modified disclosure framework, and other funds to enter and compete for investor assets more efficiently than would currently occur. The effect on competition among funds may be limited, however, to the extent that investors rely on third parties who are not affected by the rule for advice in selecting among financial products.835 834 For example, one investor survey found that 24% of surveyed mutual fund investors agreed with the statement, ‘‘I rely on a financial adviser or broker to look at these sorts of [fund] documents.’’ See ICI Investor Survey, supra footnote 36, at 20. Within subsets of the surveyed investors, 57% of mutual fund investors aged 65 and older, and 58% of mutual fund investors with household incomes less than $50,000, agreed with this statement. See id. at nn.19 and 20. A third party adviser, for example, may prefer to access all information that is available about a fund online rather than rely solely on the prospectus and shareholder report information that is the subject of the proposal. Such an adviser would not change its information or advice under the proposal. Funds would not anticipate such a change, and there would be a lesser effect on competition among funds accordingly. 835 See also supra footnote 834. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules As discussed above, the proposed clarification of the term ‘‘appropriate broad-based securities market index’’ in the management’s discussion of fund performance section of the shareholder report could result in additional costs to funds in the form of index-licensing fees. The amount of these costs would depend, among other things, on market competition among index providers. If the proposed clarification were to result in a sufficient reduction in the number of index providers producing indexes that are ‘‘appropriate broad-based securities market indexes’’ or increased demand by funds to license indexes from a sufficiently small number of competing suppliers, index-licensing fees could increase. The proposed amendments to prospectus disclosure requirements could have similar competitive effects as enhanced fee and expense disclosures. If these proposed amendments have the intended effect of making the disclosure of principal risks more usable for investors and cause each fund to highlight those risks that are truly principal to the particular fund, they may also induce funds to compete more intensively on the basis of risk exposures. For example, some funds may choose to hedge certain risks, such as foreign currency risks, or otherwise manage risks, in an effort to offer investors a narrower set of risk exposures. Finally, we noted earlier in Section III.C.4.c that certain funds may respond to the proposed amendments to the advertising rule by limiting their advertising. Reduced advertising could affect the way in which funds compete for investor assets, causing funds to focus competition more narrowly on dimensions that are disclosed in prospectuses, such as fees, expenses, and principal risks. At the same time, if investors respond to fewer fund advertisements by making fewer comparisons between funds or searching less intensively for funds that match their preferences, the proposed amendments to the advertising rule could blunt competition between funds. Capital Formation. The proposed rules and amendments could lead to an increase in capital formation. First, to the extent they increase the efficiency of exchange in markets for funds and other financial products, the proposed rules and amendments could lead to changes in fund investment in these products. Greater investment in ETFs, mutual funds, and other products, for example, could lead to increased demand for their underlying securities. The increased demand for those securities could, in turn, facilitate capital formation. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Diminished investment could have the opposite effect, although we do not have any reason to believe that the proposal would decrease capital formation. In addition, changes in the prospectus fee disclosure could affect the willingness of index providers to include funds in their indexes or of funds to invest in other funds, as some commenters have indicated.836 If the proposed amendments increase fund investments in certain other funds, they could in turn result in additional capital formation for the particular types of companies in which the acquired funds invest.837 For example, to the extent the proposal would result in funds investing more in BDCs, the proposal could enable BDCs to make additional investments in small- and mid-sized companies.838 We further note that, to the extent that increased or decreased investment in these financial products reflects substitution from other investment vehicles, the effect on capital formation would be attenuated because this would reduce the net change in the overall amount of investment in the capital markets. The proposed rules that would lower the cost of delivering disclosures to fund shareholders could have a positive effect on fund performance and attract new investors or additional capital from existing investors. If so, the rule could promote capital formation benefits. We are unable to estimate precisely the magnitude of capital formation effects that may result from our projected cost savings under the rule because the magnitude of such effects may be affected by the extent of pass-through cost savings and by other factors that affect the flow of investor capital into mutual funds and ETFs, including other components of fund returns, overall market returns, and returns on investments other than funds. To the extent that any proposed rule or amendment would increase the delivery cost, we would anticipate the opposite effect. 836 See supra footnote 611 (discussing comments on the effects of AFFE disclosure on BDC investments). 837 As an example, to the extent BDCs were excluded from indexes as a result of concerns about the effect of BDC investments on funds’ fee tables as a result of AFFE disclosure, as commenters have suggested, the proposal may result in BDCs being included in indexes again. This may occur particularly where BDCs and other funds would represent less than 10% of an index, which would permit funds tracking the index to rely on the proposed AFFE amendments. See id. 838 Of the funds that invest in acquired funds, we estimate that approximately 11% currently invest in BDCs. This is based on staff’s analysis of Form N– PORT filings received through early June 2020. PO 00000 Frm 00113 Fmt 4701 Sfmt 4702 70827 The proposed rule changes and amendments are designed to make shareholder reports and prospectus disclosures easier for shareholders to use and to help investors better understand fees and expenses through fund prospectuses or advertisements. To the extent that it becomes easier for investors to use fund disclosure or to understand investment fees and expenses, the effect may improve retail investors’ understanding about, and confidence in, the market for funds and other investment products, which may increase participation in this market by investors that previously avoided it. Such additional entry by new investors could increase the level of total capital across markets and increase the demand for new investment products and securities, which could lower the cost of capital for operating companies, precipitate capital formation in aggregate across the economy, and facilitate economic growth. These effects on capital formation would be limited, however, to the extent that investors rely on third parties who are not affected by the rule for advice in selecting among financial products. 839 Overall, we do not have reason to believe that the proposed rules or amendments would have significant effects on capital formation. S. Reasonable Alternatives 1. More or Less Frequent Disclosure The proposal would maintain a fund’s obligation to deliver an annual and a semi-annual report to shareholders. Alternatively, we could consider increasing or reducing the frequency of reports that funds would be required to deliver to shareholders. As one alternative, the Commission could propose to increase the required frequency of delivery of reports to shareholders beyond what occurs under the current disclosure framework. For example, the Commission could require funds to deliver shareholder reports on a quarterly basis, rather than on a semiannual basis as would continue to be the case under the proposal. To the extent shareholders review these additional reports, receiving the reports more frequently could keep shareholders better informed about their fund investments and could enhance shareholders’ familiarity and comfort with reviewing shareholder report disclosures, since they would encounter such disclosures more frequently. As a result, investors may make more informed investment decisions. However, increasing the frequency of 839 See E:\FR\FM\05NOP2.SGM also supra footnote 834. 05NOP2 70828 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 reports would require greater allocation of fund resources to preparing and delivering shareholder reports, which would increase fund (and shareholder) costs. In addition, receiving more frequent shareholder reports would place greater demands on shareholder time and attention compared to the proposal, which could decrease the likelihood that shareholders review the reports and rely on them to inform their investment decisions.840 The Commission could also propose alternatives to transmitting the semiannual report, such as permitting the requirement to transmit semi-annual reports to be satisfied by a fund filing certain information on Form N–CSR or by making information available on a website (either semi-annually or more frequently). Relative to the proposal, funds would benefit from cost savings associated with no longer being required to deliver the semi-annual report. Funds also could experience lower costs associated with preparing disclosures, particularly if the information they were required to provide on websites largely replicated information that many funds already provide online in monthly or quarterly fact sheets.841 Shareholders could benefit from these cost savings to the extent funds pass them through. However, shareholders who prefer to receive information more frequently than annually, as they currently do, would incur costs associated with the reduced frequency of delivery, such as costs of locating information online instead of in the delivered semi-annual report. In addition, to the extent this was an optional framework (e.g., funds could either provide certain information online or deliver semi-annual reports), the alternative framework may lead to shareholders in some funds receiving less direct information than those in other funds. 2. More or Less Information in Shareholder Reports The proposal would make the disclosures that funds send to shareholders more concise, without materially changing the overall amount or scope of information that funds provide to their shareholders (either in shareholder reports or separately online). Instead, the Commission could propose to require more (or less) information in fund shareholder reports and less (or more) information online or upon request only, relative to the 840 Existing research notes that individuals exhibit limited ability to absorb and process information. See supra Section III.C.1; Nisbett & Ross, supra footnote 815; Hirshleifer and Teoh Study, supra footnote 761. 841 See generally supra text following footnote 23. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 proposed amendments. We could further propose to reduce the overall amount of disclosure funds are required to prepare and provide, e.g., by no longer requiring funds to provide disclosure regarding the basis for the board’s approval of investment advisory contracts. The benefits of requiring more information to be included in shareholder reports (with less information online or upon request only) are that fewer investors may need to take any additional steps needed to access the information online, which would reduce burdens on those investors. However, this alternative also has certain costs. For example, requiring more information in shareholder reports may reduce the likelihood that shareholders review the reports because they may be more likely to feel overwhelmed by the length of the reports. Shareholder reports that include more information than the proposed content may also make it harder for shareholders to find key information within the report. Moreover, increasing the length of shareholder reports by requiring additional content could also increase delivery costs for funds (which could also be passed on to shareholders), particularly with respect to printing and mailing costs. As another alternative, we could further limit the content of shareholder reports. This alternative could result in shareholder reports that are easier for shareholders to review and could reduce costs associated with the preparation and delivery of shareholder reports. However, this alternative may reduce the utility of shareholder reports for many if not most shareholders if the reports do not include the key information those shareholders tend to use to monitor their fund investments or make portfolio decisions. If, as part of this alternative, we required funds to provide the information removed from shareholder reports to shareholders upon request or online, those shareholders would face the burden of requesting the information or locating it online. If we instead removed certain disclosure requirements entirely, the costs to funds of preparing disclosure would decline. This approach would, however, reduce access to information for all market participants, which may result in less informed monitoring or investment decisions by shareholders or by the market professionals they rely on for investment advice. PO 00000 Frm 00114 Fmt 4701 Sfmt 4702 3. Retaining Rule 30e–3 Flexibility for Open-End Funds Registered on Form N– 1A The Commission is proposing to exclude funds registered on Form N–1A from current rule 30e–3. Under the proposal, affected funds would be required to deliver concise shareholder reports directly to shareholders in order to meet their delivery obligations. Funds would not have the flexibility to instead deliver a paper notice with information about the online location of the shareholder report, as is the case under current rule 30e–3. As an alternative, the Commission could continue to permit these funds to rely on rule 30e–3 to satisfy their shareholder report delivery obligations. This alternative would provide optionality to funds to determine their preferred method for delivering shareholder reports where shareholders have not expressed a clear preference for electronic delivery or paper delivery of the report and could reduce costs for some funds compared to the proposal, such as for those funds that have already begun to prepare to rely on rule 30e–3. It also could reduce the potential for shareholder confusion where funds have notified shareholders of their intent to rely on rule 30e–3 and of the associated upcoming changes to shareholder report delivery. However, given that we do not expect the proposed shareholder reports to be much longer than a paper notice under rule 30e–3, we do not believe that excluding relevant funds from rule 30e– 3 as proposed would significantly increase the costs of delivering shareholder reports relative to the baseline.842 For instance, the proposed amendments may reduce processing fees associated with delivering shareholder reports through intermediaries and should not significantly increase printing and mailing costs. Moreover, we believe that delivering a concise shareholder report to shareholders directly may help them more efficiently monitor their fund investments. This is because shareholders who would otherwise receive paper notices under rule 30e–3 could avoid the additional step of finding the report online. In addition, we recognize that if a fund could rely on both rule 30e-3 and proposed rule 498B, shareholders may no longer directly receive substantive disclosure about a fund investment, beyond notices of material changes under proposed rule 498B. This could 842 See supra footnote 134 and accompanying text (discussing our belief that the proposed shareholder reports could be trifold self-mailers). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 result in shareholders being less informed, compared to the proposal. If, instead, funds were provided the option to rely on either rule 30e-3 or proposed rule 498B, a shareholder in a fund that chooses to rely on rule 30e-3 instead of proposed rule 498B would receive direct disclosure that may be less wellsuited to his or her needs than a shareholder of a fund that relies on proposed rule 498B (or on neither rule), given that prospectus disclosure is designed more for the needs of new or prospective investors than for the needs of existing shareholders. 4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds The proposed advertising rule amendments would apply to all registered investment companies and BDCs. The scope of entities affected by these amendments would therefore be broader than under the proposed rule and other proposed amendments, which apply only to open-end funds, such as mutual funds, and to ETFs. As an alternative, we could also limit the scope of the proposed amendments to the advertising rules to apply only to open-end funds. Under this alternative, the advertising rule amendments would apply to a narrower class of entities than is proposed. The effect would be to reduce both the cost and benefits of the proposed advertising amendments that are discussed in Section III.C.4, as these costs and benefits would accrue only to shareholders and issuers of the narrowed class of entities, and would no longer accrue to shareholders and issuers of any entities that would be excluded under the alternative. In addition, the alternative could lead to a disparity in the quality of the information that is available to market participants about funds that would be covered by the advertising rule amendments under the alternative and the entities that would be outside its scope. This could lead to reduced comparability and distortions in investor choice across registered investment companies and BDCs, relative to the approach the Commission is proposing, which would apply the standards across all of these entities evenly. 5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a Different Manner The proposed prospectus fee summary disclosure would require funds to provide certain fee and expense information both as a percent of a fund investment and in dollar figures based VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 on a $10,000 investment, while the presentation of those numbers in the full fee table would remain only in percentage figures. Alternatively, we could require funds to express fees and expenses in the fee summary as a percent of a fund investment only, similar to the current fee table presentation. This alternative would streamline the fee summary and could make it more visually appealing by reducing the amount of detail. It also could marginally reduce costs of preparing disclosures for funds. However, as discussed above, a fee summary that excludes dollar-based figures may be more difficult for some investors to understand.843 The proposed amendments are designed to promote more concise principal risk disclosure in the summary section of the statutory prospectus (or in summary prospectuses for funds that use summary prospectuses), but the proposal does not limit the number of principal risks a fund may disclose. As an alternative, we could limit the number of principal risks a fund may disclose (e.g., only 25 principal risks). This would streamline principal risk disclosure in a way that may make it easier for investors to digest and understand the most central risks of a fund investment. At the same time, this approach could potentially result in a fund understating its principal risks in some instances, which could mislead investors about the risks associated with an investment in the fund. The proposed rule would provide that a principal risk is one that would place more than 10% of the fund’s assets at risk (or it is reasonably likely that it would place more than 10% of the fund’s assets at risk in the future). Alternatively, we could establish different numerical thresholds in the proposed instruction. For example, we could provide a lower percentage threshold of 5% or a higher percentage threshold of 15% for determining whether a risk is principal. Compared to the proposed approach, a higher percentage threshold would result in funds disclosing fewer principal risks and reduce the costs to funds of providing these disclosures, while a lower percentage threshold would result in funds disclosing more principal risks and increase the costs to funds of providing these disclosures. Fewer principal risks being disclosed could lead to disclosure that is overall more concise and that may require less time and resources for investors to understand, while more principal risks 843 See PO 00000 supra footnotes 63 and 573. Frm 00115 Fmt 4701 Sfmt 4702 70829 being disclosed could lead to disclosure that is overall less concise and that may require more time and resources for investors to understand. At the same time, decreasing the number of principal risks a fund discloses may increase the potential for an investor to be misled about the risks of investing in a particular fund, while increasing the number of principal risks a fund discloses may decrease the potential for an investor to be misled. As another alternative, we could provide a qualitative standard or a ‘‘materiality’’ standard for funds to determine whether a risk is principal instead of a numerical-based standard. These alternatives may allow funds to tailor and adapt their principal risk disclosure better to different facts and circumstances, which could lead to more accurate identification of a fund’s principal risks and may better account for non-investment related risks, such as cybersecurity risks and new fund risks. However, these alternatives may be less effective than the proposed approach in promoting more concise and focused principal risk disclosure. These alternatives also could lead to greater variation in principal risk disclosure across funds than the proposed approach, which may make it more difficult for investors to compare funds effectively when making investment decisions. In addition, it may be more costly for funds to evaluate whether a principal risk is material compared to evaluating whether the principal risk meets the proposed quantitative standard. 6. Amending Shareholder Report Requirements for Variable Insurance Contracts or Registered Closed-End Funds The proposed shareholder report amendments apply only to funds registered on Form N–1A. The proposed amendments to shareholder reports do not apply to other registered management investment companies that transmit annual and semi-annual reports under rule 30e–1.844 Alternatively, we could extend the shareholder report disclosure amendments to other registered management investment companies, including closed-end funds that register on Form N–2 and variable annuity separate accounts that register on Form N–3. Like shareholders in open-end 844 Although all registered management investment companies are subject to rule 30e-1, the information a registered management investment company must include in its shareholder report is specified in the relevant Investment Company Act registration statement form (i.e., Forms N–1A, N–2, or Form N–3). E:\FR\FM\05NOP2.SGM 05NOP2 70830 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules funds registered on Form N–1A, shareholders in these other funds could benefit from more concise shareholder reports. However, the Commission has recently amended the disclosures that shareholders in these funds receive. For example, the recently adopted changes to closed-end fund disclosures include multiple changes to these funds’ shareholder report disclosure.845 Similarly, while the recently adopted changes to the variable insurance contract disclosure framework are focused more on prospectus disclosure and not shareholder report disclosure, we anticipate that these amendments would significantly change investors’ experience with variable contract disclosure.846 Because we lack information about shareholders’ experiences with these new disclosure requirements, we would like to assess the impact of these changes prior to proposing additional disclosure changes for variable contracts or closed-end funds. 7. Requiring Funds to Comply With Proposed Rule 498B Proposed rule 498B allows funds the option to deliver a notice of material changes to shareholders in lieu of delivering annual prospectus updates and prospectus stickers. Instead of providing funds with the option to rely on proposed rule 498B, we could require all affected funds to comply with the proposed rule.847 This alternative would have the benefit of creating a more consistent disclosure framework across funds and would result in fund shareholders generally receiving the same types of information from all funds. Under the proposal, prospectus delivery practices of funds would vary across funds depending on whether they choose to rely on rule 498B. We believe that the funds that choose not to rely on the rule would generally continue to deliver the annual prospectus update, while the funds that rely on rule 498B would not deliver the annual prospectus update and would instead provide to fund shareholders timely notification of 845 See supra footnote 129. Variable Contract Summary Prospectus Adopting Release, supra footnote 27. 847 Under the proposed rule 498B, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the shareholder would be receiving tailored shareholder reports (which would include, in the annual report, a summary of material changes that occurred over the prior year), and timely notifications to shareholders pursuant to proposed rule 498B regarding material fund changes as they occur. khammond on DSKJM1Z7X2PROD with PROPOSALS2 846 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 material changes. Under this alternative, all fund shareholders would receive prompt notices of material changes to a fund and would not receive separate annual prospectus updates directly. This may benefit the shareholders of funds that otherwise would decline to rely on rule 498B, to the extent that delivery of the more concise materials may allow them to make betterinformed investment decisions. However, this alternative may impose burdens on funds that would not otherwise choose to rely on the proposed rule. For example, funds that do not currently use summary prospectuses, including some smaller funds, may determine that the benefits of proposed rule 498B do not justify its costs since the rule would require funds to provide summary and statutory prospectuses and other information online. As a result, the alternative approach may impose greater costs on those funds, including some smaller funds, than on other funds. In addition, under the proposed amendments, all fund shareholders would receive information in the annual report about material fund changes. This uniform annual report disclosure would promote more consistent information for fund shareholders and thus facilitate betterinformed investment decisions. In addition, we believe this proposed requirement would not lead to increased costs because of the optional nature of rule 498B for two reasons. First, funds currently tend to disclose more material changes in the annual prospectus update, and disclosure of these changes would generally appear in the proposed annual report for all funds. Second, for material changes that funds disclose through prospectus stickers, we expect that funds that do not rely on proposed rule 498B would continue to deliver prospectus stickers to notify shareholders of material changes. 8. Requiring Form N–CSR To Be Tagged in Inline XBRL Format The proposal would not change the format requirement for Form N–CSR, which is not required to be filed in a structured machine-readable format.848 Alternatively, we could require management investment companies (including open-end funds, registered closed-end funds, and some variable annuity separate accounts) to tag some or all of Form N–CSR in the structured machine-readable Inline XBRL 848 The Instructions to Form N–CSR do not prescribe a format requirement for submission of the Form. As an EDGAR Form without a separate prescribed format, Form N–CSR is typically submitted in HTML (.htm) format. See Vol. 2, Sec. 5.1 of the EDGAR Filer Manual (Ver. 53, Jan. 2020). PO 00000 Frm 00116 Fmt 4701 Sfmt 4702 format.849 This requirement could include numerical detail tagging of the financial statements that would be included in Form N–CSR, as is currently required for operating company financial statements.850 The requirement could also include text block tagging for narrative disclosures (such as the discussion of prior-year performance that is proposed to be included in the annual report for openend funds and would thus be filed as part of Form N–CSR), as is currently required for principal risk disclosures in open-end fund prospectuses.851 Compared to the baseline (under which Form N–CSR is not required to be submitted in a structured machinereadable format), an Inline XBRL tagging requirement for Form N–CSR could benefit investors by enabling efficient retrieval, aggregation, and analysis of the information in Form N–CSR and by facilitating comparisons of that information across investment companies and time periods. There are studies suggesting that XBRL requirements increase the information content of prices, reduce the informational advantages held by insiders over public investors, heighten the relevance, understandability, and comparability of financial information for non-professional investors, and enhance the reports and recommendations published by financial analysts, thereby indirectly benefitting retail investors for whom such analysts represent a significant source of investment information.852 849 Such a requirement would be implemented by revising 17 CFR part 232 [Regulation S–T] and adding an Instruction to Form N–CSR which cites to Regulation S–T. In conjunction with the EDGAR Filer Manual, Regulation S–T governs the electronic submission of documents filed with the Commission. Modifying a structured format requirement for a Commission filing or series of filings can generally be accomplished through changes to Regulation S–T, and would not require dispersed changes to the various rules and forms that would be impacted by the format modification. 850 Under the proposal, open-end funds would be required to file financial statements on Form N– CSR under proposed Item 7(a) of that Form. See supra Section II.D.1(a). Closed-end funds and variable annuity separate accounts that are management investment companies would still be required to include financial statements in their shareholder reports, which are filed on Form N– CSR under Item 1 of that Form. 851 Under the proposal, open-end funds would include a discussion of prior year performance pursuant to Item 27A(d) of Form N–1A. See supra Section II.B.2(c). In addition, registered closed-end funds will be required to include a similar discussion in their shareholder reports as of August 1, 2021. See Closed-End Fund Offering Reform Adopting Release, supra footnote 128, at Sections II.I.2 and II.J. 852 See, e.g., Yuyun Huang, Yuan George Shan, & Joey Wenling Yang, Effects of Information Processing Costs on Price Informativeness: Evidence from XBRL Mandate (SSRN, 2019) available at E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Requiring Inline XBRL tagging of Form N–CSR would impose additional filing preparation costs on management investment companies compared to the baseline. Currently, management investment companies are not required to tag their Form N–CSR filings in the Inline XBRL format. As such, this alternative would impose on management investment companies the incremental costs of tagging Form N– CSR disclosures, whether implemented using internal staff or external service providers. Such costs would be partially mitigated by the fact that management investment companies will be subject to Inline XBRL tagging requirements in other filings, independent of this proposal.853 Consequently, the https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=3324198 ; Yu Cong, Jia Hao, & Lin Zou, The Impact of XBRL Reporting on Market Efficiency, 28 J. INFO. SYS. 181 (2014); Huang, Yuyun, Jerry T. Parwada, Yuan George Shan, and Joey (Wenling) Yang, Insider Profitability and Public Information: Evidence from the XBRL Mandate (SSRN, 2019) available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3455105; Jacqueline Birt, Kala Muthusamy, & Poonam Bir (2017), XBRL and the Qualitative Characteristics of Useful Financial Information, 30 ACCT. RES. J 107 (2017); Chunhui Liu, Tawei Wang, & Lee J. Yao, XBRL’s Impact on Analyst Forecast Behavior: An Empirical Study, 33 J. ACCT. & PUB. POL’Y 69 (2014); Andrew J. Felo, Joung W. Kim, & Jee-Hae Lim, Can XBRL Detailed Tagging of Footnotes Improve Financial Analysts’ Information Environment?, 28 INT’L J. ACCT. INFO. SYS. 45 (2018); Karam Kim, Doojin Ryu, & Heejin Yang, Investor Sentiment, Stock Returns, and Analyst Recommendation Changes, 48(2) INV. ANALYSTS J. 89 (2019); Alastair Lawrence, James Ryans, & Estelle Sun, Investor Demand for Sell-Side Research, 92 ACCT. REV. (2017). However, note that the studies listed here which assessed the impact of XBRL were based on operating company financial statement data, not mutual fund risk/ return summary data. 853 In 2009, the Commission adopted rules requiring mutual fund risk/return summaries to be submitted in an XBRL format entirely within an exhibit to a filing. See Interactive Data to Improve Financial Reporting, Release No. 33–9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] as corrected by Release No. 33–9002A (Apr. 1, 2009) [74 FR 15666 (Apr. 7, 2009)]. In 2018, the Commission refined the requirement to provide information in an XBRL format by requiring that, for fiscal periods ending on or after September 17, 2020 (for fund groups with at least $1 billion in assets under management) and September 17, 2021 (for all other fund groups), mutual fund filers submit this information using the Inline XBRL format, which embeds the tagged information in the document itself, rather than in an exhibit. See Inline XBRL Filing of Tagged Data, Release No. 33–10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)]. In 2020, the Commission adopted rules requiring certain closed-end fund prospectus disclosures to be tagged in Inline XBRL format for filings submitted on or after August 1, 2022 (for short-form eligible closed-end funds) and February 1, 2023 (for all other closed-end funds). See Closed-End Fund Offering Reform Adopting Release, supra footnote 128, at Sections II.I.1 and II.J. Also in 2020, the Commission adopted rules requiring certain variable insurance account prospectus disclosures to be tagged in Inline XBRL format for filings submitted on or after January 1, 2023. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 alternative of tagging Form N–CSR would not impose on management investment companies the Inline XBRL implementation costs that are often associated with being subject to an Inline XBRL requirement for the first time (such as the cost of training inhouse staff to prepare filings in Inline XBRL, and the cost to license Inline XBRL filing preparation software from vendors). However, as noted above, the primary objective of the proposed disclosure framework is to promote shareholder reports that assist existing shareholders in monitoring their fund investments, leaving information that is more useful for new and prospective investors to compare funds and make investment decisions to be retained in the fund prospectus.854 Because facilitating fund comparisons is one of the chief benefits of the Inline XBRL format, Inline XBRL requirements are likely more beneficial to investors in the context of prospectus disclosures rather than disclosures in periodic reports such as Form N–CSR. As such, the Commission has determined not to propose an Inline XBRL tagging requirement for Form N– CSR. 9. Modifying the AFFE Amendment The proposal would allow some funds to disclose AFFE, the fees and expenses associated with acquired fund investments, in a footnote to the fee table and fee summary instead of reflecting the AFFE in the bottom line annual expenses in the fee table (as funds do today). Funds with investments in acquired funds that are limited to 10 percent or less of their total assets would be eligible to disclose AFFE in a footnote. Moving the AFFE information to a footnote to the fee table would enable the eligible funds to provide disclosures that investors may find easier to use in comparing the fees and expenses of funds with comparable investment strategies. As alternatives, we could consider allowing more funds to move the AFFE disclosure into a footnote to the fee table by increasing the proposed eligibility threshold above 10%, such as to 50% or some other level, or by allowing all funds to move the AFFE disclosure into a footnote to the fee table, which may improve the salience of the expenses of the acquiring fund to investors. On the other hand, some funds may follow an investment strategy that leads them to incur significant expenses at a lower fund level, even where the fund does not have a majority of its assets invested in acquired funds. For those funds, 854 See PO 00000 supra Section II.A.2. Frm 00117 Fmt 4701 Sfmt 4702 70831 moving the AFFE expenses into a footnote to the fee table may provide for expense disclosures that are less closely related to the expenses associated with the top-level fund’s investment strategy. For example, some funds (such as certain target date funds) follow an investment strategy in which the acquiring fund has very low, or no, management fees. For those funds, a fee table that does not include the AFFE amount may confuse investors as to the expenses associated with investment in the fund.855 Therefore, we are proposing to limit eligibility for the proposed AFFE amendment to the more limited share of funds with 10% or less invested in acquired funds. As another alternative, we could consider requiring all eligible funds to rely on the proposed AFFE amendments. This could make it easier for investors to compare similar funds because funds with acquired fund investments below the 10% threshold would all disclose AFFE in a footnote. It also could reduce investor uncertainty about how a fund is disclosing AFFE information. On the other hand, allowing funds to opt into reliance on the amendment would enable funds that have relatively low, or negative, net benefit from migrating to the footnotebased approach to opt out. Moreover, a mandatory approach could require funds that maintain acquired fund investments close to the 10% threshold to move AFFE disclosure back-and-forth between the fee table and an associated footnote over time, which could contribute to investor confusion.856 Therefore, we are proposing to allow voluntary reliance on the proposed AFFE amendments. T. Request for Comment We seek comment on the economic analysis, including whether the analysis has: (1) Identified all benefits and costs, including all effects on efficiency, competition, and capital formation; (2) given due consideration to each benefit and cost, including each effect on efficiency, competition, and capital formation; and (3) identified and considered reasonable alternatives to the proposed rules. We request and encourage any interested person to submit comments regarding the proposed rules, our analysis of the potential effects of the proposed rules, and other matters that may have an effect on the proposed rules. We request that commenters identify sources of data 855 See supra footnote 816 (discussing some commenters’ views on the importance of AFFE disclosure). 856 See supra paragraph accompanying footnote 621. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70832 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules and information as well as provide data and information to assist us in analyzing the economic consequences of the proposed rules and proposed amendments. We also are interested in comments on the qualitative benefits and costs we have identified and any benefits and costs we may have overlooked. In addition to our general request for comments on the economic analysis associated with the proposed rules and proposed amendments, we request specific comment on the following aspects of the proposal: 275. What effect would the proposal have on funds’ delivery costs? Is our assessment correct that funds could use a trifold self-mailer, or a similar approach, to deliver a proposed shareholder report by mail? Why or why not? What alternatives to a trifold selfmailer might funds consider for delivering the proposed shareholder reports in paper to relevant shareholders? How would the planned mailing device affect the estimated benefits and costs of the proposal? Please provide quantitative information, if available. 276. We request comment on the costs to funds of the proposed requirement to prepare separate shareholder reports for each fund series. How would this requirement affect the cost to funds of preparing shareholder reports? Please answer this question separately for the transition cost and the ongoing costs of complying with this proposed requirement. Also please provide information on the additional costs to funds and other parties of delivering separate reports for separate fund series to shareholders, beyond any costs of report preparation. 277. We request comment on the costs of the Commission’s proposed clarification of the term ‘‘appropriate broad-based securities market index’’ for funds that are required to present their performance in relation to an ‘‘appropriate broad-based securities market index’’ in the management’s discussion of fund performance section of the shareholder report. Would this proposed clarification result in increased index-licensing fees? To what extent would competition among index providers limit or otherwise affect these fees? 278. What fraction of shareholders currently request electronic delivery of fund disclosure? 857 Would the proposal 857 We understand that the Commission estimated that fifteen percent of investors in variable contracts have requested electronic delivery. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at n.1030 and accompanying text. There are sufficient differences between the market for investment in variable contracts and the VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 cause an increase or decrease in this fraction relative to what would occur without the proposal? If so, explain and indicate the likely change. Provide supporting quantitative evidence, if available. 279. The proposal would affect financial intermediaries and other third parties that are involved in the distribution and use of the prospectus and shareholder reports, such as brokerdealers and third-party information providers. For each type of intermediary or third party, we are requesting comment on how many would be affected by the rule, the characteristics of those affected, and the consequences for retail investors. Please provide quantitative information, if available. 280. The effect of changes in disclosure under the proposal would be limited to the extent that retail investors rely on third parties for information and advice in selecting among financial products, where those third parties use more information than the proposed shareholder reports and amended prospectus disclosure. We are requesting comment on how many, or what fraction, of retail investors rely on advice from such third parties in choosing among funds or in monitoring fund investments. We are also requesting comment on whether the presence of third parties whose advice is unaffected by the proposal would reduce the impact of the proposal. Please explain and provide empirical facts to support your response. 281. How frequently do funds currently deliver prospectus stickers to shareholders on average? Do funds typically deliver prospectus stickers separately, or together with other materials (e.g., semi-annual reports)? What effects would proposed rule 498B, including the requirement to deliver prompt notices of certain material changes, have on funds’ delivery costs? 282. Are our estimates of the compliance costs associated with the proposed amendments reasonable? 283. Is our assessment of the relative costs and benefits of the proposal to exclude open-end funds registered on Form N–1A from the scope of rule 30e3 correct? Please provide qualitative or other information about the expected costs of delivering rule 30e-3 notices or complying with that rule more generally in light of funds’ additional experience with the rule after its adoption. How do these costs compare to the expected costs of preparing and delivering the proposed shareholder reports? market for investment in ETFs and mutual funds, that we believe the variable contract estimate is not a suitable indicator for the analysis of the present rule proposal. PO 00000 Frm 00118 Fmt 4701 Sfmt 4702 284. We seek information that would help us quantify or otherwise qualitatively assess the benefits of the proposed rule, particularly the benefits for retail investors. Please provide any data, studies, or other evidence that would allow us to quantify some or all of the benefits. 285. The proposal is designed to conserve the time and attention of retail investors, and other market participants, in using the disclosures that funds provide through prospectuses and shareholder reports. We do not, however, have reliable estimates of the value to investors of being able to use their time more efficiently under the proposal or being able to make more informed investment decisions. We are requesting comment on the effects of the proposal on the use of investor time and attention, the ability of investors to make informed investment decisions, and on the proposal’s likely effects on welfare of retail investors. Please provide explanations to support your comments. Please also provide examples, where appropriate, and supporting evidence from analysis of quantitative data, where available. 286. The proposal is designed to increase the use of disclosures by retail investors. We seek comment on whether the benefit in terms of investor comprehension of the disclosures is likely to vary according to the disclosure format and, in particular, according to whether delivery occurs in the form of digital media. What is the empirical evidence? Please explain and provide documentation of any quantitative evidence that includes an explanation of the data sources and analysis methods. 287. We seek comment on whether, and to what extent, funds that have the option would choose to rely on the AFFE amendments that we are proposing. For example, for purposes of the economic analysis, we have assumed that all funds that are eligible for the AFFE amendment would choose to move their AFFE disclosure to a footnote of the fee table, if allowed to do so. It is possible that not all such funds would rely on the amendment, however.858 Are there conditions under which a fund that could move AFFE out of the fee table would choose not to do so? Please explain. Also please provide data or examples to support your answer. 858 See supra paragraph accompanying footnote 621 (recognizing that funds that tend to hold acquired fund investments near the 10% threshold may prefer to consistently disclose AFFE in the fee table to avoid moving the disclosure back-and-forth between a footnote and the table). E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 288. The effects on investors of fund reliance on the proposed AFFE amendments would depend on how many funds rely on the AFFE amendment, and under what conditions. For example, we estimate that only funds with investments in acquired funds of less than 20% of total assets would likely spend time considering whether they would qualify for the AFFE amendment. We are requesting comment on the effects of the proposed amendment on funds and investors. 289. The effects on investors of the proposed change in the AFFE disclosure would depend on whether, and under what conditions, investors currently rely on the fund AFFE disclosure information. We are requesting comment on how investors and other market participants use the AFFE information that is disclosed currently. What is the evidence that investors and others rely on AFFE disclosures in making choices among funds? What is the evidence that the proposed changes would cause any difference in the way this information is used or the ease of its use by investors or other market participants? Please explain and provide supporting cites (or other background documentation). 290. We are requesting comments on whether there are any disparities between the likely effects of the advertising rule amendments on different financial products or investments that could lead to differences in the effects of the proposed advertising rule amendments across products. We specifically seek comments on differences in the effects of the proposed advertising rule amendments between ETFs or mutual funds, on the one hand, and other types of registered investment companies, on the other. 291. We are not proposing to require Form N–CSR to be submitted in a structured machine-readable format. Should we require funds to submit some or all of Form N–CSR in a structured machine-readable format such as the Inline XBRL format? What would be the benefits and costs of such a requirement? Would any resulting benefits accrue to all types of investors (e.g., retail investors and institutional investors)? Are there any particular disclosures which investors would benefit most from having access to in structured machine-readable format? Should a structured machine-readable format other than Inline XBRL, such as a custom XML format, be required for Form N–CSR? 292. Form N–CSR currently requires funds to disclose their name and VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Investment Company Act file number on the Form N–CSR cover page. Unlike the Investment Company Act file number, which is a Commissionspecific identifier, the Legal Entity Identifier (‘‘LEI’’) is used by numerous domestic and international regulatory regimes and could facilitate collection of information about a fund beyond the information disclosed in Commission filings.859 Should we require a fund that has an LEI to disclose its LEI on the Form N–CSR cover page? What would be the costs and benefits of such an approach for investors and for funds? If the approach would provide informational benefits for investors, would retail investors realize such benefits? By making additional information available outside of the shareholder reports, would the added LEI requirement contribute to the layered disclosure framework discussed above? 293. Form N–CSR currently requires funds that disclose divested securities under Item 6.b of the Form to include the Committee on Uniform Securities Identification Procedures (‘‘CUSIP’’) number for each divested security listed. Should we consider omitting Form N–CSR’s requirement to provide a CUSIP number for each divested security? Why or why not? Should we permit funds to provide, in lieu of a CUSIP number, other identifiers such as a Financial Instrument Global Identifier (FIGI) for each security? Why or why not? Would permitting voluntary use of an alternate identifier have a beneficial effect for investors, funds, or users of the data? IV. Paperwork Reduction Act Analysis U. Introduction Certain provisions of the proposed amendments contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).860 We are submitting the proposed collections of information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.861 The titles for the existing collections of information are: (1) ‘‘Form N–1A, Registration Statement under the Securities Act and under the Investment Company Act for Open-End Management Investment Companies’’ 859 The LEI is also used by private market participants for risk management and operational efficiency purposes. See the LEI ROC’s list of LEI uses at https://www.leiroc.org/lei/uses.htm. 860 44 U.S.C. 3501 through 3521. 861 44 U.S.C. 3507(d); 5 CFR 1320.11. PO 00000 Frm 00119 Fmt 4701 Sfmt 4702 70833 (OMB Control No. 3235–0307); 862 (2) ‘‘Rule 30e–1 under the Investment Company Act, Reports to Stockholders of Management Companies’’ (OMB Control No. 3235–0025) (3) ‘‘Form N– CSR, Certified Shareholder Report under the Exchange Act and under the Investment Company Act for Registered Management Investment Companies’’(OMB Control No. 3235– 0570); (4) ‘‘Rule 30e–3 under the Investment Company Act, internet Availability of Reports to Shareholders’’ (OMB Control No. 3235–0758); (5) ‘‘Rule 31a–2, Records to be Preserved by Registered Investment Companies, Certain Majority-Owned Subsidiaries thereof, and other Persons Having Transactions with Registered Investment Companies’’ (OMB Control No. 3235–0179); (6) ‘‘Rule 498 under the Securities Act of 1933, Summary Prospectuses for Open-End Management Investment Companies’’ (OMB Control No. 3235–0648); (7) ‘‘Rule 34b–1 under the Investment Company Act, Sales Literature Deemed to be Misleading’’ (OMB Control No. 3235–0346); (8) ‘‘Rule 433 under the Securities Act of 1933’’ (OMB Control No. 3235–0617); and (9) ‘‘Rule 482 under the Securities Act of 1933 Advertising by an Investment Company as Satisfying Requirements of Section 10’’ (OMB Control No. 3235– 0565). We are also submitting a new collection of information for proposed rule 498B under the Securities Act to allow funds to rely on a new layered disclosure framework for prospectus delivery to existing shareholders, subject to certain conditions. The title for this new collection of information would be ‘‘Delivery of Prospectuses to Existing Shareholders of Open-End Management Investment Companies.’’ An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. We discuss below the collection of information burdens associated with proposed amendments to Form N–1A, rule 30e–1 under the Investment Company Act, and Form N–CSR. We also discuss proposed rule 498B and proposed amendments to rule 482 under the Securities Act, rule 34b–1 under the Investment Company Act, rule 433 under the Securities Act, and rule 30e– 3 under the Investment Company Act. The Commission also intends to use two Feedback Fliers to obtain information from investors and funds about the 862 In addition to the amendments discussed below, we also are proposing amendments to Schedule 14A and Form N–14 to update certain cross references to the fee table in Form N–1A. E:\FR\FM\05NOP2.SGM 05NOP2 70834 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules V. Form N–1A khammond on DSKJM1Z7X2PROD with PROPOSALS2 In our most recent Paperwork Reduction Act submission for Form N– 863 The Commission has determined that this usage is in the public interest and will protect investors, and therefore is not subject to the requirements of the Paperwork Reduction Act of 1995. See section 19(e) and (f) of the Securities Act. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 1A, we estimated for Form N–1A a total hour burden of 1,662,190 hours, and the total annual external cost burden is $131,338,208.864 Compliance with the disclosure requirements of Form N–1A is mandatory, and the responses to the disclosure requirements will not be kept confidential. The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N–1A. BILLING CODE 8011–01–P Additionally, for the purpose of developing and considering any potential rules relating to this rulemaking, the agency may gather from and communicate with investors or other members from PO 00000 Frm 00120 Fmt 4701 Sfmt 4725 the public. See section 19(e)(1) and (f) of the Securities Act. 864 This estimate is based on the last time the rule’s information collection was submitted for PRA renewal in 2020. E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.010</GPH> proposed rule.863 The Feedback Fliers are included in this proposal as Appendix B and Appendix C hereto. W. Proposed New Shareholder Report Requirements Under Rule 30e–1 khammond on DSKJM1Z7X2PROD with PROPOSALS2 We have previously estimated that it takes a total of 1,028,658 hours, and involves a total external cost burden of BILLING CODE 8011–01–C $147,750,391, to comply with the collection of information associated with rule 30e–1.865 Compliance with the disclosure requirements of rule 30e–1 is mandatory. Responses to the disclosure requirements are not kept confidential. The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to rule 30e-1. X. Form N–CSR CSR, we estimated the annual compliance burden to comply with the collection of information requirement of In our most recent Paperwork Reduction Act submission for Form N– 865 This estimate is based on the last time the rule’s information collection was submitted for PRA renewal in 2019. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 70835 PO 00000 Frm 00121 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.011</GPH> Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Form N–CSR is 179,443 burden hours with an internal cost burden of $57,723,571, and an external cost burden estimate of $3,129,984.866 Compliance with the disclosure requirements of Form N–CSR is mandatory, and the responses to the disclosure requirements will not be kept confidential. The table below summarizes our PRA initial and ongoing annual burden estimates associated with the proposed amendments to Form N–CSR. Y. Proposed Rule 498B include, in the annual report, a summary of material changes that occurred over the prior year), and timely notifications to shareholders pursuant to proposed rule 498B regarding material fund changes as they occur. Reliance on the rule is voluntary; however, compliance with the rule’s conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential. Because a fund’s reliance on proposed rule 498B would be voluntary, the percentage of funds that would choose to rely on the rule is uncertain. We generally anticipate that the proposed rule would provide costs savings to funds, and so we assume that the vast majority of funds would rely on rule 498B to satisfy their prospectus delivery obligations.868 For purposes of this estimate, we assume that funds that currently rely on rule 498 generally would rely on proposed rule 498B. We believe this assumption is appropriate because funds that rely on rule 498 are funds that have already chosen to rely on a rule that provides an alternative means of satisfying prospectus delivery obligations, and because certain of the conditions of proposed rule 498B overlap with similar conditions to rely on rule 498.869 Therefore, we assume that these funds would experience some efficiencies in coming into compliance with proposed rule 498B. Based on 868 See supra section III.C.2.d (discussing the anticipated cost savings associated with rule 498B). 869 For example, the set of documents that funds relying on 498B must post online would be identical to the set of documents that are publicly accessible online for funds currently relying on rule 498. Therefore, for funds currently relying on 498, there would be no added burden to comply with this requirement. Proposed rule 498B would address shareholders’ continued receipt of annual prospectus updates in the years following their initial investment in a fund and uses layered disclosure concepts to tailor funds’ required disclosures to the informational needs of different types of investors.867 Under the proposed rule, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the shareholder would be receiving tailored shareholder reports (which would 866 This estimate is based on the last time the rule’s information collection was submitted for PRA renewal in 2018. 867 See supra section II.F. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00122 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.012</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 70836 70837 these assumptions, we estimate that 90% of mutual funds and ETFs would choose to rely on rule 498B.870 The table below summarizes the proposed estimates for internal and external burdens associated with this new requirement under rule 498B: Z. Rule 482 comply with rule 482’s information collection requirements to be 278,161 hours, with a time cost of $76,702,895, and with no annual external cost burden.871 Compliance with the requirements of rule 482 is mandatory, and responses to the information to rely on proposed rule 498B due to the lower compliance costs of relying on the new rule. As a result, and to simplify our calculations, we estimate that 90% of funds would rely on proposed rule 498B. 871 This estimate is based on the last time the rule’s information collection was submitted for PRA renewal in 2017. In our most recent Paperwork Reduction Act submission for rule 482, we estimated the annual burden to 870 We estimate that 93% of funds use summary prospectuses. See supra footnote 12. Funds that use summary prospectuses under rule 498 already meet several of the conditions of proposed rule 498B, which we believe would lead most of these funds VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00123 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.013</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules collections would not be kept confidential. We estimate that 36,994 responses to rule 482 are filed annually.872 We estimate that approximately 96% of the rule 482 responses provide fee and expense figures in qualifying advertisements and would, therefore, be required to comply with the proposed amendments regarding such information (for example, ensuring that the fee and expense figures are presented in accordance with the prominence and timeliness requirements in the proposed amendments to rule 482). Similarly, we estimate that 96% of the responses to rule 482 provide advertisements that include information regarding a fund’s total annual expenses and would, therefore, have to comply with the proposed amendments regarding such information. The table below summarizes the proposed estimates for internal burdens associated with this new requirement under rule 482: AA. Rule 34b–1 mirrors our proposed amendments to rule 482.873 We estimate that 351 responses to rule 34b–1 are filed annually.874 We estimate that approximately 96% of the rule 34b– 1 responses provide fee and expense figures in qualifying advertisements and would, therefore, be required to comply with the proposed amendments regarding such information. Similarly, we estimate that 96% of the responses to rule 34b–1 provide advertisements that include information regarding a fund’s total annual expenses and would, therefore, have to comply with the proposed amendments regarding such information. To apply the same fee and expenserelated requirements consistently across all registered investment company and BDC advertisements and supplemental sales literature, we are proposing to amend rules 34b-1 in a manner that 872 In 2019, there were 41,003 responses to rule 482 filed with FINRA and 262 responses filed with the Commission in 2019. Of those, 4,271 were responses from closed-end funds and BDCs. We VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 assume that, moving forward, closed-end funds and BDCs will choose to use free writing prospectuses under rule 433. Therefore, we excluded closed-end funds or BDCs from the total responses to rule 482. PO 00000 Frm 00124 Fmt 4701 Sfmt 4702 873 See supra Section II.I. estimated number of responses filed with the Commission in 2019. 874 The E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.014</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 70838 70839 In our most recent Paperwork Reduction Act submission for rule 34b– 1, we estimated the annual compliance burden to comply with the collection of information requirement in rule 34b–1 is 26,008 hours, with an internal cost burden of $7.3 million.875 There is no annual external cost burden attributed to rule 34b–1. Compliance with the requirements of rule 34b–1 is mandatory and the responses to the information collections would not be kept confidential. The table below summarizes the proposed estimates for internal burdens associated with this new requirement under rule 34b–1. BB. Rule 433 comply with the proposed content, presentation, and timeliness requirements of proposed rule 482, as applicable, if the free writing prospectus includes fee and expense information.876 As a result, regardless of whether a registered closed-end fund or BDC advertisement uses rule 482 or rule 433, the advertisement would be subject to the same requirements regarding fee We are proposing to amend rule 433 to require a registered closed-end fund or BDC free writing prospectus to 875 This estimate is based on the last time the rule’s information collection was submitted for PRA renewal in 2018. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 876 See PO 00000 supra Section II.I. Frm 00125 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.015</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules and expense information.877 Compliance with the requirements of rule 433 is mandatory and the responses to the information collections would not be kept confidential. In our most recent Paperwork Reduction Act submission for rule 433, we estimated the annual compliance burden to comply with the collection of information requirement rule 433 is 6,391 hours, at a time cost of $7,668,800, and an external cost burden estimate of $7,669,017.878 As part of that rulemaking, we also estimated that there will be 791 closed-end funds and BDCs filing approximately 4,271 free writing prospectuses. We estimate that approximately 96% of the 4,271 responses provide fee and expense figures in free writing prospectuses and would, therefore, be required to comply with the proposed amendments regarding such information. Similarly, we estimate that 96% of these responses would include information regarding a fund’s total annual expenses and would, therefore, have to comply with the proposed amendments regarding such information. The table below summarizes the proposed estimates for internal burdens associated with this new requirement under rule 433: CC. Rule 30e–3 companies registered on Form N–1A.879 Because our proposed amendment would decrease the number of funds that would be able to rely on rule 30e– 3, we are updating the PRA analysis for rule 30e–3 to account for any burden 878 This estimate is based on the last time the rule’s information collection was submitted in 2020. See Securities Offering Reform for Closed-End Investment Companies, Investment Company Act Release No. 33836 (Apr. 8, 2020). We are proposing to amend the scope of rule 30e–3 to exclude investment 877 See supra footnote 872 (noting that, for purposes of the PRA for rule 482, we excluded responses from closed-end funds and BDC). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00126 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.016</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 70840 70841 decrease that would result from this decrease in respondents. We are not updating the rule 30e–3 PRA analysis in any other respect. Reliance on the rule is voluntary; however, compliance with the rule’s conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential. Under current PRA estimates for rule 30e–3, we estimated that complying with the information collection requirements of rule 30e–3 would impose an average total annual hour burden of about 8,866 hours and an external cost burden estimate of $76,038 on funds that choose to rely on rule 30e–3.880 Of those costs, we estimated that 24,459.4 hours, at a time cost of $8,674,306, and an external cost of $69,965,020, were attributed to the compliance costs of open-end funds registered on Form N–1A. The table below summarizes these revisions to the estimated annual responses, burden hours, and burden-hour costs based on the proposed amendment to the scope of rule 30e–3. DD. Rule 498 Rule 498 under the Securities Act permits funds to satisfy their prospectus delivery obligations under the Securities Act by sending or giving investors the fund’s summary prospectus and providing the statutory prospectus on a website. Reliance on the rule is voluntary; however, compliance with the rule’s conditions is mandatory for funds relying on the rule. Responses to the information collections would not be kept confidential. We are proposing to amend the scope of rule 30e–3 to exclude investment companies registered on Form N–1A. Because our proposed amendments would decrease the number of funds that would be able to rely on rule 30e– 3, we are updating the PRA analysis for rule 498 to account for that change. We are not updating the rule 498 PRA analysis in any other respect. Under current PRA estimates for rule 498, we estimated that complying with the information collection requirements of rule 498 would impose an average total annual hour burden of about 20,327 burden hours, at a time cost of $5.8 million, and an annual external cost burden of $167,458,800. Of those costs, we estimated that the amortized aggregate annual hour burden associated with the rule 30e–3 amendments to rule 498 was 4,529 hours, at a time cost of $1,286,236. We estimated that the external costs of rule 498 did not change as a result of the rule 30e–3 amendments. The table below summarizes our proposed revisions to the estimated burden hours, and burden-hour costs based on the proposed amendment to the scope of rule 30e–3. EE. Request for Comment collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the proposed collection of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) determine whether there are ways to minimize the burden of the collection of information on those who are to respond, including through We request comment on whether these estimates are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1) Evaluate whether the proposed 880 This estimate is based on the last time the rule’s information collection was submitted in connection with the adoption of rule 30e–3 in 2019. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00127 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.017</GPH> EP05NO20.018</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 70842 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules the use of automated collection techniques or other forms of information technology. Persons wishing to submit comments on the collection of information requirements of the proposed amendments should direct them to the OMB Desk Officer for the Securities and Exchange Commission, MBX.OMB.OIRA.SEC_desk_officer@ omb.eop.gov, and should send a copy to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File No. S7–09–20. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this release; therefore a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7–09–20, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736. khammond on DSKJM1Z7X2PROD with PROPOSALS2 V. Initial Regulatory Flexibility Act Analysis This Initial Regulatory Flexibility Analysis (‘‘IRFA’’) has been prepared in accordance with section 3 of the Regulatory Flexibility Act (‘‘RFA’’).881 It relates to: The proposed amendments to funds’ annual and semi-annual report requirements, proposed new Form N– CSR requirements, and proposed new website posting requirements; the treatment of annual prospectus updates for existing fund shareholders under proposed rule 498B; the proposed amendments to fund prospectus disclosure requirements; the proposed investment company advertising rule amendments; and the proposed technical and conforming amendments. FF. Reasons for and Objectives of the Proposed Actions The Commission is proposing a new rule, rule amendments, and form amendments that would create a simplified disclosure framework for mutual funds and exchange-traded funds to highlight key information for investors. Under the proposed amendments, fund investors would continue to receive fund prospectuses in connection with their initial investment in a fund, as they do today. On an ongoing basis thereafter, the investors would receive more concise and 881 5 U.S.C. 603. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 seq.], the Exchange Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et seq.], the Investment Company Act, particularly, sections 8, 24, 30, and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507. visually engaging annual and semiannual reports designed to highlight information that we believe is particularly important for retail shareholders to assess and monitor their ongoing fund investments. The fund’s shareholder reports would serve as the primary fund disclosures that existing shareholders receive each year, in addition to notices of certain material changes if they occur during the year. The proposal would promote a layered disclosure framework that would complement the shareholder reports by continuing to make available additional information that may be of interest to some investors, including the fund’s financial statements. This information would be available online, reported on Form N–CSR, and delivered to an investor on request, free of charge. We also propose to provide funds the flexibility to make electronic versions of their shareholder reports more userfriendly and interactive. Under the proposal, mutual funds and exchangetraded funds would no longer be permitted to rely on rule 30e–3 to satisfy shareholder report transmittal requirements, in order to promote the provision of consistent disclosure that we believe is best tailored to investors’ informational needs. While it is currently common for fund shareholders to receive an updated annual prospectus each year, the proposal’s layered disclosure approach would instead rely on shareholder reports (which, in the case of the annual report, would include a summary of material changes that occurred over the prior year), as well as the online availability of the fund prospectus and timely notifications to shareholders regarding material fund changes as they occur, to keep investors informed about their ongoing fund investments. In addition, we are proposing amendments to certain mutual fund and ETF prospectus disclosure requirements, which are designed to improve the presentation of fund fees and expenses and principal risks to help investors better understand this important information. To improve fee- and expense-related information more broadly, we further propose to 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 BDCs. We propose to tailor the disclosure requirements for funds’ annual and semi-annual reports to help shareholders focus on key information that we believe is most useful for assessing and monitoring fund investments on an ongoing basis, including information about a fund’s expenses, portfolio holdings, and performance. Among other things, shareholder reports would be revised to include new disclosures (such as material changes and fund statistics in annual reports), simplify certain disclosures (such as the MDFP in annual reports), and remove certain disclosures (such as financial statements currently found in semi-annual and annual reports).883 We also propose to improve the design of funds’ shareholder reports by, for example, encouraging funds to use features that promote effective communications (e.g., tables, charts, bullet lists, question-andanswer formats) and permitting funds to use technology to enhance an investor’s understanding of material in electronic versions of shareholder reports. We estimate that approximately 50 funds are small entities that are required to prepare and transmit shareholder reports under the proposed rules.884 We expect the proposed amendments would result in some initial implementation costs but, going forward, would reduce the burdens associated with these GG. Legal Basis The Commission is proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, section 19 thereof [15 U.S.C. 77a et 882 17 CFR 270.0–10(a). Recognizing the growth in assets under management in investment companies since rule 0–10(a) was adopted, the Commission plans to revisit the definition of a small entity in rule 0–10(a). 883 See supra Sections II.B.2 and II.C.1. 884 See text following supra footnote 882. PO 00000 Frm 00128 Fmt 4701 Sfmt 4702 HH. Small Entities Subject to the Rule For purposes of Commission rulemaking in connection with the Regulatory Flexibility Act, an investment company is a small entity if, together with other investment companies in the same group of related investment companies, it has net assets of $50 million or less as of the end of its most recent fiscal year.882 Commission staff estimates that, as of June 2019, approximately 50 open-end funds (including 8 ETFs), 33 closed-end funds, and 16 BDCs are small entities. II. Projected Reporting, Recordkeeping, and Other Compliance Requirements 1. Annual and Semi-Annual Reports E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules existing disclosure requirements related to shareholder reports. We estimate that preparing amended annual report disclosure would cost $12,096 for each fund, including small entities, in its first year of compliance, and $3,360 for each subsequent year.885 We further estimate that preparing amended semi-annual report disclosure would cost $6,048 for each fund, including small entities, in its first year of compliance, and $1,680 for each subsequent year.886 khammond on DSKJM1Z7X2PROD with PROPOSALS2 2. New Form N–CSR and Website Availability Requirements We propose a layered disclosure framework that would complement the proposed shareholder report requirements by continuing to make available to investors additional, less retail-focused information, including the fund’s financial statements. This additional information, which we believe would primarily benefit financial professionals and other investors who desire more in-depth information, would be available online, reported on Form N–CSR, and delivered to an investor on request, free of charge.887 This new Form N–CSR disclosure also would need to be available on the website specified on the cover page or at the beginning of the fund’s annual report and delivered in paper or electronically upon request, free of charge.888 We estimate that approximately 50 funds are small entities that would be required to comply with the proposed new Form N–CSR and website posting requirements.889 We further estimate that complying with the new Form N– CSR and website posting requirements would cost $8,916 for each fund, including small entities, in its first year of compliance, and $2,636 for each subsequent year.890 3. Proposed Rule 498B, and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework Proposed rule 498B uses layered disclosure concepts to tailor funds’ required disclosures to the informational needs of different types of investors. Under the proposed rule, investors would continue to receive a prospectus in connection with their initial fund investment, as they do today. Thereafter, a shareholder would no longer receive annual prospectus updates, in light of the fact that the shareholder would be receiving a tailored shareholder report (which in the case of the annual report would include a summary of material changes that occurred over the prior year), and timely notifications to shareholders regarding material fund changes as they occur, which would be required under rule 498B.891 We estimate that approximately 50 funds are small entities that are required to send or give prospectuses to satisfy prospectus delivery obligations under the Securities Act.892 A fund’s reliance on proposed rule 498B would be voluntary, so the percentage of funds that would choose to rely on the rule is uncertain. Because we generally anticipate that the proposed rule would provide costs savings to funds, we assume that the vast majority of funds would rely on rule 498B to satisfy their prospectus delivery obligations.893 For purposes of this estimate, we assume that 90% of funds, including small funds, would rely on proposed rule 498B, which is roughly the same percentage of funds that currently rely on rule 498.894 We believe this assumption is appropriate because funds that rely on rule 498 are funds that have already chosen to rely on a rule that provides an alternative means of satisfying prospectus delivery obligations, and because certain of the conditions of proposed rule 498B overlap with similar conditions to rely on rule 498. Therefore, we assume that these funds would experience some efficiencies in coming into compliance with proposed rule 498B. Based on these assumptions, we estimate that approximately 45 small funds would choose to rely on proposed rule 498B.895 We estimate that preparing notices of material changes under proposed rule 498B would cost $4,032 for each fund, including small entities, in its first year, and $1,344 per year for each subsequent year.896 Further, if a fund does not currently rely on rule 498, we estimate additional compliance costs with the website availability requirements and the requirement to prepare a summary prospectus of $12,948 per fund in its 891 See supra Section II.D. text following footnote 883. 893 See supra footnote 868 and accompanying text. 894 See supra footnote 870 (estimating that 93% of funds currently rely on rule 498). 895 See supra text following footnote 872. Our estimate of 45 funds is based on the following calculation: 50 funds × 90% = 45 funds. 896 See supra footnote 811 and accompanying text. 892 See 885 See supra footnote 804 and accompanying text. 886 See supra footnote 805 and accompanying text. 887 See supra Sections II.B through II.C. 888 See supra Section II.B.3. 889 See text following footnote 882. 890 See supra footnotes 806 and 808 and accompanying text. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00129 Fmt 4701 Sfmt 4702 70843 first year and $4,316 per fund for each subsequent year.897 4. Amendments to Scope of Rule 30e– 3 Subject to conditions, rule 30e–3 generally permits investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports’ online availability instead of directly mailing the report (or emailing an electronic version of the report) to shareholders. We are proposing to amend the scope of rule 30e–3 to exclude investment companies registered on Form N–1A, which would be sending tailored shareholder reports under the proposal. This proposed amendment to the scope of the rule is designed to help ensure that all investors in these funds experience the anticipated benefits of the proposed new disclosure framework.898 5. Proposed Amendments To Fund Prospectus Disclosure Requirements We are proposing amendments to funds’ prospectus disclosure that are designed to help investors more readily understand a fund’s fees and risks, and that use layered disclosure principles that tailor disclosures of these topics to different types of investors’ informational needs. Specifically, we are proposing amendments to Form N– 1A that would create a more concise, easier-to-understand presentation of fund fees for the summary prospectus or summary section of the statutory prospectus, while maintaining the existing fee table in the statutory prospectus for investors that would like more detail.899 We are also proposing changes in some terminology that funds would use to describe fees in the prospectus.900 In addition, we are proposing Form N–1A amendments that are designed to make it easier for investors to identify and understand the principal risks of a fund investment by requiring funds to briefly disclose principal risks in general order of importance and providing funds with additional guidance for determining whether a risk is a principal risk.901 We are also proposing to rescind rule 30e–1(d), which permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report, if it includes all of the information that would otherwise be required to be 897 See supra footnote 810 and accompanying text. 898 See supra Section II.F. supra Section II.H.1. 900 See supra Section II.H.1.f. 901 See supra Section II.H.2. 899 See E:\FR\FM\05NOP2.SGM 05NOP2 70844 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules contained in the shareholder report.902 We understand that funds very rarely rely on rule 30e–1(d) to transmit a prospectus or SAI in place of a shareholder report. Additionally, we believe that allowing funds to consolidate their prospectus, SAI, and shareholder report disclosures into a single document would result in shareholders receiving long, complex, and overlapping fund disclosures that could cause shareholder confusion and fatigue.903 We estimate that approximately 50 funds are small entities that prepare prospectuses pursuant to the requirements of Form N–1A.904 We estimate that compliance with the proposed Form N–1A amendments affecting funds’ prospectus disclosure, in the aggregate, would entail initial costs of $9,072 for each fund, including small entities, and $2,016 per year for each subsequent year.905 khammond on DSKJM1Z7X2PROD with PROPOSALS2 6. Investment Company Advertising Rules We are also proposing to amend the Commission’s investment company advertising rules (for purposes of this release, Securities Act rules 482, 156, and 433 and Investment Company Act rule 34b–1) to promote transparent and balanced presentations of fees and expenses in investment company advertisements.906 As investment companies increasingly compete and market themselves on the basis of costs, we are concerned that investment company advertisements may mislead investors by creating an inaccurate impression of the costs associated with an investment.907 The proposed advertising rule amendments would generally apply to any investment company, including mutual funds, ETFs, registered closed-end funds, and BDCs. Specifically, we are proposing to amend Securities Act rules 433 and 482 and Investment Company Act rule 34b– 1 to promote transparent and balanced presentations of fees and expenses in investment company advertisements. We also are proposing to amend Securities Act rule 156 to provide factors an investment company should consider to determine whether representations about the fees and expenses associated with an investment 902 See supra Section II.H.3. supra text following footnote 647. 904 See supra text following footnote 862. 905 See supra footnotes 821 and 822 and accompanying text. 906 See supra Section II.I. 907 See supra text accompanying footnote 649. 903 See VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 in the fund could be materially misleading.908 We estimate that 50 open-end funds (including 8 registered ETFs), 33 closedend funds, and 16 BDCs are small entities that would be affected by our proposed amendments to investment company advertising rules. As discussed above, we estimate that compliance with these proposed amendments would cost $5,040 for each advertisement, including small entities, in the first year, and $1,680 per year for each subsequent year.909 JJ. Duplicative, Overlapping, or Conflicting Federal Rules Filing, Posting, and Delivery-UponRequest of Certain Information That Currently Appears in Funds’ Shareholder Reports Funds currently prepare and transmit annual and semi-annual reports to investors and file those reports, along with other information, on Form N– CSR. Under our proposal, funds would transmit tailored annual and semiannual reports to investors. Certain information currently contained in funds’ shareholder reports would no longer be included in the reports that are transmitted to investors but would instead be included in funds’ semiannual filings on Form N–CSR.910 Funds would also make that same information available on the website specified on the cover page or at the beginning of the fund’s shareholder reports and deliver that information in paper or electronically upon request, free of charge.911 We acknowledge that filing that information with the Commission, posting it online, and delivering it upon request could result in some investors receiving or being able to access the same information multiple times, which could be duplicative. However, each one of those different requirements would serve a unique purpose. We believe it is important for regulatory disclosures to be filed with the Commission for oversight and compliance purposes. The website posting requirement would provide investors with broad access to the additional information and conforms with evolving investor preferences regarding document delivery.912 Finally, the delivery-uponrequest requirements would allow investors to choose the format in which 908 See supra footnote 652 and accompanying text. 909 See supra footnotes 829 and 830 and accompanying text. 910 See supra Section II.B.1. 911 See supra Sections II.B.2 and 3. 912 See supra Section I.B.3. PO 00000 Frm 00130 Fmt 4701 Sfmt 4702 regulatory disclosures are provided, which could be especially important for investors who might not have reliable access to the internet or who might prefer paper disclosures. We also considered whether the information regarding remuneration paid to funds’ directors and officers, which we propose to remove from funds’ shareholder reports and instead require funds to file on Form N–CSR and make available online, would duplicate the detailed disclosures regarding compensation paid to each of the fund’s directors, members of any advisory board, and certain officers and affiliates that are required to appear in a fund’s SAI. We do not believe that the proposed new Form N–CSR and website availability requirement for remuneration-related information inappropriately duplicates the current SAI requirement. The different disclosure requirements vary in terms of scope and presentation requirements, and thus serve different informational needs.913 Prospectus Delivery Requirements Under proposed new rule 498B, funds would have the option of satisfying prospectus delivery requirements with respect to existing shareholders by making certain information, including summary and statutory prospectuses, publicly accessible on the fund’s website; delivering this information in paper or electronically upon request, free of charge; and complying with certain other conditions.914 This proposed rule is modeled in part on rule 498 and contains certain similar provisions, including website posting and delivery-upon-request requirements with regard to largely the same documents.915 However, compliance obligations under rules 498B and 498 apply under different circumstances (satisfying prospectus delivery requirements with respect to existing shareholders, and satisfying prospectus delivery requirements by using a summary prospectus, respectively). Furthermore, proposed rule 498B is designed to avoid duplication and instead create efficiencies for funds that currently rely on rule 498, because we believe these funds would already be familiar with the website posting and delivery-upon-request conditions and 913 For example, the required SAI information is disaggregated for each director, whereas the information that would appear on Form N–CSR and on funds’ websites would be aggregated. See supra Section II.D.1.e. 914 See supra Section II.F. 915 See supra Sections II.F.3.a and II.F.4. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules would have compliance processes in place related to these conditions. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Shareholder Report Transmission Requirements We are proposing to revise rule 30e– 3 to exclude investment companies registered on Form N–1A from the scope of the rule. Rule 30e–3 currently allows a fund to satisfy its obligation to transmit the shareholder reports that rule 30e–1 and rule 30e–2 require if the fund complies with certain conditions. These conditions generally relate to: (1) Making the fund’s shareholder report and certain other materials available on a website; (2) providing notice to investors of the website availability of the shareholder report; and (3) delivering paper copies of the materials that appear online, upon a shareholder’s request.916 If we do not revise rule 30e– 3 to exclude funds from the scope of the rule, a fund (or intermediary) could rely on both rule 30e–3 and proposed rule 498B. In that case, existing shareholders would not receive the shareholder report pursuant to proposed rule 30e–3 and furthermore would not be sent or given prospectus updates pursuant to proposed rule 498B. This would contradict our goal of ensuring consistent disclosure requirements with respect to existing fund shareholders, and also could prevent these investors from experiencing the anticipated benefits of the new tailored disclosure framework. Thus, we are proposing to amend rule 30e–3 to avoid overlapping and conflicting Federal rules. We are also proposing to rescind rule 30e–1(d), which permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report, if it includes all of the information that would otherwise be required to be contained in the shareholder report.917 We believe that allowing funds to consolidate their prospectus, SAI, and shareholder report disclosures into a single document would result in shareholders receiving long, complex, and overlapping fund disclosures which could cause shareholder confusion and fatigue and would conflict with the goals of this rulemaking. Fee Table Proposed amendments to Form N–1A are designed to create a more concise, easier-to-understand presentation of fund fees for the summary prospectus or summary section of the statutory prospectus, while maintaining the existing fee table in the statutory prospectus for investors that would like 916 See 917 See supra footnote 532. infra Section II.H.3. VerDate Sep<11>2014 23:41 Nov 04, 2020 more detail.918 Although this layered disclosure approach would result in some duplicative information (i.e., certain transaction fees, ongoing annual fees, and an expense example would appear in both the summary prospectus as well as in the statutory prospectus), we believe that both the nature and structure of each of the proposed feerelated disclosures are sufficiently different to justify overlapping information requirements. The goal of the simplified fee summary is to streamline presentation of fees, which would allow investors to more easily and rapidly understand the total costs of investing in a fund. The current, full fee table presentation would be moved to the statutory prospectus, where it could be used by financial professionals or other investors who seek additional details about fund fees to supplement the fee summary. KK. Significant Alternatives The RFA directs the Commission to consider significant alternatives that would accomplish its stated objective, while minimizing any significant economic impact on small entities. The Commission considered the following alternatives for small entities in relation our proposed amendments: (1) Establishing different reporting, recordkeeping, and other compliance requirements or frequency, to account for resources available to small entities; (2) exempting funds that are small entities from the proposed reporting, recordkeeping, and other compliance requirements, to account for resources available to small entities; (3) clarifying, consolidating, or simplifying the compliance requirements under the proposal for small entities; and (4) using performance rather than design standards. As discussed above, our proposal contemplates amendments to shareholder report content and disclosure requirements, proposed new rule 498B to address existing shareholders’ receipt of annual prospectus updates, amendments to the scope of rule 30e–3 to exclude funds registered on Form N–1A, amendments to fund prospectus fee and risk disclosures, and rescission of rule 30e– 1(d) (which currently permits a fund to transmit a copy of its prospectus or SAI in place of its shareholder report under certain conditions). Collectively, these amendments would tailor the disclosures that funds provide by using layered disclosure principles to create a new disclosure framework designed to meet the informational needs of 918 See Jkt 253001 PO 00000 infra Section II.H.1. Frm 00131 Fmt 4701 Sfmt 4702 70845 different investors (i.e., initial investors versus existing shareholders, and retail investors versus those who desire more information). The proposed amendments are designed to focus on key information different investors need to make informed investment decisions and, for existing shareholders, to assess and monitor their fund investments. In addition, our proposal would amend investment company advertising rules to promote transparent and balanced presentations of fees and expenses in investment company advertisements. We do not believe it would be appropriate to establish different reporting, recordkeeping, and other compliance requirements or frequency, to account for resources available to small entities. Small entities currently follow the same requirements that large entities do when preparing, transmitting, and filing shareholder reports; preparing and sending or giving prospectuses to investors; and preparing investment company advertisements and supplemental sales literature. If the proposal included different requirements for small funds, it could raise investor protection concerns for investors in small funds to the extent that investors in small funds would not receive the same disclosures as investors in larger funds. For example, to the extent that small funds may have fewer resources to invest in investor education or marketing materials, investors in small funds may have fewer opportunities outside of regulatory disclosures to obtain key information needed to make informed investment decisions and assess and monitor their fund investments. For this reason, it is important that the regulatory disclosures that small funds provide to investors are consistent in terms of content and frequency with the disclosures that larger funds provide to investors, so that all investors have the tools they need to meet their informational needs. More generally, our proposed disclosure requirements are tailored to meet the informational needs of different groups of investors, and to implement a layered disclosure framework that would benefit all investors. Permitting different disclosure requirements for small funds would result in small fund investors not experiencing the anticipated benefits of the new tailored disclosure framework. Furthermore, uniform prospectus fee and risk disclosure requirements would allow all investors to compare funds reporting the same information on the same frequency, and help all investors to make informed investment decisions based upon those comparisons. E:\FR\FM\05NOP2.SGM 05NOP2 70846 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Similarly, we do not believe it would be appropriate to exempt small funds from the proposed amendments. As discussed above, our contemplated disclosure framework would be disrupted if investors in smaller funds received different disclosures than investors in larger funds. We believe that investors in all funds should benefit from the Commission’s proposed disclosure amendments, not just investors in large funds. We do not believe that clarifying, consolidating, or simplifying the compliance requirements under the proposal for small funds would permit us to achieve our stated objectives. Many of the amendments we are proposing are based on existing rules or disclosure frameworks.919 We anticipate that building on existing regulatory frameworks and concepts should help to ease certain compliance burdens for funds, including small funds. For example, the website availability and delivery-upon-request provisions in proposed rules 498B and 30e–1 are modeled on parallel provisions in rule 498, which we estimate that more than 90% of all funds, including small funds, currently rely on to satisfy prospectus delivery obligations. We believe that this would create efficiencies for small funds relying on proposed rules 498B or 30e–1, because these funds would likely be familiar with these conditions and would already have compliance processes in place pursuant to rule 498. Finally, we do not believe it would be appropriate to use performance rather than design standards. As discussed above, we believe the regulatory disclosures that small funds provide to investors should be consistent with the disclosures provided to investors in larger entities. Our proposed disclosure requirements are tailored to meet the informational needs of different investors, and to implement a layered disclosure framework. We believe all fund investors should experience the anticipated benefits of the new tailored disclosure framework. Finally, we 919 For example, many of our proposed amendments to fund prospectuses, shareholder reports, and Form N–CSR largely reframe existing disclosure requirements to tailor disclosures to the informational needs of different investors, as opposed to requiring new disclosures for which funds would need to generate and develop reporting and compliance procedures for the first time. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 believe that prospectus fee and risk disclosure requirements should be uniform and standardized in order to allow investors to compare funds reporting the same information on the same frequency, and to help all investors to make informed initial investment decisions based upon those comparisons. LL. General Request for Comment The Commission requests comments regarding this IRFA. We request comments on the number of small entities that may be affected by our proposed rules and guidelines, and whether the proposed rules and guidelines would have any effects not considered in this analysis. We request that commenters describe the nature of any effects on small entities subject to the rules, and provide empirical data to support the nature and extent of such effects. We also request comment on the proposed compliance burdens and the effect these burdens would have on smaller entities. VI. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (‘‘SBREFA’’),920 the Commission must advise OMB whether a proposed regulation constitutes a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results in or is likely to result in: • An annual effect on the economy of $100 million or more; • A major increase in costs or prices for consumers or individual industries; or • Significant adverse effects on competition, investment, or innovation. We request comment on whether our proposal would be a ‘‘major rule’’ for purposes of SBREFA. We solicit comment and empirical data on: • The potential effect on the U.S. economy on an annual basis; • Any potential increase in costs or prices for consumers or individual industries; and • Any potential effect on competition, investment, or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. 920 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C. 601). PO 00000 Frm 00132 Fmt 4701 Sfmt 4702 VII. Statutory Authority The Commission is proposing the rules and forms contained in this document under the authority set forth in the Securities Act, particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Exchange Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et seq.], the Investment Company Act, particularly, sections 8, 24, 30, and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507. List of Subjects 17 CFR Part 200 Administrative practice and procedure, Organization and functions (Government agencies). 17 CFR Parts 230 and 239 Reporting and recordkeeping requirements, Securities. 17 CFR Part 240 Brokers, Reporting and recordkeeping requirements, Securities. 17 CFR Parts 270 and 274 Investment companies, Reporting and recordkeeping requirements, Securities. Text of Proposed Rules and Form Amendments For reasons set forth in the preamble, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS Subpart N—Commission Information Collection Requirements Under the Paperwork Reduction Act: OMB Control Numbers 1. The authority citation for subpart N of part 200 continues to read as follows: ■ Authority: 44 U.S.C. 3506; 44 U.S.C. 3507. 2. Amend § 200.800 in paragraph (b) by adding an entry in numerical order by section number for ‘‘Rule 498B’’ to read as follows: ■ § 200.800 OMB control numbers assigned pursuant to the Paperwork Reduction Act. * * * (b) * * * E:\FR\FM\05NOP2.SGM 05NOP2 * * 70847 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Information collection requirement 17 CFR part or section where identified and described * * Rule 498B ......................................................... * * * 230.498B ........................................................... * * * PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 3. The authority citation for part 230 continues to read in part as follows: ■ Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note, 78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a– 28, 80a–29, 80a–30, and 80a–37, and Pub. L. 112–106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted. * * * * * Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48 Stat. 78, 79, 81, and 85, as amended [15 U.S.C. 77f, 77h, 77j, 77s]. * * * * * 4. Amend § 230.156 by adding paragraph (b)(4) to read as follows: ■ § 230.156 Investment company sales literature. * * * * * (b) * * * (4) Representations about the fees or expenses associated with an investment in the fund could be misleading because of statements or omissions made involving a material fact, including situations where portrayals of the fees and expenses associated with an investment in the fund omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading. * * * * * ■ 5. Amend § 230.433 by adding paragraph (c)(3) to read as follows: § 230.433 Conditions to permissible postfiling free writing prospectuses. khammond on DSKJM1Z7X2PROD with PROPOSALS2 * * * * * (c) * * * (3) A free writing prospectus with respect to securities of a registered closed-end investment company or a business development company that includes fee or expense information must comply with paragraphs (i) and (j) of § 230.482 (Rule 482), as applicable. * * * * * ■ 6. Amend § 230.482 by revising paragraph (b)(3)(i) and adding paragraphs (i) and (j) to read as follows: § 230.482 Advertising by an investment company as satisfying requirements of section 10. * * * VerDate Sep<11>2014 * * 23:41 Nov 04, 2020 Jkt 253001 * Frm 00133 Fmt 4701 * [OMB control number TBD]. * (b) * * * (3) * * * (i) A legend disclosing that the performance data quoted represents past performance; that past performance is not a good predictor of future results; that the investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost; and that current performance may be lower or higher than the performance data quoted. The legend should also identify a toll-free telephone number or a website where an investor may obtain performance data current to the most recent month-end unless the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of use. An advertisement for a money market fund that is a government money market fund, as defined in § 270.2a–7(a)(16) of this chapter, or a retail money market fund, as defined in § 270.2a–7(a)(25) of this chapter may omit the disclosure about principal value fluctuation; and * * * * * (i) Advertisements including fee or expense figures. An advertisement that provides fee or expense figures for an investment company must include the following: (1) The maximum amount of any sales load, or any other nonrecurring fee, and the total annual expenses without any fee waiver or expense reimbursement arrangement, based on the methods of computation prescribed by the company’s registration statement form under the 1940 Act or under the Act for a prospectus and presented at least as prominently as any other fee or expense figure included in the advertisement; and (2) The expected termination date of a fee waiver or expense reimbursement arrangement, if the advertisement provides total annual expenses net of fee waiver or expense reimbursement arrangement amounts. (j) Timeliness of fee and expense information. Fee and expense information contained in an advertisement must be as of the date of the investment company’s most recent prospectus or, if the company no longer has an effective registration statement PO 00000 Current OMB control No. Sfmt 4702 * * * under the Act, as of the date of its most recent annual shareholder report, except that a company may provide more current information if available. § 230.498 [Amended] 7. Amend § 230.498 by removing paragraph (b)(1)(vii). ■ 8. Add § 230.498B to read as follows: ■ § 230.498B Delivery of prospectuses to existing shareholders of open-end management investment companies. (a) Definitions. For purposes of this section: Account means any contractual or other business relationship between a person and a Fund to effect transactions in securities issued by the fund, including the purchase or sale of securities. Existing shareholder means a shareholder to whom a Summary Prospectus or Statutory Prospectus has been previously sent or given in order to satisfy any obligation under section 5(b)(2) of the Act [15 U.S.C. 77e(b)(2)] to have a Statutory Prospectus precede or accompany the carrying or delivery of Fund shares and that has either continuously held Fund shares or, if the Fund is a money market fund as defined in § 270.2a–7 of this chapter has continuously maintained or been a beneficial owner of a Fund Account, since that Summary Prospectus or Statutory Prospectus has been sent or given. This definition excludes investors that hold the fund through a separate account funding a variable annuity contract offered on Form N–4 (§§ 239.17b and 274.11c of this chapter) or a variable life insurance contract offered on Form N–6 (§§ 239.17c and 274.11d of this chapter). Fund means an open-end management investment company, or any Series of such a company, that has, or is included in, an effective registration statement on Form N–1A (§§ 239.15A and 274.11A of this chapter) and that has a current prospectus that satisfies the requirements of section 10(a) of the Act [15 U.S.C. 77j(a)]. Series means shares offered by a Fund that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70848 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules series in accordance with § 270.18f–2(a) of this chapter. Statement of Additional Information means the statement of additional information required by Part B of Form N–1A. Statutory Prospectus means a prospectus that satisfies the requirements of section 10(a) of the Act. Summary Prospectus means the summary prospectus described in § 230.498(b). (b) Transfer of the security. With respect to Existing Shareholders, any obligation under section 5(b)(2) of the Act [15 U.S.C. 77e(b)(2)] to have a Statutory Prospectus precede or accompany the carrying or delivery of a Fund security in an offering registered on Form N–1A is satisfied if the conditions in paragraph (c) of this section are satisfied. (c) Conditions—(1) website availability of certain Fund documents. (i) The Fund’s current Summary Prospectus, Statutory Prospectus, Statement of Additional Information, and most recent annual and semiannual reports to shareholders under § 270.30e–1 of this chapter must be publicly accessible, free of charge, at the website address specified on the cover page or at the beginning of its annual and semi-annual reports to shareholders. (ii) The materials that are accessible in accordance with paragraph (c)(2)(i) of this section must be presented on the website in a format, or formats, that: (A) Are human-readable and capable of being printed on paper in humanreadable format; (B) Permit persons accessing the Statutory Prospectus or Statement of Additional Information to move directly back and forth between each section heading in a table of contents of such document and the section of the document referenced in that section heading; provided that, in the case of the Statutory Prospectus, the table of contents is either required by § 230.481(c) or contains the same section headings as the table of contents required by § 230.481(c); and (C) Permit persons accessing the Summary Prospectus to move directly back and forth between: (1) Each section of the Summary Prospectus and any section of the Statutory Prospectus and Statement of Additional Information that provides additional detail concerning that section of the Summary Prospectus; or (2) Links located at both the beginning and end of the Summary Prospectus, or that remain continuously visible to persons accessing the Summary Prospectus, and tables of contents of VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 both the Statutory Prospectus and the Statement of Additional Information that meet the requirements of paragraph (c)(2)(ii)(B) of this section. (iii) Persons accessing the materials specified in paragraph (c)(1)(i) of this section must be able to permanently retain, free of charge, an electronic version of such materials in a format, or formats, that meet each of the requirements of paragraphs (c)(2)(ii)(A) and (B) of this section. (iv) The conditions in paragraphs (c)(2)(i) through (iii) of this section shall be deemed to be met, notwithstanding the fact that the materials specified in paragraph (c)(2)(i) of this section are not available for a time in the manner required by paragraphs (c)(2)(i) through (iii) of this section, provided that: (A) The Fund has reasonable procedures in place to ensure that the specified materials are available in the manner required by paragraphs (c)(2)(i) through (c)(2)(iii) of this section; and (B) The Fund takes prompt action to ensure that the specified documents become available in the manner required by paragraphs (c)(2)(i) through (c)(2)(iii) of this section, as soon as practicable following the earlier of the time at which it knows or reasonably should have known that the documents are not available in the manner required by paragraphs (c)(2)(i) through (iii) of this section. (2) Material changes to the Fund. If any material change has been made to the Fund with respect to any of the topics described in Item 27A(g) of Form N–1A, and the Fund files a posteffective amendment to its prospectus pursuant to § 230.485 or files a prospectus supplement with the Commission pursuant to § 230.497 regarding any such material change, the Fund (or a financial intermediary through which shares of the Fund may be purchased or sold) must provide Existing Shareholders notice of that change. Such notice must be provided within three business days of either the effective date of the Fund’s posteffective amendment filing or the filing date of the prospectus supplement filing, by first-class mail or other means designed to ensure equally prompt receipt, unless that change is disclosed in the Fund’s most recent annual report to shareholders. Such notice will be considered to be provided to investors who share an address if the requirements of section § 230.154 are met with regard to delivery of that notice. (d) Other requirements. If paragraph (b) of this section is relied on with respect to a Fund: PO 00000 Frm 00134 Fmt 4701 Sfmt 4702 (1) Delivery upon request of certain Fund documents. (i) The Fund (or a financial intermediary through which shares of the Fund may be purchased or sold) must send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of any of the documents listed in paragraph (c)(2) of this section to any person requesting such a copy within three business days after receiving a request for a paper copy; and (ii) The Fund (or a financial intermediary through which shares of the Fund may be purchased or sold) must send, at no cost to the requestor, and by email, an electronic copy of any of the documents listed in paragraph (c)(2) of this section to any person requesting such a copy within three business days after receiving a request for an electronic copy. The requirement to send an electronic copy of a document by email may be satisfied by sending a direct link to the online document; provided that a current version of the document is directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent and the email explains both how long the link will remain useable and that, if the recipient desires to retain a copy of the document, he or she should access and save the document. (2) Convenient for reading and printing. (i) The materials that are accessible in accordance with paragraph (c)(1) of this section must be presented on the website in a format, or formats, that are convenient for both reading online and printing on paper; and (ii) Persons accessing the materials that are accessible in accordance with paragraph (c)(1) of this section must be able to permanently retain, free of charge, an electronic version of such materials in a format, or formats, that are convenient for both reading online and printing on paper. (3) Compliance with this paragraph (d) not a condition to reliance on paragraph (b) of this section. Compliance with this paragraph (d) is not a condition to the ability to rely on paragraph (b) of this section with respect to a Fund, and failure to comply with this paragraph (d) does not negate the ability to rely on paragraph (b). PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 9. The general authority citation for part 239 is revised to read as follows: ■ Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u–5, 78w(a), 78ll, E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 78mm, 80a–2(a), 80a–3, 80a–8, 80a–9, 80a– 10, 80a–13, 80a–24, 80a–26, 80a-29, 80a-30, 80a-37, and sec. 71003 and sec. 84001, Pub. L. 114–94, 129 Stat. 1321, unless otherwise noted. * * * * * 10. Amend Form N–14 (referenced in § 239.23) by removing in Item 3(a) ‘‘Item 3 of Form N–1A’’ and adding in its place ‘‘Item 8A of Form N–1A’’. ■ PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 11. The general authority citation for part 240 continues to read as follows: ■ Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 4, 80b–11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112–106, secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. * * * § 240.14a–101 * * [Amended] 12. Amend § 240.14a–101 by removing the phrase ‘‘Item 3 of Form N– 1A’’ and adding in its place ‘‘Item 8A of Form N–1A’’ in paragraph (a)(3)(iv) and Instruction 4 of Item 22. ■ PART 270—RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940 13. The authority for part 270 continues to read in part as follows: ■ Authority: 15 U.S.C. 80a–1 et seq., 80a– 34(d), 80a–37, 80a–39, and Pub. L. 111–203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted. * * * * * Section 270.30e–1 is also issued under 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78l, 78m, 78n, 78o(d), 78w(a), 80a–8, 80a–29, and 80a–37. * * * * * 14. Amend § 270.30e–1 by: a. Removing paragraph (d); b. Redesignating paragraphs (b) and (c) as paragraphs (c) and (d); ■ c. Adding a new paragraph (b); and ■ d. Revising newly redesignated paragraphs (c) and (d) and paragraphs (f)(2)(ii)(F) and (f)(4). The addition and revisions read as follows: khammond on DSKJM1Z7X2PROD with PROPOSALS2 ■ ■ ■ § 270.30e–1 Reports to stockholders of management companies. * * * * * (b)(1) To satisfy its obligations under section 30(e) of the 1940 Act, an openend management investment company VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 registered on Form N–1A (§§ 239.15A and 274.11A of this chapter) also must: (i) Make certain materials available on a website, as described under paragraph (b)(2) of this section; and (ii) Deliver certain materials upon request, as described under paragraph (b)(3) of this section. (2) The following website availability requirements are applicable to an openend management investment company registered on Form N–1A (§§ 239.15A and 274.11A of this chapter). (i) The company must make the disclosures required by Items 7 through 11 of Form N–CSR (§§ 249.331 and 274.128 of this chapter) publicly accessible, free of charge, at the website address specified at the beginning of the report to stockholders under paragraph (a) of this section, no later than 70 days after the end of the fiscal half-year or fiscal year of the company until 70 days after the end of the next fiscal half-year or fiscal year of the company, respectively. The company may satisfy the requirement in this paragraph (b)(2)(i) by making its most recent report on Form N–CSR publicly accessible, free of charge, at the specified website address for the time period that this paragraph (b)(2)(i) specifies. (ii) Unless the company is a money market fund under § 270.2a–7, the company must make the company’s complete portfolio holdings, if any, as of the close of the company’s most recent first and third fiscal quarters, after the date on which the company’s registration statement became effective, presented in accordance with the schedules set forth in §§ 210.12–12 through 210.12–14 of this chapter (Regulation S–X), which need not be audited. The complete portfolio holdings required by this paragraph (b)(2)(ii) must be made publicly accessible, free of charge, at the website address specified at the beginning of the report to stockholders under paragraph (a) of this section, not later than 70 days after the close of the of the first and third fiscal quarters until 70 days after the end of the next first and third fiscal quarters of the company, respectively. (iii) The website address relied upon for compliance with this section may not be the address of the Commission’s electronic filing system. (iv) The materials that are accessible in accordance with paragraph (b)(2)(i) or (ii) of this section must be presented on the website in a format, or formats, that are convenient for both reading online and printing on paper. (v) Persons accessing the materials specified in paragraph (b)(2)(i) or (ii) of this section must be able to permanently retain, free of charge, an electronic PO 00000 Frm 00135 Fmt 4701 Sfmt 4702 70849 version of such materials in a format, or formats, that meet the requirements of paragraph (b)(2)(iv) of this section. (vi) The requirements set forth in paragraphs (b)(2)(i) through (v) of this section will be deemed to be met, notwithstanding the fact that the materials specified in paragraphs (b)(2)(i) and (ii) of this section are not available for a time in the manner required by paragraphs (b)(2)(i) through (v) of this section, provided that: (A) The company has reasonable procedures in place to ensure that the specified materials are available in the manner required by paragraphs (b)(2)(i) through (v) of this section; and (B) The company takes prompt action to ensure that the specified materials become available in the manner required by paragraphs (b)(2)(i) through (v) of this section, as soon as practicable following the earlier of the time at which it knows or reasonably should have known that the materials are not available in the manner required by paragraphs (b)(2)(i) through (v) of this section. (vii) The materials specified in paragraph (b)(2)(i) or (ii) of this section may be separately available for each series of a fund or grouped by the types of materials and/or by series, so long as the grouped information: (A) Is presented in a format designed to communicate the information effectively; (B) Clearly distinguishes the different types of materials and/or each series (as applicable); and (C) Provides a means of easily locating the relevant information (including, for example, a table of contents that includes hyperlinks to the specific materials and series). (3) The following requirements to deliver certain materials upon request are applicable to an open-end management investment company registered on Form N–1A (§§ 239.15A and 274.11A of this chapter). (i) The company (or a financial intermediary through which shares of the company may be purchased or sold) must send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of any of the materials specified in paragraph (b)(2)(i) or (ii) of this section, to any person requesting such a copy within three business days after receiving a request for a paper copy. (ii) The company (or a financial intermediary through which shares of the company may be purchased or sold) must send, at no cost to the requestor, and by email or other reasonably prompt means, an electronic copy of any of the materials specified in E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70850 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules paragraph (b)(2)(i) or (ii) of this section, to any person requesting such a copy within three business days after receiving a request for an electronic copy. The requirement to send an electronic copy of the requested materials may be satisfied by sending a direct link to the online location of the materials; provided that a current version of the materials is directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent and the email explains both how long the link will remain useable and that, if the recipient desires to retain a copy of the materials, he or she should access and save the materials. (c) For registered management companies other than open-end management investment companies registered on Form N–1A, if any matter was submitted during the period covered by the shareholder report to a vote of shareholders, through the solicitation of proxies or otherwise, furnish the following information: (1) The date of the meeting and whether it was an annual or special meeting. (2) If the meeting involved the election of directors, the name of each director elected at the meeting and the name of each other director whose term of office as a director continued after the meeting. (3) A brief description of each matter voted upon at the meeting and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each such matter, including a separate tabulation with respect to each matter or nominee for office. Instruction 1 to paragraph (c). The solicitation of any authorization or consent (other than a proxy to vote at a shareholders’ meeting) with respect to any matter shall be deemed a submission of such matter to a vote of shareholders within the meaning of this paragraph (c). (d) Each report shall be transmitted within 60 days after the close of the period for which such report is being made. * * * * * (f) * * * (2) * * * (ii) * * * (F) Contain the following prominent statement, or similar clear and understandable statement, in bold-face type: ‘‘Important Notice Regarding Delivery of Shareholder Materials’’. This statement also must appear on the envelope in which the notice is VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 delivered. Alternatively, if the notice is delivered separately from other communications to investors, this statement may appear either on the notice or on the envelope in which the notice is delivered; * * * * * (4) For purposes of this section, address means a street address, a post office box number, an electronic mail address, a facsimile telephone number, or other similar destination to which paper or electronic materials are transmitted, unless otherwise provided in this section. If the company has reason to believe that the address is a street address of a multi-unit building, the address must include the unit number. ■ 15. Amend § 270.30e–3 by revising paragraph (h)(2) to read as follows: § 270.30e–3 Internet availability of reports to shareholders. * * * * * (h) * * * (2) Fund means a registered management company registered on Form N–2 (§§ 239.14 and 274.11a of this chapter) or Form N–3 (§§ 239.17a and 274.11b of this chapter) and any separate series of the management company. * * * * * ■ 16. Amend § 270.31a–2 by: ■ a. Removing the word ‘‘and’’ at the end of paragraph (a)(5); ■ b. In paragraph (a)(6), removing the period and adding ‘‘; and’’ in its place; and ■ c. Adding paragraph (a)(7). The addition reads as follows: § 270.31a–2 Records to be preserved by registered investment companies, certain majority-owned subsidiaries thereof, and other persons having transactions with registered investment companies. (a) * * * (7) Preserve for a period not less than six years, the first two years in an easily accessible place, any shareholder report required by § 270.30e–1 (including any version posted on a website or otherwise provided electronically) that is not filed with the Commission in the exact form in which it was used. * * * * * ■ 17. Amend § 270.34b–1 by revising the introductory text and paragraph (b)(3) and adding paragraph (c) to read as follows: § 270.34b–1 misleading. Sales literature deemed to be Any advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors PO 00000 Frm 00136 Fmt 4701 Sfmt 4702 that is required to be filed with the Commission by section 24(b) of the Act [15 U.S.C. 80a–24(b)] (for purposes of paragraph (a) and (b) of this section, ‘‘sales literature’’) will have omitted to state a fact necessary in order to make the statements made therein not materially misleading unless the sales literature includes the information specified in paragraphs (a) and (b) of this section. Any registered investment company or business development company advertisement, pamphlet, circular, form letter, or other sales literature addressed to or intended for distribution to prospective investors in connection with a public offering (for purposes of paragraph (c) of this section, ‘‘sales literature’’) will have omitted to state a fact necessary in order to make the statements therein not materially misleading unless the sales literature includes the information specified in paragraph (c) of this section. Note 1 to § 270.34b–1 Introductory Text: The fact that the sales literature includes the information specified in paragraphs (a) and (b) of this section does not relieve the investment company, underwriter, or dealer of any obligations with respect to the sales literature under the antifraud provisions of the Federal securities laws. For guidance about factors to be weighed in determining whether statements, representations, illustrations, and descriptions contained in investment company sales literature are misleading, see § 230.156 of this chapter. * * * * * (b) * * * (3) The requirements specified in paragraph (b)(1) of this section do not apply to any quarterly, semi-annual, or annual report to shareholders under Section 30 of the Act [15 U.S.C. 80a–29] containing performance data for a period commencing no earlier than the first day of the period covered by the report; nor do the requirements of paragraphs (d)(3)(ii), (d)(4)(ii), and (g) of § 230.482 of this chapter apply to any such periodic report containing any other performance data. (c)(1) Except as provided in paragraph (c)(2) of this section: (i) In any sales literature that contains fee and expense figures for a registered investment company or business development company, include the disclosure required by paragraph (i) of § 230.482 of this chapter. (ii) Any fee and expense information included in sales literature must meet the timeliness requirements of paragraph (j) of § 230.482 of this chapter. (2) The requirements specified in paragraph (c)(1) of this section do not apply to any quarterly, semi-annual, or annual report to shareholders under E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Section 30 of the Act [15 U.S.C. 80a–29] or to other reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 79m or 78o(d)) containing fee and expense information; nor do the requirements of paragraphs (i) and (j) of § 230.482 of this chapter or paragraph (c)(3) of § 230.433 of this chapter apply to any such report containing fee and expense information. [ ] pursuant to paragraph (a)(2) of rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. Omit from the facing sheet reference to the other Act if the Registration Statement or amendment is filed under PART 274—FORMS PRESCRIBED only one of the Acts. Include the UNDER THE INVESTMENT COMPANY ‘‘Approximate Date of Proposed Public ACT OF 1940 Offering’’ and ‘‘Title of Securities Being ■ 18. The authority for part 274 Registered’’ only where securities are continues to read in part as follows: being registered under the Securities Act of 1933. Authority: 15 U.S.C. 77f, 77g, 77h, 77j, Form N–1A is to be used by open-end 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 80a–26, 80a-29, and Pub. L. 111–203, management investment companies, sec. 939A, 124 Stat. 1376 (2010), unless except insurance company separate otherwise noted. accounts and small business investment * * * * * companies licensed under the United ■ 19. Revise Form N–1A (referenced in States Small Business Administration, §§ 239.15A and 274.11A) to read as to register under the Investment follows: Company Act of 1940 and to offer their shares under the Securities Act of 1933. Note: The text of Form N–1A will not appear in the Code of Federal Regulations. The Commission has designed Form N– 1A to provide investors with United States information that will assist them in making a decision about investing in an Securities and Exchange Commission investment company eligible to use the Washington, DC 20549 Form. The Commission also may use the Form N–1A information provided on Form N–1A in its regulatory, disclosure review, REGISTRATION STATEMENT UNDER inspection, and policy making roles. THE SECURITIES ACT OF 1933 A Registrant is required to disclose Pre-Effective Amendment No. ll[ ] the information specified by Form N– Post-Effective Amendment No. ll[ ] 1A, and the Commission will make this and/or REGISTRATION STATEMENT UNDER information public. A Registrant is not THE INVESTMENT COMPANY required to respond to the collection of ACT OF 1940 information contained in Form N–1A Amendment No. ll[ ] unless the Form displays a currently Registrant Exact Name as Specified in valid Office of Management and Budget Charter (OMB) control number. Please direct llllllllllllllllll comments concerning the accuracy of Address of Principal Executive Offices the information collection burden (Number, Street, City, State, Zip Code) estimate and any suggestions for llllllllllllllllll reducing the burden to Secretary, Registrant’s Telephone Number, Securities and Exchange Commission, including Area Code 100 F Street NE, Washington, DC llllllllllllllllll 20549–1090. The OMB has reviewed Name and Address (Number, Street, this collection of information under the City, State, Zip Code) of Agent for clearance requirements of 44 U.S.C. Service 3507. llllllllllllllllll Approximate Date of Proposed Public Contents of Form N–1A Offering GENERAL INSTRUCTIONS A. Definitions It is proposed that this filing will B. Filing and Use of Form N–1A become effective (check appropriate C. Preparation of the Registration box) Statement [ ] immediately upon filing pursuant to D. Incorporation by Reference paragraph (b) PART A: INFORMATION REQUIRED IN [ ] on (date) pursuant to paragraph (b) A PROSPECTUS [ ] 60 days after filing pursuant to Item 1. Front and Back Cover Pages paragraph (a) Item 2. Risk/Return Summary: [ ] on (date) pursuant to paragraph (a) Investment Objectives/Goals [ ] 75 days after filing pursuant to Item 3. Risk/Return Summary: Fee paragraph (a)(2) on (date) VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00137 Fmt 4701 Sfmt 4702 70851 Summary Item 4. Risk/Return Summary: Investments, Risks, and Performance Item 5. Management Item 6. Purchase and Sale of Fund Shares Item 7. Tax Information Item 8. Financial Intermediary Compensation Item 8A. Fee Table Item 9. Investment Objectives, Principal Investment Strategies, Related Risks, and Disclosure of Portfolio Holdings Item 10. Management, Organization, and Capital Structure Item 11. Shareholder Information Item 12. Distribution Arrangements Item 13. Financial Highlights Information PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION Item 14. Cover Page and Table of Contents Item 15. Fund History Item 16. Description of the Fund and Its Investments and Risks Item 17. Management of the Fund Item 18. Control Persons and Principal Holders of Securities Item 19. Investment Advisory and Other Services Item 20. Portfolio Managers Item 21. Brokerage Allocation and Other Practices Item 22. Capital Stock and Other Securities Item 23. Purchase, Redemption, and Pricing of Shares Item 24. Taxation of the Fund Item 25. Underwriters Item 26. Calculation of Performance Data Item 27. Financial Statements Item 27A. Annual and Semi-Annual Shareholder Report PART C: OTHER INFORMATION Item 28. Exhibits Item 29. Persons Controlled by or Under Common Control with the Fund Item 30. Indemnification Item 31. Business and Other Connections of Investment Adviser Item 32. Principal Underwriters Item 33. Location of Accounts and Records Item 34. Management Services Item 35. Undertakings SIGNATURES General Instructions A. Definitions References to sections and rules in this Form N–1A are to the Investment Company Act of 1940 [15 U.S.C. 80a–1 E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70852 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules et seq.] (the ‘‘Investment Company Act’’), unless otherwise indicated. Terms used in this Form N–1A have the same meaning as in the Investment Company Act or the related rules, unless otherwise indicated. As used in this Form N–1A, the terms set out below have the following meanings: ‘‘Class’’ means a class of shares issued by a Multiple Class Fund that represents interests in the same portfolio of securities under rule 18f–3 [17 CFR 270.18f–3] or under an order exempting the Multiple Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a– 18(f), 18(g), and 18(i)]. ‘‘Exchange-Traded Fund’’ means a Fund or Class, the shares of which are listed and traded on a national securities exchange, and that has formed and operates under an exemptive order granted by the Commission or in reliance on rule 6c–11 [17 CFR 270.6c– 11] under the Investment Company Act. ‘‘Fund’’ means the Registrant or a separate Series of the Registrant. When an item of Form N–1A specifically applies to a Registrant or a Series, those terms will be used. ‘‘Market Price’’ has the same meaning as in rule 6c–11 [17 CFR 270.6c–11] under the Investment Company Act. ‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or more Funds (each a ‘‘Feeder Fund’’) holds shares of a single Fund (the ‘‘Master Fund’’) in accordance with section 12(d)(1)(E) [15 U.S.C. 80a– 12(d)(1)(E)]. ‘‘Money Market Fund’’ means a registered open-end management investment company, or series thereof, that is regulated as a money market fund pursuant to rule 2a–7 [17 CFR 270.2a– 7] under the Investment Company Act of 1940. ‘‘Multiple Class Fund’’ means a Fund that has more than one Class. ‘‘Registrant’’ means an open-end management investment company registered under the Investment Company Act. ‘‘SAI’’ means the Statement of Additional Information required by Part B of this Form. ‘‘Securities Act’’ means the Securities Act of 1933 [15 U.S.C. 77a et seq.]. ‘‘Securities Exchange Act’’ means the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.]. ‘‘Series’’ means shares offered by a Registrant that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that series in accordance with rule 18f–2(a) [17 CFR 270.18f– 2(a)]. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 B. Filing and Use of Form N–1A 1. What is Form N–1A used for? Form N–1A is used by Funds, except insurance company separate accounts and small business investment companies licensed under the United States Small Business Administration, to file: (a) An initial registration statement under the Investment Company Act and amendments to the registration statement, including amendments required by rule 8b–16 [17 CFR 270.8b– 16]; (b) An initial registration statement under the Securities Act and amendments to the registration statement, including amendments required by section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)]; or (c) Any combination of the filings in paragraph (a) or (b). 2. What is included in the registration statement? (a) For registration statements or amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, include the facing sheet of the Form, Parts A, B, and C, and the required signatures. (b) For registration statements or amendments filed only under the Investment Company Act, include the facing sheet of the Form, responses to all Items of Parts A (except Items 1, 2, 3, 4, 8A, and 13), B, and C (except Items 28(e) and (i)–(k)), and the required signatures. 3. What are the fees for Form N–1A? No registration fees are required with the filing of Form N–1A to register as an investment company under the Investment Company Act or to register securities under the Securities Act. See section 24(f) [15 U.S.C. 80a–24(f)] and related rule 24f–2 [17 CFR 270.24f–2]. 4. What rules apply to the filing of a registration statement on Form N–1A? (a) For registration statements and amendments filed under both the Investment Company Act and the Securities Act or only under the Securities Act, the general rules regarding the filing of registration statements in Regulation C under the Securities Act [17 CFR 230.400– 230.497] apply to the filing of Form N– 1A. Specific requirements concerning Funds appear in rules 480–485 and 495–497 of Regulation C. (b) For registration statements and amendments filed only under the Investment Company Act, the general provisions in rules 8b–1—8b–32 [17 PO 00000 Frm 00138 Fmt 4701 Sfmt 4702 CFR 270.8b–1—270.8b–32] apply to the filing of Form N–1A. (c) The plain English requirements of rule 421 under the Securities Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form N–1A. The information required by Items 2 through 8 must be provided in plain English under rule 421(d) under the Securities Act. (d) Regulation S–T [17 CFR 232.10– 232.903] applies to all filings on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (‘‘EDGAR’’). C. Preparation of the Registration Statement 1. Administration of the Form N–1A Requirements (a) The requirements of Form N–1A are intended to promote effective communication between the Fund and prospective investors. A Fund’s prospectus should clearly disclose the fundamental characteristics and investment risks of the Fund, using concise, straightforward, and easy to understand language. A Fund should use document design techniques that promote effective communication. The prospectus should emphasize the Fund’s overall investment approach and strategy. (b) The prospectus disclosure requirements in Form N–1A are intended to elicit information for an average or typical investor who may not be sophisticated in legal or financial matters. The prospectus should help investors to evaluate the risks of an investment and to decide whether to invest in a Fund by providing a balanced disclosure of positive and negative factors. Disclosure in the prospectus should be designed to assist an investor in comparing and contrasting the Fund with other funds. (c) Responses to the Items in Form N– 1A should be as simple and direct as reasonably possible and should include only as much information as is necessary to enable an average or typical investor to understand the particular characteristics of the Fund. The prospectus should avoid: Including lengthy legal and technical discussions; simply restating legal or regulatory requirements to which Funds generally are subject; and disproportionately emphasizing possible investments or activities of the Fund that are not a significant part of the Fund’s investment operations. Brevity is especially important in describing the practices or aspects of the Fund’s operations that do not differ materially from those of other investment companies. Avoid excessive E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules detail, technical or legal terminology, and complex language. Also avoid lengthy sentences and paragraphs that may make the prospectus difficult for many investors to understand and detract from its usefulness. (d) The requirements for prospectuses included in Form N–1A will be administered by the Commission in a way that will allow variances in disclosure or presentation if appropriate for the circumstances involved while remaining consistent with the objectives of Form N–1A. khammond on DSKJM1Z7X2PROD with PROPOSALS2 2. Form N–1A Is Divided Into Three Parts (a) Part A. Part A includes the information required in a Fund’s prospectus under section 10(a) of the Securities Act. The purpose of the prospectus is to provide essential information about the Fund in a way that will help investors to make informed decisions about whether to purchase the Fund’s shares described in the prospectus. In responding to the Items in Part A, avoid cross-references to the SAI or shareholder reports. Crossreferences within the prospectus are most useful when their use assists investors in understanding the information presented and does not add complexity to the prospectus. (b) Part B. Part B includes the information required in a Fund’s SAI. The purpose of the SAI is to provide additional information about the Fund that the Commission has concluded is not necessary or appropriate in the public interest or for the protection of investors to be in the prospectus, but that some investors may find useful. Part B affords the Fund an opportunity to expand discussions of the matters described in the prospectus by including additional information that the Fund believes may be of interest to some investors. The Fund should not duplicate in the SAI information that is provided in the prospectus, unless necessary to make the SAI comprehensible as a document independent of the prospectus. (c) Part C. Part C includes other information required in a Fund’s registration statement. 3. Additional Matters (a) Organization of Information. Organize the information in the prospectus and SAI to make it easy for investors to understand. Notwithstanding rule 421(a) under the Securities Act regarding the order of information required in a prospectus, disclose the information required by Items 2 through 8 in numerical order at the front of the prospectus. Do not VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 precede these Items with any other Item except the Cover Page (Item 1) or a table of contents meeting the requirements of rule 481(c) under the Securities Act. Information that is included in response to Items 2 through 8 need not be repeated elsewhere in the prospectus, other than fee information required in both Item 3 and Item 8A. Disclose the information required by Item 12 (Distribution Arrangements) in one place in the prospectus. Only principal risks should be disclosed in the prospectus, in accordance with Items 4 and 9. (b) Other Information. A Fund may include, except in response to Items 2 through 8A, information in the prospectus or the SAI that is not otherwise required. For example, a Fund may include charts, graphs, or tables so long as the information is not incomplete, inaccurate, or misleading and does not, because of its nature, quantity, or manner of presentation, obscure or impede understanding of the information that is required to be included. Items 2 through 8A may not include disclosure other than that required or permitted by those Items. (c) Use of Form N–1A Registration Statement by More Than One Registrant, Series, or Class. A Form N–1A registration statement may be used by one or more Registrants, Series, or Classes. (i) When disclosure is provided for more than one Fund or Class, the disclosure should be presented in a format designed to communicate the information effectively. Except as required by paragraph (c)(ii) for Items 2 through 8, Funds may order or group the response to any Item in any manner that organizes the information into readable and comprehensible segments and is consistent with the intent of the prospectus to provide clear and concise information about the Funds or Classes. Funds are encouraged to use, as appropriate, tables, side-by-side comparisons, captions, bullet points, or other organizational techniques when presenting disclosure for multiple Funds or Classes. (ii) Paragraph (a) requires Funds to disclose the information required by Items 2 through 8 in numerical order at the front of the prospectus and not to precede Items 2 through 8 with other information. Except as permitted by paragraph (c)(iii), a prospectus that contains information about more than one Fund must present all of the information required by Items 2 through 8 for each Fund sequentially and may not integrate the information for more than one Fund together. That is, a prospectus must present all of the PO 00000 Frm 00139 Fmt 4701 Sfmt 4702 70853 information for a particular Fund that is required by Items 2 through 8 together, followed by all of the information for each additional Fund, and may not, for example, present all of the Item 2 (Risk/ Return Summary: Investment Objectives/Goals) information for several Funds followed by all of the Item 3 (Risk/Return Summary: Fee Summary) information for several Funds. If a prospectus contains information about multiple Funds, clearly identify the name of the relevant Fund at the beginning of the information for the Fund that is required by Items 2 through 8. A Multiple Class Fund may present the information required by Items 2 through 8 separately for each Class or may integrate the information for multiple Classes, although the order of the information must be as prescribed in Items 2 through 8. For example, the prospectus may present all of the Item 2 (Risk/Return Summary: Investment Objectives/Goals) information for several Classes followed by all of the Item 3 (Risk/Return Summary: Fee Summary) information for the Classes, or may present Items 2 and 3 for each of several Classes sequentially. Other presentations of multiple Class information also would be acceptable if they are consistent with the Form’s intent to disclose the information required by Items 2 through 8 in a standard order at the beginning of the prospectus. For a Multiple Class Fund, clearly identify the relevant Classes at the beginning of the Items 2 through 8 information for those Classes. (iii) A prospectus that contains information about more than one Fund may integrate the information required by any of Items 6 through 8 for all of the Funds together, provided that the information contained in any Item that is integrated is identical for all Funds covered in the prospectus. If the information required by any of Items 6 through 8 is integrated pursuant to this paragraph, the integrated information should be presented immediately following the separate presentations of Item 2 through 8 information for individual Funds. In addition, include a statement containing the following information in each Fund’s separate presentation of Item 2 through 8 information, in the location where the integrated information is omitted: ‘‘For important information about [purchase and sale of fund shares], [tax information], and [financial intermediary compensation], please turn to [identify section heading and page number of prospectus].’’ (d) Modified Prospectuses for Certain Funds. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70854 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (i) A Fund may modify or omit, if inapplicable, the information required by Items 6, 11(b)–(d) and 12(a)(2)–(5) for funds used as investment options for: (A) A defined contribution plan that meets the requirements for qualification under section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)]; (B) a tax-deferred arrangement under sections 403(b) or 457 of the Internal Revenue Code [26 U.S.C. 403(b) and 457]; and (C) a variable contract as defined in section 817(d) of the Internal Revenue Code [26 U.S.C. 817(d)], if covered in a separate account prospectus. (ii) A Fund that uses a modified prospectus under Instruction (d)(i) may: (A) Alter the legend required on the back cover page by Item 1(b)(1) to state, as applicable, that the prospectus is intended for use in connection with a defined contribution plan, tax-deferred arrangement, or variable contract; and (B) modify other disclosure in the prospectus consistent with offering the Fund as a specific investment option for a defined contribution plan, taxdeferred arrangement, or variable contract. (iii) A Fund may omit the information required by Items 4(b)(2)(iii)(B) and (C) and 4(b)(2)(iv) if the Fund’s prospectus will be used exclusively to offer Fund shares as investment options for one or more of the following: (A) A defined contribution plan that meets the requirements for qualification under section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)], a taxdeferred arrangement under section 403(b) or 457 of the Internal Revenue Code [26 U.S.C. 403(b) or 457], a variable contract as defined in section 817(d) of the Internal Revenue Code [26 U.S.C. 817(d)], or a similar plan or arrangement pursuant to which an investor is not taxed on his or her investment in the Fund until the investment is sold; or (B) persons that are not subject to the Federal income tax imposed under section 1 of the Internal Revenue Code [26 U.S.C. 1], or any successor to that section. (iv) A Fund that omits information under Instruction (d)(iii) may alter the legend required on the back cover page by Item 1(b)(1) to state, as applicable, that the prospectus is intended for use in connection with a defined contribution plan, tax-deferred arrangement, variable contract, or similar plan or arrangement, or persons described in Instruction (d)(iii)(B). (e) Dates. Rule 423 under the Securities Act [17 CFR 230.423] applies to the dates of the prospectus and the SAI. The SAI should be made available VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 at the same time that the prospectus becomes available for purposes of rules 430 and 460 under the Securities Act [17 CFR 230.430 and 230.460]. (f) Sales Literature. A Fund may include sales literature in the prospectus so long as the amount of this information does not add substantial length to the prospectus and its placement does not obscure essential disclosure. (g) Interactive Data File. (i) An Interactive Data File (§ 232.11 of this chapter) is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S–T (§ 232.405 of this chapter) for any registration statement or post-effective amendment thereto on Form N–1A that includes or amends information provided in response to Items 2, 4, or 8A. (A) Except as required by paragraph (g)(i)(B), the Interactive Data File must be submitted as an amendment to the registration statement to which the Interactive Data File relates. The amendment must be submitted on or before the date the registration statement or post-effective amendment that contains the related information becomes effective. (B) In the case of a post-effective amendment to a registration statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), or (vii) of rule 485 under the Securities Act [17 CFR 230.485(b)], the Interactive Data File must be submitted either with the filing, or as an amendment to the registration statement to which the Interactive Data Filing relates that is submitted on or before the date the post-effective amendment that contains the related information becomes effective. (ii) An Interactive Data File is required to be submitted to the Commission in the manner provided by rule 405 of Regulation S–T for any form of prospectus filed pursuant to paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 230.497(c) or (e)] that includes information provided in response to Items 2, 4, or 8A that varies from the registration statement. The Interactive Data File must be submitted with the filing made pursuant to rule 497. (iii) The Interactive Data File must be submitted in accordance with the specifications in the EDGAR Filer Manual, and in such a manner that will permit the information for each Series and, for any information that does not relate to all of the Classes in a filing, each Class of the Fund to be separately identified. PO 00000 Frm 00140 Fmt 4701 Sfmt 4702 D. Incorporation by Reference 1. Specific Rules for Incorporation by Reference in Form N–1A Registration Statement (a) A Fund may not incorporate by reference into a prospectus information that Part A of this Form requires to be included in a prospectus, except as specifically permitted by Part A of the Form. (b) A Fund may incorporate by reference any or all of the SAI into the prospectus (but not to provide any information required by Part A to be included in the prospectus) without delivering the SAI with the prospectus. (c) A Fund may incorporate by reference into the SAI or its response to Part C, information that Parts B and C require to be included in the Fund’s registration statement. 2. General Requirements All incorporation by reference must comply with the requirements of this Form and the following rules on incorporation by reference: Rule 411 under the Securities Act [17 CFR 230.411] (general rules on incorporation by reference in a prospectus); rule 303 of Regulation S–T [17 CFR 232.303] (specific requirements for electronically filed documents); and rule 0–4 [17 CFR 270.0–4] (additional rules on incorporation by reference for Funds). Part A—Information Required in a Prospectus Item 1. Front and Back Cover Pages (a) Front Cover Page. Include the following information, in plain English under rule 421(d) under the Securities Act, on the outside front cover page of the prospectus: (1) The Fund’s name and the Class or Classes, if any, to which the prospectus relates. (2) The exchange ticker symbol of the Fund’s shares or, if the prospectus relates to one or more Classes of the Fund’s shares, adjacent to each such Class, the exchange ticker symbol of such Class of the Fund’s shares. If the Fund is an Exchange-Traded Fund, also identify the principal U.S. market or markets on which the Fund shares are traded. (3) The date of the prospectus. (4) The statement required by rule 481(b)(1) under the Securities Act. Instruction. A Fund may include on the front cover page a statement of its investment objectives, a brief (e.g., one sentence) description of its operations, or any additional information, subject to the requirement set out in General Instruction C.3(b). E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (b) Back Cover Page. Include the following information, in plain English under rule 421(d) under the Securities Act, on the outside back cover page of the prospectus: (1) A statement that the SAI includes additional information about the Fund, and a statement to the following effect: Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders and in Form N–CSR. In the Fund’s annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. In Form N–CSR, you will find the Fund’s annual and semi-annual financial statements. Explain that the SAI, the Fund’s annual and semi-annual reports to shareholders, and Form N–CSR are available, without charge, upon request, and explain how shareholders in the Fund may make inquiries to the Fund. Provide a toll-free telephone number for investors to call: To request the SAI; to request the Fund’s annual or semiannual report; to request the Form N– CSR; to request other information about the Fund; and to make shareholder inquiries. Also, state the Fund makes available its SAI, annual and semiannual report, and Form N–CSR, free of charge, on or through the Fund’s website at a specified address. If the Fund does not make its SAI and shareholder reports available in this manner, disclose the reasons why it does not do so (including, where applicable, that the Fund does not have a website). Instructions 1. A Fund may indicate, if applicable, that the SAI, annual and semi-annual report, Form N–CSR, and other information are available by email request. 2. A Fund may indicate, if applicable, that the SAI and other information are available from a financial intermediary (such as a broker-dealer or bank) through which shares of the Fund may be purchased or sold. When a Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for the SAI, the annual report, the semi-annual report, or Form N–CSR, the Fund (or financial intermediary) must send the requested document within 3 business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery. 3. A Fund that has not yet been required to deliver an annual or semiannual report to shareholders under rule 30e–1 [17 CFR 270.30e–1] or to file a Form N–CSR report may omit the statements required by this paragraph regarding the report. 4. A Money Market Fund may omit the sentence indicating that a reader will find in the Fund’s annual report a discussion of the market conditions and investment strategies that significantly affect the Fund’s performance during its last fiscal year. (2) A statement whether and from where information is incorporated by reference into the prospectus as permitted by General Instruction D. Unless the information is delivered with the prospectus, explain that the Fund will provide the information without charge, upon request (referring to the 70855 telephone number provided in response to paragraph (b)(1)). Instruction. The Fund may combine the information about incorporation by reference with the statements required under paragraph (b)(1). (3) State that reports and other information about the Fund are available on the EDGAR Database on the Commission’s website at https:// www.sec.gov, and that copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov. (4) The Fund’s Investment Company Act file number on the bottom of the back cover page in type size smaller than that generally used in the prospectus (e.g., 8-point modern type). Item 2. Risk/Return Summary: Investment Objectives/Goals Disclose the Fund’s investment objectives or goals. A Fund also may identify its type or category (e.g., that it is a Money Market Fund or a balanced fund). Item 3. Risk/Return Summary: Fee Summary Include the following information, in plain English under rule 421(d) under the Securities Act, after Item 2: Your Investment Costs These are the amounts you could pay to buy, hold, and sell shares of the Fund. These costs reduce the value of your investment. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example below. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Transaction Fees (fees paid each time you buy or sell): Purchase Charge (as a percentage of your investment) ........................................................ [Up to] ll% (Or [up to] $ll, if you invest $10,000). Exit Charge (as a percentage of ll) .................................................................................... [Up to] ll% (Or [up to] $ll, if you invest $10,000). Maximum Purchase Charge Imposed on Reinvested Dividends [and Other Distribu- [Up to] ll% (Or [up to] $ll, if you invest tions] (as a percentage of ll). $10,000). Early Exit Fee (as a percentage of amount redeemed) ......................................................... [Up to] ll% (Or [up to] $ll, if you invest $10,000). Exchange Fee ........................................................................................................................... [Up to] ll% (Or [up to] $ll, if you invest $10,000). Maximum Account Fee .......................................................................................................... [Up to] ll% (Or [up to] $ll, if you invest $10,000). Ongoing Annual Fees (estimated expenses you pay each year as a percentage of the value of your investment) Ongoing Annual Fees ............................................................................................................. ll% (Or $ll, if you invest $10,000). Ongoing Annual Fees with Temporary Discount * .............................................................. ll% (Or $ll, if you invest $10,000). * Discount expected to end on [date]. Example This example may help you understand the costs of investing in the VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Fund. The example assumes that: (1) You invest $10,000 in the Fund; (2) your investment has a 5% return each year; PO 00000 Frm 00141 Fmt 4701 Sfmt 4702 and (3) the Fund’s operating expenses are based on the table above. E:\FR\FM\05NOP2.SGM 05NOP2 70856 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 1 Year Although your actual costs may be higher or lower, based on these assumptions, your costs would be: ........... If you sold your shares at the end of the relevant period, your costs would be: ................................................... The example does not reflect purchase charges on reinvested dividends [and other distributions]. If these purchase charges were included, your costs would be higher. khammond on DSKJM1Z7X2PROD with PROPOSALS2 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 ll%. Instructions 1. General. (a) Round all dollar figures to the nearest dollar and all percentages to the nearest hundredth of one percent. (b) Include the narrative explanations in the order indicated. A Fund may modify the narrative explanations if the explanation contains comparable information to that shown. (c) Footnotes and other extraneous disclosure are not permitted, except that a footnote is permitted in a case where omitting it would cause the disclosure to be materially misleading, in that fees borne by the investor would be materially higher than fees presented in the fee summary. (d) If the Fund offers sales charge discounts, include ‘‘up to’’ before the maximum transaction fee amount in the table. (e) If the prospectus offers more than one Class of a Multiple Class Fund or more than one Feeder Fund that invests in the same Master Fund, provide a separate response for each Class or Feeder Fund. (f) If the Fund is an Exchange-Traded Fund, exclude any fees charged for the purchase and redemption of the Fund’s creation units. 2. Transaction Fees. Based on the information given in response to Item 8A, provide the maximum purchase charge, maximum exit charge, maximum purchase charge on reinvested dividends and other distributions, early exit fee, and exchange fee. Also disclose the dollar value of the maximum purchase charge, maximum exit charge, maximum purchase charge on reinvested dividends and other distributions, early exit fee, and exchange fee, based on a $10,000 investment. Any transaction fees equaling $0 should not be included and the applicable line item should be omitted. However, a Multiple Class VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Fund that shows a charge and line item because one Class imposes a charge may show 0 as the charge for the other Classes. 3. Maximum Account Fee. Based on the information given in response to Item 8A, provide the maximum account fee. Also disclose the dollar value of the maximum account fee based on a $10,000 investment. Any account fee equaling $0 should not be included and the maximum account fee line item should be omitted. 4. Ongoing Annual Fees. (a) Based on the information given in response to Item 8A, provide the total Ongoing Annual Fees. If the Fund is a New Fund, include a parenthetical after the total Ongoing Annual Fees to state that the amount is estimated. (b) If there are expense reimbursement or fee waiver arrangements that will reduce any Fund operating expenses for no less than one year from the effective date of the Fund’s registration statement, a Fund may also show the Fund’s net expenses after subtracting the fee reimbursement or expense waiver from the total Ongoing Annual Fees under a caption titled ‘‘Ongoing Annual Fees with Temporary Discount.’’ The Fund should place this additional caption directly below the ‘‘Ongoing Annual Fees’’ caption of the table. If the Fund provides this disclosure, provide in a footnote the expected termination date of the expense reimbursement or fee waiver arrangement. (c) Also disclose the dollar value of the total Ongoing Annual Fees and, as applicable, the dollar value of the total Ongoing Annual Fees with Temporary Discount based on a $10,000 investment. (d) If the Fund is including disclosure responsive to instruction 4(f)(ii) of Item 8A, provide the footnote required by that instruction. 5. Example. (a) Calculate the example in accordance with Instruction 5 to Item 8A for 1- and 10-year periods. If the Fund is a New Fund, as described in Instruction 7 to Item 8A, provide information for 1- and 3-year periods in the Example and estimate any shareholder account fees collected. (b) Include the second 1- and 10-year periods and related narrative explanation only if an exit charge or other fee is charged upon redemption. PO 00000 Frm 00142 Fmt 4701 Sfmt 4702 $ll $ll 10 Years $ll $ll 6. Portfolio Turnover. Disclose the portfolio turnover rate provided in response to Item 13(a) for the most recent fiscal year (or for such shorter period as the Fund has been in operation). Disclose the period for which the information is provided if less than a full fiscal year. A Fund that is a Money Market Fund may omit the portfolio turnover information required by this Item. Item 4. Risk/Return Summary: Investments, Risks, and Performance Include the following information, in plain English under rule 421(d) under the Securities Act, in the order and subject matter indicated: (a) Principal Investment Strategies of the Fund. Based on the information given in response to Item 9(b), summarize how the Fund intends to achieve its investment objectives by identifying the Fund’s principal investment strategies (including the type or types of securities in which the Fund invests or will invest principally) and any policy to concentrate in securities of issuers in a particular industry or group of industries. (b) Principal Risks of Investing in the Fund. (1) Narrative Risk Disclosure. (i) Based on the information given in response to Item 9(c), briefly summarize the principal risks of investing in the Fund, including the risks to which the Fund’s portfolio as a whole is subject and the circumstances reasonably likely to affect adversely the Fund’s net asset value, yield, and total return. Unless the Fund is a Money Market Fund, disclose that loss of money is a risk of investing in the Fund. Instructions 1. A Fund may, in responding to this Item, describe the types of investors for whom the Fund is intended or the types of investment goals that may be consistent with an investment in the Fund. 2. A Fund should describe principal risks in order of importance, with the most significant risks appearing first. A Fund may use any reasonable means of determining the significance of risks. A Fund should not describe principal risks in alphabetical order. 3. A Fund should, where appropriate, tailor risk disclosures to how the Fund E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules operates rather than rely on generic, standard risk disclosures. (ii) Statements Provided by Money Market Funds. (A) If the Fund is a Money Market Fund that is not a government Money Market Fund, as defined in § 270.2a– 7(a)(16) or a retail Money Market Fund, as defined in § 270.2a–7(a)(25), include the following statement: You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. (B) If the Fund is a Money Market Fund that is a government Money Market Fund, as defined in § 270.2a– 7(a)(16), or a retail Money Market Fund, as defined in § 270.2a–7(a)(25), and that is subject to the requirements of §§ 270.2a–7(c)(2)(i) and/or (ii) of this chapter (or is not subject to the requirements of §§ 270.2a–7(c)(2)(i) and/ or (ii) of this chapter pursuant to § 270.2a–7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to impose liquidity fees and suspend redemptions consistent with the requirements of §§ 270.2a–7(c)(2)(i) and/ or (ii)), include the following statement: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. (C) If the Fund is a Money Market Fund that is a government Money Market Fund, as defined in § 270.2a– 7(a)(16), that is not subject to the requirements of §§ 270.2a–7(c)(2)(i) and/ VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 or (ii) of this chapter pursuant to § 270.2a–7(c)(2)(iii) of this chapter, and that has not chosen to rely on the ability to impose liquidity fees and suspend redemptions consistent with the requirements of §§ 270.2a–7(c)(2)(i) and/ or (ii), include the following statement: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. Instruction. If an affiliated person, promoter, or principal underwriter of the Fund, or an affiliated person of such a person, has contractually committed to provide financial support to the Fund, and the term of the agreement will extend for at least one year following the effective date of the Fund’s registration statement, the statement specified in Item 4(b)(1)(ii)(A), Item 4(b)(1)(ii)(B), or Item 4(b)(1)(ii)(C) may omit the last sentence (‘‘The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.’’). For purposes of this Instruction, the term ‘‘financial support’’ includes any capital contribution, purchase of a security from the Fund in reliance on § 270.17a– 9, purchase of any defaulted or devalued security at par, execution of letter of credit or letter of indemnity, capital support agreement (whether or not the Fund ultimately received support), performance guarantee, or any other similar action reasonably intended to increase or stabilize the value or liquidity of the fund’s portfolio; however, the term ‘‘financial support’’ excludes any routine waiver of fees or reimbursement of fund expenses, routine inter-fund lending, routine inter-fund purchases of fund shares, or any action that would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the fund’s portfolio. (iii) If the Fund is advised by or sold through an insured depository institution, state that: An investment in the Fund is not a deposit of the bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. PO 00000 Frm 00143 Fmt 4701 Sfmt 4702 70857 Instruction. A Money Market Fund that is advised by or sold through an insured depository institution should combine the disclosure required by Items 4(b)(1)(ii) and (iii) in a single statement. (iv) If applicable, state that the Fund is non-diversified, describe the effect of non-diversification (e.g., disclose that, compared with other funds, the Fund may invest a greater percentage of its assets in a particular issuer), and summarize the risks of investing in a non-diversified fund. (2) Risk/Return Bar Chart and Table. (i) Include the bar chart and table required by paragraphs (b)(2)(ii) and (iii) of this section. Provide a brief explanation of how the information illustrates the variability of the Fund’s returns (e.g., by stating that the information provides some indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year to year and by showing how the Fund’s average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance). Provide a statement to the effect that the Fund’s past performance (before and after taxes) is not a good predictor of the Fund’s future performance. If applicable, include a statement explaining that updated performance information is available and providing a website address and/or toll-free telephone number where the updated information may be obtained. (ii) If the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund’s annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund’s registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund’s fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund’s highest and lowest return for a quarter during the 10 years or other period of the bar chart. (iii) If the Fund has annual returns for at least one calendar year, provide a table showing the Fund’s (A) average annual total return; (B) average annual total return (after taxes on distributions); and (C) average annual total return (after taxes on distributions and redemption). A Money Market Fund should show only the returns described in clause (A) of the preceding sentence. All returns should be shown for 1-, 5-, and 10calendar year periods ending on the date of the most recently completed E:\FR\FM\05NOP2.SGM 05NOP2 70858 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules calendar year (or for the life of the Fund, if shorter), but only for periods subsequent to the effective date of the Fund’s registration statement. The table also should show the returns of an appropriate broad-based securities market index as defined in Instruction 6 to Item 27A(d)(2) for the same periods. A Fund that has been in existence for more than 10 years also may include returns for the life of the Fund. A Money Market Fund may provide the Fund’s 7-day yield ending on the date of the most recent calendar year or disclose a toll-free telephone number that investors can use to obtain the Fund’s current 7-day yield. For a Fund (other than a Money Market Fund or a Fund described in General Instruction C.3.(d)(iii)), provide the information in the following table with the specified captions: AVERAGE ANNUAL TOTAL RETURNS [For the periods ended December 31, ll ] 1 year Return Before Taxes ................................................................................................................... Return After Taxes on Distributions ............................................................................................ Return After Taxes on Distributions and Sale of Fund Shares .................................................. Index (reflects no deduction for [fees, expenses, or taxes] ) ...................................................... (iv) Adjacent to the table required by paragraph 4(b)(2)(iii), provide a brief explanation that: (A) After-tax returns are calculated using the historical highest individual Federal marginal income tax rates and do not reflect the impact of state and local taxes; (B) Actual after-tax returns depend on an investor’s tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts; (C) If the Fund is a Multiple Class Fund that offers more than one Class in the prospectus, after-tax returns are shown for only one Class and after-tax returns for other Classes will vary; and (D) If average annual total return (after taxes on distributions and redemption) is higher than average annual total return, the reason for this result may be explained. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. Bar Chart. (a) Provide annual total returns beginning with the earliest calendar year. Calculate annual returns using the Instructions to Item 13(a), except that the calculations should be based on calendar years. If a Fund’s shares are sold subject to a sales charge (e.g., purchase charge or exit charge) or account fees, state that sales charges or account fees are not reflected in the bar chart and that, if these amounts were reflected, returns would be less than those shown. (b) For a Fund that provides annual total returns for only one calendar year or for a Fund that does not include the bar chart because it does not have annual returns for a full calendar year, modify, as appropriate, the narrative VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 explanation required by paragraph (b)(2)(i) (e.g., by stating that the information gives some indication of the risks of an investment in the Fund by comparing the Fund’s performance with a broad measure of market performance). 2. Table. (a) Calculate a Money Market Fund’s 7-day yield under Item 26(a); the Fund’s average annual total return under Item 26(b)(1); and the Fund’s average annual total return (after taxes on distributions) and average annual total return (after taxes on distributions and redemption) under Items 26(b)(2) and (3), respectively. (b) A Fund may include, in addition to the required broad-based securities market index, information for one or more other indexes as permitted by Instruction 7 to Item 27A(d)(2). If an additional index is included, disclose information about the additional index in the narrative explanation accompanying the bar chart and table (e.g., by stating that the information shows how the Fund’s performance compares with the returns of an index of funds with similar investment objectives). (c) If the Fund selects an index that is different from the index used in a table for the immediately preceding period, explain the reason(s) for the selection of a different index and provide information for both the newly selected and the former index. (d) A Fund (other than a Money Market Fund) may include the Fund’s yield calculated under Item 26(b)(2). Any Fund may include its taxequivalent yield calculated under Item 26. If a Fund’s yield is included, provide a toll-free telephone number that investors can use to obtain current yield information. PO 00000 Frm 00144 Fmt 4701 Sfmt 4702 5 years (or life of fund) 10 years (or life of fund) ll% ll% ll% ll% ll% ll% ll% ll% ll% ll% ll% ll% (e) Returns required by paragraphs 4(b)(2)(iii)(A), (B), and (C) for a Fund or Series must be adjacent to one another and appear in that order. The returns for a broad-based securities market index, as required by paragraph 4(b)(2)(iii), must precede or follow all of the returns for a Fund or Series rather than be interspersed with the returns of the Fund or Series. 3. Multiple Class Funds. (a) When a Multiple Class Fund presents information for more than one Class together in response to Item 4(b)(2), provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets) if the Fund: (i) Selects the Class with 10 or more years of annual returns if other Classes have fewer than 10 years of annual returns; (ii) Selects the Class with the longest period of annual returns when the Classes all have fewer than 10 years of returns; and (iii) If the Fund provides annual total returns in the bar chart for a Class that is different from the Class selected for the most immediately preceding period, explain in a footnote to the bar chart the reasons for the selection of a different Class. (b) When a Multiple Class Fund offers a new Class in a prospectus and separately presents information for the new Class in response to Item 4(b)(2), include the bar chart with annual total returns for any other existing Class for the first year that the Class is offered. Explain in a footnote that the returns are for a Class that is not presented that would have substantially similar annual returns because the shares are invested in the same portfolio of securities and the annual returns would differ only to E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules the extent that the Classes do not have the same expenses. Include return information for the other Class reflected in the bar chart in the performance table. (c) When a Multiple Class Fund presents information for more than one Class together in response to Item 4(b)(2): (i) Provide the returns required by paragraph 4(b)(2)(iii)(A) of this Item for each of the Classes; (ii) Provide the returns required by paragraphs 4(b)(2)(iii)(B) and (C) of this Item for only one of those Classes. The Fund may select the Class for which it provides the returns required by paragraphs 4(b)(2)(iii)(B) and (C) of this Item, provided that the Fund: (A) Selects a Class that has been offered for use as an investment option for accounts other than those described in General Instruction C.3.(d)(iii)(A); (B) Selects a Class described in paragraph (c)(ii)(A) of this Instruction with 10 or more years of annual returns if other Classes described in paragraph (c)(ii)(A) of this Instruction have fewer than 10 years of annual returns; (C) Selects the Class described in paragraph (c)(ii)(A) of this Instruction with the longest period of annual returns if the Classes described in paragraph (c)(ii)(A) of this Instruction all have fewer than 10 years of returns; and (D) If the Fund provides the returns required by paragraphs 4(b)(2)(iii)(B) and (C) of this Item for a Class that is different from the Class selected for the most immediately preceding period, explain in a footnote to the table the reasons for the selection of a different Class; (iii) The returns required by paragraphs 4(b)(2)(iii)(A), (B), and (C) of this Item for the Class described in paragraph (c)(ii) of this Instruction should be adjacent and should not be interspersed with the returns of other Classes; and (iv) All returns shown should be identified by Class. (d) If a Multiple Class Fund offers a Class in the prospectus that converts into another Class after a stated period, compute average annual total returns in the table by using the returns of the other Class for the period after conversion. 4. Change in Investment Adviser. If the Fund has not had the same investment adviser during the last 10 calendar years, the Fund may begin the bar chart and the performance information in the table on the date that the current adviser began to provide advisory services to the Fund subject to VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 the conditions in Instruction 12 of Item 27A(d)(2). Item 5. Management (a) Investment Adviser(s). Provide the name of each investment adviser of the Fund, including sub-advisers. Instructions 1. A Fund need not identify a subadviser whose sole responsibility for the Fund is limited to day-to-day management of the Fund’s holdings of cash and cash equivalent instruments, unless the Fund is a Money Market Fund or other Fund with a principal investment strategy of regularly holding cash and cash equivalent instruments. 2. A Fund having three or more subadvisers, each of which manages a portion of the Fund’s portfolio, need not identify each such sub-adviser, except that the Fund must identify any subadviser that is (or is reasonably expected to be) responsible for the management of a significant portion of the Fund’s net assets. For purposes of this paragraph, a significant portion of a Fund’s net assets generally will be deemed to be 30% or more of the Fund’s net assets. (b) Portfolio Manager(s). State the name, title, and length of service (or year service began) of the person or persons employed by or associated with the Fund or an investment adviser of the Fund who are primarily responsible for the day-to-day management of the Fund’s portfolio (‘‘Portfolio Manager’’). Instructions 1. This requirement does not apply to a Money Market Fund. 2. If a committee, team, or other group of persons associated with the Fund or an investment adviser of the Fund is jointly and primarily responsible for the day-to-day management of the Fund’s portfolio, information in response to this Item is required for each member of such committee, team, or other group. If more than five persons are jointly and primarily responsible for the day-to-day management of the Fund’s portfolio, the Fund need only provide information for the five persons with the most significant responsibility for the day-today management of the Fund’s portfolio. Item 6. Purchase and Sale of Fund Shares (a) Purchase of Fund Shares. Disclose the Fund’s minimum initial or subsequent investment requirements. (b) Sale of Fund Shares. Also disclose that the Fund’s shares are redeemable and briefly identify the procedures for redeeming shares (e.g., on any business day by written request, telephone, or wire transfer). PO 00000 Frm 00145 Fmt 4701 Sfmt 4702 70859 (c) Exchange-Traded Funds. If the Fund is an Exchange-Traded Fund, the Fund may omit the information required by paragraphs (a) and (b) of this Item and must disclose: (1) That Individual Fund shares may only be bought and sold in the secondary market through a broker or dealer at market price; (2) That because ETF shares trade at market prices rather than net asset value, shares may trade at a price greater than net asset value (premium) or less than net asset value (discount); (3) That an investor may incur costs attributable to the difference between the highest price a buyer is willing to purchase shares of the Fund (bid) and the lowest price a seller is willing to accept for shares of the Fund (ask) when buying or selling shares in the secondary market (the ‘‘bid-ask spread’’); (4) If applicable, how to access recent information, including information on the Fund’s net asset value, Market Price, premiums and discounts, and bid-ask spreads, on the Exchange-Traded Fund’s website; and (5) The median bid-ask spread for the Fund’s most recent year. Instructions 1. A Fund may omit the information required by paragraph (c)(5) of this Item if it satisfies the requirements of paragraph (c)(1)(v) of Rule 6c–11 [17 CFR 270.6c–11(c)(1)(v)] under the Investment Company Act. 2. An Exchange-Traded Fund that had its initial listing on a national securities exchange at or before the beginning of the most recently completed fiscal year must include the median bid-ask spread for the Fund’s most recent fiscal year. For an Exchange-Traded Fund that had an initial listing after the beginning of the most recently completed fiscal year, explain that the Exchange-Traded Fund did not have a sufficient trading history to report trading information and related costs. Information should be based on the most recently completed fiscal year end. 3. Bid-Ask Spread (Median). Calculate the median bid-ask spread by dividing the difference between the national best bid and national best offer by the midpoint of the national best bid and national best offer as of the end of each ten-second interval throughout each trading day of the Exchange-Traded Fund’s most recent fiscal year. Once the bid-ask spread for each ten-second interval throughout the fiscal year is determined, sort the spreads from lowest to highest. If there is an odd number of spread intervals, then the median is the middle number. If there E:\FR\FM\05NOP2.SGM 05NOP2 70860 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules is an even number of spread intervals, then the median is the average between the two middle numbers. Express the spread as a percentage, rounded to the nearest hundredth percent. 4. A Fund may combine the information required by Item 6(c)(4) into the information required by Item 1(b)(1) and Rule 498(b)(1)(v) [17 CFR 230.498(b)(1)(v)] under the Securities Act. Item 7. Tax Information State, as applicable, that the Fund intends to make distributions that may be taxed as ordinary income or capital gains or that the Fund intends to distribute tax-exempt income. For a Fund that holds itself out as investing in securities generating tax-exempt income, provide, as applicable, a general statement to the effect that a portion of the Fund’s distributions may be subject to Federal income tax. Item 8A. Fee Table Item 8. Financial Intermediary Compensation Include the following statement. A Fund may modify the statement if the modified statement contains comparable information. A Fund may omit the statement if neither the Fund nor any of its related companies pay financial intermediaries for the sale of Fund shares or related services. Payments to Broker-Dealers and Other Financial Intermediaries If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information. Include the following information, in plain English under rule 421(d) under the Securities Act: Fees and Expenses of the Fund This table describes the fees and expenses that you could pay if you buy, hold, and sell shares of the Fund. These costs reduce the value of your investment. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example below. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $[ ] in [name of fund family] funds. More information about these and other discounts is available from your financial professional and in [identify section heading and page number] of the Fund’s prospectus and [identify section heading and page number] of the Fund’s statement of additional information. Transaction Fees (fees paid each time you buy or sell): Purchase Charge (as a percentage of your investment) ............................................................................................................. Exit Charge (as a percentage of ll) ......................................................................................................................................... Maximum Purchase Charge Imposed on Reinvested Dividends [and Other Distributions] (as a percentage of ll) ......... Early Exit Fee (as a percentage of amount redeemed, if applicable) ....................................................................................... Exchange Fee ............................................................................................................................................................................... Maximum Account Fee ............................................................................................................................................................... Ongoing Annual Fees (estimated expenses you pay each year as a percentage of the value of your investment): Management Fees ........................................................................................................................................................................ Selling Fees .................................................................................................................................................................................. Other Expenses ............................................................................................................................................................................ ....................................................................................................................................................................................................... ....................................................................................................................................................................................................... ....................................................................................................................................................................................................... Total Ongoing Annual Fees ............................................................................................................................................................... Temporary Discount ........................................................................................................................................................................... Total Ongoing Annual Fees with Temporary Discount ................................................................................................................... Example This example may help you understand the cost of investing in the Fund. The example assumes that: (1) You invest $10,000 in the Fund; (2) your investment has a 5% return each year; 1 Year khammond on DSKJM1Z7X2PROD with PROPOSALS2 Although your actual costs may be higher or lower, based on these assumptions, your costs would be: .................................................................. If you sold your shares at the end of the relevant period, your costs would be: ................................................................................................................ The example does not reflect purchase charges on reinvested dividends [and other distributions]. If these purchase charges were included, your costs would be higher. 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 VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Sfmt 4702 3 Years 5 Years 10 Years $ll $ll $ll $ll $ll $ll 1. General. (a) Round all dollar figures to the nearest dollar and all percentages to the nearest hundredth of one percent. (b) Include the narrative explanations in the order indicated. A Fund may modify the narrative explanations if the explanation contains comparable Fmt 4701 and (3) the Fund’s operating expenses are based on the table above. $ll Instructions Frm 00146 % % % % ll% ll% ll% ll% ll% $ll may result in higher taxes. The Fund’s annual portfolio turnover rate is ll%. PO 00000 ll% ll% ll% ll% ll% ll% information to that shown. The narrative explanation regarding sales charge discounts is only required by a Fund that offers such discounts and should specify the minimum level of investment required to qualify for a discount as disclosed in the table required by Item 12(a)(1). (c) Include the caption ‘‘Maximum Account Fees’’ only if the Fund charges these fees. A Fund may omit other captions if the Fund does not charge the E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules fees or expenses covered by the captions. (d) Multiple Class and Master-Feeder Funds. (i) If the Fund is a Feeder Fund, reflect the aggregate expenses of the Feeder Fund and the Master Fund in a single fee table using the captions provided. In a footnote to the fee table, state that the table and Example reflect the expenses of both the Feeder and Master Funds. (ii) If the prospectus offers more than one Class of a Multiple Class Fund or more than one Feeder Fund that invests in the same Master Fund, provide a separate response for each Class or Feeder Fund. (e) If the Fund is an Exchange-Traded Fund, exclude any fees charged for the purchase and redemption of the Fund’s creation units. 2. Transaction Fees. (a) ‘‘Purchase Charge’’ is the sales charge (load) imposed on purchases, expressed as a percentage of the offering price. Provide the maximum purchase charge. (b) ‘‘Exit Charge’’ includes the total deferred sales charge (load) payable upon redemption, in installments, or both, expressed as a percentage of the amount or amounts stated in response to Item 12(a). Provide the maximum exit charge. A Fund may include in a footnote to the table, if applicable, a tabular presentation showing the amount of exit charges over time or a narrative explanation of the exit charges (e.g., ll% in the first year after purchase, declining to ll% in the ll year and eliminated thereafter). (c) If more than one type of sales charge (load) is imposed (e.g., a purchase charge and an exit charge), the first caption in the table should read ‘‘Maximum Combined Purchase and Exit Charge’’ and show the maximum cumulative percentage. Show the percentage amounts and the terms of each sales charge (load) comprising that figure on separate lines below. (d) If a purchase charge is imposed on shares purchased with reinvested capital gains distributions or returns of capital, include the bracketed words in the ‘‘Maximum Purchase Charge Imposed on Reinvested Dividends’’ caption. (e) ‘‘Early Exit Fee’’ includes a fee charged for any redemption of the Fund’s shares, but does not include an exit charge upon redemption, and, if the Fund is a Money Market Fund, does not include a liquidity fee imposed upon the sale of Fund shares in accordance with rule 2a–7(c)(2). (f) ‘‘Exchange Fee’’ includes the maximum fee charged for any exchange VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 or transfer of interest from the Fund to another fund. The Fund may include in a footnote to the table, if applicable, a tabular presentation of the range of exchange fees or a narrative explanation of the fees. 3. Maximum Account Fees. Disclose account fees that may be charged to a typical investor in the Fund; fees that apply to only a limited number of shareholders based on their particular circumstances need not be disclosed. Include a caption describing the maximum account fee (e.g., ‘‘Maximum Account Maintenance Fee’’ or ‘‘Maximum Cash Management Fee’’). State the maximum annual account fee as either a fixed dollar amount or a percentage of assets. Include in a parenthetical to the caption the basis on which any percentage is calculated. If an account fee is charged only to accounts that do not meet a certain threshold (e.g., accounts under $5,000), the Fund may include the threshold in a parenthetical to the caption or footnote to the table. The Fund may include an explanation of any nonrecurring account fee in a parenthetical to the caption or in a footnote to the table. 4. Ongoing Annual Fees. (a) ‘‘Management Fees’’ include investment advisory fees (including any fees based on the Fund’s performance), any other management fees payable to the investment adviser or its affiliates, and administrative fees payable to the investment adviser or its affiliates that are not included as ‘‘Other Expenses.’’ (b) ‘‘Selling Fees’’ include all distribution or other expenses incurred during the most recent fiscal year under a plan adopted pursuant to rule 12b–1 [17 CFR 270.12b–1]. Under an appropriate caption or a subcaption of ‘‘Other Expenses,’’ disclose the amount of any distribution or similar expenses deducted from the Fund’s assets other than pursuant to a rule 12b–1 plan. (c) ‘‘Other Expenses’’. (i) ‘‘Other Expenses’’ include all expenses not otherwise disclosed in the table that are deducted from the Fund’s assets or charged to all shareholder accounts. The amount of expenses deducted from the Fund’s assets are the amounts shown as expenses in the Fund’s statement of operations (including increases resulting from complying with paragraph 2(g) of rule 6–07 of Regulation S–X [17 CFR 210.6– 07]). (ii) ‘‘Other Expenses’’ do not include extraordinary expenses. ‘‘Extraordinary expenses’’ refers to expenses that are distinguished by their unusual nature and by the infrequency of occurrence. Unusual nature means the expense has PO 00000 Frm 00147 Fmt 4701 Sfmt 4702 70861 a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the fund, taking into account the environment in which the fund operates. Infrequency of occurrence means the expense is not reasonably expected to recur in the foreseeable future, taking into consideration the environment in which the fund operates. The environment of a fund includes such factors as the characteristics of the industry or industries in which it operates, the geographical location of its operations, and the nature and extent of governmental regulation. If extraordinary expenses were incurred that materially affected the Fund’s ‘‘Other Expenses,’’ disclose in a footnote to the table what ‘‘Other Expenses’’ would have been had the extraordinary expenses been included. (iii) The Fund may subdivide this caption into no more than three subcaptions that identify the largest expense or expenses comprising ‘‘Other Expenses,’’ but must include a total of all ‘‘Other Expenses.’’ Alternatively, the Fund may include the components of ‘‘Other Expenses’’ in a parenthetical to the caption. (d) ‘‘Ongoing Annual Fees’’. (i) Base the percentages of ‘‘Ongoing Annual Fees’’ on amounts incurred during the Fund’s most recent fiscal year, but include in expenses amounts that would have been incurred absent expense reimbursement or fee waiver arrangements. If the Fund has changed its fiscal year and, as a result, the most recent fiscal year is less than three months, use the fiscal year prior to the most recent fiscal year as the basis for determining ‘‘Ongoing Annual Fees.’’ (ii) If there have been any changes in ‘‘Ongoing Annual Fees’’ that would materially affect the information disclosed in the table: (A) Restate the expense information using the current fees as if they had been in effect during the previous fiscal year; and (B) In a footnote to the table, disclose that the expense information in the table has been restated to reflect current fees. (iii) A change in ‘‘Ongoing Annual Fees’’ means either an increase or a decrease in expenses that occurred during the most recent fiscal year or that is expected to occur during the current fiscal year. A change in ‘‘Ongoing Annual Fees’’ does not include a decrease in operating expenses as a percentage of assets due to economies of scale or breakpoints in a fee arrangement resulting from an increase in the Fund’s assets. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (e) If there are expense reimbursement or fee waiver arrangements that will reduce any Fund operating expenses for no less than one year from the effective date of the Fund’s registration statement, a Fund may add two captions to the table: One caption showing the amount of the expense reimbursement or fee waiver, and a second caption showing the Fund’s net expenses after subtracting the fee reimbursement or expense waiver from the total fund operating expenses. The Fund should place these additional captions directly below the ‘‘Total Ongoing Annual Fees’’ caption of the table and should use appropriate descriptive captions, such as ‘‘Temporary Discount’’ and ‘‘Total Ongoing Annual Fees with Temporary Discount,’’ respectively. If the Fund provides this disclosure, also disclose the period for which the expense reimbursement or fee waiver arrangement is expected to continue, including the expected termination date, and briefly describe who can terminate the arrangement and under what circumstances. (f) Acquired Fund Fees and Expenses. (i) If the Fund (unless it is a Feeder Fund) invests in shares of one or more Acquired Funds, add a subcaption to the ‘‘Ongoing Annual Fees’’ portion of the table directly above the subcaption titled ‘‘Total Ongoing Annual Fees.’’ Title the additional subcaption: ‘‘Acquired Fund Fees and Expenses.’’ Disclose in the subcaption fees and expenses incurred indirectly by the Fund as a result of investment in shares of one or more Acquired Funds. For purposes of this item, an ‘‘Acquired Fund’’ means any company in which the Fund invests or has invested during the relevant fiscal period that (A) is an investment company or (B) would be an investment company under section 3(a) of the Investment Company Act [15 U.S.C. 80a–3(a)] but for the exceptions to that definition provided for in sections 3(c)(1) and 3(c)(7) of the Investment Company Act [15 U.S.C. 80a–3(c)(1) and 80a–3(c)(7)]. If a Fund uses another term in response to other requirements of this Form to refer to Acquired Funds, it may include that term in parentheses following the subcaption title. (ii) A Fund may omit the Acquired Fund Fees and Expenses subcaption in the table if the ratio of the Acquiring Fund’s investments in Acquired Funds (excluding Money Market Funds) to the Fund’s total assets for the prior fiscal year, as calculated as described below, is 10 percent or less and the Fund discloses in a footnote to the table: The amount of the Fund’s Acquired Fund Fees and Expenses, and a statement that the Fund’s [Total] Ongoing Annual Fees in the table would be higher if these fees and expenses were included. Calculate the ratio in the following manner. (A) For each of the 12 months that compose the prior fiscal year, divide the Fund’s investments in Acquired Funds (excluding Money Market Funds) as of the end of the month by the Fund’s total assets as of the end of the month. This will produce 12 data items (or fewer if the Fund has been in operation for less than a full fiscal year). (B) Calculate the average of the 12 (or fewer) data items. This figure is the ratio. (iii) Determine the ‘‘Acquired Fund Fees and Expenses’’ according to the following formula: Where: AFFE = Acquired Fund fees and expenses; F1, F2, F3, . . . = Total annual operating expense ratio for each Acquired Fund; FY = Number of days in the relevant fiscal year (or the number of days since the date the Fund made its first investment, if less than a year); AI1, AI2, AI3, . . . = Average invested balance in each Acquired Fund; D1, D2, D3, . . . = Number of days invested in each Acquired Fund; ‘‘Transaction Fees’’ = The total amount of purchase charges, exit charges, redemption fees, or other transaction fees paid by the Fund in connection with acquiring or disposing of shares in any Acquired Funds during the most recent fiscal year; and ‘‘Incentive Allocations’’ = Any allocation of capital from the Acquiring Fund to the adviser of the Acquired Fund (or its affiliate based on a percentage of the Acquiring Fund’s income, capital gains and/or appreciation in the Acquired Fund. recent fiscal period as disclosed in the Acquired Fund’s most recent shareholder report. If the ratio of expenses to average net assets is not included in the most recent shareholder report, or the Acquired Fund is a newly formed fund that has not provided a shareholder report, then the ratio of expenses to average net assets of the Acquired Fund is the ratio of total annual operating expenses to average annual net assets of the Acquired Fund for its most recent fiscal period as disclosed in the most recent communication from the Acquired Fund to the Fund. For purposes of this Instruction: (i) Acquired Fund expenses include increases resulting from brokerage service and expense offset arrangements and reductions resulting from fee waivers or reimbursements by the Acquired Funds’ investment advisers or sponsors; and (ii) Acquired Fund expenses do not include expenses (i.e., performance fees) that are incurred solely upon the realization and/or distribution of a gain. If an Acquired Fund has no operating history, include in the Acquired Funds’ expenses any fees payable to the Acquired Fund’s investment adviser or its affiliates stated in the Acquired Fund’s registration statement, offering memorandum or other similar communication without giving effect to any performance. (vi) To determine the average invested balance (AI1) the numerator is the sum of the amount initially invested in an Acquired Fund during the most recent fiscal year (if the investment was held at the end of the previous fiscal year, use the amount invested as of the end of the previous fiscal year) and the amounts invested in the Acquired Fund no less frequently than monthly during the period the investment is held by the Fund (if the investment was held through the end of the fiscal year, use each month-end through and including the fiscal year end). Divide the numerator by the number of measurement points included in the calculation of the numerator (i.e., if an investment is made during the fiscal year and held for 3 succeeding months, the denominator would be 4). (vii) A New Fund should base the Acquired Fund fees and expenses and the percent invested in Acquired Funds on assumptions of the specific Acquired Funds in which the New Fund expects to invest. Disclose in a footnote to the table that Acquired Fund fees and (iv) Calculate the average net assets of the Fund for the most recent fiscal year, as provided in Item 13(a) (see Instruction 4 to Item 13(a)). (v) The total annual operating expense ratio used for purposes of this calculation (F1) is the annualized ratio of operating expenses to average net assets for the Acquired Fund’s most VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.004</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 70862 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules expenses are based on estimated amounts for the current fiscal year. (viii) If the Fund includes the Acquired Fund fees and expenses subcaption in the table, the Fund may clarify in a footnote to the fee table that the Total Ongoing Annual Fees under Item 8A do not correlate to the ratio of expenses to average net assets given in the fund’s shareholder reports or in response to Item 13, which reflects the operating expenses of the Fund and does not include Acquired Fund fees and expenses. 5. Example. (a) Assume that the percentage amounts listed under ‘‘Ongoing Annual Fees’’ remain the same in each year of the 1-, 3-, 5-, and 10-year periods, except that an adjustment may be made to reflect any expense reimbursement or fee waiver arrangements that will reduce any Fund operating expenses for no less than one year from the effective date of the Fund’s registration statement. An adjustment to reflect any expense reimbursement or fee waiver arrangement may be reflected only in the period(s) for which the expense reimbursement or fee waiver arrangement is expected to continue. (b) For any breakpoint in any fee, assume that the amount of the Fund’s assets remains constant as of the level at the end of the most recently completed fiscal year. (c) Assume reinvestment of all dividends and distributions. (d) Reflect recurring and nonrecurring fees charged to all investors other than any exchange fees or any purchase charges on shares purchased with reinvested dividends or other distributions. If purchase charges are imposed on reinvested dividends or other distributions, include the narrative explanation following the Example and include the bracketed words when purchase charges are charged on reinvested capital gains distributions or returns of capital. Reflect any shareholder account fees collected by more than one Fund by dividing the total amount of the fees collected during the most recent fiscal year for all Funds whose shareholders are subject to the fees by the total average net assets of the Funds. Add the resulting percentage to ‘‘Ongoing Annual Fees’’ and assume that it remains the same in each of the 1-, 3, 5-, and 10-year periods. A Fund that charges account fees based on a minimum account requirement exceeding $10,000 may adjust its account fees based on the amount of the fee in relation to the Fund’s minimum account requirement. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 (e) Include the second 1-, 3-, 5-, and 10-year periods and related narrative explanation only if an exit charge or other fee is charged upon redemption. Reflect any exit charge by assuming redemption of the entire account at the end of the year in which the exit charge is due. In the case of an exit charge that is based on the Fund’s net asset value at the time of payment, assume that the net asset value at the end of each year includes the 5% annual return for that and each preceding year. 6. Portfolio Turnover. Disclose the portfolio turnover rate provided in response to Item 13(a) for the most recent fiscal year (or for such shorter period as the Fund has been in operation). Disclose the period for which the information is provided if less than a full fiscal year. A Fund that is a Money Market Fund may omit the portfolio turnover information required by this Item. 7. New Funds. For purposes of this Item, a ‘‘New Fund’’ is a Fund that does not include in Form N–1A financial statements reporting operating results or that includes financial statements for the Fund’s initial fiscal year reporting operating results for a period of 6 months or less. The following Instructions apply to New Funds. (a) Base the percentages expressed in ‘‘Ongoing Annual Fees’’ on payments that will be made, but include in expenses, amounts that will be incurred without reduction for expense reimbursement or fee waiver arrangements, estimating amounts of ‘‘Other Expenses.’’ Disclose in a footnote to the table that ‘‘Other Expenses’’ are based on estimated amounts for the current fiscal year. (b) Complete only the 1- and 3-year period portions of the Example and estimate any shareholder account fees collected. Item 9. Investment Objectives, Principal Investment Strategies, Related Risks, and Disclosure of Portfolio Holdings (a) Investment Objectives. State the Fund’s investment objectives and, if applicable, state that those objectives may be changed without shareholder approval. (b) Implementation of Investment Objectives. Describe how the Fund intends to achieve its investment objectives. In the discussion: (1) Describe the Fund’s principal investment strategies, including the particular type or types of securities in which the Fund principally invests or will invest. PO 00000 Frm 00149 Fmt 4701 Sfmt 4702 70863 Instructions 1. A strategy includes any policy, practice, or technique used by the Fund to achieve its investment objectives. 2. Whether a particular strategy, including a strategy to invest in a particular type of security, is a principal investment strategy depends on the strategy’s anticipated importance in achieving the Fund’s investment objectives, and how the strategy affects the Fund’s potential risks and returns. In determining what a principal investment strategy is, consider, among other things, the amount of the Fund’s assets expected to be committed to the strategy, the amount of the Fund’s assets expected to be placed at risk by the strategy, and the likelihood of the Fund’s losing some or all of those assets from implementing the strategy. 3. A negative strategy (e.g., a strategy not to invest in a particular type of security or not to borrow money) is not a principal investment strategy. 4. Disclose any policy to concentrate in securities of issuers in a particular industry or group of industries (i.e., investing more than 25% of a Fund’s net assets in a particular industry or group of industries). 5. Disclose any other policy specified in Item 16(c)(1) that is a principal investment strategy of the Fund. 6. Disclose, if applicable, that the Fund may, from time to time, take temporary defensive positions that are inconsistent with the Fund’s principal investment strategies in attempting to respond to adverse market, economic, political, or other conditions. Also disclose the effect of taking such a temporary defensive position (e.g., that the Fund may not achieve its investment objective). 7. Disclose whether the Fund (if not a Money Market Fund) may engage in active and frequent trading of portfolio securities to achieve its principal investment strategies. If so, explain the tax consequences to shareholders of increased portfolio turnover, and how the tax consequences of, or trading costs associated with, a Fund’s portfolio turnover may affect the Fund’s performance. (2) Explain in general terms how the Fund’s adviser decides which securities to buy and sell (e.g., for an equity fund, discuss, if applicable, whether the Fund emphasizes value or growth or blends the two approaches). (c) Risks. Disclose the principal risks of investing in the Fund, including the risks to which the Fund’s particular portfolio as a whole is expected to be subject and the circumstances reasonably likely to affect adversely the E:\FR\FM\05NOP2.SGM 05NOP2 70864 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Fund’s net asset value, yield, or total return. Instructions 1. In determining whether a risk is a principal risk, a Fund should consider whether the risk would place more than 10% of the Fund’s assets at risk, or whether it is reasonably likely that the risk would place more than 10% of the Fund’s assets at risk in the future. 2. In the case of an Acquiring Fund, risks should only be included if they are principal risks of the Acquiring Fund. A principal risk of an Acquired Fund should not be included unless it is a principal risk of the Acquiring Fund. 3. If a Fund’s strategy provides the freedom to invest in different types of assets at the manager’s discretion, disclose that an investor may not know—and has no way to know—how the fund will invest in the future and its associated risks. (d) Portfolio Holdings. State that a description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available (i) in the Fund’s SAI; and (ii) on the Fund’s website, if applicable. Item 10. Management, Organization, and Capital Structure (a) Management. (1) Investment Adviser. (i) Provide the name and address of each investment adviser of the Fund, including sub advisers. Describe the investment adviser’s experience as an investment adviser and the advisory services that it provides to the Fund. (ii) Describe the compensation of each investment adviser of the Fund as follows: (A) If the Fund has operated for a full fiscal year, state the aggregate fee paid to the adviser for the most recent fiscal year as a percentage of average net assets. If the Fund has not operated for a full fiscal year, state what the adviser’s fee is as a percentage of average net assets, including any breakpoints. (B) If the adviser’s fee is not based on a percentage of average net assets (e.g., the adviser receives a performancebased fee), describe the basis of the adviser’s compensation. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. If the Fund changed advisers during the fiscal year, describe the compensation and the dates of service for each adviser. 2. Explain any changes in the basis of computing the adviser’s compensation during the fiscal year. 3. If a Fund has more than one investment adviser, disclose the VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 aggregate fee paid to all of the advisers, rather than the fees paid to each adviser, in response to this Item. (2) Portfolio Manager. For each Portfolio Manager identified in response to Item 5(b), state the Portfolio Manager’s business experience during the past 5 years. Include a statement, adjacent to the foregoing disclosure, that the SAI provides additional information about the Portfolio Manager’s(s’) compensation, other accounts managed by the Portfolio Manager(s), and the Portfolio Manager’s(s’) ownership of securities in the Fund. If a Portfolio Manager is a member of a committee, team, or other group of persons associated with the Fund or an investment adviser of the Fund that is jointly and primarily responsible for the day-to-day management of the Fund’s portfolio, provide a brief description of the person’s role on the committee, team, or other group (e.g., lead member), including a description of any limitations on the person’s role and the relationship between the person’s role and the roles of other persons who have responsibility for the day-to-day management of the Fund’s portfolio. (3) Legal Proceedings. Describe any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Fund or the Fund’s investment adviser or principal underwriter is a party. Include the name of the court in which the proceedings are pending, the date instituted, the principal parties involved, a description of the factual basis alleged to underlie the proceeding, and the relief sought. Include similar information as to any legal proceedings instituted, or known to be contemplated, by a governmental authority. Instruction. For purposes of this requirement, legal proceedings are material only to the extent that they are likely to have a material adverse effect on the Fund or the ability of the investment adviser or principal underwriter to perform its contract with the Fund. (b) Capital Stock. Disclose any unique or unusual restrictions on the right freely to retain or dispose of the Fund’s shares or material obligations or potential liabilities associated with holding the Fund’s shares (not including investment risks) that may expose investors to significant risks. Item 11. Shareholder Information (a) Pricing of Fund Shares. Describe the procedures for pricing the Fund’s shares, including: (1) An explanation that the price of Fund shares is based on the Fund’s net PO 00000 Frm 00150 Fmt 4701 Sfmt 4702 asset value and the method used to value Fund shares (market price, fair value, or amortized cost); except that if the Fund is an Exchange-Traded Fund, an explanation that the price of Fund shares is based on a market price. Instruction. A Fund (other than a Money Market Fund) must provide a brief explanation of the circumstances under which it will use fair value pricing and the effects of using fair value pricing. With respect to any portion of a Fund’s assets that are invested in one or more open-end management investment companies that are registered under the Investment Company Act, the Fund may briefly explain that the Fund’s net asset value is calculated based upon the net asset values of the registered open-end management investment companies in which the Fund invests, and that the prospectuses for these companies explain the circumstances under which those companies will use fair value pricing and the effects of using fair value pricing. (2) A statement as to when calculations of net asset value are made and that the price at which a purchase or redemption is effected is based on the next calculation of net asset value after the order is placed. (3) A statement identifying in a general manner any national holidays when shares will not be priced and specifying any additional local or regional holidays when the Fund shares will not be priced. Instructions 1. In responding to this Item, a Fund may use a list of specific days or any other means that effectively communicates the information (e.g., explaining that shares will not be priced on the days on which the New York Stock Exchange is closed for trading). 2. If the Fund has portfolio securities that are primarily listed on foreign exchanges that trade on weekends or other days when the Fund does not price its shares, disclose that the net asset value of the Fund’s shares may change on days when shareholders will not be able to purchase or redeem the Fund’s shares. (b) Purchase of Fund Shares. Describe the procedures for purchasing the Fund’s shares. (c) Redemption of Fund Shares. Describe the procedures for redeeming the Fund’s shares, including: (1) Any restrictions on redemptions. (2) Any redemption charges, including how these charges will be collected and under what circumstances the charges will be waived. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (3) Any procedure that a shareholder can use to sell the Fund’s shares to the Fund or its underwriter through a broker-dealer, noting any charges that may be imposed for such service. Instruction. The specific fees paid through the broker-dealer for such service need not be disclosed. (4) The circumstances, if any, under which the Fund may redeem shares automatically without action by the shareholder in accounts below a certain number or value of shares. (5) The circumstances, if any, under which the Fund may delay honoring a request for redemption for a certain time after a shareholder’s investment (e.g., whether a Fund does not process redemptions until clearance of the check for the initial investment). (6) Any restrictions on, or costs associated with, transferring shares held in street name accounts. (7) The number of days following receipt of shareholder redemption requests in which the fund typically expects to pay out redemption proceeds to redeeming shareholders. If the number of days differs by method of payment (e.g., check, wire, automated clearing house), then disclose the typical number of days or estimated range of days that the fund expects it will take to pay out redemptions proceeds for each method used. (8) The methods that the Fund typically expects to use to meet redemption requests, and whether those methods are used regularly, or only in stressed market conditions (e.g., sales of portfolio assets, holdings of cash or cash equivalents, lines of credit, interfund lending, and/or ability to redeem in kind). (d) Dividends and Distributions. Describe the Fund’s policy with respect to dividends and distributions, including any options that shareholders may have as to the receipt of dividends and distributions. (e) Frequent Purchases and Redemptions of Fund Shares. (1) Describe the risks, if any, that frequent purchases and redemptions of Fund shares by Fund shareholders may present for other shareholders of the Fund. (2) State whether or not the Fund’s board of directors has adopted policies and procedures with respect to frequent purchases and redemptions of Fund shares by Fund shareholders. (3) If the Fund’s board of directors has not adopted any such policies and procedures, provide a statement of the specific basis for the view of the board that it is appropriate for the Fund not to have such policies and procedures. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 (4) If the Fund’s board of directors has adopted any such policies and procedures, describe those policies and procedures, including: (i) Whether or not the Fund discourages frequent purchases and redemptions of Fund shares by Fund shareholders; (ii) Whether or not the Fund accommodates frequent purchases and redemptions of Fund shares by Fund shareholders; and (iii) Any policies and procedures of the Fund for deterring frequent purchases and redemptions of Fund shares by Fund shareholders, including any restrictions imposed by the Fund to prevent or minimize frequent purchases and redemptions. Describe each of these policies, procedures, and restrictions with specificity. Indicate whether each of these restrictions applies uniformly in all cases or whether the restriction will not be imposed under certain circumstances, including whether each of these restrictions applies to trades that occur through omnibus accounts at intermediaries, such as investment advisers, broker-dealers, transfer agents, third party administrators, and insurance companies. Describe with specificity the circumstances under which any restriction will not be imposed. Include a description of the following restrictions, if applicable: (A) Any restrictions on the volume or number of purchases, redemptions, or exchanges that a shareholder may make within a given time period; (B) Any exchange fee or redemption fee; (C) Any costs or administrative or other fees or charges that are imposed on shareholders deemed to be engaged in frequent purchases and redemptions of Fund shares, together with a description of the circumstances under which such costs, fees, or charges will be imposed; (D) Any minimum holding period that is imposed before an investor may make exchanges into another Fund; (E) Any restrictions imposed on exchange or purchase requests submitted by overnight delivery, electronically, or via facsimile or telephone; and (F) Any right of the Fund to reject, limit, delay, or impose other conditions on exchanges or purchases or to close or otherwise limit accounts based on a history of frequent purchases and redemptions of Fund shares, including the circumstances under which such right will be exercised. (5) If applicable, include a statement, adjacent to the disclosure required by paragraphs (e)(1) through (e)(4) of this Item, that the SAI includes a description PO 00000 Frm 00151 Fmt 4701 Sfmt 4702 70865 of all arrangements with any person to permit frequent purchases and redemptions of Fund shares. (f) Tax Consequences. (1) Describe the tax consequences to shareholders of buying, holding, exchanging and selling the Fund’s shares, including, as applicable, that: (i) The Fund intends to make distributions that may be taxed as ordinary income and capital gains (which may be taxable at different rates depending on the length of time the Fund holds its assets). If the Fund expects that its distributions, as a result of its investment objectives or strategies, will consist primarily of ordinary income or capital gains, provide disclosure to that effect. (ii) The Fund’s distributions, whether received in cash or reinvested in additional shares of the Fund, may be subject to Federal income tax. (iii) An exchange of the Fund’s shares for shares of another fund will be treated as a sale of the Fund’s shares and any gain on the transaction may be subject to Federal income tax. (2) For a Fund that holds itself out as investing in securities generating taxexempt income: (i) Modify the disclosure required by paragraph (f)(1) to reflect that the Fund intends to distribute tax- exempt income. (ii) Also disclose, as applicable, that: (A) The Fund may invest a portion of its assets in securities that generate income that is not exempt from Federal or state income tax; (B) Income exempt from Federal tax may be subject to state and local income tax; and (C) Any capital gains distributed by the Fund may be taxable. (3) If the Fund does not expect to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code [I.R.C. 851 et seq.], explain the tax consequences. If the Fund expects to pay an excise tax under the Internal Revenue Code [I.R.C. 4982] with respect to its distributions, explain the tax consequences. (g) Exchange-Traded Funds. If the Fund is an Exchange-Traded Fund: (1) The Fund may omit from the prospectus the information required by Items 11(a)(2), (b), and (c). (2) Provide a table showing the number of days the Market Price of the Fund shares was greater than the Fund’s net asset value and the number of days it was less than the Fund’s net asset value (i.e., premium or discount) for the most recently completed calendar year, and the most recently completed calendar quarters since that year (or the life of the Fund, if shorter). The Fund E:\FR\FM\05NOP2.SGM 05NOP2 70866 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules may omit the information required by this paragraph if it satisfies the requirements of paragraphs (c)(1)(ii)–(iv) and (c)(1)(vi) of Rule 6c–11 [17 CFR 270.6c–11(c)(1)(ii)–(iv) and (c)(1)(vi)] under the Investment Company Act. Instruction 1. Provide the information in tabular form. 2. Express the information as a percentage of the net asset value of the Fund, using separate columns for the number of days the Market Price was greater than the Fund’s net asset value and the number of days it was less than the Fund’s net asset value. Round all percentages to the nearest hundredth of one percent. 3. Adjacent to the table, provide a brief explanation that: Shareholders may pay more than net asset value when they buy Fund shares and receive less than net asset value when they sell those shares, because shares are bought and sold at current market prices. 4. Include a statement that the data presented represents past performance and cannot be used to predict future results. Item 12. Distribution Arrangements (a) Sales Loads. (1) Describe any sales loads, including exit charges, applied to purchases of the Fund’s shares. Include in a table any purchase charge (and each breakpoint in the charge, if any) as a percentage of both the offering price and the net amount invested. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. If the Fund’s shares are sold subject to a purchase charge, explain that the term ‘‘offering price’’ includes the purchase charge. 2. Disclose, if applicable, that purchase charges are imposed on shares, or amounts representing shares, that are purchased with reinvested dividends or other distributions. 3. Discuss, if applicable, how exit charges are imposed and calculated, including: (a) Whether the specified percentage of the exit charge is based on the offering price, or the lesser of the offering price or net asset value at the time the exit charge is paid. (b) The amount of the exit charge as a percentage of both the offering price and the net amount invested. (c) A description of how the exit charge is calculated (e.g., in the case of a partial redemption, whether or not the exit charge is calculated as if shares or amounts representing shares not subject to an exit charge are redeemed first, and other shares or amounts representing VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 shares are then redeemed in the order purchased). (d) If applicable, the method of paying an installment exit charge (e.g., by withholding of dividend payments, involuntary redemptions, or separate billing of a shareholder’s account). (2) Unless disclosed in response to paragraph (a)(1), briefly describe any arrangements that result in breakpoints in, or elimination of, purchase charges or exit charges (e.g., letters of intent, accumulation plans, dividend reinvestment plans, withdrawal plans, exchange privileges, employee benefit plans, redemption reinvestment plans, and waivers for particular classes of investors). Identify each class of individuals or transactions to which the arrangements apply and state each different breakpoint as a percentage of both the offering price and the net amount invested. If applicable, state that additional information concerning purchase charge or exit charge breakpoints is available in the Fund’s SAI. Instructions 1. The description, pursuant to paragraph (a)(1) or (a)(2) of this Item 12, of arrangements that result in breakpoints in, or elimination of, purchase charges or exit charges must include a brief summary of shareholder eligibility requirements, including a description or list of the types of accounts (e.g., retirement accounts, accounts held at other financial intermediaries), account holders (e.g., immediate family members, family trust accounts, solely controlled business accounts), and fund holdings (e.g., funds held within the same fund complex) that may be aggregated for purposes of determining eligibility for purchase charge or exit charge breakpoints. 2. The description pursuant to paragraph (a)(2) of this Item 12 need not contain any information required by Items 17(d) and 23(b). (3) Describe, if applicable, the methods used to value accounts in order to determine whether a shareholder has met purchase charge or exit charge breakpoints, including the circumstances in which and the classes of individuals to whom each method applies. Methods that should be described, if applicable, include historical cost, net amount invested, and offering price. (4) Eligibility for Breakpoints (i) State, if applicable, that, in order to obtain a breakpoint discount, it may be necessary at the time of purchase for a shareholder to inform the Fund or his or her financial intermediary of the PO 00000 Frm 00152 Fmt 4701 Sfmt 4702 existence of other accounts in which there are holdings eligible to be aggregated to meet purchase charge or exit charge breakpoints. Describe any information or records, such as account statements, that it may be necessary for a shareholder to provide to the Fund or his or her financial intermediary in order to verify his or her eligibility for a breakpoint discount. This description must include, if applicable: (A) Information or records regarding shares of the Fund or other funds held in all accounts (e.g., retirement accounts) of the shareholder at the financial intermediary; (B) Information or records regarding shares of the Fund or other funds held in any account of the shareholder at another financial intermediary; and (C) Information or records regarding shares of the Fund or other funds held at any financial intermediary by related parties of the shareholder, such as members of the same family or household. (ii) If the Fund permits eligibility for breakpoints to be determined based on historical cost, state that a shareholder should retain any records necessary to substantiate historical costs because the Fund, its transfer agent, and financial intermediaries may not maintain this information. (5) State whether the Fund makes available free of charge, on or through the Fund’s website at a specified address, and in a clear and prominent format, the information required by paragraphs (a)(1) through (a)(4) and Item 23(a), including whether the website includes hyperlinks that facilitate access to the information. If the Fund does not make the information required by paragraphs (a)(1) through (a)(4) and Item 23(a) available in this manner, disclose the reasons why it does not do so (including, where applicable, that the Fund does not have a website). Instruction. All information required by paragraph (a) of this Item 12 must be adjacent to the table required by paragraph (a)(1) of this Item 12; must be presented in a clear, concise, and understandable manner; and must include tables, schedules, and charts as expressly required by paragraph (a)(1) of this Item 12 or where doing so would facilitate understanding. (b) Selling Fees. If the Fund has adopted a plan under rule 12b–1, state the amount of the distribution fee payable under the plan and provide disclosure to the following effect: (1) The Fund has adopted a plan under rule 12b–1 that allows the Fund to pay distribution fees for the sale and distribution of its shares; and E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (2) Because these fees are paid out of the Fund’s assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. Instruction. If the Fund pays service fees under its rule 12b–1 plan, modify this disclosure to reflect the payment of these fees (e.g., by indicating that the Fund pays distribution and other fees for the sale of its shares and for services provided to shareholders). For purposes of this paragraph, service fees have the same meaning given that term under FINRA rule 2341. (c) Multiple Class and Master-Feeder Funds. (1) Describe the main features of the structure of the Multiple Class Fund or Master-Feeder Fund. (2) If more than one Class of a Multiple Class Fund is offered in the prospectus, provide the information required by paragraphs (a) and (b) for each of those Classes. (3) If a Multiple Class Fund offers in the prospectus shares that provide for mandatory or automatic conversions or exchanges from one Class to another Class, provide the information required by paragraphs (a) and (b) for both the shares offered and the Class into which the shares may be converted or exchanged. (4) If a Feeder Fund has the ability to change the Master Fund in which it invests, describe briefly the circumstances under which the Feeder Fund can do so. Instruction. A Feeder Fund that does not have the authority to change its Master Fund need not disclose the possibility and consequences of its no longer investing in the Master Fund. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Item 13. Financial Highlights Information (a) Provide the following information for the Fund, or for the Fund and its subsidiaries, audited for at least the latest 5 years and consolidated as required in Regulation S–X [17 CFR 210]. Financial Highlights The financial highlights table is intended to help you understand the Fund’s financial performance for the past 5 years [or, if shorter, the period of the Fund’s operations]. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned [or lost] on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by lllll, whose VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 report, along with the Fund’s financial statements, are included in [the SAI or annual Form N–CSR report], and are available on the Fund’s website and upon request. Net Asset Value, Beginning of Period Income From Investment Operations Net Investment Income Net Gains or Losses on Securities (both realized and unrealized) Total From Investment Operations Less Distributions Dividends (from net investment income) Distributions (from capital gains) Returns of Capital Total Distributions Net Asset Value, End of Period Per Share Market Value, End of Period [for ETFs only] Total Return lllllllllllllllllll Ratios/Supplemental Data Net Assets, End of Period Ratio of Expenses to Average Net Assets Ratio of Net Income to Average Net Assets Portfolio Turnover Rate Instructions 1. General (a) Present the information in comparative columnar form for each of the last 5 fiscal years of the Fund (or for such shorter period as the Fund has been in operation), but only for periods subsequent to the effective date of the Fund’s registration statement. Also present the information for the period between the end of the latest fiscal year and the date of the latest balance sheet or statement of assets and liabilities. When a period in the table is for less than a full fiscal year, a Fund may annualize ratios in the table and disclose that the ratios are annualized in a note to the table. (b) List per share amounts at least to the nearest cent. If the offering price is expressed in tenths of a cent or more, then state the amounts in the table in tenths of a cent. Present the information using a consistent number of decimal places. (c) Include the narrative explanation before the financial information. A Fund may modify the explanation if the explanation contains comparable information to that shown. 2. Per Share Operating Performance (a) Derive net investment income data by adding (deducting) the increase (decrease) per share in undistributed net investment income for the period to (from) dividends from net investment income per share for the period. The increase (decrease) per share may be derived by comparing the per share PO 00000 Frm 00153 Fmt 4701 Sfmt 4702 70867 figures obtained by dividing undistributed net investment income at the beginning and end of the period by the number of shares outstanding on those dates. Other methods of computing net investment income may be acceptable. Provide an explanation in a note to the table of any other method used to compute net investment income. (b) The amount shown at the Net Gains or Losses on Securities caption is the balancing figure derived from the other amounts in the statement. The amount shown at this caption for a share outstanding throughout the year may not agree with the change in the aggregate gains and losses in the portfolio securities for the year because of the timing of sales and repurchases of the Fund’s shares in relation to fluctuating market values for the portfolio. (c) For any distributions made from sources other than net investment income and capital gains, state the per share amounts separately at the Returns of Capital caption and note the nature of the distributions. 3. Total Return (a) To calculate total return based on net asset value per share: (i) Assume an initial investment made at the net asset value calculated on the last business day before the first day of each period shown. (ii) Do not reflect purchase charges, exit charges, or account fees in the initial investment, but, if purchase charges, exit charges, or account fees are imposed, note that they are not reflected in total return. (iii) Reflect any purchase charge assessed upon reinvestment of dividends or distributions. (iv) Assume a redemption at the price calculated on the last business day of each period shown. (v) For a period less than a full fiscal year, state the total return for the period and disclose that total return is not annualized in a note to the table. (b) For ETFs only, present as a separate caption total return based on market value per share. To calculate total return based on per share market value, assume a purchase of common stock at the current market price on the first day and a sale at the current market price on the last day of each period reported on the table. A Registrant also should briefly explains in a note the differences between this calculation and the calculation required by Instruction 3(a). 4. Ratios/Supplemental Data (a) Calculate ‘‘average net assets’’ based on the value of the net assets E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70868 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules determined no less frequently than the end of each month. (b) Calculate the Ratio of Expenses to Average Net Assets using the amount of expenses shown in the Fund’s statement of operations for the relevant fiscal period, including increases resulting from complying with paragraph 2(g) of rule 6–07 of Regulation S–X and reductions resulting from complying with paragraphs 2(a) and (f) of rule 6– 07 regarding fee waivers and reimbursements. (c) A Fund that is a Money Market Fund may omit the Portfolio Turnover Rate. (d) Calculate the Portfolio Turnover Rate as follows: (i) Divide the lesser of amounts of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. Calculate the monthly average by totaling the values of portfolio securities as of the beginning and end of the first month of the fiscal year and as of the end of each of the succeeding 11 months and dividing the sum by 13. (ii) Exclude from both the numerator and the denominator amounts relating to all securities, including options, whose maturities or expiration dates at the time of acquisition were one year or less. Include all long-term securities, including long-term U.S. Government securities. Purchases include any cash paid upon the conversion of one portfolio security into another and the cost of rights or warrants. Sales include net proceeds of the sale of rights and warrants and net proceeds of portfolio securities that have been called or for which payment has been made through redemption or maturity. (iii) If the Fund acquired the assets of another investment company or of a personal holding company in exchange for its own shares during the fiscal year in a purchase-of-assets transaction, exclude the value of securities acquired from purchases and securities sold from sales to realign the Fund’s portfolio. Adjust the denominator of the portfolio turnover computation to reflect these excluded purchases and sales and disclose them in a footnote. (iv) Include in purchases and sales any short sales that the Fund intends to maintain for more than one year and put and call options with expiration dates more than one year from the date of acquisition. Include proceeds from a short sale in the value of the portfolio securities sold during the period; include the cost of covering a short sale in the value of portfolio securities purchased during the period. Include VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 premiums paid to purchase options in the value of portfolio securities purchased during the reporting period; include premiums received from the sale of options in the value of the portfolio securities sold during the period. (e) A Fund may incorporate by reference the Financial Highlights Information from Form N–CSR into the prospectus in response to this Item if the Fund transmits the annual report required by rule 30e–1(b) with the prospectus or, if the report has been previously transmitted (e.g., to a current shareholder), the Fund includes the statement required by Item 1(b)(1). Part B—Information Required in a Statement of Additional Information Item 14. Cover Page and Table of Contents (a) Front Cover Page. Include the following information on the outside front cover page of the SAI: (1) The Fund’s name and the Class or Classes, if any, to which the SAI relates. If the Fund is a Series, also provide the Registrant’s name. (2) The exchange ticker symbol of the Fund’s securities or, if the SAI relates to one or more Classes of the Fund’s securities, adjacent to each such class, the exchange ticker symbol of such Class of the Fund’s securities. If the Fund is an Exchange-Traded Fund, also identify the principal U.S. market or markets on which the Fund shares are traded. (3) A statement or statements: (i) That the SAI is not a prospectus; (ii) How the prospectus may be obtained; and (iii) Whether and from where information is incorporated by reference into the SAI, as permitted by General Instruction D. Instruction. Any information incorporated by reference into the SAI must be delivered with the SAI unless the information has been previously delivered in a shareholder report (e.g., to a current shareholder), and the Fund states that the shareholder report is available, without charge, upon request. Provide a toll-free telephone number to call to request the report. (4) The date of the SAI and of the prospectus to which the SAI relates. (b) Table of Contents. Include under appropriate captions (and subcaptions) a list of the contents of the SAI and, when useful, provide cross-references to related disclosure in the prospectus. Item 15. Fund History (a) Provide the date and form of organization of the Fund and the name PO 00000 Frm 00154 Fmt 4701 Sfmt 4702 of the state or other jurisdiction in which the Fund is organized. (b) If the Fund has engaged in a business other than that of an investment company during the past 5 years, state the nature of the other business and give the approximate date on which the Fund commenced business as an investment company. If the Fund’s name was changed during that period, state its former name and the approximate date on which it was changed. Briefly describe the nature and results of any change in the Fund’s business or name that occurred in connection with any bankruptcy, receivership, or similar proceeding, or any other material reorganization, readjustment or succession. Item 16. Description of the Fund and Its Investments and Risks (a) Classification. State that the Fund is an open-end, management investment company and indicate, if applicable, that the Fund is diversified. (b) Investment Strategies and Risks. Describe any investment strategies, including a strategy to invest in a particular type of security, used by an investment adviser of the Fund in managing the Fund that are not principal strategies and the risks of those strategies. (c) Fund Policies. (1) Describe the Fund’s policy with respect to each of the following: (i) Issuing senior securities; (ii) Borrowing money, including the purpose for which the proceeds will be used; (iii) Underwriting securities of other issuers; (iv) Concentrating investments in a particular industry or group of industries; (v) Purchasing or selling real estate or commodities; (vi) Making loans; and (vii) Any other policy that the Fund deems fundamental or that may not be changed without shareholder approval, including, if applicable, the Fund’s investment objectives. Instruction. If the Fund reserves freedom of action with respect to any practice specified in paragraph (c)(1), state the maximum percentage of assets to be devoted to the practice and disclose the risks of the practice. (2) State whether shareholder approval is necessary to change any policy specified in paragraph (c)(1). If so, describe the vote required to obtain this approval. (d) Temporary Defensive Position. Disclose, if applicable, the types of investments that a Fund may make while assuming a temporary defensive E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 position described in response to Item 9(b). (e) Portfolio Turnover. Explain any significant variation in the Fund’s portfolio turnover rates over the two most recently completed fiscal years or any anticipated variation in the portfolio turnover rate from that reported for the last fiscal year in response to Item 13. Instruction This paragraph does not apply to a Money Market Fund. (f) Disclosure of Portfolio Holdings (1) Describe the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities to any person, including: (i) How the policies and procedures apply to disclosure to different categories of persons, including individual investors, institutional investors, intermediaries that distribute the Fund’s shares, third-party service providers, rating and ranking organizations, and affiliated persons of the Fund; (ii) Any conditions or restrictions placed on the use of information about portfolio securities that is disclosed, including any requirement that the information be kept confidential or prohibitions on trading based on the information, and any procedures to monitor the use of this information; (iii) The frequency with which information about portfolio securities is disclosed, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed; (iv) Any policies and procedures with respect to the receipt of compensation or other consideration by the Fund, its investment adviser, or any other party in connection with the disclosure of information about portfolio securities; (v) The individuals or categories of individuals who may authorize disclosure of the Fund’s portfolio securities (e.g., executive officers of the Fund); (vi) The procedures that the Fund uses to ensure that disclosure of information about portfolio securities is in the best interests of Fund shareholders, including procedures to address conflicts between the interests of Fund shareholders, on the one hand, and those of the Fund’s investment adviser; principal underwriter; or any affiliated person of the Fund, its investment adviser, or its principal underwriter, on the other; and (vii) The manner in which the board of directors exercises oversight of disclosure of the Fund’s portfolio securities. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Instruction. Include any policies and procedures of the Fund’s investment adviser, or any other third party, that the Fund uses, or that are used on the Fund’s behalf, with respect to the disclosure of the Fund’s portfolio securities to any person. (2) Describe any ongoing arrangements to make available information about the Fund’s portfolio securities to any person, including the identity of the persons who receive information pursuant to such arrangements. Describe any compensation or other consideration received by the Fund, its investment adviser, or any other party in connection with each such arrangement, and provide the information described by paragraphs (f)(1)(ii), (iii), and (v) of this Item with respect to such arrangements. Instructions 1. The consideration required to be disclosed by Item 16(f)(2) includes any agreement to maintain assets in the Fund or in other investment companies or accounts managed by the investment adviser or by any affiliated person of the investment adviser. 2. The Fund is not required to describe an ongoing arrangement to make available information about the Fund’s portfolio securities pursuant to this Item, if, not later than the time that the Fund makes the portfolio securities information available to any person pursuant to the arrangement, the Fund discloses the information in a publicly available filing with the Commission that is required to include the information. 3. The Fund is not required to describe an ongoing arrangement to make available information about the Fund’s portfolio securities pursuant to this Item if: (a) The Fund makes the portfolio securities information available to any person pursuant to the arrangement no earlier than the day next following the day on which the Fund makes the information available on its website in the manner specified in its prospectus pursuant to paragraph (b); and (b) the Fund has disclosed in its current prospectus that the portfolio securities information will be available on its website, including (1) the nature of the information that will be available, including both the date as of which the information will be current (e.g., monthend) and the scope of the information (e.g., complete portfolio holdings, Fund’s largest 20 holdings); (2) the date when the information will first become available and the period for which the information will remain available, PO 00000 Frm 00155 Fmt 4701 Sfmt 4702 70869 which shall end no earlier than the date on which the Fund files its Form N–CSR or Form N–PORT for the last month of the Fund’s first or third fiscal quarters with the Commission for the period that includes the date as of which the website information is current; and (3) the location on the Fund’s website where either the information or a prominent hyper link (or series of prominent hyperlinks) to the information will be available. (g) Money Market Fund Material Events. If the Fund is a Money Market Fund (except any Money Market Fund that is not subject to the requirements of §§ 270.2a–7(c)(2)(i) and/or (ii) of this chapter pursuant to § 270.2a–7(c)(2)(iii) of this chapter, and has not chosen to rely on the ability to impose liquidity fees and suspend redemptions consistent with the requirements of §§ 270.2a–7(c)(2)(i) and/or (ii)) disclose, as applicable, the following events: (1) Imposition of Liquidity Fees and Temporary Suspensions of Fund Redemptions. (i) During the last 10 years, any occasion on which the Fund has invested less than ten percent of its total assets in weekly liquid assets (as provided in § 270.2a–7(c)(2)(ii)), and with respect to each such occasion, whether the Fund’s board of directors determined to impose a liquidity fee pursuant to § 270.2a–7(c)(2)(ii) and/or temporarily suspend the Fund’s redemptions pursuant to § 270.2a– 7(c)(2)(i). (ii) During the last 10 years, any occasion on which the Fund has invested less than thirty percent, but more than ten percent, of its total assets in weekly liquid assets (as provided in § 270.2a–7(c)(2)(i)) and the Fund’s board of directors has determined to impose a liquidity fee pursuant to § 270.2a– 7(c)(2)(i) and/or temporarily suspend the Fund’s redemptions pursuant to § 270.2a–7(c)(2)(i). Instructions 1. With respect to each such occasion, disclose: The dates and length of time for which the Fund invested less than ten percent (or thirty percent, as applicable) of its total assets in weekly liquid assets; the dates and length of time for which the Fund’s board of directors determined to impose a liquidity fee pursuant to § 270.2a– 7(c)(2)(i) or § 270.2a–7(c)(2)(ii), and/or temporarily suspend the Fund’s redemptions pursuant to § 270.2a– 7(c)(2)(i); and the size of any liquidity fee imposed pursuant to § 270.2a– 7(c)(2)(i) or § 270.2a–7(c)(2)(ii). 2. The disclosure required by Item 16(g)(1) should incorporate, as E:\FR\FM\05NOP2.SGM 05NOP2 70870 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules appropriate, any information that the Fund is required to report to the Commission on Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N–CR [17 CFR 274.222]. 3. The disclosure required by Item 16(g)(1) should conclude with the following statement: ‘‘The Fund was required to disclose additional information about this event [or ‘‘these events,’’ as appropriate] on Form N–CR and to file this form with the Securities and Exchange Commission. Any Form N–CR filing submitted by the Fund is available on the EDGAR Database on the Securities and Exchange Commission’s website at https://www.sec.gov.’’ (2) Financial Support Provided to Money Market Funds. During the last 10 years, any occasion on which an affiliated person, promoter, or principal underwriter of the Fund, or an affiliated person of such a person, provided any form of financial support to the Fund, including a description of the nature of support, person providing support, brief description of the relationship between the person providing support and the Fund, date support provided, amount of support, security supported (if applicable), and the value of security supported on date support was initiated (if applicable). khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. The term ‘‘financial support’’ includes any capital contribution, purchase of a security from the Fund in reliance on § 270.17a–9, purchase of any defaulted or devalued security at par, execution of letter of credit or letter of indemnity, capital support agreement (whether or not the Fund ultimately received support), performance guarantee, or any other similar action reasonably intended to increase or stabilize the value or liquidity of the Fund’s portfolio; excluding, however, any routine waiver of fees or reimbursement of Fund expenses, routine inter-fund lending, routine inter-fund purchases of Fund shares, or any action that would qualify as financial support as defined above, that the board of directors has otherwise determined not to be reasonably intended to increase or stabilize the value or liquidity of the Fund’s portfolio. 2. If during the last 10 years, the Fund has participated in one or more mergers with another investment company (a ‘‘merging investment company’’), provide the information required by Item 16(g)(2) with respect to any merging investment company as well as with respect to the Fund; for purposes of this Instruction, the term ‘‘merger’’ means a merger, consolidation, or purchase or sale of substantially all of the assets between the Fund and a merging investment company. If the person or entity that previously provided financial support to a merging investment company is not currently an affiliated person, promoter, or principal underwriter of the Fund, the Fund need not provide the information required by Item 16(g)(2) with respect to that merging investment company. 3. The disclosure required by Item 16(g)(2) should incorporate, as appropriate, any information that the Fund is required to report to the Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N–CR [17 CFR 274.222]. 4. The disclosure required by Item 16(g)(2) should conclude with the following statement: ‘‘The Fund was required to disclose additional information about this event [or ‘‘these events,’’ as appropriate] on Form N–CR and to file this form with the Securities and Exchange Commission. Any Form N–CR filing submitted by the Fund is available on the EDGAR Database on the Securities and Exchange Commission’s website at https://www.sec.gov.’’ Item 17. Management of the Fund Instructions 1. For purposes of this Item 17, the terms below have the following meanings: (a) The term ‘‘family of investment companies’’ means any two or more registered investment companies that: (1) Share the same investment adviser or principal underwriter; and (2) Hold themselves out to investors as related companies for purposes of investment and investor services. (b) The term ‘‘fund complex’’ means two or more registered investment companies that: (1) Hold themselves out to investors as related companies for purposes of investment and investor services; or (2) Have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (c) The term ‘‘immediate family member’’ means a person’s spouse; child residing in the person’s household (including step and adoptive children); and any dependent of the person, as defined in section 152 of the Internal Revenue Code [26 U.S.C. 152]. (d) The term ‘‘officer’’ means the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions. 2. When providing information about directors, furnish information for directors who are interested persons of the Fund separately from the information for directors who are not interested persons of the Fund. For example, when furnishing information in a table, you should provide separate tables (or separate sections of a single table) for directors who are interested persons and for directors who are not interested persons. When furnishing information in narrative form, indicate by heading or otherwise the directors who are interested persons and the directors who are not interested persons. (a) Management Information. (1) Provide the information required by the following table for each director and officer of the Fund, and, if the Fund has an advisory board, member of the board. Explain in a footnote to the table any family relationship between the persons listed. (1) (2) (3) (4) (5) (6) Name, Address, and Age (or Year of Birth) Position(s) Held with Fund Term of Office and Length of Time Served (or Year Service Began) Principal Occupation(s) During Past 5 Years Number of Portfolios in Fund Complex Overseen by Director Other Directorships Held by Director Instructions 1. For purposes of this paragraph, the term ‘‘family relationship’’ means any relationship by blood, marriage, or VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 adoption, not more remote than first cousin. 2. For each director who is an interested person of the Fund, describe, in a footnote or otherwise, the relationship, events, or transactions by PO 00000 Frm 00156 Fmt 4701 Sfmt 4702 reason of which the director is an interested person. 3. State the principal business of any company listed under column (4) unless the principal business is implicit in its name. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 4. Indicate in column (6) directorships not included in column (5) that are held by a director in any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act [15 U.S.C. 78l] or subject to the requirements of section 15(d) of the Securities Exchange Act [15 U.S.C. 78o(d)] or any company registered as an investment company under the Investment Company Act, and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same fund complex, identify the fund complex and provide the number of portfolios overseen as a director in the fund complex rather than listing each portfolio separately. (2) For each individual listed in column (1) of the table required by paragraph (a)(1) of this Item 17, except for any director who is not an interested person of the Fund, describe any positions, including as an officer, employee, director, or general partner, held with affiliated persons or principal underwriters of the Fund. Instruction When an individual holds the same position(s) with two or more registered investment companies that are part of the same fund complex, identify the fund complex and provide the number of registered investment companies for which the position(s) are held rather than listing each registered investment company separately. (3) Describe briefly any arrangement or understanding between any director or officer and any other person(s) (naming the person(s)) pursuant to which he was selected as a director or officer. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instruction Do not include arrangements or understandings with directors or officers acting solely in their capacities as such. (b) Leadership Structure and Board of Directors. (1) Briefly describe the leadership structure of the Fund’s board, including the responsibilities of the board of directors with respect to the Fund’s management and whether the chairman of the board is an interested person of the Fund. If the chairman of the board is an interested person of the Fund, disclose whether the Fund has a lead independent director and what specific role the lead independent director plays in the leadership of the Fund. This disclosure should indicate why the Fund has determined that its leadership structure is appropriate given the specific characteristics or circumstances of the Fund. In addition, disclose the extent of the board’s role in the risk oversight of the Fund, such as how the board administers its oversight function and the effect that this has on the board’s leadership structure. (2) Identify the standing committees of the Fund’s board of directors, and provide the following information about each committee: (i) A concise statement of the functions of the committee; (ii) The members of the committee; (iii) The number of committee meetings held during the last fiscal year; and (iv) If the committee is a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting recommendations. (3) Positions Held by Directors and Their Immediate Family Members (i) Unless disclosed in the table required by paragraph (a)(1) of this Item 17, describe any positions, including as an officer, employee, director, or general partner, held by any director who is not an interested person of the Fund, or immediate family member of the director, during the two most recently completed calendar years with: (A) The Fund; (B) An investment company, or a person that would be an investment 70871 company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) [15 U.S.C. 80a–3(c)(1) and (c)(7)], having the same investment adviser or principal underwriter as the Fund or having an investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with an investment adviser or principal underwriter of the Fund; (C) An investment adviser, principal underwriter, or affiliated person of the Fund; or (D) Any person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund. (ii) Unless disclosed in the table required by paragraph (a)(1) of this Item 17 or in response to paragraph (b)(3) of this Item 17, indicate any directorships held during the past five years by each director in any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act [15 U.S.C. 78l] or subject to the requirements of section 15(d) of the Securities Exchange Act [15 U.S.C. 78o(d)] or any company registered as an investment company under the Investment Company Act, and name the companies in which the directorships were held. Instruction. When an individual holds the same position(s) with two or more portfolios that are part of the same fund complex, identify the fund complex and provide the number of portfolios for which the position(s) are held rather than listing each portfolio separately. (4) For each director, state the dollar range of equity securities beneficially owned by the director as required by the following table: (i) In the Fund; and (ii) On an aggregate basis, in any registered investment companies overseen by the director within the same family of investment companies as the Fund. (1) (2) (3) Name of Director Dollar Range of Equity Securities in the Fund Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Director in Family of Investment Companies Instructions 1. Information should be provided as of the end of the most recently completed calendar year. Specify the valuation date by footnote or otherwise. 2. Determine ‘‘beneficial ownership’’ in accordance with rule 16a–1(a)(2) VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 under the Exchange Act [17 CFR 240.16a–1(a)(2)]. 3. If the SAI covers more than one Fund or Series, disclose in column (2) the dollar range of equity securities beneficially owned by a director in each Fund or Series overseen by the director. PO 00000 Frm 00157 Fmt 4701 Sfmt 4702 4. In disclosing the dollar range of equity securities beneficially owned by a director in columns (2) and (3), use the following ranges: None, $1–$10,000, $10,001–$50,000, $50,001–$100,000, or over $100,000. E:\FR\FM\05NOP2.SGM 05NOP2 70872 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (5) For each director who is not an interested person of the Fund, and his immediate family members, furnish the information required by the following indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund: (1) (2) (3) (4) (5) (6) Name of Director Name of Owners and Relationships to Director Company Title of Class Value of Securities Percent of Class Instructions 1. Information should be provided as of the end of the most recently completed calendar year. Specify the valuation date by footnote or otherwise. 2. An individual is a ‘‘beneficial owner’’ of a security if he is a ‘‘beneficial owner’’ under either rule 13d–3 or rule 16a–1(a)(2) under the Exchange Act [17 CFR 240.13d–3 or 240.16a–1(a)(2)]. 3. Identify the company in which the director or immediate family member of the director owns securities in column (3). When the company is a person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter, describe the company’s relationship with the investment adviser or principal underwriter. 4. Provide the information required by columns (5) and (6) on an aggregate basis for each director and his immediate family members. (6) Unless disclosed in response to paragraph (b)(5) of this Item 17, describe any direct or indirect interest, the value of which exceeds $120,000, of each director who is not an interested person of the Fund, or immediate family member of the director, during the two most recently completed calendar years, in: (i) An investment adviser or principal underwriter of the Fund; or (ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund. khammond on DSKJM1Z7X2PROD with PROPOSALS2 table as to each class of securities owned beneficially or of record in: (i) An investment adviser or principal underwriter of the Fund; or (ii) A person (other than a registered investment company) directly or Instructions 1. A director or immediate family member has an interest in a company if he is a party to a contract, arrangement, or understanding with respect to any securities of, or interest in, the company. 2. The interest of the director and the interests of his immediate family members should be aggregated in determining whether the value exceeds $120,000. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 (7) Describe briefly any material interest, direct or indirect, of any director who is not an interested person of the Fund, or immediate family member of the director, in any transaction, or series of similar transactions, during the two most recently completed calendar years, in which the amount involved exceeds $120,000 and to which any of the following persons was a party: (i) The Fund; (ii) An officer of the Fund; (iii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) [15 U.S.C. 80a–3(c)(1) and (c)(7)], having the same investment adviser or principal underwriter as the Fund or having an investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with an investment adviser or principal underwriter of the Fund; (iv) An officer of an investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) [15 U.S.C. 80a–3(c)(1) and (c)(7)], having the same investment adviser or principal underwriter as the Fund or having an investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control with an investment adviser or principal underwriter of the Fund; (v) An investment adviser or principal underwriter of the Fund; (vi) An officer of an investment adviser or principal underwriter of the Fund; (vii) A person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund; or (viii) An officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund. PO 00000 Frm 00158 Fmt 4701 Sfmt 4702 Instructions 1. Include the name of each director or immediate family member whose interest in any transaction or series of similar transactions is described and the nature of the circumstances by reason of which the interest is required to be described. 2. State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest. 3. In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments. 4. Compute the amount of the interest of any director or immediate family member of the director without regard to the amount of profit or loss involved in the transaction(s). 5. As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination. 6. Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed ‘‘material’’ within the meaning of paragraph (b)(7) of this Item 17 where the interest of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified in paragraphs (b)(7)(i) E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules through (b)(7)(viii) of this Item 17, and the transaction is not material to the company. 7. The materiality of any interest is to be determined on the basis of the significance of the information to investors in light of all the circumstances of the particular case. The importance of the interest to the person having the interest, the relationship of the parties to the transaction with each other, and the amount involved in the transaction are among the factors to be considered in determining the significance of the information to investors. 8. No information need be given as to any transaction where the interest of the director or immediate family member arises solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 and the director or immediate family member receives no extra or special benefit not shared on a pro rata basis by all holders of the Class of securities. 9. Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the end of the most recently completed calendar year, and the rate of interest paid or charged. 10. No information need be given as to any routine, retail transaction. For example, the Fund need not disclose that a director has a credit card, bank or brokerage account, residential mortgage, or insurance policy with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 unless the director is accorded special treatment. (8) Describe briefly any direct or indirect relationship, in which the amount involved exceeds $120,000, of any director who is not an interested person of the Fund, or immediate family member of the director, that existed at any time during the two most recently completed calendar years with any of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17. Relationships include: (i) Payments for property or services to or from any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17; (ii) Provision of legal services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17; (iii) Provision of investment banking services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17, other than as a VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 participating underwriter in a syndicate; and (iv) Any consulting or other relationship that is substantially similar in nature and scope to the relationships listed in paragraphs (b)(8)(i) through (b)(8)(iii) of this Item 17. Instructions 1. Include the name of each director or immediate family member whose relationship is described and the nature of the circumstances by reason of which the relationship is required to be described. 2. State the nature of the relationship and the amount of business conducted between the director or immediate family member and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 as a result of the relationship during the two most recently completed calendar years. 3. In computing the amount involved in a relationship, include all periodic payments in the case of any agreement providing for periodic payments. 4. Disclose indirect, as well as direct, relationships. A person who has a position or relationship with, or interest in, a company that has a relationship with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 may have an indirect relationship by reason of the position, relationship, or interest. 5. In determining whether the amount involved in a relationship exceeds $120,000, amounts involved in a relationship of the director should be aggregated with those of his immediate family members. 6. In the case of an indirect interest, identify the company with which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 has a relationship; the name of the director or immediate family member affiliated with the company and the nature of the affiliation; and the amount of business conducted between the company and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 during the two most recently completed calendar years. 7. In calculating payments for property and services for purposes of paragraph (b)(8)(i) of this Item 17, the following may be excluded: A. Payments where the transaction involves the rendering of services as a common contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or B. Payments that arise solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 and no extra PO 00000 Frm 00159 Fmt 4701 Sfmt 4702 70873 or special benefit not shared on a pro rata basis by all holders of the class of securities is received. 8. No information need be given as to any routine, retail relationship. For example, the Fund need not disclose that a director has a credit card, bank or brokerage account, residential mortgage, or insurance policy with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17 unless the director is accorded special treatment. (9) If an officer of an investment adviser or principal underwriter of the Fund, or an officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund, served during the two most recently completed calendar years, on the board of directors of a company where a director of the Fund who is not an interested person of the Fund, or immediate family member of the director, was during the two most recently completed calendar years, an officer, identify: (i) The company; (ii) The individual who serves or has served as a director of the company and the period of service as director; (iii) The investment adviser or principal underwriter or person controlling, controlled by, or under common control with the investment adviser or principal underwriter where the individual named in paragraph (b)(9)(ii) of this Item 17 holds or held office and the office held; and (iv) The director of the Fund or immediate family member who is or was an officer of the company; the office held; and the period of holding the office. (10) For each director, briefly discuss the specific experience, qualifications, attributes, or skills that led to the conclusion that the person should serve as a director for the Fund at the time that the disclosure is made, in light of the Fund’s business and structure. If material, this disclosure should cover more than the past five years, including information about the person’s particular areas of expertise or other relevant qualifications. (c) Compensation. For all directors of the Fund and for all members of any advisory board who receive compensation from the Fund, and for each of the three highest paid officers or any affiliated person of the Fund who received aggregate compensation from the Fund for the most recently completed fiscal year exceeding $60,000 (‘‘Compensated Persons’’): (1) Provide the information required by the following table: E:\FR\FM\05NOP2.SGM 05NOP2 70874 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 COMPENSATION TABLE (1) (2) (3) (4) (5) Name of Person, Position Aggregate Compensation From Fund Pension or Retirement Benefits Accrued As Part of Funds Expenses Estimated Annual Benefits Upon Retirement Total Compensation From Fund and Fund Complex Paid to Directors Instructions 1. For column (1), indicate, as necessary, the capacity in which the remuneration is received. For Compensated Persons who are directors of the Fund, compensation is amounts received for service as a director. 2. If the Registrant has not completed its first full year since its organization, furnish the information for the current fiscal year, estimating future payments that would be made pursuant to an existing agreement or understanding. Disclose in a footnote to the Compensation Table the period for which the information is furnished. 3. Include in column (2) amounts deferred at the election of the Compensated Person, whether pursuant to a plan established under Section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)] or otherwise for the fiscal year in which earned. Disclose in a footnote to the Compensation Table the total amount of deferred compensation (including interest) payable to or accrued for any Compensated Person. 4. Include in columns (3) and (4) all pension or retirement benefits proposed to be paid under any existing plan in the event of retirement at normal retirement date, directly or indirectly, by the Registrant, any of its subsidiaries, or other companies in the Fund Complex. Omit column (4) where retirement benefits are not determinable. 5. For any defined benefit or actuarial plan under which benefits are determined primarily by final compensation (or average final compensation) and years of service, provide the information required in column (4) in a separate table showing estimated annual benefits payable upon retirement (including amounts attributable to any defined benefit supplementary or excess pension award plans) in specified compensation and years of service classifications. Also provide the estimated credited years of service for each Compensated Person. 6. Include in column (5) only aggregate compensation paid to a director for service on the board and all other boards of investment companies in a Fund Complex specifying the number of such other investment companies. (2) Describe briefly the material provisions of any pension, retirement, VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 or other plan or any arrangement, other than fee arrangements disclosed in paragraph (c)(1), under which the Compensated Persons are or may be compensated for services provided, including amounts paid, if any, to the compensated Person under these arrangements during the most recently completed fiscal year. Specifically include the criteria used to determine amounts payable under the plan, the length of service or vesting period required by the plan, the retirement age or other event that gives rise to payment under the plan, and whether the payment of benefits is secured or funded by the Fund. (d) Sales Loads. Disclose any arrangements that result in breakpoints in, or elimination of, purchase charges or exit charges for directors and other affiliated persons of the Fund. Identify each class of individuals and transactions to which the arrangements apply and state each different breakpoint as a percentage of both the offering price and the net amount invested of the Fund’s shares. Explain, as applicable, the reasons for the difference in the price at which securities are offered generally to the public, and the prices at which securities are offered to directors and other affiliated persons of the Fund. (e) Codes of Ethics. Provide a brief statement disclosing whether the Fund and its investment adviser and principal underwriter have adopted codes of ethics under rule 17j–1 of the Investment Company Act [17 CFR 270.17j–1] and whether these codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Fund. Instruction: A Fund that is not required to adopt a code of ethics under rule 17j–1 of the Investment Company Act is not required to respond to this item (f) Proxy Voting Policies. Unless the Fund invests exclusively in non-voting securities, describe the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities, including the procedures that the Fund uses when a vote presents a conflict between the interests of Fund shareholders, on the one hand, and those of the Fund’s PO 00000 Frm 00160 Fmt 4701 Sfmt 4702 investment adviser; principal underwriter; or any affiliated person of the Fund, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the Fund’s investment adviser, or any other third party, that the Fund uses, or that are used on the Fund’s behalf, to determine how to vote proxies relating to portfolio securities. Also, state that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12month period ended June 30 is available (1) without charge, upon request, by calling a specified toll-free telephone number; or on or through the Fund’s website at a specified address; or both; and (2) on the Commission’s website at https://www.sec.gov. Instructions 1. A Fund may satisfy the requirement to provide a description of the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities by including a copy of the policies and procedures themselves. 2. If a Fund discloses that the Fund’s proxy voting record is available by calling a toll-free telephone number, and the Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for this information, the Fund (or financial intermediary) must send the information disclosed in the Fund’s most recently filed report on Form N– PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery. 3. If a Fund discloses that the Fund’s proxy voting record is available on or through its website, the Fund must make available free of charge the information disclosed in the Fund’s most recently filed report on Form N– PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Fund’s most recently filed report on Form N– PX must remain available on or through the Fund’s website for as long as the Fund remains subject to the requirements of Rule 30b1–4 [17 CFR 270.30b1–4] and discloses that the Fund’s proxy voting record is available on or through its website. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Item 18. Control Persons and Principal Holders of Securities Provide the following information as of a specified date no more than 30 days prior to the date of filing the registration statement or an amendment. (a) Control Persons. State the name and address of each person who controls the Fund and explain the effect of that control on the voting rights of other security holders. For each control person, state the percentage of the Fund’s voting securities owned or any other basis of control. If the control person is a company, give the jurisdiction under the laws of which it is organized. List all parents of the control person. Instruction. For purposes of this paragraph, ‘‘control’’ means (i) the beneficial ownership, either directly or through one or more controlled companies, of more than 25% of the voting securities of a company; (ii) the acknowledgment or assertion by either the controlled or controlling party of the existence of control; or (iii) an adjudication under section 2(a)(9), which has become final, that control exists. (b) Principal Holders. State the name, address, and percentage of ownership of each person who owns of record or is known by the Fund to own beneficially 5% or more of any Class of the Fund’s outstanding equity securities. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. Calculate the percentages based on the amount of securities outstanding. 2. If securities are being registered under or in connection with a plan of acquisition, reorganization, readjustment or succession, indicate, as far as practicable, the ownership that would result from consummation of the plan based on present holdings and commitments. 3. Indicate whether the securities are owned of record, beneficially, or both. Show the respective percentage owned in each manner. (c) Management Ownership. State the percentage of the Fund’s equity securities owned by all officers, directors, and members of any advisory board of the Fund as a group. If the amount owned by directors and officers as a group is less than 1% of the Class, provide a statement to that effect. Item 19. Investment Advisory and Other Services (a) Investment Advisers. Disclose the following information with respect to each investment adviser: (1) The name of any person who controls the adviser, the basis of the VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 person’s control, and the general nature of the person’s business. Also disclose, if material, the business history of any organization that controls the adviser. (2) The name of any affiliated person of the Fund who also is an affiliated person of the adviser, and a list of all capacities in which the person is affiliated with the Fund and with the adviser. Instruction. If an affiliated person of the Fund alone or together with others controls the adviser, state that fact. It is not necessary to provide the amount or percentage of the outstanding voting securities owned by the controlling person. (3) The method of calculating the advisory fee payable by the Fund including: (i) The total dollar amounts that the Fund paid to the adviser (aggregated with amounts paid to affiliated advisers, if any), and any advisers who are not affiliated persons of the adviser, under the investment advisory contract for the last three fiscal years; (ii) If applicable, any credits that reduced the advisory fee for any of the last three fiscal years; and (iii) Any expense limitation provision. Instructions 1. If the advisory fee payable by the Fund varies depending on the Fund’s investment performance in relation to a standard, describe the standard along with a fee schedule in tabular form. The Fund may include examples showing the fees that the adviser would earn at various levels of performance as long as the examples include calculations showing the maximum and minimum fee percentages that could be earned under the contract. 2. State separately each type of credit or offset. 3. When a Fund is subject to more than one expense limitation provision, describe only the most restrictive provision. 4. For a Registrant with more than one Series, or a Multiple Class Fund, describe the methods of allocation and payment of advisory fees for each Series or Class. (b) Principal Underwriter. State the name and principal business address of any principal underwriter for the Fund. Disclose, if applicable, that an affiliated person of the Fund is an affiliated person of the principal underwriter and identify the affiliated person. (c) Services Provided by Each Investment Adviser and Fund Expenses Paid by Third Parties. (1) Describe all services performed for or on behalf of the Fund supplied or PO 00000 Frm 00161 Fmt 4701 Sfmt 4702 70875 paid for wholly or in substantial part by each investment adviser. (2) Describe all fees, expenses, and costs of the Fund that are to be paid by persons other than an investment adviser or the Fund, and identify those persons. (d) Service Agreements. Summarize the substantive provisions of any other management-related service contract that may be of interest to a purchaser of the Fund’s shares, under which services are provided to the Fund, indicating the parties to the contract, and the total dollars paid and by whom for the past three years. Instructions 1. The term ‘‘management-related service contract’’ includes any contract with the Fund to keep, prepare, or file accounts, books, records, or other documents required under federal or state law, or to provide any similar services with respect to the daily administration of the Fund, but does not include the following: (a) Any contract with the Fund to provide investment advice; (b) Any agreement with the Fund to perform as custodian, transfer agent, or dividend-paying agent for the Fund; and (c) Any contract with the Fund for outside legal or auditing services, or contract for personal employment entered into with the Fund in the ordinary course of business. 2. No information need be given in response to this paragraph with respect to the service of mailing proxies or periodic reports to the Fund’s shareholders. 3. In summarizing the substantive provisions of any management-related service contract, include the following: (a) The name of the person providing the service; (b) The direct or indirect relationships, if any, of the person with the Fund, an investment adviser of the Fund or the Fund’s principal underwriter; and (c) The nature of the services provided, and the basis of the compensation paid for the services for the last three fiscal years. (e) Other Investment Advice. If any person (other than a director, officer, member of an advisory board, employee, or investment adviser of the Fund), through any understanding, whether formal or informal, regularly advises the Fund or the Fund’s investment adviser with respect to the Fund’s investing in, purchasing, or selling securities or other property, or has the authority to determine what securities or other property should be purchased or sold by the Fund, and receives direct or indirect E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70876 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules remuneration, provide the following information: (1) The person’s name; (2) A description of the nature of the arrangement, and the advice or information provided; and (3) Any remuneration (including, for example, participation, directly or indirectly, in commissions or other compensation paid in connection with transactions in the Fund’s portfolio securities) paid for the advice or information, and a statement as to how the remuneration was paid and by whom it was paid for the last three fiscal years. Instruction. Do not include information for the following: 1. Persons who advised the investment adviser or the Fund solely through uniform publications distributed to subscribers; 2. Persons who provided the investment adviser or the Fund with only statistical and other factual information, advice about economic factors and trends, or advice as to occasional transactions in specific securities, but without generally advising about the purchase or sale of securities by the Fund; 3. A company that is excluded from the definition of ‘‘investment adviser’’ of an investment company under section 2(a)(20)(iii) [15 U.S.C. 80a– 2(a)(20)(iii)]; 4. Any person the character and amount of whose compensation for these services must be approved by a court; or 5. Other persons as the Commission has by rule or order determined not to be an ‘‘investment adviser’’ of an investment company. (f) Dealer Reallowances. Disclose any purchase charge reallowed to dealers as a percentage of the offering price of the Fund’s shares. (g) Rule 12b–1 Plans. If the Fund has adopted a plan under rule 12b–1, describe the material aspects of the plan, and any agreements relating to the implementation of the plan, including: (1) A list of the principal types of activities for which payments are or will be made, including the dollar amount and the manner in which amounts paid by the Fund under the plan during the last fiscal year were spent on: (i) Advertising; (ii) Printing and mailing of prospectuses to other than current shareholders; (iii) Compensation to underwriters; (iv) Compensation to broker-dealers; (v) Compensation to sales personnel; (vi) Interest, carrying, or other financing charges; and (vii) Other (specify). VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 (2) The relationship between amounts paid to the distributor and the expenses that it incurs (e.g., whether the plan reimburses the distributor only for expenses incurred or compensates the distributor regardless of its expenses). (3) The amount of any unreimbursed expenses incurred under the plan in a previous year and carried over to future years, in dollars and as a percentage of the Fund’s net assets on the last day of the previous year. (4) Whether the Fund participates in any joint distribution activities with another Series or investment company. If so, disclose, if applicable, that fees paid under the Fund’s rule 12b–1 plan may be used to finance the distribution of the shares of another Series or investment company, and state the method of allocating distribution costs (e.g., relative net asset size, number of shareholder accounts). (5) Whether any of the following persons had a direct or indirect financial interest in the operation of the plan or related agreements: (i) Any interested person of the Fund; or (ii) Any director of the Fund who is not an interested person of the Fund. (6) The anticipated benefits to the Fund that may result from the plan. (h) Other Service Providers. (1) Unless disclosed in response to paragraph (d), identify any person who provides significant administrative or business affairs management services for the Fund (e.g., an ‘‘administrator’’), describe the services provided, and the compensation paid for the services. (2) State the name and principal business address of the Fund’s transfer agent and the dividend-paying agent. (3) State the name and principal business address of the Fund’s custodian and independent public accountant and describe generally the services performed by each. If the Fund’s portfolio securities are held by a person other than a commercial bank, trust company, or depository registered with the Commission as custodian, state the nature of the business of that person or persons. (4) If an affiliated person of the Fund, or an affiliated person of the affiliated person, acts as custodian, transfer agent, or dividend-paying agent for the Fund, describe the services that the person performs and the basis for remuneration. (i) Securities Lending. (1) Provide the following dollar amounts of income and fees/ compensation related to the securities lending activities of each Series during its most recent fiscal year: PO 00000 Frm 00162 Fmt 4701 Sfmt 4702 (i) Gross income from securities lending activities, including income from cash collateral reinvestment; (ii) All fees and/or compensation for each of the following securities lending activities and related services: Any share of revenue generated by the securities lending program paid to the securities lending agent(s) (‘‘revenue split’’); fees paid for cash collateral management services (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split; administrative fees that are not included in the revenue split; fees for indemnification that are not included in the revenue split; rebates paid to borrowers; and any other fees relating to the securities lending program that are not included in the revenue split, including a description of those other fees; (iii) The aggregate fees/compensation disclosed pursuant to paragraph (ii); and (iv) Net income from securities lending activities (i.e., the dollar amount in paragraph (i) minus the dollar amount in paragraph (iii)). Instruction. If a fee for a service is included in the revenue split, state that the fee is ‘‘included in the revenue split.’’ (2) Describe the services provided to the Series by the securities lending agent in the Series’ most recent fiscal year. Item 20. Portfolio Managers (a) Other Accounts Managed. If a Portfolio Manager required to be identified in response to Item 5(b) is primarily responsible for the day-to-day management of the portfolio of any other account, provide the following information: (1) The Portfolio Manager’s name; (2) The number of other accounts managed within each of the following categories and the total assets in the accounts managed within each category: (A) Registered investment companies; (B) Other pooled investment vehicles; and (C) Other accounts. (3) For each of the categories in paragraph (a)(2) of this Item, the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on the performance of the account; and (4) A description of any material conflicts of interest that may arise in connection with the Portfolio Manager’s management of the Fund’s investments, on the one hand, and the investments of the other accounts included in response to paragraph (a)(2) of this Item, on the other. This description would include, E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules for example, material conflicts between the investment strategy of the Fund and the investment strategy of other accounts managed by the Portfolio Manager and material conflicts in allocation of investment opportunities between the Fund and other accounts managed by the Portfolio Manager. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. Provide the information required by this paragraph as of the end of the Fund’s most recently completed fiscal year, except that, in the case of an initial registration statement or an update to the Fund’s registration statement that discloses a new Portfolio Manager, information with respect to any newly identified Portfolio Manager must be provided as of the most recent practicable date. Disclose the date as of which the information is provided. 2. If a committee, team, or other group of persons that includes the Portfolio Manager is jointly and primarily responsible for the day-to-day management of the portfolio of an account, include the account in responding to paragraph (a) of this Item. (b) Compensation. Describe the structure of, and the method used to determine, the compensation of each Portfolio Manager required to be identified in response to Item 5(b). For each type of compensation (e.g., salary, bonus, deferred compensation, retirement plans and arrangements), describe with specificity the criteria on which that type of compensation is based, for example, whether compensation is fixed, whether (and, if so, how) compensation is based on Fund pre- or after-tax performance over a certain time period, and whether (and, if so, how) compensation is based on the value of assets held in the Fund’s portfolio. For example, if compensation is based solely or in part on performance, identify any benchmark used to measure performance and state the length of the period over which performance is measured. Instructions 1. Provide the information required by this paragraph as of the end of the Fund’s most recently completed fiscal year, except that, in the case of an initial registration statement or an update to the Fund’s registration statement that discloses a new Portfolio Manager, information with respect to any newly identified Portfolio Manager must be provided as of the most recent practicable date. Disclose the date as of which the information is provided. 2. Compensation includes, without limitation, salary, bonus, deferred compensation, and pension and VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 retirement plans and arrangements, whether the compensation is cash or non-cash. Group life, health, hospitalization, medical reimbursement, relocation, and pension and retirement plans and arrangements may be omitted, provided that they do not discriminate in scope, terms, or operation in favor of the Portfolio Manager or a group of employees that includes the Portfolio Manager and are available generally to all salaried employees. The value of compensation is not required to be disclosed under this Item. 3. Include a description of the structure of, and the method used to determine, any compensation received by the Portfolio Manager from the Fund, the Fund’s investment adviser, or any other source with respect to management of the Fund and any other accounts included in the response to paragraph (a)(2) of this Item. This description must clearly disclose any differences between the method used to determine the Portfolio Manager’s compensation with respect to the Fund and other accounts, e.g., if the Portfolio Manager receives part of an advisory fee that is based on performance with respect to some accounts but not the Fund, this must be disclosed. (c) Ownership of Securities. For each Portfolio Manager required to be identified in response to Item 5(b), state the dollar range of equity securities in the Fund beneficially owned by the Portfolio Manager using the following ranges: None, $1–$10,000, $10,001– $50,000, $50,001–$ 100,000, $100,001– $500,000, $500,001–$1,000,000, or over $1,000,000. Instructions 1. Provide the information required by this paragraph as of the end of the Fund’s most recently completed fiscal year, except that, in the case of an initial registration statement or an update to the Fund’s registration statement that discloses a new Portfolio Manager, information with respect to any newly identified Portfolio Manager must be provided as of the most recent practicable date. Specify the valuation date. 2. Determine ‘‘beneficial ownership’’ in accordance with rule 16a–1(a)(2) under the Exchange Act [17 CFR 240.16a–1(a)(2)]. Item 21. Brokerage Allocation and Other Practices (a) Brokerage Transactions. Describe how transactions in portfolio securities are affected, including a general statement about brokerage commissions, markups, and markdowns on principal transactions and the aggregate amount PO 00000 Frm 00163 Fmt 4701 Sfmt 4702 70877 of any brokerage commissions paid by the Fund during its three most recent fiscal years. If, during either of the two years preceding the Fund’s most recent fiscal year, the aggregate dollar amount of brokerage commissions paid by the Fund differed materially from the amount paid during the most recent fiscal year, state the reason(s) for the difference(s). (b) Commissions. (1) Identify, disclose the relationship, and state the aggregate dollar amount of brokerage commissions paid by the Fund during its three most recent fiscal years to any broker: (i) That is an affiliated person of the Fund or an affiliated person of that person; or (ii) An affiliated person of which is an affiliated person of the Fund, its investment adviser, or principal underwriter. (2) For each broker identified in response to paragraph (b)(1), state: (i) The percentage of the Fund’s aggregate brokerage commissions paid to the broker during the most recent fiscal year; and (ii) The percentage of the Fund’s aggregate dollar amount of transactions involving the payment of commissions effected through the broker during the most recent fiscal year. (3) State the reasons for any material difference in the percentage of brokerage commissions paid to, and the percentage of transactions effected through, a broker disclosed in response to paragraph (b)(1). (c) Brokerage Selection. Describe how the Fund will select brokers to effect securities transactions for the Fund and how the Fund will evaluate the overall reasonableness of brokerage commissions paid, including the factors that the Fund will consider in making these determinations. Instructions 1. If the Fund will consider the receipt of products or services other than brokerage or research services in selecting brokers, specify those products and services. 2. If the Fund will consider the receipt of research services in selecting brokers, identify the nature of those research services. 3. State whether persons acting on the Fund’s behalf are authorized to pay a broker a higher brokerage commission than another broker might have charged for the same transaction in recognition of the value of (a) brokerage or (b) research services provided by the broker. 4. If applicable, explain that research services provided by brokers through E:\FR\FM\05NOP2.SGM 05NOP2 70878 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 which the Fund effects securities transactions may be used by the Fund’s investment adviser in servicing all of its accounts and that not all of these services may be used by the adviser in connection with the Fund. If other policies or practices are applicable to the Fund with respect to the allocation of research services provided by brokers, explain those policies and practices. (d) Directed Brokerage. If, during the last fiscal year, the Fund or its investment adviser, through an agreement or understanding with a broker, or otherwise through an internal allocation procedure, directed the Fund’s brokerage transactions to a broker because of research services provided, state the amount of the transactions and related commissions. (e) Regular Broker-Dealers. If the Fund has acquired during its most recent fiscal year or during the period of time since organization, whichever is shorter, securities of its regular brokers or dealers as defined in rule 10b–1 [17 CFR 270.10b–1] or of their parents, identify those brokers or dealers and state the value of the Fund’s aggregate holdings of the securities of each issuer as of the close of the Fund’s most recent fiscal year. Instruction. The Fund need only disclose information about an issuer that derived more than 15% of its gross revenues from the business of a broker, a dealer, an underwriter, or an investment adviser during its most recent fiscal year. Item 22. Capital Stock and Other Securities (a) Capital Stock. For each Class of capital stock of the Fund, provide: (1) The title of each Class; and (2) A full discussion of the following provisions or characteristics of each Class, if applicable: (i) Restrictions on the right freely to retain or dispose of the Fund’s shares; (ii) Material obligations or potential liabilities associated with owning the Fund’s shares (not including investment risks); (iii) Dividend rights; (iv) Voting rights (including whether the rights of shareholders can be modified by other than a majority vote); (v) Liquidation rights; (vi) Preemptive rights; (vii) Conversion rights; (viii) Redemption provisions; (ix) Sinking fund provisions; and (x) Liability to further calls or to assessment by the Fund. Instructions 1. If any Class described in response to this paragraph possesses cumulative VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 voting rights, disclose the existence of those rights and explain the operation of cumulative voting. 2. If the rights evidenced by any Class described in response to this paragraph are materially limited or qualified by the rights of any other Class, explain those limitations or qualifications. (b) Other Securities. Describe the rights of any authorized securities of the Fund other than capital stock. If the securities are subscription warrants or rights, state the title and amount of securities called for, and the period during which and the prices at which the warrants or rights are exercisable. Item 23. Purchase, Redemption, and Pricing of Shares (a) Purchase of Shares. To the extent that the prospectus does not do so, describe how the Fund’s shares are offered to the public. Include any special purchase plans or methods not described in the prospectus or elsewhere in the SAI, including letters of intent, accumulation plans, dividend reinvestment plans, withdrawal plans, exchange privileges, employee benefit plans, redemption reinvestment plans, and waivers for particular classes of shareholders. (b) Fund Reorganizations. Disclose any arrangements that result in breakpoints in, or elimination of, purchase charges or exit charges in connection with the terms of a merger, acquisition, or exchange offer made under a plan of reorganization. Identify each class of individuals to which the arrangements apply and state each different purchase charge or exit charge available as a percentage of both the offering price and the net amount invested. (c) Offering Price. Describe the method followed or to be followed by the Fund in determining the total offering price at which its shares may be offered to the public and the method(s) used to value the Fund’s assets. Instructions 1. Describe the valuation procedure(s) that the Fund uses in determining the net asset value and public offering price of its shares. 2. Explain how the excess of the offering price over the net amount invested is distributed among the Fund’s principal underwriters or others and the basis for determining the total offering price. 3. Explain the reasons for any difference in the price at which securities are offered generally to the public, and the prices at which securities are offered for any class of PO 00000 Frm 00164 Fmt 4701 Sfmt 4702 transactions or to any class of individuals. 4. Unless provided as a continuation of the balance sheet in response to Item 27, include a specimen price-make-up sheet showing how the Fund calculates the total offering price per unit. Base the calculation on the value of the Fund’s portfolio securities and other assets and its outstanding securities as of the date of the balance sheet filed by the Fund. (d) Redemption in Kind. If the Fund has received an order of exemption from section 18(f) or has filed a notice of election under rule 18f–1 that has not been withdrawn, describe the nature, extent, and effect of the exemptive relief or notice. (e) Arrangements Permitting Frequent Purchases and Redemptions of Fund Shares. Describe any arrangements with any person to permit frequent purchases and redemptions of Fund shares, including the identity of the persons permitted to engage in frequent purchases and redemptions pursuant to such arrangements, and any compensation or other consideration received by the Fund, its investment adviser, or any other party pursuant to such arrangements. Instructions 1. The consideration required to be disclosed by Item 23(e) includes any agreement to maintain assets in the Fund or in other investment companies or accounts managed by the investment adviser or by any affiliated person of the investment adviser. 2. If the Fund has an arrangement to permit frequent purchases and redemptions by a group of individuals, such as the participants in a defined contribution plan that meets the requirements for qualification under Section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)], the Fund may identify the group rather than identifying each individual group member. Item 24. Taxation of the Fund (a) If applicable, state that the Fund is qualified or intends to qualify under Subchapter M of the Internal Revenue Code. Disclose the consequences to the Fund if it does not qualify under Subchapter M. (b) Disclose any special or unusual tax aspects of the Fund, such as taxation resulting from foreign investment or from status as a personal holding company, or any tax loss carry-forward to which the Fund may be entitled. E:\FR\FM\05NOP2.SGM 05NOP2 70879 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Item 25. Underwriters (a) Distribution of Securities. For each principal underwriter distributing securities of the Fund, state: (1) The nature of the obligation to distribute the Fund’s securities; (2) Whether the offering is continuous; and and other compensation received by each principal underwriter, who is an affiliated person of the Fund or an affiliated person of that affiliated person, directly or indirectly, from the Fund during the Fund’s most recent fiscal year: (1) (2) (3) (4) (5) Name of Principal Underwriter Net Underwriting Discounts and Commissions Compensation on Redemptions and Repurchases Brokerage Commissions Other Compensation Instruction Disclose in a footnote to the table the type of services rendered in consideration for the compensation listed under column (5). (c) Other Payments. With respect to any payments made by the Fund to an underwriter or dealer in the Fund’s shares during the Fund’s last fiscal year, disclose the name and address of the underwriter or dealer, the amount paid and basis for determining that amount, the circumstances surrounding the payments, and the consideration received by the Fund. Do not include information about: (1) Payments made through deduction from the offering price at the time of sale of securities issued by the Fund; (2) Payments representing the purchase price of portfolio securities acquired by the Fund; (3) Commissions on any purchase or sale of portfolio securities by the Fund; or (4) Payments for investment advisory services under an investment advisory contract. Instructions 1. Do not include in response to this paragraph information provided in response to paragraph (b) or with respect to service fees under the Instruction to Item 12(b)(2). Do not include any payment for a service excluded by Instructions 1 and 2 to Item 19(d) or by Instruction 2 to Item 34. 2. If the payments were made under an arrangement or policy applicable to dealers generally, describe only the arrangement or policy. khammond on DSKJM1Z7X2PROD with PROPOSALS2 (3) The aggregate dollar amount of underwriting commissions and the amount retained by the principal underwriter for each of the Fund’s last three fiscal years. (b) Compensation. Provide the information required by the following table with respect to all commissions Item 26. Calculation of Performance Data (a) Money Market Funds. Yield quotation(s) for a Money Market Fund included in the prospectus should be calculated according to paragraphs (a)(1)–(4). (1) Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet included in the VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 registration statement, calculate the Fund’s yield by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical preexisting account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7) with the resulting yield figure carried to at least the nearest hundredth of one percent. (2) Effective Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet included in the registration statement, calculate the Fund’s effective yield, carried to at least the nearest hundredth of one percent, by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, subtracting a hypothetical charge reflecting deductions from shareholder accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7] ¥ 1. (3) Tax Equivalent Current Yield Quotation. Calculate the Fund’s tax equivalent current yield by dividing that portion of the Fund’s yield (as calculated under paragraph (a)(1)) that is tax- exempt by 1 minus a stated income tax rate and adding the quotient to that portion, if any, of the Fund’s yield that is not tax-exempt. (4) Tax Equivalent Effective Yield Quotation. Calculate the Fund’s tax equivalent effective yield by dividing PO 00000 Frm 00165 Fmt 4701 Sfmt 4702 that portion of the Fund’s effective yield (as calculated under paragraph (a)(2)) that is tax-exempt by 1 minus a stated income tax rate and adding the quotient to that portion, if any, of the Fund’s effective yield that is not tax-exempt. Instructions 1. When calculating yield or effective yield quotations, the calculation of net change in account value must include: (a) The value of additional shares purchased with dividends from the original share and dividends declared on both the original shares and additional shares; and (b) All fees, other than non-recurring account or sales charges, that are imposed on all shareholder accounts in proportion to the length of the base period. For any account fees that vary with the size of the account, assume an account size equal to the Fund’s mean (or median) account size. 2. Exclude realized gains and losses from the sale of securities and unrealized appreciation and depreciation from the calculation of yield and effective yield. Exclude income other than investment income. 3. Disclose the amount or specific rate of any nonrecurring account or sales charges not included in the calculation of the yield. 4. If the Fund holds itself out as distributing income that is exempt from Federal, state, or local income taxation, in calculating yield and effective yield (but not tax equivalent yield or tax equivalent effective yield), reduce the yield quoted by the effect of any income taxes on the shareholder receiving dividends, using the maximum rate for individual income taxation. For example, if the Fund holds itself out as distributing income exempt from Federal taxation and the income taxes of State A, but invests in some securities of State B, it must reduce its yield by the effect of state income taxes that must be paid by the residents of State A on that portion of the income attributable to the securities of State B. E:\FR\FM\05NOP2.SGM 05NOP2 70880 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (b) Other Funds. Performance information included in the prospectus should be calculated according to paragraphs (b)(1)–(6). (1) Average Annual Total Return Quotation. For the 1-, 5-, and 10-year periods ended on the date of the most recent balance sheet included in the registration statement (or for the periods the Fund has been in operation), calculate the Fund’s average annual total return by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the Fund’s operations) that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)n = ERV Where: P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10- year periods (or fractional portion). khammond on DSKJM1Z7X2PROD with PROPOSALS2 Instructions 1. Assume the maximum purchase charge (or other charges deducted from payments) is deducted from the initial $1,000 payment. 2. Assume all distributions by the Fund are reinvested at the price stated in the prospectus (including any purchase charge imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the Fund’s mean (or median) account size. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the Fund’s shares. 4. Determine the ending redeemable value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed an exit charge, assume the maximum exit charge is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. 5. State the average annual total return quotation to the nearest hundredth of one percent. 6. Total return information in the prospectus need only be current to the end of the Fund’s most recent fiscal year. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 (2) Average Annual Total Return (After Taxes on Distributions) Quotation. For the 1-, 5-, and 10-year periods ended on the-date-of the most recent balance sheet included in the registration statement (or for the periods the Fund has been in operation), calculate the Fund’s average annual total return (after taxes on distributions) by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the Fund’s operations) that would equate the initial amount invested to the ending value, according to the following formula: P(1 + T)n = ATVD Where: P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ATVD = ending value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion), after taxes on fund distributions but not after taxes on redemption. Instructions 1. Assume the maximum purchase charge (or other charges deducted from payments) is deducted from the initial $1,000 payment. 2. Assume all distributions by the Fund, less the taxes due on such distributions, are reinvested at the price stated in the prospectus (including any purchase charge imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Calculate the taxes due on any distributions by the Fund by applying the tax rates specified in Instruction 4 to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, longterm capital gain). The taxable amount and tax character of each distribution should be as specified by the Fund on the dividend declaration date, but may be adjusted to reflect subsequent recharacterizations of distributions. Distributions should be adjusted to reflect the Federal tax impact the distribution would have on an individual taxpayer on the reinvestment date. For example, assume no taxes are due on the portion of any distribution that would not result in Federal income tax on an individual, e.g., tax-exempt interest or non-taxable returns of capital. The effect of applicable tax credits, such as the foreign tax credit, should be taken into account in accordance with Federal tax law. 4. Calculate the taxes due using the highest individual marginal Federal income tax rates in effect on the PO 00000 Frm 00166 Fmt 4701 Sfmt 4702 reinvestment date. The rates used should correspond to the tax character of each component of the distributions (e.g., ordinary income rate for ordinary income distributions, short-term capital gain rate for short-term capital gain distributions, long-term capital gain rate for long-term capital gain distributions). Note that the required tax rates may vary over the measurement period. Disregard any potential tax liabilities other than Federal tax liabilities (e.g., state and local taxes); the effect of phaseouts of certain exemptions, deductions, and credits at various income levels; and the impact of the Federal alternative minimum tax. 5. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the Fund’s mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay such fees. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the Fund’s shares. 6. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed an exit charge, assume the maximum exit charge is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. Assume that the redemption has no tax consequences. 7. State the average annual total return (after taxes on distributions) quotation to the nearest hundredth of one percent. (3) Average Annual Total Return (After Taxes on Distributions and Redemption) Quotation. For the 1-, 5-, and 10-year periods ended on the date of the most recent balance sheet included in the registration statement (or for the periods the Fund has been in operation), calculate the Fund’s average annual total return (after taxes on distributions and redemption) by finding the average annual compounded rates of return over the 1-, 5-, and 10year periods (or for the periods of the Fund’s operations) that would equate the initial amount invested to the ending value, according to the following formula: P(1 + T)n = ATVDR Where: P = a hypothetical initial payment of $1,000. T = average annual total return (after taxes on distributions and redemption). n = number of years. ATVDR = ending value of a hypothetical $1,000 payment made at the beginning of E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Instructions 1. Assume the maximum purchase charge (or other charges deducted from payments) is deducted from the initial $1,000 payment. 2. Assume all distributions by the Fund, less the taxes due on such distributions, are reinvested at the price stated in the prospectus (including any purchase charge imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Calculate the taxes due on any distributions by the Fund by applying the tax rates specified in Instruction 4 to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, longterm capital gain). The taxable amount and tax character of each distribution should be as specified by the Fund on the dividend declaration date, but may be adjusted to reflect subsequent recharacterizations of distributions. Distributions should be adjusted to reflect the Federal tax impact the distribution would have on an individual taxpayer on the reinvestment date. For example, assume no taxes are due on the portion of any distribution that would not result in Federal income tax on an individual, e.g., tax-exempt interest or non-taxable returns of capital. The effect of applicable tax credits, such as the foreign tax credit, should be taken into account in accordance with Federal tax law. 4. Calculate the taxes due using the highest individual marginal Federal income tax rates in effect on the reinvestment date. The rates used should correspond to the tax character of each component of the distributions (e.g., ordinary income rate for ordinary income distributions, short-term capital gain rate for short-term capital gain distributions, long-term capital gain rate for long-term capital gain distributions). Note that the required tax rates may vary over the measurement period. Disregard any potential tax liabilities other than Federal tax liabilities (e.g., state and local taxes); the effect of phaseouts of certain exemptions, deductions, and credits at various income levels; and the impact of the Federal alternative minimum tax. 5. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the Fund’s mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 such fees. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the Fund’s shares. 6. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed an exit charge, assume the maximum exit charge is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. 7. Determine the ending value by subtracting capital gains taxes resulting from the redemption and adding the tax benefit from capital losses resulting from the redemption. (a) Calculate the capital gain or loss upon redemption by subtracting the tax basis from the redemption proceeds (after deducting any nonrecurring charges as specified by Instruction 6). (b) The Fund should separately track the basis of shares acquired through the $1,000 initial investment and each subsequent purchase through reinvested distributions. In determining the basis for a reinvested distribution, include the distribution net of taxes assumed paid from the distribution, but not net of any purchase charges imposed upon reinvestment. Tax basis should be adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable Federal tax law. (c) The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption should be separately determined for shares acquired through the $1,000 initial investment and each subsequent purchase through reinvested distributions. The Fund should not assume that shares acquired through reinvestment of distributions have the same holding period as the initial $1,000 investment. The tax character should be determined by the length of the measurement period in the case of the initial $1,000 investment and the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. (d) Calculate the capital gains taxes (or the benefit resulting from tax losses) using the highest Federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with Federal tax law applicable on the redemption date. For example, applicable Federal tax law should be used to determine whether and how gains and losses from the sale of shares PO 00000 Frm 00167 Fmt 4701 Sfmt 4702 with different holding periods should be netted, as well as the tax character (e.g., short-term or long-term) of any resulting gains or losses. Assume that a shareholder has sufficient capital gains of the same character from other investments to offset any capital losses from the redemption so that the taxpayer may deduct the capital losses in full. 8. State the average annual total return (after taxes on distributions and redemption) quotation to the nearest hundredth of one percent. (4) Yield Quotation. Based on a 30day (or one month) period ended on the date of the most recent balance sheet included in the registration statement, calculate the Fund’s yield by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period. Instructions 1. To calculate interest earned on debt obligations for purposes of ‘‘a’’ above: (a) Calculate the yield to maturity of each obligation held by the Fund based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day of each month or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest). The maturity of an obligation with a call provision(s) is the next call date on which the obligation reasonably may be expected to be called, or if none, the maturity date. (b) Divide the yield to maturity by 360 and multiply the quotient by the market value of the obligation (including actual accrued interest) to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the portfolio. Assume that each month has 30 days. (c) Total the interest earned on all debt obligations and all dividends accrued on all equity securities during the 30-day (or one month) period. Although the period for calculating interest earned is based on calendar E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.005</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 the 1-, 5-, or 10-year periods (or fractional portion), after taxes on fund distribution and redemption. 70881 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70882 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules months, a 30-day yield may be calculated by aggregating the daily interest on the portfolio from portions of 2 months. In addition, a Fund may recalculate daily interest income on the portfolio more than once a month. (d) For a tax-exempt obligation issued without original issue discount and having a current market discount, use the coupon rate of interest in lieu of the yield to maturity. For a tax-exempt obligation with original issue discount in which the discount is based on the current market value and exceeds the then-remaining portion of original issue discount (market discount), base the yield to maturity on the imputed rate of the original issue discount calculation. For a tax-exempt obligation with original issue discount, where the discount based on the current market value is less than the then-remaining portion of original issue discount (market premium), base the yield to maturity on the market value. 2. For discount and premium on mortgage or other receivables-backed obligations that are expected to be subject to monthly payments of principal and interest (‘‘paydowns’’): (a) Account for gain or loss attributable to actual monthly paydowns as an increase or decrease to interest income during the period; and (b) The Fund may elect: (i) To amortize the discount and premium on the remaining securities, based on the cost of the securities, to the weighted average maturity date, if the information is available, or to the remaining term of the securities, if the weighted average maturity date is not available; or (ii) Not to amortize the discount or premium on the remaining securities. 3. Solely for the purpose of calculating yield, recognize dividend income by accruing 1/360 of the stated dividend rate of the security each day that the security is in the portfolio. 4. Do not use equalization accounting in calculating yield. 5. Include expenses accrued under a plan adopted under rule 12b–1 in the expenses accrued for the period. Reimbursement accrued under the plan may reduce the accrued expenses, but only to the extent the reimbursement does not exceed expenses accrued for the period. 6. Include in the expenses accrued for the period all recurring fees that are charged to all shareholder accounts in proportion to the length of the base period. For any account fees that vary with the size of the account, assume an account size equal to the Fund’s mean (or median) account size. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 7. If a broker-dealer or an affiliate of the broker-dealer (as defined in rule 1– 02(b) of Regulation S–X [17 CFR 210.1– 02(b)]) has, in connection with directing the Fund’s brokerage transactions to the broker-dealer, provided, agreed to provide, paid for, or agreed to pay for, in whole or in part, services provided to the Fund (other than brokerage and research services as those terms are used in section 28(e) of the Securities Exchange Act [15 U.S.C. 78bb(e)]), add to expenses accrued for the period an estimate of additional amounts that would have been accrued for the period if the Fund had paid for the services directly in an arm’s length transaction. 8. Undeclared earned income, calculated in accordance with generally accepted accounting principles, may be subtracted from the maximum offering price. Undeclared earned income is the net investment income that, at the end of the base period, has not been declared as a dividend, but is reasonably expected to be and is declared as a dividend shortly thereafter. 9. Disclose the amount or specific rate of any nonrecurring account or sales charges. 10. If, in connection with the sale of the Fund’s shares, an exit charge payable in installments is imposed, the ‘‘maximum public offering price’’ includes the aggregate amount of the installments (‘‘installment charge amount’’). (5) Tax Equivalent Yield Quotation. Based on a 30-day (or one month) period ended on the date of the most recent balance sheet included in the registration statement, calculate the Fund’s tax equivalent yield by dividing that portion of the Fund’s yield (as calculated under paragraph (b)(2)) that is tax-exempt by 1 minus a stated income tax rate and adding the quotient to that portion, if any, of the Fund’s yield that is not tax-exempt. (6) Non-Standardized Performance Quotation. A Fund may calculate performance using any other historical measure of performance (not subject to any prescribed method of computation) if the measurement reflects all elements of return. Item 27. Financial Statements (a) Include, in a separate section following the responses to the preceding Items, the financial statements and schedules required by Regulation S–X. The specimen price- make-up sheet required by Instruction 4 to Item 23(c) may be provided as a continuation of the balance sheet specified by Regulation S–X. PO 00000 Frm 00168 Fmt 4701 Sfmt 4702 Instructions 1. The statements of any subsidiary that is not a majority-owned subsidiary required by Regulation S–X may be omitted from Part B and included in Part C. 2. In addition to the requirements of rule 3–18 of Regulation S–X [17 CFR 210.3–18], any Fund registered under the Investment Company Act that has not previously had an effective registration statement under the Securities Act must include in its initial registration statement under the Securities Act any additional financial statements and condensed financial information (which need not be audited) necessary to make the financial statements and condensed financial information included in the registration statement current as of a date within 90 days prior to the date of filing. Item 27A. Annual and Semi-Annual Shareholder Report (a) Annual and Semi-Annual Reports. Every annual shareholder report required by rule 30e–1 must contain the information required by paragraphs (b) through (i) of this Item and may contain the information permitted by paragraph (j) of this Item. Every semi-annual shareholder report required by rule 30e– 1 must contain the information required by paragraphs (b), (c), (e), (f), (h), and (i) of this Item and may contain other information permitted or required in annual shareholder reports. Instructions 1. For annual shareholder reports, disclose the information required or permitted by paragraphs (b) through (j) of this Item in the same order as these items appear below. In an annual shareholder report that appears on a website or is otherwise provided electronically, organize the information in a manner that gives each item similar prominence as that provided by the order prescribed in this Instruction. 2. For semi-annual shareholder reports, disclose the information that must appear in the report pursuant to paragraph (a) of this Item in the same order as these items appear below. Any other information permitted in annual shareholder reports, which the Fund chooses to include in its semi-annual shareholder report pursuant to this Item, must also be included in the same order as these items appear below. For example, if a Fund chooses to include the information described in paragraph (g) in its semi-annual shareholder report, the information in the Fund’s semi-annual report must appear in the following order: Paragraphs (b), (c), (e), E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (f), (g), (h), and (i). In a semi-annual shareholder report that appears on a website or electronically, organize the information in a manner that gives each item similar prominence as that provided by the order prescribed in this Instruction. 3. Do not include information in an annual or semi-annual shareholder report other than disclosure that Item 27A and its Instructions require or permit in annual or semi-annual shareholder reports, as applicable, or as provided by rule 8b–20 under the Investment Company Act [17 CFR 270.8b–20]. 4. Prepare a separate annual or semiannual shareholder report for each Series of a Fund. 5. A Fund may not incorporate by reference any information into its annual or semi-annual shareholder report. 6. Use plain English in an annual or semi-annual shareholder report, taking into consideration Fund shareholders’ level of financial experience. Include white space and use other design features to make the annual or semiannual shareholder report easy to read. The annual or semi-annual shareholder report should be concise and direct. Specifically: (i) Use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless clearly explained; (v) avoid multiple negatives; (vi) use ‘‘you,’’ ‘‘we,’’ etc. to speak directly to shareholders; and (vii) use descriptive headers and sub-headers. Do not use vague or imprecise ‘‘boilerplate.’’ 7. If a required disclosure is inapplicable, a Fund may omit the disclosure from an annual or semiannual shareholder report. A Fund may modify a required legend or narrative information if the modified language contains comparable information. 8. Funds should use design techniques that promote effective communication. Funds are encouraged to use, as appropriate, question-andanswer formats, charts, graphs, tables, bullet lists, and other graphics or text features to respond to the required disclosures. For an annual or semi-annual shareholder report that appears on a website or is otherwise provided electronically, funds are encouraged to use online tools (for example, tools that populate discrete sets of information based on investor selections—e.g., Class-specific information, performance information over different time horizons, or the dollar value used to illustrate the Fund’s expenses or to VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 populate the performance line graph, as applicable). The default presentation must use the value that the applicable form requirement prescribes. Funds also may include: (i) A means of facilitating electronic access to video or audio messages, or other forms of information (e.g., hyperlink, website address, Quick Response Code (‘‘QR code’’), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) expense calculators; or (vi) other forms of electronic media, communications, or tools designed to enhance an investor’s understanding of material in the annual or semi-annual shareholder report. Any information that is not included in the annual or semi-annual shareholder report filed on Form N–CSR shall have the same status, under the Federal securities laws, as any other website or electronic content that the Fund produces or disseminates. 9. In an annual or semi-annual shareholder report posted on a website or otherwise provided electronically, Funds must provide a means of facilitating access to any information that is referenced in the annual or semiannual shareholder report if the information is available online, including, for example, hyperlinks to the Fund’s prospectus and financial statements. In an annual or semi-annual shareholder report that is delivered in paper format, Funds may include website addresses, QR codes, or other means of facilitating access to such information. Funds must provide a link specific enough to lead investors directly to the particular information, rather than to the home page or section of the fund’s website other than on which the information is posted. The link may be to a central site central site with prominent links to the referenced information. 10. Explanatory or supplemental information included in an annual or semi-annual shareholder report under Instruction 8 or 9 may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, Funds may include instructions on their use and interpretation. 11. Unless otherwise indicated, the reporting period for an annual shareholder report is the Fund’s most recent fiscal year, and the reporting period for a semi-annual shareholder report is the Fund’s most recent fiscal half-year. 12. The Fund’s annual or semi-annual shareholder report must be given greater prominence than other materials that PO 00000 Frm 00169 Fmt 4701 Sfmt 4702 70883 accompany the report, with the exception of other shareholder reports, summary prospectuses or statutory prospectuses (both as defined in rule 498 under the Securities Act [17 CFR 230.498]), or a notice of internet availability of proxy materials under rule 14a–6 under the Securities Exchange Act [17 CFR 240.14a–6]. 13. In an annual or semi-annual shareholder report posted on a website or otherwise provided electronically, Funds may satisfy legibility requirements applicable to printed documents by presenting all required information in a format that promotes effective communication as described in Instruction 8. The body of every printed annual or semi-annual shareholder report and other tabular data included therein shall comply with the applicable legibility of prospectus requirements set forth in rule 420 under the Securities Act of 1933. (b) Cover Page or Beginning of Annual or Semi-Annual Shareholder Report. Include on the cover page or at the beginning of the annual or semi-annual shareholder report: (1) The Fund’s name and the Class or Classes, if any, to which the annual or semi-annual shareholder report relates. (2) The exchange ticker symbol of the Fund’s shares or, if the annual or semiannual shareholder report relates to one or more Classes of the Fund’s shares, adjacent to each such Class, its exchange ticker symbol. If the Fund is an Exchange-Traded Fund, also identify the principal U.S. market or markets on which the Fund’s shares are traded. (3) A statement identifying the document as an ‘‘annual shareholder report’’ or a ‘‘semi-annual shareholder report,’’ as applicable. (4) The following statement: This [annual or semi-annual] shareholder report contains important information about [the Fund] for the period of [beginning date] to [end date] [as well as certain changes to the Fund]. You can find additional information about the Fund at [______]. You can also request this information by contacting us at [______]. Instructions 1. A Fund may include graphics, logos, and other design or text features on the cover page or at the beginning of its annual or semi-annual shareholder report to help shareholders identify the materials as the Fund’s annual or semiannual shareholder report. 2. In the statement required under paragraph (b)(4), provide the toll-free telephone number and, as applicable, email address that shareholders can use to request additional information about E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules the Fund. Provide a website address where information about the Fund is available. The website address must be specific enough to lead shareholders directly to the materials that are required to be accessible under rule 30e–1, rather than to the home page or a section of the website other than on which the materials are posted. The website may be a central site with prominent links to the materials that must be accessible under rule 30e–1. In addition to the website address, a Fund may include other ways an investor can find or request additional information about the Fund (e.g., QR code, mobile application). A Fund that discloses material fund changes under paragraph (g) of this Item 27A must include the bracketed language in the required statement referring to certain changes to the Fund. (c) Fund Expenses. In a table, provide the expenses of an ongoing $10,000 investment in the Fund during the reporting period. The table must show: (i) The beginning value of the account; (ii) total return during the period, before deducting expenses; (iii) expenses in dollars paid during the period; (iv) the ending value of the account based on net asset value return; (v) for ETFs only, the ending value of the account based on market value return; and (vi) expenses as a percent of an investor’s investment in the Fund (i.e. expense ratio). Instructions footnote to the expense table, state that the expense table reflects the expenses of both the Feeder and Master Funds. (e) If the report covers more than one Class of a Multiple Class Fund, provide a separate expense table, or a separate line item in the expense table, for each Class. (f) In a footnote to the ‘‘Total return before costs paid’’ column, the Fund must qualitatively describe, in plain English under rule 421(d) under the Securities Act, other costs included in total return, if material to the fund. For example, if applicable, the Fund must explain that the total return includes fund investment transaction costs, securities lending costs, or acquired fund fees and expenses, which materially reduced total return. (g) In a footnote to the ‘‘Costs paid’’ and the ‘‘Costs paid as a percentage of your investment’’ columns, the Fund must briefly explain, in plain English under rule 421(d) under the Securities Act, that the table does not reflect shareholder transaction costs associated with purchasing or selling Fund shares. (h) If the Fund is an Exchange-Traded Fund: (i) In addition to the ‘‘Ending account value’’ column (which, for an ExchangeTraded Fund, must be titled ‘‘Ending account value (based on net asset value return)’’), also provide the ‘‘Ending account value (based on market value return)’’ column in the expense table. (ii) Modify the narrative explanation to state that investors may pay brokerage commissions on their purchases and sales of Exchange-Traded Fund shares, which are not reflected in the expense table; and (iii) Exclude any fees charged for the purchase and redemption of the Fund’s creation units. (i) If the Fund’s annual or semiannual shareholder report covers a period of time that is less than the full reporting period of the annual or semiannual report, the Fund must include a footnote to the table to briefly explain 1. General. (a) Round all percentages in the table to the nearest hundredth of one percent and round all dollar figures in the table to the nearest dollar. (b) Provide the amounts in each of the columns as a mathematical expression, as appropriate (i.e., include +,¥and = symbols). Costs paid during the period must be expressed as a negative amount. Total return, if negative during the period, must be expressed as a negative amount. (c) Use text and/or table features to make the ‘‘costs paid’’ and ‘‘costs paid as a percentage of your investment’’ columns more noticeable and more prominent than the other columns of the table through, for example: Graphics, larger font size, different border width or column shading, or different colors or font styles. (d) If the Fund is a Feeder Fund, reflect the aggregate expenses of the Feeder Fund and the Master Fund. In a VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00170 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 EP05NO20.006</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS2 70884 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules that expenses for the full reporting period would be higher. (j) If the disclosed expenses include extraordinary expenses, the Fund may include a brief footnote to the ‘‘Costs paid as a percentage of your investment’’ column disclosing what actual costs would have been if extraordinary expenses were not included. ‘‘Extraordinary expenses’’ refers to expenses that are distinguished by their unusual nature and by the infrequency of their occurrence. Unusual nature means the expense has a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the Fund, taking into account the environment in which the Fund operates. Infrequency of occurrence means the expense is not reasonably expected to recur in the foreseeable future, taking into consideration the environment in which the Fund operates. The environment of a Fund includes such factors as the characteristics of the industry or industries in which it operates, the geographical location of its operations, and the nature and extent of government regulation. 2. Computation. (a) To determine ‘‘Costs paid,’’ 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. (b) Assume reinvestment of all dividends and distributions. (c) In the annual shareholder report, disclose the expense ratio in the ‘‘Costs paid as a percentage of your investment’’ column as it appears in the Fund’s most recent audited financial statements or financial highlights. In the semi-annual shareholder report, the Fund’s expense ratio in the ‘‘Costs paid as a percentage of your investment column’’ should be calculated in the manner required by Instruction 4(b) to Item 13(a) using the expenses for the Fund’s most recent fiscal half-year. Express the expense ratio on an annualized basis. (d) The figure reflected in the ‘‘Total return before costs paid’’ column should equal the figure in the ‘‘Ending account value (based on net asset value return)’’ column less the figure in the ‘‘Beginning account value’’ column less the figure in the ‘‘Costs paid’’ column. (e) To calculate the Fund’s ‘‘Ending account value (based on net asset value return),’’ multiply $10,000 by the Fund’s net asset value return. In the annual shareholder report, use the Fund’s net asset value return as it VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 appears in the Fund’s most recent audited financial statements or financial highlights. In the semi-annual report, the Fund’s net asset value return should be calculated in the manner required by Instruction 3 to Item 13(a). (f) For Exchange-Traded Funds only, calculate the Fund’s ‘‘Ending account value (based on market value return)’’ by multiplying $10,000 by the Fund’s market value return. In the semi-annual report, the Fund’s market value return should be calculated in the manner required by Instruction 3 to Item 13(a). In the annual shareholder report, use the Fund’s market value return as it appears in the Fund’s most recent audited financial statements or financial highlights. (d) Management’s Discussion of Fund Performance. Disclose the following information unless the Fund is a Money Market Fund: (1) Briefly summarize the key factors that materially affected the Fund’s performance during the reporting period, including the relevant market conditions and the investment strategies and techniques used by the Fund’s investment adviser. Instruction 1. As appropriate, use graphics or text features, such as bullet lists or tables, to present the key factors. Do not include a lengthy, generic, or overly broad discussion of the factors that generally affected market performance during the reporting period. (2) Line graph and table. (i) Provide a line graph comparing the initial and subsequent account values at the end of each of the most recently completed 10 fiscal years of the Fund (or for the life of the Fund, if shorter), but only for periods subsequent to the effective date of the Fund’s registration statement. Assume a $10,000 initial investment at the beginning of the first fiscal year in an appropriate broadbased securities market index for the same period. (ii) In a table placed within or next to the graph, provide the Fund’s average annual total returns for the 1-, 5-, and 10-year periods as of the end of the reporting period (or for the life of the Fund, if shorter), but only for periods subsequent to the effective date of the Fund’s registration statement. Separately provide the average annual total returns with and without sales charges, as applicable. Also provide the average annual total returns of an appropriate broad-based securities market index for the same periods. (iii) Include a statement accompanying the graph and table to the effect that: PO 00000 Frm 00171 Fmt 4701 Sfmt 4702 70885 (A) The Fund’s past performance is not a good predictor of the Fund’s future performance. Use text features to make the statement noticeable and prominent through, for example: Graphics, larger font size, or different colors or font styles. (B) The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or redemption of fund shares. Instructions 1. Line Graph Computation. (a) Assume that the initial investment was made at the offering price last calculated on the business day before the first day of the first fiscal year. (b) Base subsequent account values on the net asset value of the Fund last calculated on the last business day of the first and each subsequent fiscal year. (c) Calculate the final account value by assuming the account was closed and redemption was at the price last calculated on the last business day of the reporting period. (d) Base the line graph on the Fund’s required minimum initial investment if that amount exceeds $10,000. 2. Sales Load. Reflect any purchase charges (or any other fees charged at the time of purchasing shares or opening an account) by beginning the line graph at the amount that actually would be invested (i.e., assume that the maximum purchase charge, and other charges deducted from payments, is deducted from the initial $10,000 investment). For a Fund whose shares are subject to a contingent exit charge, assume the deduction of the maximum exit charge (or other charges) that would apply for a complete redemption that received the price last calculated on the last business day of the reporting period. For any other exit charge, assume that the deduction is in the amount(s) and at the time(s) that the exit charge actually would have been deducted. 3. Dividends and Distributions. Assume reinvestment of all of the Fund’s dividends and distributions on the reinvestment dates during the period, and reflect any purchase charge imposed upon reinvestment of dividends or distributions or both. 4. Account Fees. Reflect recurring fees that are charged to all accounts. (a) For any account fees that vary with the size of the account, assume a $10,000 account size. (b) Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the Fund’s shares. (c) Reflect an annual account fee that applies to more than one Fund by E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 70886 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules allocating the fee in the following manner: Divide the total amount of account fees collected during the year by the Funds’ total average net assets, multiply the resulting percentage by the average account value for each Fund and reduce the value of each hypothetical account at the end of each fiscal year during which the fee was charged. 5. Table Computation. Compute average annual total returns in accordance with Item 26(b)(1). To calculate average annual total returns without sales charges, do not deduct sales charges, as applicable, as otherwise described in the instructions to Item 26(b)(1). For the Fund’s 1-year annual total return without sales charges in an annual shareholder report, use the 1-year total return in the Fund’s most recent audited financial highlights. 6. Appropriate Broad-Based Securities Market Index. For purposes of this Item, an ‘‘appropriate broad-based securities market index’’ is one that is administered by an organization that is not an affiliated person of the Fund, its investment adviser, or principal underwriter, unless the index is widely recognized and used. A ‘‘broad-based index’’ is an index that represents the overall applicable domestic or international equity or debt markets, as appropriate. Adjust the index to reflect the reinvestment of dividends on securities in the index, but do not reflect the expenses of the Fund. 7. Additional Indexes. A Fund is encouraged to compare its performance not only to the required broad-based index, but also to other more narrowly based indexes that reflect the market sectors in which the Fund invests. A Fund also may compare its performance to an additional broad-based index, or to a non-securities index (e.g., the Consumer Price Index), so long as the comparison is not misleading. 8. Change in Index. If the Fund uses an index that is different from the one used for the immediately preceding reporting period, explain the reason(s) for the change and compare the Fund’s annual change in the value of an investment in the hypothetical account with the new and former indexes. 9. Interim Periods. The line graph may compare the ending values of interim periods (e.g., monthly or quarterly ending values), so long as those periods are after the effective date of the Fund’s registration statement. 10. Scale. The axis of the graph measuring dollar amounts may use either a linear or a logarithmic scale. 11. New Funds. A New Fund (as defined in Instruction 7 to Item 8A) is not required to include the information VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 specified by this Item in its annual shareholder report, unless Form N–1A (or the Fund’s annual Form N–CSR report) contains audited financial statements covering a period of at least 6 months. 12. Change in Investment Adviser. If the Fund has not had the same investment adviser for the previous 10 fiscal years, the Fund may begin the line graph on the date that the current adviser began to provide advisory services to the Fund so long as: (a) Neither the current adviser nor any affiliate is or has been in ‘‘control’’ of the previous adviser under section 2(a) (9) [15 U.S.C. 80a–2(a)(9)]; (b) The current adviser employs no officer(s) of the previous adviser or employees of the previous adviser who were responsible for providing investment advisory or portfolio management services to the Fund; and (c) The graph is accompanied by a statement explaining that previous periods during which the Fund was advised by another investment adviser are not shown. 13. Multiple Class Funds. (a) Provide information about account values in the line graph under Item 27A(d)(2)(i) for at least one Class. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets) if the Fund: (i) Selects the Class with 10 or more years of annual returns if other Classes have fewer than 10 years of annual returns; (ii) Selects the Class with the longest period of annual returns when the Classes all have fewer than 10 years of annual returns; and (iii) If the Fund provides account values in the line graph for a Class that is different from the Class selected for the most immediately preceding annual shareholder report, briefly explain in a footnote to the line graph the reasons for selecting a different Class. (b) Provide information about each Class’s average annual total returns in the table under Item 27A(d)(2)(ii). 14. Material Changes. If a material change to the Fund has occurred during the period covered by the line graph and table, such as a change in investment adviser or a change to the Fund’s investment strategies, the Fund may include a brief legend or footnote to describe the relevant change and when it occurred. 15. Availability of Updated Performance Information. If the Fund provides updated performance information on its website or through other widely accessible mechanisms, direct shareholders to where they can find this information. PO 00000 Frm 00172 Fmt 4701 Sfmt 4702 (3) If the Fund has a policy or practice of maintaining a specified level of distributions to shareholders, disclose if the Fund was unable to meet the specified level of distribution during the reporting period. Also discuss the extent to which the Fund’s distribution policy resulted in distributions of capital. (4) For an Exchange-Traded Fund, provide a table showing the number of days the Market Price of the Fund shares was greater than the Fund’s net asset value and the number of days it was less than the Fund’s net asset value (i.e., premium or discount) for the most recently completed calendar year, and the most recently completed calendar quarters since that year (or the life of the Fund, if shorter). The Fund may omit the information required by this paragraph if it satisfies the requirements of paragraphs (c)(1)(ii)–(iv) and (c)(1)(vi) of Rule 6c–11 [17 CFR 270.6c– 11(c)(1)(ii)–(iv) and (c)(1)(vi)] under the Investment Company Act. Instructions 1. Provide the information in tabular form. 2. Express the information as a percentage of the net asset value of the Exchange-Traded Fund, using separate columns for the number of days the Market Price was greater than the Fund’s net asset value and the number of days it was less than the Fund’s net asset value. Round all percentages to the nearest hundredth of one percent. 3. Adjacent to the table, provide a brief explanation that: Shareholders may pay more than net asset value when they buy Fund shares and receive less than net asset value when they sell those shares, because shares are bought and sold at current market prices. 4. Include a statement that the data presented represents past performance and cannot be used to predict future results. (e) Fund Statistics. Disclose the Fund’s net assets, total number of portfolio holdings, and portfolio turnover rate as of the end of the reporting period. A Fund may provide additional statistics that the Fund believes would help shareholders better understand the Fund’s activities and operations during the reporting period (e.g., tracking error, maturity, duration, average credit quality, or yield). Instructions 1. If the Fund provides a statistic that is otherwise described in this form, it must follow any associated instructions describing the calculation method for the relevant statistic. E:\FR\FM\05NOP2.SGM 05NOP2 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 2. As appropriate, use graphics or text features, such as bullet lists or tables, to present the fund statistics. 3. If the Fund provides a statistic in a shareholder report that is otherwise included in, or could be derived from, the Fund’s financial statements or financial highlights, the fund must use or derive such statistic from the Fund’s most recent financial statements or financial highlights. 4. A Fund may briefly describe the significance or limitations of any disclosed statistics in a parenthetical, footnote, or similar presentation. 5. A Fund may include additional statistics only if they are reasonably related to the Fund’s investment strategy. (f) Graphical Representation of Holdings. One or more tables, charts, or graphs depicting the portfolio holdings of the Fund, as of the end of the reporting period, by reasonably identifiable categories (e.g., type of security, industry sector, geographic regions, credit quality, or maturity) showing the percentage of (i) net asset value, (ii) total investments, (iii) net exposure, or (iv) total exposure attributable to each. The categories and the basis of the presentation should be disclosed in a manner reasonably designed to depict clearly the types of investments made by the Fund, given its investment objectives. A fund that uses ‘‘net exposure’’ or ‘‘total exposure’’ as a basis for representing its holdings may also include a brief explanation of this presentation. If the Fund depicts portfolio holdings according to the credit quality, it should include a brief description of how the credit quality of the holdings were determined, and if credit ratings, as defined in section 3(a)(60) of the Securities Exchange Act [15 U.S.C. 78(c)(a)(60)], assigned by a credit rating agency, as defined in section 3(a)(61) of the Securities Exchange Act [15 U.S.C. 78(c)(a)(61)], are used, concisely explain how they were identified and selected. This description should be included near, or as part of, the graphical representation. (g) Material Fund Changes. Briefly describe any material change, with respect to any of the following items, that has occurred since the beginning of the reporting period or that the Fund plans to make in connection with updating its prospectus under section 10(a)(3) of the Securities Act for the current fiscal year. The Fund also may describe other material changes that it would like to disclose to its shareholders. (1) The Fund’s name (as described in Item 1(a)(1)); VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 (2) The Fund’s investment objectives or goals (as described in Item 2); (3) With respect to material increases, the Fund’s ongoing annual fees, transaction fees, or maximum account fee (as described in Item 3); (4) The Fund’s principal investment strategies (as described in Item 4(a)); (5) The principal risks of investing in the Fund (as described in Item 4(b)(1)); (6) The Fund’s investment adviser(s) (as described in Item 5(a)); and (7) The Fund’s portfolio manager(s) (as described in Item 5(b)). Instructions 1. Provide a concise description of each material change that the fund describes as specified in this Item 27A(g). Provide enough detail to allow shareholders to understand each change and how each change may affect shareholders. 2. Include a legend to the effect of the following: ‘‘This is a summary of certain changes [and planned changes] to the Fund since [date]. For more complete information, you may review the Fund’s next prospectus, which we expect to be available by [date] at [____] or upon request at [____].’’ Provide the toll-free telephone number and, as applicable, email address that shareholders can use to request copies of the Fund’s prospectus. If the updated prospectus will be made available on a website, provide the address of the central site where a link to the prospectus will be available. 3. A Fund is not required to disclose a material change that occurred during the reporting period if the Fund already disclosed this change in its last annual shareholder report because, for example, the change occurred before the last annual shareholder report was transmitted to shareholders or the Fund planned to make the change in connection with updating its prospectus under section 10(a)(3) of the Securities Act at that time. (h) Changes in and Disagreements with Accountants. If the Fund is required to disclose on Form N–CSR the information that Item 304(a)(1) of Regulation S–K [17 CFR 229.304] requires, provide: (1) A statement of whether the former accountant resigned, declined to stand for re-election, or was dismissed and the date thereof; and (2) A brief, plain English description of disagreements(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. (i) Statement Regarding Liquidity Risk Management Program. If the board of PO 00000 Frm 00173 Fmt 4701 Sfmt 4702 70887 directors reviewed the Fund’s liquidity risk management program pursuant to rule 22e–4(b)(2)(iii) of the Act [17 CFR 270.22e–4(b)(2)(iii)] during the Fund’s most recent fiscal half-year, briefly summarize the: (i) Key factors or market events that materially affected the fund’s liquidity risk during the reporting period; (ii) key features of the Fund’s liquidity risk management program; and (iii) effectiveness of the Fund’s liquidity risk management program over the past year. Instructions 1. The disclosure responsive to this item should be tailored to the fund rather than rely on generic, standard disclosures. 2. If the board reviews the liquidity risk management program more frequently than annually, a fund may choose to include the discussion of the program’s operation and effectiveness over the past year in one of either the fund’s annual or semi-annual reports, but does not need to include it in both reports. (j) Availability of Additional Information. Provide a brief, plain English statement that certain additional Fund information is available on the Fund’s website. Include plain English references to, as applicable, the fund’s prospectus, financial information, holdings, and proxy voting information. A Fund may also refer to other information available on the Fund’s website if it reasonably believes that shareholders would likely view the information as important. Instructions 1. Provide means of facilitating shareholders’ access to the additional information in accordance with Instruction 9 to Item 27A(a). 2. If the Fund provides prominent links to the additional information it refers to under this Item 27A(j) on the same central site the Fund discloses under Item 27A(b), the Fund may state that materials are available at the website address included at the beginning of its annual or semi-annual shareholder report. The Fund would not need to provide other means of facilitating shareholders’ access to the relevant additional information under these circumstances. (k) Householding. A Fund may include disclosure required under rule 30e–1(e)(3) [17 CFR 270.30e–1(e)(3)] or rule 498B(c)(3) under the Securities Act [17 CFR 230.498B(c)(3)] to explain how shareholders who have consented to receive a single annual or semi-annual shareholder report or notice of material E:\FR\FM\05NOP2.SGM 05NOP2 70888 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules changes at a shared address may revoke this consent. Part C—Other Information khammond on DSKJM1Z7X2PROD with PROPOSALS2 Item 28. Exhibits Subject to General Instruction D regarding incorporation by reference and rule 483 under the Securities Act [17 CFR 230.483], file the exhibits listed below as part of the registration statement. Letter or number the exhibits in the sequence indicated and file copies rather than originals, unless otherwise required by rule 483. Reflect any exhibit incorporated by reference in the list below and identify the previously filed document containing the incorporated material. (a) Articles of Incorporation. The Fund’s current articles of incorporation, charter, declaration of trust or corresponding instruments and any related amendment. (b) By-laws. The Fund’s current bylaws or corresponding instruments and any related amendment. (c) Instruments Defining Rights of Security Holders. Instruments defining the rights of holders of the securities being registered, including the relevant portion of the Fund’s articles of incorporation or by-laws. (d) Investment Advisory Contracts. Investment advisory contracts relating to the management of the Fund’s assets. (e) Underwriting Contracts. Underwriting or distribution contracts between the Fund and a principal underwriter, and agreements between principal underwriters and dealers. (f) Bonus or Profit Sharing Contracts. Bonus, profit sharing, pension, or similar contracts or arrangements in whole or in part for the benefit of the Fund’s directors or officers in their official capacity. Describe in detail any plan not included in a formal document. (g) Custodian Agreements. Custodian agreements and depository contracts under section 17(f) [15 U.S.C. 80a–17(f)] concerning the Fund’s securities and similar investments, including the schedule of remuneration. (h) Other Material Contracts. Other material contracts not made in the ordinary course of business to be performed in whole or in part on or after the filing date of the registration statement. (i) Legal Opinion. An opinion and consent of counsel regarding the legality of the securities being registered, stating whether the securities will, when sold, be legally issued, fully paid, and nonassessable. (j) Other Opinions. Any other opinions, appraisals, or rulings, and related consents relied on in preparing VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 the registration statement and required by section 7 of the Securities Act [15 U.S.C. 77g]. (k) Omitted Financial Statements. Financial statements omitted from Item 27. (l) Initial Capital Agreements. Any agreements or understandings made in consideration for providing the initial capital between or among the Fund, the underwriter, adviser, promoter or initial shareholders and written assurances from promoters or initial shareholders that purchases were made for investment purposes and not with the intention of redeeming or reselling. (m) Rule 12b–1 Plan. Any plan entered into by the Fund under rule 12b–1 and any agreements with any person relating to the plan’s implementation. (n) Rule 18f–3 Plan. Any plan entered into by the Fund under rule 18f–3, any agreement with any person relating to the plan’s implementation, and any amendment to the plan or an agreement. (o) Reserved. (p) Codes of Ethics. Any codes of ethics adopted under rule 17j–1 of the Investment Company Act [17 CFR 270.17j–1] and currently applicable to the Fund (i.e., the codes of the Fund and its investment advisers and principal underwriters). If there are no codes of ethics applicable to the Fund, state the reason (e.g., that the Fund is a Money Market Fund). Instructions 1. A Fund that is a Feeder Fund also must file a copy of all codes of ethics applicable to the Master Fund. 2. Schedules (or similar attachments) to the exhibits required by this Item are not required to be filed provided that they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in the exhibit or the disclosure document. Each exhibit filed must contain a list briefly identifying the contents of all omitted schedules. Registrants need not prepare a separate list of omitted information if such information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. In addition, the registrant must provide a copy of any omitted schedule to the Commission or its staff upon request. 3. The registrant may redact information from exhibits required to be filed by this Item if disclosure of such information would constitute a clearly unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses and similar information). PO 00000 Frm 00174 Fmt 4701 Sfmt 4702 4. The registrant may redact provisions or terms of exhibits required to be filed by paragraph (h) of this Item if those provisions or terms are both (1) not material and (2) would likely cause competitive harm to the registrant if publicly disclosed. If it does so, the registrant should mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (1) not material and (2) would likely cause competitive harm to the registrant if publicly disclosed. The registrant also must indicate by brackets where the information is omitted from the filed version of the exhibit. If requested by the Commission or its staff, the registrant must promptly provide an unredacted copy of the exhibit on a supplemental basis. The Commission staff also may request the registrant to provide its materiality and competitive harm analyses on a supplemental basis. Upon evaluation of the registrant’s supplemental materials, the Commission or its staff may request the registrant to amend its filing to include in the exhibit any previously redacted information that is not adequately supported by the registrant’s materiality and competitive harm analyses. The registrant may request confidential treatment of the supplemental material pursuant to Rule 83 (§ 200.83 of this chapter) while it is in the possession of the Commission or its staff. After completing its review of the supplemental information, the Commission or its staff will return or destroy it at the request of the registrant, if the registrant complies with the procedures outlined in Rules 418 (§ 230.418 of this chapter). 5. Each exhibit identified in the exhibit index (other than an exhibit filed in eXtensible Business Reporting Language) must include an active link to an exhibit that is filed with the registration statement or, if the exhibit is incorporated by reference, an active hyperlink to the exhibit separately filed on EDGAR. If the registration statement is amended, each amendment must include active hyperlinks to the exhibits required with the amendment. Item 29. Persons Controlled by or Under Common Control With the Fund Provide a list or diagram of all persons directly or indirectly controlled by or under common control with the Fund. For any person controlled by another person, disclose the percentage of voting securities owned by the immediately controlling person or other E:\FR\FM\05NOP2.SGM 05NOP2 70889 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules basis of that person’s control. For each company, also provide the state or other sovereign power under the laws of which the company is organized. Instructions 1. Include the Fund in the list or diagram and show the relationship of each company to the Fund and to the other companies named, using crossreferences if a company is controlled through direct ownership of its securities by two or more persons. 2. Indicate with appropriate symbols subsidiaries that file separate financial statements, subsidiaries included in consolidated financial statements, or unconsolidated subsidiaries included in group financial statements. Indicate for other subsidiaries why financial statements are not filed. Instructions State the general effect of any contract, arrangements or statute under which any director, officer, underwriter or affiliated person of the Fund is insured or indemnified against any liability incurred in their official capacity, other than insurance provided by any director, officer, affiliated person, or underwriter for their own protection. 1. Disclose the name and principal business address of any company for which a person listed above serves in the capacity of director, officer, employee, partner, or trustee, and the nature of the relationship. 2. The names of investment advisory clients need not be given in answering this Item. Item 31. Business and Other Connections of Investment Adviser (a) State the name of each investment company (other than the Fund) for which each principal underwriter currently distributing the Fund’s securities also acts as a principal underwriter, depositor, or investment adviser. (b) Provide the information required by the following table for each director, officer, or partner of each principal underwriter named in the response to Item 25: Describe any other business, profession, vocation or employment of a substantial nature that each investment adviser, and each director, officer or partner of the adviser, is or has been engaged within the last two fiscal years for his or her own account or in the capacity of director, officer, employee, partner, or trustee. Item 32. Principal Underwriters (1) (2) Name and Principal Business Address ............. Positions and Offices with Underwriter ............ Positions and Offices with Fund. (c) Provide the information required by the following table for all commissions and other compensation received, directly or indirectly, from the Fund during the last fiscal year by each principal underwriter who is not an affiliated person of the Fund or any affiliated person of an affiliated person: (1) (2) Name of Principal Underwriter. (3) (3) Net Underwriting Discounts and Commissions. (4) Compensation on Redemptions and Repurchases. Item 34. Management Services 1. Disclose the type of services rendered in consideration for the compensation listed under column (5). 2. Instruction 1 to Item 25(c) also applies to this Item. Provide a summary of the substantive provisions of any management-related service contract not discussed in Part A or B, disclosing the parties to the contract and the total amount paid and by whom for the Fund’s last three fiscal years. State the name and address of each person maintaining physical possession of each account, book, or other document required to be maintained by section 31(a) [15 U.S.C. 80a–30(a)] and the rules under that section. Instructions 1. The instructions to Item 20.4 of this form shall also apply to this item. 2. Information need not be provided for any service for which total payments of less than $5,000 were made during each of the last three fiscal years. 3. A Fund may omit this information to the extent it is provided in its most recent report on Form N–CEN [17 CFR 274.101]. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 Instructions 1. The instructions to Item 19 also apply to this Item. 2. Exclude information about any service provided for payments totaling less than $5,000 during each of the last three fiscal years. Item 35. Undertakings In initial registration statements filed under the Securities Act, provide an undertaking to file an amendment to the registration statement with certified financial statements showing the initial capital received before accepting subscriptions from more than 25 persons if the Fund intends to raise its PO 00000 Frm 00175 Fmt 4701 Sfmt 4702 (5) Brokerage Commissions ... Instructions Item 33. Location of Accounts and Records khammond on DSKJM1Z7X2PROD with PROPOSALS2 Item 30. Indemnification Other Compensation. initial capital under section 14(a)(3) [15 U.S.C. 80a–14(a)(3)]. Signatures Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Fund (certifies that it meets all of the requirement for effectiveness of this registration statement under rule 485(b) under the Securities Act and) has duly caused this registration statement to be signed on its behalf by the undersigned, duly authorized, in the city of ___, and State of ___, on the ___ day of ___ . lllllllllllllllllll Fund lllllllllllllllllll By Signature lllllllllllllllllll Title Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated. lllllllllllllllllll E:\FR\FM\05NOP2.SGM 05NOP2 70890 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Signature lllllllllllllllllll Title lllllllllllllllllll Date ■ 20. Amend Form N–CSR (referenced in §§ 249.331 and 274.128) by: ■ a. In the third sentence of the second paragraph on the cover page of Form N– CSR, removing ‘‘450 Fifth Street NW, Washington, DC 20549–0609’’ and adding in its place ‘‘100 F Street NE, Washington, DC 20549–1090’’; ■ b. In the first sentence of General Instruction D, removing ‘‘Items 4, 5, and 12(a)(1)’’ adding in its place ‘‘Items 4, 5, and 17(a)I1)’’; ■ c. In the second sentence of Instruction (c) to Item 2(a), removing ‘‘Item 13(a)(1)’’ and adding in its place ‘‘Item 18(a)(1)’’; ■ d. Revising Item 6(a); ■ e. Redesignating Items 7 through 13 as Items 12 through 18, respectively; ■ f. Adding Items 7 through 11; and ■ g. In the first sentence of the instruction to paragraph (a)(2) of Item 13, removing ‘‘Item 13(a)(1)’’ and adding in its place ‘‘Item 18(a)(1)’’. The additions read as follows: Note: The text of Form N–CSR does not, and these amendments will not, appear in the Code of Federal Regulations. Form N–CSR khammond on DSKJM1Z7X2PROD with PROPOSALS2 * * * * * Item 6. Investments. File Schedule I—Investments in securities of unaffiliated issuers as of the close of the reporting period as set forth in § 210.1212 of Regulation S–X [17 CFR 210.12–12], unless the schedule is included as part of the report to shareholders filed under Item 1 of this Form or is included in the financial statements filed under Item 7 of this Form’’; * * * * * Item 7. Financial Statements and Financial Highlights for Open-End Management Investment Companies. (a) An open-end management investment company registered on Form N–1A [17 CFR 239.15A and 17 CFR 274.11A] must file its most recent annual or semi-annual financial statements required, and for the periods specified, by Regulation S–X. (b) An open-end management investment company registered on Form N–1A [17 CFR 239.15A and 17 CFR 274.11A] must file the information required by Item 13 of Form N–1A. Instruction to paragraph (a) and (b). The financial statements and financial highlights filed under this Item must be audited and be accompanied by any VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 associated accountant’s report, as defined in rule 1–02(a) of Regulation S– X [17 CFR 210.1–02(a)], except that in the case of a report on this Form N–CSR as of the end of a fiscal half-year, the financial statements and financial highlights need not be audited. Item 8. Changes in and Disagreements with Accountants for Open-End Management Investment Companies. An open-end management investment company registered on Form N–1A [17 CFR 239.15A and 17 CFR 274.11A] must disclose the information concerning changes in and disagreements with accountants and on accounting and financial disclosure required by Item 304 of Regulation S–K [17 CFR 229.304]. Item 9. Proxy Disclosures for OpenEnd Management Investment Companies. If any matter was submitted during the period covered by the report to a vote of shareholders of an open-end management investment company registered on Form N–1A [17 CFR 239.15A and 17 CFR 274.11A], through the solicitation of proxies or otherwise, the company must furnish the following information: (1) The date of the meeting and whether it was an annual or special meeting. (2) If the meeting involved the election of directors, the name of each director elected at the meeting and the name of each other director whose term of office as a director continued after the meeting. (3) A brief description of each matter voted upon at the meeting and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each such matter, including a separate tabulation with respect to each matter or nominee for office. Instruction. The solicitation of any authorization or consent (other than a proxy to vote at a shareholders’ meeting) with respect to any matter shall be deemed a submission of such matter to a vote of shareholders within the meaning of this Item. Item 10. Remuneration Paid to Directors, Officers, and Others of OpenEnd Management Investment Companies. An open-end management investment company registered on Form N–1A [17 CFR 239.15A and 17 CFR 274.11A] must disclose the aggregate remuneration paid by the company during the period covered by the report to: (1) All directors and all members of any advisory board for regular compensation; PO 00000 Frm 00176 Fmt 4701 Sfmt 4702 (2) Each director and each member of an advisory board for special compensation; (3) All officers; and (4) Each person of whom any officer or director of the Fund is an affiliated person. Item 11. Statement Regarding Basis for Approval of Investment Advisory Contract. If the board of directors approved any investment advisory contract during the Fund’s most recent fiscal half-year, discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board’s approval. Include the following in the discussion: (1) Factors relating to both the board’s selection of the investment adviser and approval of the advisory fee and any other amounts to be paid by the Fund under the contract. This would include, but not be limited to, a discussion of the nature, extent, and quality of the services to be provided by the investment adviser; the investment performance of the Fund and the investment adviser; the costs of the services to be provided and profits to be realized by the investment adviser and its affiliates from the relationship with the Fund; the extent to which economies of scale would be realized as the Fund grows; and whether fee levels reflect these economies of scale for the benefit of Fund investors. Also indicate in the discussion whether the board relied upon comparisons of the services to be rendered and the amounts to be paid under the contract with those under other investment advisory contracts, such as contracts of the same and other investment advisers with other registered investment companies or other types of clients (e.g., pension funds and other institutional investors). If the board relied upon such comparisons, describe the comparisons that were relied on and how they assisted the board in concluding that the contract should be approved; and (2) If applicable, any benefits derived or to be derived by the investment adviser from the relationship with the Fund such as soft dollar arrangements by which brokers provide research to the Fund or its investment adviser in return for allocating Fund brokerage. Instructions (1) Board approvals covered by this Item include both approvals of new investment advisory contracts and approvals of contract renewals. Investment advisory contracts covered by this Item include subadvisory contracts. E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules (2) Conclusory statements or a list of factors will not be considered sufficient disclosure. Relate the factors to the specific circumstances of the Fund and the investment advisory contract and state how the board evaluated each factor. For example, it is not sufficient to state that the board considered the amount of the investment advisory fee without stating what the board concluded about the amount of the fee and how that affected its decision to approve the contract. (3) If any factor enumerated in paragraph (d)(6)(i) of this Item is not relevant to the board’s evaluation of an investment advisory contract, note this and explain the reasons why that factor is not relevant;’’ * * * * * By the Commission. Dated: August 5, 2020. J. Matthew DeLesDernier Assistant Secretary. Note: The Appendices will not appear in the Code of Federal Regulations. 70891 Appendix A [Graphic: The XYZ Income Fund, XYZ Funds, Inc. Class A—XYZIA Class Z— XYZIZ] Annual Shareholder Report 2020 January 31, This annual shareholder report contains important information about the XYZ Income Fund for the period of February 1, 2019 to January 31, 2020 as well as certain changes to the Fund. You can find additional information at XYZfunds.com/XYZIFdocs or on the XYZ App. You can also request this information by contacting us at 1–800–XYZ– FUND or documents@xyzfunds.com. WHAT WERE YOUR FUND COSTS FOR THE PERIOD? [Based on a hypothetical $10,000 investment] Beginning account value 2/1/2019 Class Class A ................................................................................. Class Z ................................................................................. Total return before costs paid * $10,000 10,000 Costs paid † ¥$78 ¥53 +$723 +723 Ending account value 1/31/2020 = $10,645 = 10,670 Costs paid as a percentage of your investment † 0.77 0.52 * Certain Fund expenses, such as those associated with buying and selling fund investments, reduced your total return. † The costs paid during the period do not reflect certain costs paid outside the Fund (such as purchase charges you might have paid if you bought shares of the Fund during the period). How did the Fund perform last year? What affected the Fund’s performance? Performance Highlights • XYZ Income Fund returned 6.45% for Class A and 6.70% for Class Z for the 12 months ended January 31, 2020. The Fund underperformed its benchmark (the QRS Aggregate Bond Index), which returned 7.72%. This underperformance is largely the result of our portfolio holding more interestrate sensitive investments than our benchmark. • Top contributors to performance: Æ Long-term fixed interest rate investments because the Federal Reserve reduced interest rates during the period which increased longterm bond prices; and Æ investments in technology and financial services companies. • Top detractors from performance: Æ Short duration investments (such as bank loans) and new purchases of fixed income instruments because of the lower interest rate environment; and Æ investments in oil and telecommunication companies. Performance Attribution Asset class Top Contributors: ↑ Corporate—High Yield. ↑ Corporate—High Quality. ↑ Mortgage Backed Securities. Top Detractors: ↓ Bank Loans. ↓ Asset Backed Securities. ↓ Treasury. Asset class ↑ Health Care. Top Detractors: ↓ Energy. ↓ Telecommunications. ↓ Industrials. How did the Fund perform over the past 10 years? Keep in mind that the Fund’s past performance is not a good predictor of how the Fund will perform in the future. Cumulative Performance: February 1, 2010 through January 31, 2020. Initial Investment of $10,000. Sector [Graphic: Line Graph Showing Class Z and Class A Performance Compared to Performance of the QRS Aggregate Bond Index] Top Contributors: ↑ Technology. ↑ Financial Services. AVERAGE ANNUAL TOTAL RETURNS khammond on DSKJM1Z7X2PROD with PROPOSALS2 1 year (%) Class A (with purchase charge) .................................................................................................. Class A (without purchase charge) ............................................................................................. Class Z ......................................................................................................................................... QRS Aggregate Bond Fund ........................................................................................................ 5 years (%) 1.21 6.45 6.70 7.72 Visit xyzfunds.com/XYZG or the XYZ app for more recent performance information. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00177 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 4.32 5.36 5.61 5.21 10 years (%) 5.29 5.86 6.11 4.25 70892 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules WHAT ARE SOME KEY FUND STATISTICS? [as of January 31, 2020] Fund Size: ............................................................................................................................................................................................... Number of Investments: .......................................................................................................................................................................... Annual Portfolio Turnover: ...................................................................................................................................................................... Average Credit Quality: * ......................................................................................................................................................................... 30-Day SEC Yield: **. • Class A ............................................................................................................................................................................................. • Class Z ............................................................................................................................................................................................. Effective Duration: ................................................................................................................................................................................... Weighted Average Maturity: .................................................................................................................................................................... $789 mil. 722. 78%. BB.* 4.28%. 4.53%. 1.4 years. 5.4 years. * The Average Credit Quality is based on credit ratings provided by UVW Rating Inc. ** The 30-Day SEC Yield is a standardized calculation so you can compare yields across funds. WHAT DID THE FUND INVEST IN? [as of January 31, 2020] Asset class (% of net assets) Bank Loans .......................................................................................................................................................................................... Corporate—High Quality ...................................................................................................................................................................... Corporate—High Yield ......................................................................................................................................................................... Mortgage Backed Securities ................................................................................................................................................................ Treasury ............................................................................................................................................................................................... Asset Backed Securities ...................................................................................................................................................................... Cash ..................................................................................................................................................................................................... Equity ................................................................................................................................................................................................... Other .................................................................................................................................................................................................... 52.6 14.3 11.4 7.1 4.8 3.3 1.8 1.6 3.1 Credit quality * (% of net assets) U.S. Government ................................................................................................................................................................................. AAA ...................................................................................................................................................................................................... AA ........................................................................................................................................................................................................ A ........................................................................................................................................................................................................... BBB ...................................................................................................................................................................................................... BB ........................................................................................................................................................................................................ B ........................................................................................................................................................................................................... CCC & Below ....................................................................................................................................................................................... Unrated ................................................................................................................................................................................................ 4.8 3.6 5.8 16.7 20.4 34.9 8.1 3.6 2.1 * Credit Quality is based on credit ratings provided by UVW Rating Inc., a nationally recognized statistical rating organization, because the XYZ Advisers (the Fund’s manager) believes they have the broadest coverage of securities held by the Fund. Sector (% of net assets) khammond on DSKJM1Z7X2PROD with PROPOSALS2 [Graphic: Pie chart showing percentages of Fund’s net assets invested in: Technology (23%), Consumer Discretionary (7%), Industrials (9%), Financial Services (11%), Consumer Staples (4%), Health Care (12%), Telecommunications (9%), Energy (13%), Real Estate (6%), and Materials (6%)] Visit www.xyzfunds.com/XYZG or the XYZ App for more recent holdings information. How has the Fund changed? Beginning June 1, 2020, the Fund is revising its Interest Rate Risk to include risks of very low or negative interest rates. Very low or negative interest rates may prevent the Fund from earning positive returns and increases the risk of rising interest rates, which may negatively impact the Fund’s performance. This is a summary of a planned change to the Fund’s principal risk disclosure. For more complete information, you may review the Fund’s next prospectus, which we expect to be available by June 1, 2020 at XYZfunds.com/XYZIFdocs or upon request at 1–800–XYZ–FUND or documents@ xyzfunds.com. How does the Fund ensure that it has money available to pay me when I exit the Fund? The XYZ Loan Fund has investments that may not be as liquid as typical stocks and bonds. Primary source of the Fund’s liquidity risk: How does the Fund manage its liquidity risk? The Fund invested significantly in bank loans. When a fund sells one of these loans, it may take a significant amount of time before the Fund receives the money from the sale. • The Fund has a liquidity risk management program (LRMP) to ensure the Fund can pay you on time when you sell shares. • This program includes: (1) Maintaining a minimum amount of highly liquid assets and limiting purchases of illiquid assets; (2) borrowing money and entering into expedited settlement agreements when needed; and (3) stress testing to see how the Fund would perform in stressed market conditions and, if necessary, modifying the Fund’s investments in response to these tests. • At a meeting on December 5, 2019, the Fund’s board of directors reviewed a report prepared by XZY Advisers (the LRMP administrator) that described the operation of the Fund’s LRMP over the prior year and affirmed that the program effectively managed the fund’s liquidity risk. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 PO 00000 Frm 00178 Fmt 4701 Sfmt 4702 E:\FR\FM\05NOP2.SGM 05NOP2 70893 khammond on DSKJM1Z7X2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules Where can I find additional information about the Fund? [Graphic: QR Code that takes the reader to XYZfunds.com/XYZGEdocs] Additional information is available on the Fund’s website, including its: • Prospectus • financial information • holdings • proxy voting information • description of UVW Rating Inc.’s credit ratings Appendix B Feedback Flier: Shareholder Reports We require mutual funds and exchangetraded funds (ETFs) to provide you with an annual and semi-annual shareholder report. These reports include key information about a fund, but they can often be long. We are proposing changes to these reports to better highlight information that would be helpful to you as you monitor your investments. We would like to know what you think. Please take a few minutes to review this sample annual shareholder report and answer any or all of these questions. Thank you for your feedback! Questions 1. Overall, would the sample shareholder report be useful in monitoring your fund investments? If not, how would you change it? 2. Rate the sections of the sample shareholder report. Please indicate whether you find each section useful or not useful. Please consider explaining your responses in the comments. Section Useful Not useful a. ‘‘What was your cost for the period?’’ ................................................................ b. ‘‘How did the Fund perform last year? What affected the Fund’s performance?’’. c. ‘‘How did the Fund perform over the past 10 years?’’ ....................................... d. ‘‘What are some key Fund statistics?’’ ............................................................... e. ‘‘What did the Fund invest in?’’ .......................................................................... f. ‘‘How has the Fund changed?’’ ........................................................................... g. ‘‘How does the Fund ensure that it has money available to pay me when I exit the Fund?’’. h. ‘‘Where can I find additional information about the Fund?’’ ............................... b b b b b b b b b b b b b b b b 3. The section titled ‘‘What was your cost for the period?’’ includes an example of what it costs to hold fund shares this year. a. Is the table clear? [ ] Yes [ ] No b. Is it helpful to see ‘‘costs paid’’ both in dollars and as a percentage of your investment? [ ] Yes [ ] No c. Is it clear how the total returns of the fund minus the costs paid result in the ending account value? [ ] Yes [ ] No 4. The section titled ‘‘How did the Fund perform last year? What affected the Fund’s performance?’’ includes narrative and graphic presentations. a. There is a narrative description of the fund’s past performance in the ‘‘Performance Highlights’’ section. Does the narrative description help you understand the key drivers of fund performance? [ ] Yes [ ] No b. There is a graphic presentation of key drivers of the fund’s past performance in the ‘‘Performance Attribution’’ section. Does the graphic presentation help you understand why the fund performed as it did over the past year? [ ] Yes [ ] No c. There is a line graph representing the fund’s performance in dollars over the past 10 years. Does this graph help you understand how the fund performed over that time period? [ ] Yes [ ] No d. There is an ‘‘Average Total Returns Table’’ showing the fund’s performance as a percentage over the past 1, 5, and 10 years. Does this table help you understand how the fund performed over those time periods? [ ] Yes [ ] No VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 e. Is it helpful to see the fund’s performance both in dollars and as a percentage? [ ] Yes [ ] No Is there any information that could be presented more clearly in the ‘‘How did the Fund perform last year?’’ section? 5. The sample shareholder report includes key statistics about the fund’s size, number of investments, and annual portfolio turnover. Do these statistics provide meaningful information regarding the fund, for example, to help put the fund’s performance and investments into context? [ ] Yes [ ] No 6. The section titled ‘‘What did the Fund invest in?’’ includes charts describing the types of investments made by the fund. Do these charts help you understand how the fund is investing your money? [ ] Yes [ ] No 7. The section titled ‘‘How has the Fund changed?’’ describes important changes to the fund within the last fiscal year. What types of changes are most important to you? 8. Is there any information in the sample shareholder report that is difficult to understand, confusing, too technical, or that could be presented more clearly? 9. Is there additional information that we should require in the shareholder report? This could include the fund’s full financial statements, the results of any shareholder votes and/or how much the fund paid to directors, officers, and others. Is there any information in the sample shareholder report that should be highlighted more? 10. Under the proposal, in addition to the shareholder report, you also would have access to more information about the fund online (and delivered in paper on request). How likely would you be to seek more information on the following? a. The fund’s full financial statements b. Key financial information over time PO 00000 Frm 00179 Fmt 4701 Sfmt 4702 Why? c. Changes in and disagreements with accountants d. Results of any shareholder votes e. How much the fund paid to directors, officers and others 11. Is the length of the document: [ ] Too short [ ] Too long [ ] About right 12. How would you prefer to receive or read a document like the sample shareholder report? lllllllllllllllllllll a. On paper b. In an email c. On a website d. A combination of paper and digital e. Other (explain) 13. Do you have any additional suggestions for improving the shareholder report? lllllllllllllllllllll We will post your feedback on our website. Your submission will be posted without change; we do not redact or edit personal identifying information from submissions. You should only make submissions that you wish to make available publicly. If you are interested in more information on the proposal, or want to provide feedback on additional questions, click here. Comments should be received on or before [[ ]], 2020. Thank You! lllllllllllllllllllll Other Ways To Submit Your Feedback You also can send us feedback in the following ways (include the file number S7– 09–20 in your response): lllllllllllllllllllll Print Your Responses and Mail: Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. lllllllllllllllllllll Print a PDF of Your Responses and Email: Use the printer friendly page and select a E:\FR\FM\05NOP2.SGM 05NOP2 70894 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules PDF printer to create a file you can email to: rule-comments@sec.gov. lllllllllllllllllllll Print a Blank Copy of This Flier, Fill it Out, and Mail: Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. Appendix C Feedback Flier: Tailored Fund Disclosure Framework To Highlight Key Information We are proposing a disclosure framework for mutual funds and exchange-traded funds (‘‘funds’’) that would highlight key information for investors. The proposal includes: • Amendments to fund shareholder reporting requirements; • an alternative approach to the current delivery of annual prospectus updates to fund investors; and • amendments to the presentation of fee and principal risk disclosure in fund prospectuses. In addition, we are proposing amendments to fund advertising rules to promote more transparent and balanced statements about investment costs. Those amendments would apply to all registered investment companies and business development companies. More information about the proposal is available at https://www.sec.gov/rules/ proposed/2020/34-89478.pdf. We are particularly interested in learning what small funds think about the proposed disclosure framework. Hearing from small funds could help us learn how the proposed amendments and new rule would affect these funds. We would appreciate your feedback on any or all of the following questions. All of the following questions are optional, including any questions that ask about identifying information. Please note that responses to these questions—including any other general identifying information you provide—will be made public. Questions Item 1: General Identifying Information Instructions: At your option, you may include general identifying information that would help us contextualize your other feedback on the proposal. This information could include responses to the following questions, as well as any other general identifying information you would like to provide. Responses to these items—like responses to the other items on this Feedback Flier—will be made public. i. How big is the fund in terms of net asset value? (This may be expressed as a range, for example, $40 million to $50 million.) ii. Please include any additional general identifying information that you wish to provide, that could add context for your feedback on the proposal. Item 2: Current Shareholder Reporting and Prospectus Delivery Practices The fund currently must provide annual and semi-annual shareholder reports in paper, unless the shareholder has elected electronic delivery. i. Please provide an estimate of approximately how much it currently costs the fund annually to prepare and transmit annual shareholder reports. Please provide a dollar range of those costs and expenses. ii. Please provide an estimate of approximately how much it currently costs the fund annually to prepare and transmit semi-annual shareholder reports. Please provide a dollar range of those costs and expenses. iii. Rule 30e–3 under the Investment Company Act of 1940 currently provides an optional ‘‘notice and access’’ method to allow funds to satisfy their obligations to transmit shareholder reports, beginning on January 1, 2021. Do you anticipate that the fund will rely on the rule? [yes/no] iv. Please provide any other information that you think could be helpful regarding the costs and expenses associated with current requirements to prepare and transmit annual and semi-annual shareholder reports. Item 3: Principal Elements of the Proposed New Disclosure Framework Proposed New Requirements for Funds’ Annual and Semi-Annual Shareholder Reports i. We are proposing that shareholder reports include the content described below. Please indicate whether the content should remain in the shareholder report, as proposed, whether the content should be disclosed elsewhere, or whether the content should be eliminated. If you think the content should be disclosed elsewhere, please explain. PROPOSED SHAREHOLDER REPORTS Should the content remain in fund shareholder reports, as proposed? (yes/no) Description Please include any comments that you would like to share about either the usefulness of the proposed content, including whether the content should be eliminated, or the location of the proposed content. If the content should be disclosed elsewhere, please explain. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Expense Example ............................................................. Management’s Discussion of Fund Performance (required in Annual Report; optional in Semi-Annual Report). Fund Statistics (fund’s size, number of investments, and annual portfolio turnover). Graphical Representation of Holdings .............................. Material Fund Changes (required in Annual Report; optional in Semi-Annual Report). Statement Regarding Liquidity Risk Management Program. ii. Is there content that should be added to funds’ shareholder reports that is not included in the proposal (yes/no)? If so, what content should be added to funds’ shareholder reports? iii. Approximately how much do you think it would cost the fund to transition to the new requirements for preparing and transmitting annual and semi-annual shareholder reports under the proposal? Please provide a dollar range of those costs and expenses. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 iv. Approximately how much do you think it would cost the fund on an ongoing annual basis to prepare and transmit annual shareholder reports under the proposal? Please provide a dollar range of those costs and expenses. v. Approximately how much do you think it would cost the fund on an ongoing annual basis to prepare and transmit semi-annual shareholder reports under the proposal? Please provide a dollar range of those costs and expenses. PO 00000 Frm 00180 Fmt 4701 Sfmt 4702 Proposed New Form N–CSR and Website Availability Requirements i. We are proposing that the fund no longer include the content, described in the chart below, in its annual and semi-annual shareholder reports. Instead, the fund would include that content in its filings on Form N– CSR. Please indicate whether the content should be disclosed in the fund’s filings on Form N–CSR, as proposed, whether the content should remain in the fund’s annual and semi-annual shareholder reports, or whether the content should be eliminated. If E:\FR\FM\05NOP2.SGM 05NOP2 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules 70895 you think the content should be disclosed elsewhere, please explain. PROPOSED NEW CONTENT FOR FORM N–CSR Should the content be disclosed in filings on Form N–CSR, as proposed? (yes/no) Description Should the content remain in shareholder reports? (yes/no) Should the content be disclosed elsewhere or eliminated? If the content should be disclosed elsewhere, please explain. khammond on DSKJM1Z7X2PROD with PROPOSALS2 Financial statements for funds. Financial highlights for funds. Remuneration paid to directors, officers and others of funds. Changes in and disagreement with accountants for funds. Matters submitted to fund shareholders for a vote. Statement regarding the basis for the board’s approval of investment advisory contract. ii. Is there content that a fund should have to disclose on Form N–CSR that is not included in the proposal (yes/no)? If so, what content requirement(s) should be added to Form N–CSR? iii. Approximately how much do you think it would cost the fund to transition to the proposed requirements to file certain new information on Form N–CSR instead of including this information in its annual and/ or semi-annual shareholder reports? Please provide a dollar range of those costs and expenses. iv. Approximately how much do you think it would cost the fund on an ongoing annual basis to comply with the proposed new Form N–CSR content requirements? Please provide a dollar range of those costs and expenses. v. We are also proposing to require that a fund would have to make available all of new Form N–CSR content (described in the chart above), as well as the fund’s complete portfolio holdings as of the close of the fund’s most recent first and third fiscal quarters, on a website. In addition, we are proposing that the fund deliver such materials to investors upon request, free of charge. a. Approximately how much do you think it would cost the fund to transition to the proposed new website availability requirements? Please provide a dollar range of those costs and expenses. b. Approximately how much do you think it would cost the fund on an ongoing annual basis to comply with the proposed new website availability requirements? Please provide a dollar range of those costs and expenses. Proposed New Treatment of Annual Prospectus Updates i. Please provide an estimate of approximately how much it currently costs the fund on an annual basis to provide annual prospectus updates to shareholders. Please provide a dollar range of those costs and expenses. ii. Reliance on proposed rule 498B—under which the fund would send existing investors certain notices in lieu of annual prospectus updates—would be optional. Do you think that the fund would rely on proposed rule 498B? [yes/no] VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 If you think the fund would rely on proposed rule 498B, approximately how much do you think the following would cost the fund? Please provide a dollar range of those costs and expenses: a. The cost to the fund of transitioning to proposed rule 498B; b. The ongoing costs on an annual basis for the fund to comply with proposed rule 498B (excluding transmitting notices of material changes to shareholders); and c. The ongoing costs on an annual basis for the fund to transmit notices of material changes to shareholders, if any. Proposed Changes to Rule 30e–3: Open-End Funds Could No Longer Use ‘‘Notice and Access’’ Model to Transmit Shareholder Reports i. Beginning on January 1, 2021, a fund currently would be permitted to transmit shareholder reports under rule 30e–3, provided certain conditions are met, such as including a required statement on each prospectus. However, the proposal would no longer permit open-end funds to rely on rule 30e–3 to transmit shareholder reports. Approximately how much do you think it would cost the fund to transition away from the rule 30e–3 ‘‘notice and access’’ model? Please provide a dollar range of those costs and expenses. Proposed Prospectus Disclosure Changes: Fund Fees and Risks i. Approximately what do you think it would cost the fund to transition to the proposed new requirements for prospectus disclosure of fund fees and expenses, and fund principal risks? Please provide a dollar range of those costs and expenses. ii. Approximately what do you think it would cost the fund on an ongoing annual basis to comply with the proposed new requirements for prospectus disclosure of fund fees and expenses, and fund principal risks? Please provide a dollar range of those costs and expenses. iii. Should we modify any of the proposed new requirements for prospectus disclosure of fund fees and expenses, and fund principal risks, and if so, how? iv. Are there additional ways to improve how funds disclose their fees and expenses PO 00000 Frm 00181 Fmt 4701 Sfmt 4702 to represent more accurately the full costs associated with a fund investment and to help investors better understand their investment costs? Proposed Amendments To Fund Advertising Rules i. Does the fund currently include fee and expense information in its advertisements and other marketing materials? [yes/no] ii. We are proposing to amend the advertising rules to require that investment company fees and expenses in advertisements and supplemental sales literature be consistent with relevant prospectus fee table presentations and be reasonably current. The proposed amendments also address current representations of fund fees and expenses that could be materially misleading. Approximately how much do you think it would cost the fund to comply with the proposed amendments to the investment company advertising rules (please provide a dollar range)? iii. Are there additional ways that we could improve the fee and expense presentations in fund advertisements and supplemental sales literature? Item 4: Other Feedback Instructions: Please provide any additional suggestions or comments you have about our fund disclosure proposal. In addition, please provide any suggestions or comments about what the Commission can do to encourage the use of technology in fund disclosure. We will post your feedback on our website. Your submission will be posted without change; we do not redact or edit personal identifying information from submissions. You should only make submissions that you wish to make available publicly. If you are interested in more information on the proposal, or want to provide feedback on additional questions, click here. Comments should be received on or before ll, 2020. Thank you! lllllllllllllllllllll E:\FR\FM\05NOP2.SGM 05NOP2 70896 Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS2 Other Ways To Submit Your Feedback You also can send us feedback in the following ways (include the file number S7– 09–20 in your response): lllllllllllllllllllll Print Your Responses and Mail: Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. VerDate Sep<11>2014 23:41 Nov 04, 2020 Jkt 253001 lllllllllllllllllllll Print a PDF of Your Responses and Email: Use the printer friendly page and select a PDF printer to create a file you can email to: rule-comments@sec.gov. lllllllllllllllllllll Print a Blank Copy of This Flier, Fill it Out, and Mail: Secretary, Securities and Exchange PO 00000 Frm 00182 Fmt 4701 Sfmt 9990 Commission, 100 F Street NE, Washington, DC 20549–1090. lllllllllllllllllllll [FR Doc. 2020–17449 Filed 11–4–20; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\05NOP2.SGM 05NOP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 215 (Thursday, November 5, 2020)]
[Proposed Rules]
[Pages 70716-70896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17449]



[[Page 70715]]

Vol. 85

Thursday,

No. 215

November 5, 2020

Part II





 Securities and Exchange Commission





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17 CFR Parts 200, 230, 239, et al.





 Tailored Shareholder Reports, Treatment of Annual Prospectus Updates 
for Existing Investors, and Improved Fee and Risk Disclosure for Mutual 
Funds and Exchange-Traded Funds; Fee Information in Investment Company 
Advertisements; Proposed Rule

Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 / 
Proposed Rules

[[Page 70716]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 239, 240, 270, and 274

[Release Nos. 33-10814; 34-89478; IC-33963; File No. S7-09-20]
RIN 3235-AM52


Tailored Shareholder Reports, Treatment of Annual Prospectus 
Updates for Existing Investors, and Improved Fee and Risk Disclosure 
for Mutual Funds and Exchange-Traded Funds; Fee Information in 
Investment Company Advertisements

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing rule and form amendments that would modernize the disclosure 
framework for open-end management investment companies. The disclosure 
framework would feature concise and visually engaging shareholder 
reports that would highlight key information that is particularly 
important for retail investors to assess and monitor their fund 
investments. Certain information that may be less relevant to retail 
investors--and of more interest to financial professionals and 
investors who desire more in-depth information--would no longer appear 
in funds' shareholder reports but would be available online, delivered 
free of charge upon request, and filed on a semi-annual basis on Form 
N-CSR. Funds' shareholder reports would serve as the central source of 
fund disclosure for existing shareholders. Thus, instead of delivering 
prospectus updates to existing shareholders each year, open-end funds 
would have an alternative way to keep shareholders informed. This 
framework would rely on the shareholder report (which would include a 
summary of material fund changes), along with timely notifications to 
shareholders about material fund changes as they occur and continued 
availability of the fund's prospectus. The Commission is also proposing 
amendments to open-end fund prospectus disclosure requirements to 
provide greater clarity and more consistent information about fees, 
expenses, and principal risks. Finally, the Commission is proposing 
amendments to the advertising rules for registered investment companies 
and business development companies to promote more transparent and 
balanced statements about investment costs.

DATES: Comments should be received by January 4, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File No. S7-09-20 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-20. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (https://www.sec.gov/rules/proposed.shtml). 
Comments are also available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Room 1580, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information you wish to make available publicly. Persons 
wishing to provide comments regarding the proposal may wish to submit 
our Investor Feedback Flier or Smaller Fund Feedback Flier, available 
at Appendices B and C, respectively.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Daniel K. Chang, 
Mykaila DeLesDernier, Pamela K. Ellis, Angela Mokodean, Senior 
Counsels; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin 
Johnson, Assistant Director, at (202) 551-6792, Investment Company 
Regulation Office; Daniel Rooney, Assistant Chief Accountant; Keith 
Carpenter or Michael Kosoff, Senior Special Counsels, at (202) 551-
6921, Disclosure Review and Accounting Office; Division of Investment 
Management; U.S. Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION: The Commission is proposing new 17 CFR 
230.498B [new rule 498B] under the Securities Act of 1933 (``Securities 
Act'').\1\ We also are proposing amendments to the following rules and 
forms:
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 80a et seq.
    \3\ 15 U.S.C. 78a et seq.

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            Commission reference                CFR citation [17 CFR]
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Organization; Conduct and Ethics; And        Sec.  Sec.   200.1 through
 Information and Requests.                    200.800.
    Section 800............................  Sec.   200.800.
Securities Act:
    Rule 156...............................  Sec.   230.156.
    Rule 433...............................  Sec.   230.433.
    Rule 482...............................  Sec.   230.482.
    Rule 498...............................  Sec.   230.498.
    Form N-14..............................  Sec.   239.23.
Securities Act and Investment Company Act
 of 1940 (``Investment Company Act''): \2\
    Form N[dash]1A.........................  Sec.  Sec.   239.15A and
                                              274.11A.
Securities Exchange Act of 1934 (``Exchange
 Act''): \3\
    Schedule 14A...........................  Sec.   240.14a-101.
Exchange Act and Investment Company Act:
    Form N-CSR.............................  Sec.  Sec.   249.331 and
                                              274.128.

[[Page 70717]]

 
Investment Company Act:
    Rule 30e-1.............................  Sec.   270.30e-1.
    Rule 30e-3.............................  Sec.   270.30e-3.
    Rule 31a-2.............................  Sec.   270.31a-2.
    Rule 34b-1.............................  Sec.   270.34b-1.
------------------------------------------------------------------------

Table of Contents

I. Introduction and Background
    A. Current Approach To Disclosure for Fund Shareholders
    B. Information About Investor Preferences
    1. Fund Shareholder Preferences Regarding Ongoing Disclosures
    2. Fee and Risk Disclosure Preferences
    3. Disclosure Delivery Preferences
    C. Developments Affecting Fund Disclosure and Marketing 
Practices
II. Discussion
    A. Overview of Proposed New Disclosure Framework
    1. Executive Summary
    2. Considerations and Goals
    B. Annual Shareholder Report
    1. Scope of Annual Report Disclosure, and Registrants Subject to 
Amendments
    2. Contents of the Proposed Annual Report
    3. Format and Presentation of Annual Report
    4. Electronic Annual Reports
    C. Semi-Annual Shareholder Report
    1. Scope and Contents of the Proposed Semi-Annual Report
    2. Format and Presentation of Semi-Annual Report
    3. Electronic Semi-Annual Reports
    D. New Form N-CSR and website Availability Requirements
    1. Proposed Form N-CSR Filing Requirements
    2. Proposed website Availability Requirements
    3. Proposed Delivery Upon Request Requirements
    E. Disclosure Item Proposed To Be Removed From Shareholder 
Report and Not Filed on Form N-CSR
    F. Proposed Rule 498B and Treatment of Annual Prospectus Updates 
Under Proposed Disclosure Framework
    1. Overview
    2. Scope of Proposed New Rule 498B
    3. Conditions To Rely Upon Proposed New Rule 498B
    4. Other Requirements
    G. Amendments Narrowing Scope of Rule 30e-3
    H. Proposed Amendments To Fund Prospectus Disclosure 
Requirements
    1. Improved Prospectus Fee Disclosures
    2. Improved Prospectus Risk Disclosures
    3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)
    I. Investment Company Advertising Rule Amendments
    J. Technical and Conforming Amendments
    K. Compliance Date
III. Economic Analysis
    A. Introduction
    B. Economic Baseline and Affected Parties
    1. Descriptive Industry Statistics
    2. Fund Prospectuses
    3. Fund Shareholder Reports
    4. Delivery of Fund Prospectuses and Shareholder Reports
    5. Investor Use of Fund Disclosure
    6. Fund Advertisements
    C. Costs and Benefits
    1. Broad Economic Considerations
    2. Modified Disclosure Framework for Existing Fund Shareholders
    3. Prospectus Disclosure Amendments
    4. Advertising Rule Amendments
    D. Effects on Efficiency, Competition, and Capital Formation
    E. Reasonable Alternatives
    1. More or Less Frequent Disclosure
    2. More or Less Information in Shareholder Reports
    3. Retaining Rule 30e-3 Flexibility for Open-End Funds 
Registered on Form N-1A
    4. Limiting the Advertising Rule Amendments to ETFs and Mutual 
Funds
    5. Amending Prospectus Fee, Expense, and Principal Risk 
Disclosure in a Different Manner
    6. Amending Shareholder Report Requirements for Variable 
Insurance Contracts or Registered Closed-End Funds
    7. Requiring Funds To Comply With Proposed Rule 498B
    8. Requiring Form N-CSR to be Tagged in Inline XBRL Format
    9. Modifying the AFFE Amendment
    F. Request for Comment
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Form N-1A
    C. Proposed New Shareholder Report Requirements Under Rule 30e-1
    D. Form N-CSR
    E. Proposed Rule 498B
    F. Rule 482
    G. Rule 34b-1
    H. Rule 433
    I. Rule 30e-3
    J. Rule 498
    K. Request for Comment
V. Initial Regulatory Flexibility Act Analysis
    A. Reasons for and Objectives of the Proposed Actions
    B. Legal Basis
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    1. Annual and Semi-Annual Reports
    2. New Form N-CSR and website Availability Requirements
    3. Proposed Rule 498B, and Treatment of Annual Prospectus 
Updates under Proposed Disclosure Framework
    4. Amendments to Scope of Rule 30e-3
    5. Proposed Amendments to Fund Prospectus Disclosure 
Requirements
    6. Investment Company Advertising Rules
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. General Request for Comment
VI. Consideration of Impact on the Economy
VII. Statutory Authority

I. Introduction and Background

    The Commission is proposing to tailor the disclosures that mutual 
funds and exchange-traded funds (``ETFs'' and, collectively with mutual 
funds, ``funds'') must provide to investors to highlight key 
information investors need to assess and monitor their fund investments 
and make informed investment decisions.\4\ Currently, most mutual funds 
and ETFs rely on a layered disclosure framework with respect to the 
prospectus information they provide to fund investors in order to 
tailor this disclosure to investors' informational needs.\5\ The vast 
majority of funds provide: (1) A summary prospectus to investors in 
connection with their initial investment decision; and (2) more-
detailed information that may be of interest to some investors, which 
is available online in the form of the ``statutory prospectus'' and 
Statement of Additional Information (``SAI'').\6\ However, this 
approach to

[[Page 70718]]

layered, tailored disclosure does not extend to other disclosure funds 
provide to their shareholders. After making their initial decision to 
invest in a fund, fund shareholders typically receive an updated 
prospectus annually, as well as annual and semi-annual shareholder 
reports (or ``annual reports'' and ``semi-annual reports'' 
respectively, and collectively ``shareholder reports'').\7\ These 
shareholder reports provide detailed information about a fund's 
operations and activities during the last full- or half-year period and 
can be quite lengthy. For example, it is not unusual for annual reports 
to exceed 100 pages in length.
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    \4\ For purposes of this release, the term ``fund'' generally 
refers to an open-end management investment company registered on 
Form N-1A or a series thereof, unless otherwise specified. Mutual 
funds and most ETFs are open-end management investment companies 
registered on Form N-1A. An open-end management investment company 
is an investment company, other than a unit investment trust or 
face-amount certificate company, that offers for sale or has 
outstanding any redeemable security of which it is the issuer. See 
sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-
4 and 80a-5(a)(1)].
    \5\ Throughout this release, we generally use the term 
``investor'' to refer to both prospective investors in a fund and 
fund shareholders (i.e., persons who hold an investment in 
securities issued by a fund). We generally use the term 
``shareholder'' to refer specifically to those who hold an 
investment in securities issued by a fund.
    \6\ See section 5(b)(2) of the Securities Act [15 U.S.C. 
77e(b)(2)] (generally requiring that a fund or financial 
intermediary deliver a prospectus to an investor in connection with 
his or her purchase of the fund's securities). Funds generally amend 
their prospectuses annually to reflect changes to the disclosed 
information.
     A fund's prospectus generally must include information 
contained in the fund's registration statement. See section 10(a) of 
the Securities Act [15 U.S.C. 77j(a)]. For purposes of this release, 
a prospectus meeting the requirements of a section 10(a) prospectus 
is referred to as a ``statutory prospectus.'' Form N-1A requires a 
fund to disclose the information that Items 2 through 8 of Form N-1A 
require in numerical order at the front of the prospectus. See 
General Instruction C.3.a to Form N-1A. For purposes of this 
release, we refer to this front section of the statutory prospectus 
as the ``summary section of the statutory prospectus.''
     A fund may use a summary prospectus (which includes the 
information required or permitted by Items 2 through 8 of Form N-1A) 
to satisfy prospectus delivery obligations under certain conditions 
(e.g., the statutory prospectus is posted online). See rule 498 
under the Securities Act [17 CFR 230.498]. For purposes of this 
release, a summary prospectus that a fund uses to satisfy its 
prospectus delivery obligations, as rule 498 permits, is referred to 
as a ``summary prospectus.''
    \7\ See section 30(e) of the Investment Company Act [15 U.S.C. 
80a-29(e)]; rule 30e-1 under the Investment Company Act [17 CFR 
270.30e-1]. Shareholders in a fund typically receive an annual 
update of the fund's prospectus to satisfy prospectus delivery 
requirements for any additional shares of the fund the shareholder 
may purchase. See infra discussion accompanying and following 
footnote 11. In addition to the annual prospectus update, a 
shareholder also may receive prospectus supplements, or 
``stickers,'' during the year if material or other changes occur to 
the fund. See infra footnote 13 and accompanying text.
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    In June 2018, the Commission issued a request for comment seeking 
feedback on retail investors' experience with fund disclosure and on 
ways to improve fund disclosure.\8\ We have considered feedback the 
Commission received in response to this request for comment, which 
generally showed that retail investors prefer concise, layered 
disclosure and feel overwhelmed by the volume of fund information they 
currently receive. We have also considered prior investor testing and 
surveys, past fund disclosure reform initiatives, and developments 
affecting fund disclosure practices.\9\
---------------------------------------------------------------------------

    \8\ See Request for Comment on Fund Retail Investor Experience 
and Disclosure, Investment Company Act Release No. 33113 (June 5, 
2018) [83 FR 26891 (June 11, 2018)] (``Fund Investor Experience 
RFC'').
    \9\ See, e.g., infra Sections I.B and I.C.
---------------------------------------------------------------------------

    After considering this information, we are proposing a layered 
disclosure framework for fund shareholders that would highlight key 
information for assessing and monitoring a fund investment and 
informing investment decisions (e.g., whether to buy additional shares, 
continue to hold, or sell a fund investment), with additional 
information available online and upon request. The proposal would 
implement this new framework principally by amending the requirements 
for funds' annual and semi-annual reports to highlight information that 
we believe is particularly important for retail shareholders to assess 
and monitor their ongoing fund investments. These tailored shareholder 
reports would serve as the primary fund disclosure that existing 
shareholders receive each year, in addition to notices of certain 
material changes if they occur during the year.
    The proposal is designed to alleviate concerns that fund retail 
shareholders currently may receive disclosure materials that are not 
well-suited to their needs, which may contribute to investor confusion 
or indifference. Current disclosures, for example, may include 
information that is less useful for most retail shareholders to assess 
and monitor their fund investments, either because the information is 
primarily designed to inform an initial purchase decision, or because 
the information is of interest to only some investors (for example, 
those investors who want detailed fund information), as well as 
financial professionals and market analysts. Furthermore, current fund 
disclosures in some cases are delivered close in time to one another 
and include similar sets of information that may appear redundant or 
inconsistent to shareholders. Under the proposal, the amounts and types 
of available fund information would remain largely unchanged. However, 
information that is of interest only to some shareholders, or 
information that we believe generally is less useful for purposes of 
assessing and monitoring an ongoing investment, would be available 
online and delivered upon request to fund shareholders who want that 
additional information.
    In addition to layering disclosure for existing fund shareholders, 
we are proposing certain amendments to the way funds present their fees 
and expenses and principal risks in prospectuses. Many retail investors 
responding to the Fund Investor Experience RFC stated that current fee 
and expense and principal risk disclosure is difficult to understand 
and use. The proposed amendments are designed to provide investors with 
simpler, easier-to-understand information about a fund's fees and 
expenses and principal risks, including a summary presentation of 
bottom-line fee figures that uses plain language descriptions and more 
concise principal risk disclosure that generally orders risks by 
importance. Consistent with the current layered approach to prospectus 
disclosure, additional information about a fund's fee and expenses and 
risks would remain available for interested investors.
    To improve the clarity of fee and expense information that is 
available to investors more generally, we also propose to amend the 
Commission's investment company advertising rules. The proposed 
amendments would require that a registered investment company or 
business development company (``BDC'') advertisement discussing fees 
and expenses include certain standardized figures and provide 
reasonably current information. In addition, we are proposing 
amendments to address potentially misleading statements about fees and 
expenses in these investment company advertisements.

A. Current Approach To Disclosure for Fund Shareholders

    Today, a fund investor receives a prospectus in connection with his 
or her initial purchase of fund shares. A fund's prospectus serves as 
the principal selling document for potential investors to help inform 
investment decisions and facilitate fund comparisons. Fund prospectuses 
provide important information that an investor should consider when 
making an investment, including information about a fund's principal 
investment strategies, fees and expenses, principal risks, and 
performance.\10\ Under the Federal securities laws, a fund (or a 
financial intermediary) must deliver an updated copy of the fund's 
summary or statutory prospectus to an existing fund shareholder if the 
shareholder purchases additional shares of the fund.\11\ We understand 
that, to satisfy

[[Page 70719]]

applicable prospectus delivery requirements, most funds send an updated 
summary or statutory prospectus annually to all shareholders to avoid 
the need to track each shareholder's additional purchase activity 
throughout the year. Other funds may track this activity and send a 
summary or statutory prospectus only to those shareholders who have 
purchased fund shares during the relevant period. The vast majority of 
funds use summary prospectuses.\12\ Outside of the annual prospectus 
update, a fund shareholder may also receive updates at other times 
during the year when a fund supplements, or ``stickers,'' its 
prospectus disclosure to reflect material or other changes.\13\
---------------------------------------------------------------------------

    \10\ See, e.g., Enhanced Disclosure and New Prospectus Delivery 
Option for Registered Open-End Management Investment Companies, 
Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 
(Jan. 26, 2009)] (``2009 Summary Prospectus Adopting Release''). The 
summary prospectus that the Commission adopted took into account 
investors' preferences as reflected in focus group interviews and a 
telephone survey. See 2009 Summary Prospectus Adopting Release at 
n.32 and accompanying text.
    \11\ Section 10(a)(3) of the Securities Act, and section 24(e) 
and 17 CFR 270.8b-16 [rule 8b-16 under the Investment Company Act], 
generally require a fund to update its registration statement (which 
includes its prospectus) annually. The effect of section 10(a)(3) is 
to require funds to update their prospectuses annually to reflect 
current fee, performance, and other financial information (the 
``annual prospectus update'').
     Section 5(b)(2) of the Securities Act makes it unlawful to 
deliver a security for purposes of sale or for delivery after sale 
``unless accompanied or preceded'' by a statutory prospectus. 
Because the requirements of section 5(b)(2) are applicable to ``any 
person,'' its obligations apply to financial intermediaries through 
which funds are sold, as well as to the funds themselves. See supra 
footnote 6 (recognizing that a fund or financial intermediary may 
deliver a summary prospectus to satisfy this prospectus delivery 
obligation under certain conditions).
    \12\ We estimate that as of December 31, 2018, approximately 93% 
of mutual funds and ETFs use summary prospectuses. This estimate is 
based on data on the number of mutual funds and ETFs that filed a 
summary prospectus in 2018 in the Commission's Electronic Data, 
Gathering, Analysis, and Retrieval system (``EDGAR'') (10,808) and 
the Investment Company Institute's estimated number of mutual funds 
and ETFs as of December 31, 2018 (11,656). See Investment Company 
Institute, 2019 Investment Company Fact Book, at 50, available at 
https://www.ici.org/pdf/2019_factbook.pdf.
    \13\ See generally 17 CFR 230.497 [rule 497 under the Securities 
Act]; see also section 12(a)(2) of the Securities Act (providing a 
civil remedy if a prospectus includes an untrue statement of a 
material fact or omits to state a fact necessary in order to make 
the statements, in the light of the circumstances under which they 
were made, not misleading); 17 CFR 230.408 [rule 408 under the 
Securities Act] (requiring registrants to include, in addition to 
the information expressly required to be included in a registration 
statement, such further material information, if any, as may be 
necessary to make the required statements, in the light of the 
circumstances under which they are made, not misleading).
---------------------------------------------------------------------------

    In addition to annual prospectus updates and interim stickers, fund 
shareholders also receive shareholder reports on a semi-annual 
basis.\14\ These reports include detailed information about a fund's 
operations over a given half- or full-year period, including 
information about the following items. Certain of this information, 
including fund performance information, appears only in annual reports.
---------------------------------------------------------------------------

    \14\ See section 30(e) of the Investment Company Act [15 U.S.C. 
80a-29(e)]; rule 30e-1 under the Investment Company Act [17 CFR 
270.30e-1]. A fund or an intermediary may transmit the shareholder 
report to an investor. Most fund investors engage an investment 
professional and hold their fund investments as beneficial owners 
through accounts with intermediaries. As a result, intermediaries 
commonly assume responsibility for distributing fund shareholder 
reports to beneficial owners. See Optional internet Availability of 
Investment Company Shareholder Reports, Investment Company Act 
Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)] 
(``Rule 30e-3 Adopting Release''), at paragraph accompanying n.274.
---------------------------------------------------------------------------

     The ongoing costs of a $1,000 fund investment for the most 
recent fiscal half-year, including actual expenses (which a shareholder 
can use to understand his or her ongoing costs of investing in the 
fund) and hypothetical expenses (which a shareholder can use to compare 
different funds' ongoing costs);
     Performance, including information about the fund's 
performance over the past 10 years and fund management's discussion of 
fund performance for the last fiscal year;
     Portfolio holdings, which includes a list of the fund's 
investments and graphical representations of the fund's holdings by 
certain categories (e.g., type of security, industry sector, geographic 
region, credit quality, or maturity); \15\
---------------------------------------------------------------------------

    \15\ A fund may include a summary schedule of its investments in 
securities of unaffiliated issuers, which includes approximately its 
50 largest holdings, in the financial statements it provides in the 
shareholder report, provided it makes the complete list of 
investments in unaffiliated issuers available online and upon 
request. Alternatively, a fund must include that complete list of 
its investments in securities of unaffiliated issuers in its 
shareholder reports. See Instruction 1 to Item 27(b)(1) of Form N-
1A; Instruction to Item 27(c)(1) of Form N-1A; 17 CFR 210.12-12B 
[rule 12-12B of Regulation S-X].
---------------------------------------------------------------------------

     Fund financials, including financial statements and 
financial highlights, which are audited in annual reports; \16\
---------------------------------------------------------------------------

    \16\ See Items 27(b)(1) and 27(b)(2) of Form N-1A. The financial 
statements and financial highlights in a fund's semi-annual report 
need not be audited. See Items 27(c)(1) and 27(c)(2) of Form N-1A.
---------------------------------------------------------------------------

     A fund's board of directors and management, including 
remuneration that the fund paid to these and certain other parties;
     Results of any shareholder vote held during the relevant 
period;
     The availability of additional information regarding the 
fund's proxy voting record, code of ethics, quarterly portfolio 
holdings, and board of directors;
     Changes in and disagreements with fund accountants;
     Any board approval of an investment advisory contract 
during the relevant period; and
     The operation and effectiveness of the fund's liquidity 
risk management program.\17\
---------------------------------------------------------------------------

    \17\ See Item 27(b), (c), and (d) of Form N-1A; rule 30e-1(b) 
under the Investment Company Act [17 CFR 270.30e-1(b)].
---------------------------------------------------------------------------

    Additionally, some funds currently include other information in 
their shareholder reports that is not required by Commission rules or 
forms. For example, some funds typically include in their shareholder 
reports information such as president's letters, interviews with 
portfolio managers, market commentary, or specific portfolio statistics 
that are not required (e.g., top ten largest holdings, summary 
statistics with respect to debt yields and maturities).\18\ Based on 
staff analysis, the average annual report is approximately 134 pages 
long, and the average semi-annual report is approximately 116 pages 
long.\19\
---------------------------------------------------------------------------

    \18\ See, e.g., Fund Investor Experience RFC, supra footnote 8, 
at Section II.D.5.
    \19\ We recognize, however, that the length of funds' 
shareholder reports can vary substantially. For example, the staff 
observed annual reports ranging in length from 22 pages to more than 
600 pages. These figures are based on a 2020 staff review that 
included a sample of reports from large, mid-sized, and small funds 
that were available on fund websites. One apparent reason for the 
different lengths of these reports is that some reports covered a 
single fund (or series), while others covered many. For example, 
most reports that were between 22 and 45 pages long covered a single 
series. However, the number of series a report covered did not 
solely explain the differences in length. For reports that were 
longer than 45 pages, there generally was not a clear and consistent 
relationship between the number of series a report covered and the 
report's length. See also Comment Letter of Investment Company 
Institute on File No. S7-08-15 (Mar. 14, 2016), at n.49, available 
at https://www.sec.gov/comments/s7-08-15/s70815-581.pdf (estimating 
that, in 2016, the average annual report was 114 pages long).
---------------------------------------------------------------------------

    Shareholder reports and prospectuses provide some of the same 
categories of information, including information about expenses and 
performance. A fund shareholder typically receives an annual report and 
an annual prospectus update close in time, commonly within two months 
of one another.\20\ We understand that some funds even deliver a 
shareholder report and the annual prospectus update at the same time.
---------------------------------------------------------------------------

    \20\ Under rule 30e-1, funds generally must transmit annual 
reports within 60 days after the close of the fiscal year. See rule 
30e-1(c) [17 CFR 270.30e-1(c)]. Under Securities Act section 
10(a)(3) and Investment Company Act rule 8b-16(a), funds typically 
update their prospectuses within 120 days of the end of fiscal year-
end, and updated prospectuses are often delivered to existing 
shareholders soon thereafter.
---------------------------------------------------------------------------

    With respect to the delivery mechanism, a fund shareholder 
currently receives shareholder reports and prospectuses in paper or 
electronically.\21\ We understand that

[[Page 70720]]

shareholders electing electronic delivery of fund disclosure materials 
typically receive an email that contains a link to where the materials 
are available online. Additionally, if a fund chooses to rely on rule 
30e-3, beginning as early as January 1, 2021, a shareholder who 
currently receives fund shareholder reports in the mail may begin 
receiving instead notices that a shareholder report is available at an 
identified website address.\22\ Nonetheless, a shareholder may continue 
to receive the full report in paper if he or she notifies the fund (or 
relevant financial intermediary) that he or she wishes to receive paper 
copies of the reports. The costs of delivering prospectuses and 
shareholder reports, including printing and mailing costs and 
processing fees, are generally fund expenses borne by shareholders.
---------------------------------------------------------------------------

    \21\ See Use of Electronic Media for Delivery Purposes, 
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458 
(Oct. 13, 1995)] (providing Commission views on the use of 
electronic media to deliver information to investors, with a focus 
on electronic delivery of prospectuses, annual reports, and proxy 
solicitation materials); Use of Electronic Media by Broker-Dealers, 
Transfer Agents, and Investment Advisers for Delivery of 
Information, Investment Company Act Release No. 21945 (May 9, 1996) 
[61 FR 24644 (May 15, 1996)]; Use of Electronic Media, Investment 
Company Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 
2000)].
    \22\ See rule 30e-3 under the Investment Company Act [17 CFR 
270.30e-3]; Rule 30e-3 Adopting Release, supra footnote 14.
---------------------------------------------------------------------------

    Beyond prospectuses and shareholder reports, many funds prepare 
other information for potential or current investors that the 
securities laws and Commission rules do not require. For example, many 
funds prepare advertising materials, which can include materials in 
newspapers, magazines, radio, television, direct mail advertisements, 
fact sheets, newsletters, and on various web-based platforms. 
Advertising materials are subject to certain requirements under 
Commission rules.\23\ As an example, many funds prepare monthly or 
quarterly fact sheets that concisely provide certain information about 
a fund, such as the fund's performance and strategies, illustrations of 
the fund's holdings, and certain fund statistics (e.g., net asset 
value, expense ratio). Fact sheets are often one or two pages long. 
Some shareholders or financial professionals may use fact sheets to 
monitor fund investments because, for example, they include more up-to-
date performance information than shareholder reports or prospectuses.
---------------------------------------------------------------------------

    \23\ See infra Section II.I (discussing the Commission's 
advertising rules and certain proposed changes to these rules).
---------------------------------------------------------------------------

B. Information About Investor Preferences

    Our understanding of investor preferences regarding fund disclosure 
is informed by many sources, including responses to the Fund Investor 
Experience RFC, prior investor testing and surveys, and past disclosure 
reform initiatives. In response to the Fund Investor Experience RFC, 
the Commission received many comments from individual investors, 
including through a Feedback Flier on Improving Fund Disclosure (the 
``Feedback Flier'') that accompanied the release to facilitate retail 
investor input.\24\ In addition to the input we received from 
individual investors, some other commenters on the Fund Investor 
Experience RFC provided the results of investor surveys they conducted 
regarding fund disclosure.\25\ Moreover, the Commission and its staff 
have been involved with other relevant investor testing and surveys, 
including investor testing regarding shareholder reports in 2011 and a 
study on financial literacy in 2012.\26\ Several past Commission 
rulemakings have also provided information about investors' disclosure 
preferences, including rulemakings regarding summary prospectuses for 
mutual funds and ETFs, summary prospectuses for variable annuity and 
variable life insurance contracts, and broker-dealer and investment 
adviser relationship summaries.\27\
---------------------------------------------------------------------------

    \24\ The majority of individual investors responding to the Fund 
Investor Experience RFC used the Feedback Flier to provide their 
views. See Fund Investor Experience RFC, supra footnote 8, at 
Appendix B. Unless otherwise indicated, comments cited in this 
release are the public comments on the Fund Investor Experience RFC, 
supra footnote 8, which are available at https://www.sec.gov/comments/s7-12-18/s71218.htm.
    \25\ See, e.g., Comment Letter of Broadridge Financial 
Solutions, Inc. (Oct. 31, 2018) (``Broadridge Comment Letter I''); 
Comment Letter of the Consumer Federation of America (Oct. 31, 2018) 
(``CFA Comment Letter''); Comment Letter of Investment Company 
Institute (Oct. 24, 2018) (``ICI Comment Letter I''); Comment Letter 
of Broadridge Financial Solutions, Inc. (Apr. 28, 2020) 
(``Broadridge Comment Letter II'').
    \26\ See Investor Testing of Selected Mutual Fund Annual Reports 
(Feb. 9, 2012) (``2012 Report on Investor Testing of Fund Annual 
Reports''), available at https://www.sec.gov/comments/s7-08-15/s70815-3.pdf; SEC Staff, Study Regarding Financial Literacy Among 
Investors (Aug. 2012) (``Financial Literacy Study''), available at 
https://www.investor.gov/publications-research-studies/sec-research; 
see also Recommendation of the Investor Advisory Committee on 
Disclosure Effectiveness (May 21, 2020) (``IAC Disclosure 
Effectiveness Recommendation''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/disclosure-effectiveness.pdf (discussing, among other things, research findings 
relating to investors' understanding of fund disclosure).
    \27\ See 2009 Summary Prospectus Adopting Release, supra 
footnote 10; Updated Disclosure Requirements and Summary Prospectus 
for Variable Annuity and Variable Life Insurance Contracts, 
Investment Company Act Release No. 33814 (Mar. 11, 2020) [85 FR 
25964 (May 1, 2020)] (``Variable Contract Summary Prospectus 
Adopting Release''); Form CRS Relationship Summary; Amendments to 
Form ADV, Investment Advisers Act Release No. 5247 (June 5, 2019) 
[84 FR 33492 (July 12, 2019)] (``Form CRS Adopting Release'').
---------------------------------------------------------------------------

1. Fund Shareholder Preferences Regarding Ongoing Disclosures
    Based on available information, as detailed below, we understand 
that many fund shareholders would prefer to receive a smaller volume of 
fund disclosures each year. In addition, many shareholders view funds' 
current annual and semi-annual reports as overly long and complex. 
Available evidence suggests that, as a result of the volume and 
complexities of fund disclosures, many shareholders do not read much, 
if any, of the ongoing disclosures they receive. We understand that 
fund shareholders would prefer concise, layered shareholder report 
disclosure that highlights key information and that uses design 
features to make the reports easier to understand and use.
Investor Preferences for Concise, Layered Disclosure
    The vast majority of individual investors responding to questions 
in the Fund Investor Experience RFC about summary disclosure expressed 
a preference for summary disclosure with additional information 
available online or upon request, while only a very few stated that 
they did not prefer concise, summary disclosure.\28\ Some investors 
specifically addressed and supported a more concise, summary 
shareholder report.\29\ Moreover, several investors expressed concern 
about the current length of fund disclosure materials.\30\ Commenters' 
overall preference for summary disclosure is generally consistent with 
other information the Commission has received--through investor 
testing, surveys, and other information-gathering--that similarly

[[Page 70721]]

indicates that investors strongly prefer concise, layered 
disclosure.\31\
---------------------------------------------------------------------------

    \28\ For example, of the 49 individual investors who responded 
to a question about summary disclosure in the Feedback Flier, 46 
investors preferred summary disclosure and three investors did not. 
See, e.g., Comment Letter of Carol Palmer (June 5, 2018) (``Palmer 
Comment Letter''); Comment Letter of Perry Balke (June 5, 2018) 
(``Balke Comment Letter'') (``Seems like there should be a 
disclosure for the ultimate investor and then additional/other 
disclosures for Advisors/Institutions to analyze.''); Comment Letter 
of Sara Karlidag (June 6, 2018) (``Karlidag Comment Letter''); 
Comment Letter of Chip Morton (Dec. 28, 2018) (``Morton Comment 
Letter'') (``I like the more detailed reports''). Investors who 
responded to the Fund Investor Experience outside of the Feedback 
Flier also supported more concise, summary disclosure. See, e.g., 
Comment Letter of Virginia Lamp (Aug. 13, 2018); Comment Letter of 
Mark Pitts (July 15, 2018).
    \29\ See, e.g., Comment Letter of Ann Watters (Oct. 8, 2018); 
Comment Letter of Allen Weaver (Oct. 8, 2018) (``Weaver Comment 
Letter''); Comment Letter of Steve Henry (Oct. 8, 2018) (``Henry 
Comment Letter'').
    \30\ See, e.g., Comment Letter of Carla Rojas (June 9, 2018) 
(``Rojas Comment Letter'') (stating that fund disclosure is too 
long); Comment Letter of Richard Franco (Sept. 24, 2018) (``Franco 
Comment Letter''); Comment Letter of Lisa Nevin (June 13, 2018) 
(``Nevin Comment Letter''); Comment Letter of Mike Woods (Sept. 2, 
2018) (``Woods Comment Letter''); Comment Letter of David (Aug. 30, 
2018) (``David Comment Letter'') (stating that fund disclosures are 
too overwhelming to be useful).
    \31\ See, e.g., Broadridge Comment Letter I; ICI Comment Letter 
I; Broadridge Comment Letter II; 2012 Report on Investor Testing of 
Fund Annual Reports, supra footnote 26 (noting that the concept of a 
shortened annual report appealed to many focus group participants); 
see also 2009 Summary Prospectus Adopting Release, supra footnote 
10, at Section II (discussing investors' preferences for summary 
disclosure with respect to fund prospectuses); Financial Literacy 
Study, supra footnote 26 (noting that, based on the feedback of 
commenters and the results of quantitative and qualitative research, 
``[w]ith respect to investment product disclosures, investors favor 
summary documents containing key information about the investment 
product''); Understanding Investor Preferences for Mutual Fund 
Information, Investment Company Institute (2006) (``Investor 
Preferences Report''), available at https://www.ici.org/pdf/rpt_06_inv_prefs_full.pdf; Form CRS Adopting Release, supra footnote 
27, at n.36 (discussing similar preferences for concise disclosure 
with respect to broker-dealer and investment adviser relationship 
summaries); Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27, at n.33 (discussing commenters' support for 
layered disclosure in the case of variable annuity and variable life 
insurance contracts); IAC Disclosure Effectiveness Recommendation, 
supra footnote 26 (discussing, among other things, the use of 
layered disclosure as an approach to develop more investor-friendly 
disclosures).
---------------------------------------------------------------------------

Investor Views on the Usability and Design of Funds' Shareholder 
Reports
    Available evidence suggests that investors generally view fund 
shareholder reports as difficult to understand. Several investors 
responding to the Fund Investor Experience RFC stated that fund 
disclosure is too complicated.\32\ For instance, many investors 
indicated that there is too much technical writing in fund 
disclosure.\33\ Investors also expressed a strong preference for the 
inclusion of more tables, charts, and graphs in fund disclosure to make 
information more understandable to the average investor.\34\ Similarly, 
the majority of investors participating in certain past quantitative 
and qualitative investor testing initiatives on the Commission's behalf 
expressed the view that funds' annual reports are written more for 
advanced investors, financial professionals, or regulators than for an 
average investor.\35\ Investor surveys that other market participants 
have conducted further support the conclusion that investors view 
funds' shareholder reports as too lengthy and complicated, and 
difficult for the average investor to use to effectively find 
information of interest.\36\ These surveys have found that, for 
example, approximately 41% to 72% of surveyed investors find fund 
shareholder reports difficult to understand.\37\
---------------------------------------------------------------------------

    \32\ See, e.g., Karlidag Comment Letter; Rojas Comment Letter; 
Comment Letter of Melanie Jallah (June 12, 2018) (``Jallah Comment 
Letter''); Nevin Comment Letter; Comment Letter of Roberto Delmonte 
(June 15, 2018) (``Delmonte Comment Letter''); Broadridge Comment 
Letter I (stating that in a quantitative survey, 72% of investors 
who review mutual fund or ETF disclosure said they do not find the 
information easy to understand); Comment Letter of Helen and Bob 
Hague (Aug. 30, 2018) (``Hague Comment Letter'') (stating that they 
understand summary prospectus disclosure, but not annual report 
disclosure); Comment Letter of Michael Dougle (Aug. 30, 2018) 
(``Dougle Comment Letter''); David Comment Letter.
    \33\ See, e.g., Comment Letter of Harold Thomas (June 8, 2018) 
(``Thomas Comment Letter''); Rojas Comment Letter; Jallah Comment 
Letter; Comment Letter of Kate Freedman (June 12, 2018) (``Freedman 
Comment Letter''); Nevin Comment Letter; Delmonte Comment Letter; 
Comment Letter of Rich Kirchoff (June 21, 2018) (``Kirchoff Comment 
Letter''); Comment Letter of Tom Arnold (June 23, 2018) (``Arnold 
Comment Letter'') (stating that there is too much boilerplate in 
fund disclosures, which are legal documents instead of informative 
documents); Comment Letter of Mimi Solo (July 16, 2018) (``Solo 
Comment Letter''); Woods Comment Letter (stating that fund 
disclosure is not useful because there is too much boilerplate and 
legalese).
    \34\ See, e.g., Comment Letter of Jack Wilhelm (Aug. 30, 2018) 
(``Wilhelm Comment Letter''); Comment Letter of Frank W. (Aug. 30, 
2018) (``Frank W. Comment Letter''); Comment Letter of Caryn Stiles 
(Aug. 30, 2018) (``Stiles Comment Letter''); Comment Letter of Mrs. 
Kellie (Aug. 30, 2018); Hague Comment Letter; Comment Letter of J.L. 
(Aug. 30, 2018) (``J.L. Comment Letter''); Woods Comment Letter; 
Comment Letter of Amanda Yukle (Sept. 6, 2018) (``Yukle Comment 
Letter''); Comment Letter of Joanna Baker (Sept. 11, 2018) (``Baker 
Comment Letter''). However, one investor expressed a preference for 
text disclosure. See Comment Letter of Mark Freeland (Dec. 2, 2018) 
(``Freeland Comment Letter'').
     See also Financial Literacy Study, supra footnote 26 
(explaining that, based on public comments and qualitative and 
quantitative research, investors prefer that disclosures be written 
in clear, concise, understandable language, using bullet points, 
tables, charts, and/or graphs); Investor Preferences Report, supra 
footnote 31 (indicating that investors prefer graphics and charts 
describing an investment over a narrative description).
    \35\ See 2012 Report on Investor Testing of Fund Annual Reports, 
supra footnote 26, at 10, 75, and 80. For example, one focus group 
participant in the 2012 research described the annual report 
disclosure they reviewed as ``mind-clogging,'' while another 
participant suggested that annual reports ``should be written in 
fifth grade English.'' Another participant stated, ``If they're 
sending it to us, use a summary and pie charts. (The more 
sophisticated investors) can go online.''
    \36\ See Broadridge Comment Letter I (explaining the findings of 
qualitative feedback from 45 retail investors regarding a typical 
mutual fund annual report, including that investors found the 
document to be too long and overwhelming and preferred disclosures 
that can be read in a few minutes and that focus on essential 
information); Mutual Fund Investors' Views on Shareholder Reports: 
Reactions to a Summary Shareholder Report Prototype, Investment 
Company Institute (Oct. 2018) (``ICI Investor Survey''), available 
at https://www.ici.org/pdf/ppr_18_summary_shareholder.pdf; 
Broadridge Comment Letter II.
    \37\ See Broadridge Comment Letter I (stating that 72% of 
surveyed investors that review mutual fund or ETF disclosures do not 
find them easy to understand); ICI Investor Survey, supra footnote 
36 (stating that 67% of surveyed mutual fund investors who recalled 
receiving fund shareholder reports indicated that the reports are 
difficult to understand); Broadridge Comment Letter II (providing 
the results of two surveys in which 41% and 53% of surveyed 
investors, respectively, found the reports very or somewhat 
difficult to understand, with older investors and those with lower 
incomes more likely to find the reports difficult to understand).
---------------------------------------------------------------------------

Investors' Current Use of Fund Disclosures
    Several investors responding to the Fund Investor Experience RFC 
stated that they do not review funds' disclosure materials at all.\38\ 
Investor testing and surveys also suggest that many fund shareholders 
tend to read very little, if any, of funds' disclosure materials. For 
example, in one investor survey, 12% of fund shareholders stated that 
they ``never'' review mutual fund or ETF disclosure, while an 
additional 37% said that they review this disclosure ``some of the 
time.''\39\ Another survey found that 63% of mutual fund shareholders 
who recalled receiving fund shareholder reports read, at most, very 
little of them.\40\ Two other surveys found somewhat higher readership 
levels of shareholder reports, with only 4% and 8% of surveyed 
shareholders responding that they do not read the reports.\41\ However, 
a majority of fund shareholders in one of these surveys also indicated 
that they spend 15 minutes or less reviewing the reports.\42\
---------------------------------------------------------------------------

    \38\ See, e.g., Delmonte Comment Letter; Comment Letter of 
Helena Krus (July 29, 2018) (``Krus Comment Letter''); Comment 
Letter of Logan Fowler (Aug. 13, 2018) (``Fowler Comment Letter''); 
Wilhelm Comment Letter; Comment Letter of Nina Grano (Aug. 30, 2018) 
(``Grano Comment Letter''); Comment Letter of Jack Olstrom (Aug. 30, 
2018) (``Olstrom Comment Letter''); Dougle Comment Letter; Comment 
Letter of Frank J. (Aug. 30, 2018); J.L. Comment Letter; Franco 
Comment Letter; Comment Letter of Irwin Joseph (Nov. 19, 2018) 
(``Joseph Comment Letter''). Some of these commenters stated that 
they do not review fund disclosure materials because they are too 
long or complex, or generally are not well suited to investors' 
needs. See, e.g., Fowler Comment Letter; Franco Comment Letter; 
Grano Comment Letter.
    \39\ See Broadridge Comment Letter I.
    \40\ See ICI Investor Survey, supra footnote 36; see also 2012 
Report on Investor Testing of Fund Annual Reports, supra footnote 
26, at 61, 69 (stating that, of participants in the qualitative 
component of this testing, 52% read a few key sections of fund 
annual reports, 14% scan the table of contents and/or the first few 
pages, and 25% file it or discard it unread; of online survey 
respondents, 72% read a few key sections, 10% scan the first few 
pages, and 3% file it or discard it unread).
    \41\ See Broadridge Comment Letter II. One of these surveys 
found that 8% of surveyed investors do not read the reports, 19% 
read very little of the reports, and 28% read some of the reports. 
The other survey found that 4% of surveyed investors do not read the 
reports and 56% read some of the reports.
    \42\ See id. (providing the results of a survey in which 21% of 
investors said that they typically spend 5 minutes or less reviewing 
shareholder reports and an additional 41% of investors said that 
they typically spend 6 to 15 minutes reviewing the reports).
---------------------------------------------------------------------------

    Survey results relating to readership of shareholder reports also 
suggest that shareholders may not read some, or all,

[[Page 70722]]

of a fund's shareholder report due, in part, to the fact that many view 
shareholder reports as overly long and complex documents that are not 
designed to meet the average shareholder's needs.\43\ Fund shareholders 
may, however, be more likely to read a more concise version of a fund's 
shareholder report.\44\ Academic research similarly suggests that, due 
to limits on an individual's ability to absorb and process information, 
investors may be more likely to understand and effectively use concise 
disclosure that is well-organized and focused on key information.\45\
---------------------------------------------------------------------------

    \43\ See, e.g., ICI Investor Survey, supra footnote 36 (``The 
survey results demonstrate that mutual fund investors who find the 
current reports difficult to understand are less likely to read 
them.'').
    \44\ See, e.g., Broadridge Comment Letter I (discussing the 
results of a quantitative survey related to fund disclosure in which 
approximately 39% of investors said they would be more likely to 
look at or review a summary format of a fund's annual and semi-
annual reports); ICI Comment Letter I (discussing an investor survey 
of a summary shareholder report prototype, in which more than 90% of 
participants indicated that they would be more likely to read the 
summary prototype than a full-length shareholder report); Broadridge 
Comment Letter II (providing the results of a survey in which 88% of 
investors indicated that they were more likely to read a summary 
shareholder report than a full-length report). Two commenters used 
the same summary shareholder report prototype, developed by the ICI, 
in their investor surveys. The prototype was approximately three 
pages in length and primarily focused on performance, fund expenses, 
and illustrations of fund holdings. See ICI Comment Letter I; 
Broadridge Comment Letter II.
    \45\ See, e.g., Disclosure: Psychology Changes Everything, 
George Loewenstein, Cass R. Sunstein, and Russell Goldman, Annual 
Review of Economics (2014) (providing a comprehensive survey of 
literature relevant to disclosure regulation and suggesting that 
``[g]iven the limits of human attention, perhaps the most obvious 
way to improve the effectiveness of disclosures is to simplify them 
. . . [and] to reduce the number of less important disclosures so as 
to increase the salience of the most important ones''); see also 
infra Section III.C.1 (discussing additional academic research on 
characteristics that may increase the effectiveness of a given 
disclosure).
---------------------------------------------------------------------------

Investor Views on the Content of Funds' Shareholder Reports
    Investors participating in investor testing and surveys have 
expressed a consistent interest in certain specific shareholder report 
disclosure items.\46\ The principal items of interest that investors 
have consistently identified for purposes of monitoring an ongoing fund 
investment include performance, holdings, and fund expenses.\47\ For 
example, investor testing and surveys have found that approximately 60% 
to more than 80% of investors believe that fund performance information 
is important.\48\ As for fund holdings information, testing and surveys 
have found that approximately 38% to 79% of investors view this 
information as important.\49\ Testing and surveys have also found that 
approximately 34% to 72% of investors believe that fund expense 
information is important.\50\
---------------------------------------------------------------------------

    \46\ We are not aware of investor testing or surveys that 
specifically have explored fund shareholders' level of interest in 
prospectus-related disclosure they receive through annual prospectus 
updates or interim prospectus stickers. However, the results of at 
least one survey suggest that fund shareholders are more likely to 
use shareholder reports than prospectuses to monitor their fund 
investments. See Investor Preferences Report, supra footnote 31, at 
15.
    \47\ See 2012 Report on Investor Testing of Fund Annual Reports, 
supra footnote 26, at 51-52 (stating that about half of online 
survey respondents considered items regarding performance, holdings, 
and expenses as ``absolutely essential information for any 
investor''); Broadridge Comment Letter I; ICI Comment Letter I; 
Investor Preferences Report, supra footnote 31; Broadridge Comment 
Letter II. Some commenters on the Fund Investor Experience RFC also 
suggested that a summary or streamlined shareholder report should 
focus on a fund's expenses, performance, and holdings. See, e.g., 
Comment Letter of The Capital Group Companies (Oct. 30, 2018) 
(``Capital Group Comment Letter''); Henry Comment Letter. Similarly, 
we understand that these content topics are those that experts 
recommend that investors consider in understanding a fund 
investment. See, e.g., IAC Disclosure Effectiveness Recommendation, 
supra footnote 26, at n.4 and accompanying text (``To select a 
mutual fund, for example, experts are nearly unanimous in 
recommending that investors consider the fund's investment 
objectives and strategies, risks, fees and expenses, past 
performance, including the volatility of that performance, the 
reputation of the fund manager, tax implications of an investment in 
the fund, and information about such account features as investment 
minimums.'').
    \48\ See Broadridge Comment Letter I (finding that, of the 50% 
of surveyed investors that review mutual fund or ETF annual and 
semi-annual reports ``always'' or ``most of the time,'' 75% of those 
investors often look at or review fund performance information); 
2012 Report on Investor Testing of Fund Annual Reports, supra 
footnote 26, at 49 (stating that 61% of participants in the 
qualitative component of this testing ranked the discussion of fund 
performance in the top three most important shareholder report 
items); ICI Comment Letter I (finding that approximately 83% of 
surveyed investors said that performance highlights information is 
very important or somewhat important); Investor Preferences Report, 
supra footnote 31 (stating that, after purchase, 76% of investors 
review performance information); Broadridge Comment Letter II 
(providing the results of an investor survey in which 89% of 
investors rated the performance section of the annual report as 
important and 63% rated the portfolio commentary (or performance 
highlights) section as important).
    \49\ See Broadridge Comment Letter I (stating that, of the 50% 
of surveyed investors that review mutual fund or ETF annual and 
semi-annual reports ``always'' or ``most of the time,'' 67% of those 
investors often look at or review fund portfolio holdings 
information); 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 49 (finding that 38% of participants 
in the qualitative component of this testing ranked the graphical 
representation of holdings in the top three most important 
shareholder report items); see also ICI Comment Letter I (stating 
that approximately 79% of surveyed investors said that graphical 
representation of holdings information is very important or somewhat 
important); Investor Preferences Report, supra footnote 31 (stating 
that, after purchase, 41% of investors review portfolio holdings); 
Broadridge Comment Letter II (discussing a survey in which 63% of 
investors rated disclosure about the characteristics of a fund--
including top holdings, asset allocations, and industry 
allocations--as important for annual reports and 64% of investors 
rated this disclosure as important for semi-annual reports).
    \50\ See Broadridge Comment Letter I (stating that, of the 50% 
of surveyed investors that review mutual fund or ETF annual and 
semi-annual reports ``always'' or ``most of the time,'' 61% of those 
investors often look at or review fund expense information); 2012 
Report on Investor Testing of Fund Annual Reports, supra footnote 
26, at 49 (finding that 34% of participants in the qualitative 
component of this testing ranked the expense example in the top 
three most important shareholder report items); Broadridge Comment 
Letter II (discussing a survey in which 69% of investors rated 
expense disclosure as important for annual reports and 66% of 
investors rated it as important for semi-annual reports); see also 
ICI Comment Letter I (stating that approximately 72% of surveyed 
investors said that the fund expense example is very important or 
somewhat important); Investor Preferences Report, supra footnote 31 
(stating that, after purchase, 55% of investors review fund fees and 
expenses).
---------------------------------------------------------------------------

    Investors have expressed varying levels of interest in reviewing a 
fund's financial statements and financial highlights. For example, at 
least one survey has found somewhat high levels of interest in this 
information from shareholders who currently review fund shareholder 
reports (i.e., 63% of these investors often review a fund's financial 
statements), and another survey found that a majority of investors 
rated financial highlights disclosure as important.\51\ Other surveys, 
as well as comments on the Investor Experience RFC, suggest that the 
average investor may have less interest in financial statements and 
financial highlights.\52\ As for other types of shareholder report 
disclosure, investors typically have expressed less interest in these 
other disclosures.\53\
---------------------------------------------------------------------------

    \51\ See Broadridge Comment Letter I; Broadridge Comment Letter 
II (stating that 55% of investors rated the financial highlights as 
important annual report disclosure and 53% of investors rated this 
disclosure as important for semi-annual reports, but 47% of surveyed 
investors viewed the statement of financial condition and operations 
as important disclosure for annual or semi-annual reports).
    \52\ See 2012 Report on Investor Testing of Fund Annual Reports, 
supra footnote 26, at 49 and 52 (indicating that approximately 38% 
to 41% of surveyed investors found the financial highlights to be 
important, while approximately 24% to 33% of surveyed investors 
believed that financial statements were important); see also ICI 
Comment Letter I (determining not to include financial statements 
and most financial highlights data points in a summary shareholder 
report mockup and instead concluding that ``they were of a more 
technical nature that a typical retail investor would not read or 
understand,'' although such information would be available online 
under the commenter's proposed approach); Rojas Comment Letter 
(``What am I supposed to do with a very long list of holdings and 
financial statements?''); Balke Comment Letter (``Financial 
Statements are of little value.''); Fowler Comment Letter (``What am 
I supposed to do with fund financial statements?'').
    \53\ See Broadridge Comment Letter I (finding that surveyed 
investors tended to have less interest in remuneration paid to 
directors, officers, and others, as well as information about 
directors and officers); 2012 Report on Investor Testing of Fund 
Annual Reports, supra footnote 26, at 52 (stating that surveyed 
investors generally had less interest in information about changes 
in, and disagreements with accountants; results of any shareholder 
vote; discussion of the reasons the board approved an advisory 
contract; statements about where to find certain additional fund 
information; and information about directors and officers); 
Broadridge Comment Letter II (providing the results of a survey in 
which 26% of investors rated disclosure about the fund's directors 
and officers as important, and 25% of investors rated disclosure 
about the board's approval of the investment advisory contract as 
important).

---------------------------------------------------------------------------

[[Page 70723]]

Investor Views on the Volume and Frequency of Fund Disclosure
    In addition to concerns about the length of funds' shareholder 
reports, some investors responding to the Fund Investor Experience RFC 
expressed concern about the overall volume and frequency of fund 
disclosures they receive each year. For example, several investors 
expressed the view that they receive too many fund disclosure materials 
and that they feel overwhelmed by the amount of information they 
receive.\54\ Another investor expressed a preference for less frequent 
disclosure.\55\
---------------------------------------------------------------------------

    \54\ See, e.g., Delmonte Comment Letter (``There is too much 
information provided to me. I buy a mutual fund because I want 
convenience and to more efficiently spend my time. Stop giving me 
hours['] worth of reading I do not understand.''); Solo Comment 
Letter (stating that there are too many fund disclosure materials, 
they are too long, and they do not distill the right information); 
Rojas Comment Letter.
    \55\ Comment Letter of Anonymous (Aug. 30, 2018) (``Anonymous 
Comment Letter'') (``I invest for the long term. I do not need 
constant updates.'')
---------------------------------------------------------------------------

    However, with respect to shareholder reports in particular, one 
investor survey found that 86% of investors thought that the current 
semi-annual frequency at which they receive reports was ``about the 
right frequency,'' while 11% of investors viewed semi-annual reports as 
too frequent and 3% expressed a preference for more frequent 
shareholder reports. In this survey, investors' preferred frequency 
changed somewhat for a prototype summary shareholder report.\56\ If 
they were to receive a summary shareholder report, 56% of investors 
preferred semi-annual reports, 27% preferred quarterly reports, 17% 
preferred annual reports, and 1% did not want to receive the 
reports.\57\
---------------------------------------------------------------------------

    \56\ See supra footnote 44 (discussing the prototype summary 
shareholder report developed by the ICI).
    \57\ See Broadridge Comment Letter II.
---------------------------------------------------------------------------

2. Fee and Risk Disclosure Preferences
    We understand that investors generally prefer concise, summary 
disclosure that allows them to quickly understand key information. 
Similarly, we understand that this general preference extends to 
investors' preferences about disclosures regarding fund fees and risks.
Investor Views on Fee and Risk Disclosure
    The majority of investors responding to a question in the Feedback 
Flier about fee disclosure expressed the view that funds do not clearly 
disclose their fees and expenses.\58\ Many of these investors suggested 
that funds should simplify their fee and expense disclosure.\59\ 
Several investors recommended reducing the number of line items in the 
prospectus fee table or providing only one ``bottom-line'' number 
showing the fees associated with an investment in the fund.\60\ Several 
investors also expressed an interest in comparing fees and expenses 
across multiple funds to help inform their investment decisions.\61\ 
Other commenters who responded more generally to the Fund Investor 
Experience RFC also expressed concern that fund fees are hard to 
understand, and that certain terminology Form N-1A uses (e.g., use of 
terms like ``12b-1 fees'' and ``front-end loads'') is similarly 
difficult to understand.\62\ Some commenters suggested that funds 
should disclose fees in terms of dollars rather than percentages to 
make the disclosure more understandable to investors.\63\
---------------------------------------------------------------------------

    \58\ Approximately 33 investors responded to the Feedback Flier 
question asking, ``Do you think funds clearly disclose their fees 
and expenses?'' Of these 33 investors, 21 investors replied ``no'' 
and 12 investors replied ``yes.''
    \59\ See, e.g., Krus Comment Letter; Stiles Comment Letter; 
Anonymous Comment Letter; Hague Comment Letter; J.L. Comment Letter; 
Woods Comment Letter; Comment Letter of Jake Hamm (Sept. 3, 2018); 
Yukle Comment Letter.
    \60\ See, e.g., Grano Comment Letter; Anonymous Comment Letter; 
Yukle Comment Letter; J.L. Comment Letter.
    \61\ See, e.g., Palmer Comment Letter; Balke Comment Letter; 
Karlidag Comment Letter; Kirchoff Comment Letter; Solo Comment 
Letter; Krus Comment Letter.
    \62\ See, e.g., Comment Letter of AARP (Oct. 31, 2018) (``AARP 
Comment Letter''); Comment Letter of Independent Directors Council 
(Oct. 30, 2018); Comment Letter of Carla Ruiz (Aug. 17, 2018) 
(``Ruiz Comment Letter''). A recent study of mutual fund financial 
literacy also found that many survey participants were unable to 
correctly answer certain true-or-false questions about general 
aspects of funds' fee structures, as well as other characteristics 
of funds. See Brian Scholl and Angela Fontes, Adding Depth to 
Financial Literacy: What Does the Public Know About Mutual Funds? 
Towards a New Index of Investor Knowledge, SEC Office of the 
Investor Advocate (July 18, 2019).
    \63\ See, e.g., AARP Comment Letter; Comment Letter of A. Miller 
(July 21, 2018); see also infra footnote 573 (citing other evidence 
that dollar-based disclosure may be easier for some investors to 
understand).
---------------------------------------------------------------------------

Investor Views on Principal Risk Disclosure
    Many investors responding to the Fund Investor Experience RFC also 
suggested that disclosure about a fund's risks is too long.\64\ Some 
investors suggested that funds should order risks by importance and 
provide the most important risks first.\65\ Other investors suggested 
that more focused risk disclosure would be helpful.\66\ Consistent with 
these investor preferences, Commission staff has encouraged funds to 
take steps to improve their principal risk disclosure including by, for 
example, ordering risks by importance, better tailoring their risk 
disclosure, and concisely summarizing principal risks in the summary 
prospectus.\67\
---------------------------------------------------------------------------

    \64\ See, e.g., Krus Comment Letter; Solo Comment Letter; Fowler 
Comment Letter; Stiles Comment Letter; Comment Letter of Hector 
Ewing (Aug. 30, 2018) (``Ewing Comment Letter''); J.L. Comment 
Letter; Woods Comment Letter; Baker Comment Letter; Olstrom Comment 
Letter.
    \65\ See, e.g., Stiles Comment Letter; Dougle Comment Letter; 
J.L. Comment Letter; Ruiz Comment Letter; see also Frank W. Comment 
Letter (expressing interest in disclosure that better explains the 
level of a given risk).
    \66\ See, e.g., Freeland Comment Letter (stating that funds 
should only disclose risks based on how the fund normally and 
actually invests).
    \67\ See Division of Investment Management, Accounting and 
Disclosure Information 2019-08, Improving Principal Risks 
Disclosure, available at https://www.sec.gov/investment/accounting-and-disclosure-information/principal-risks/adi-2019-08-improving-principal-risks-disclosure (``ADI 2019-08'').
---------------------------------------------------------------------------

3. Disclosure Delivery Preferences
    Based on information from the Fund Investor Experience RFC and 
investor testing and surveys, investors have shown a general 
familiarity with using the internet to find information about a fund 
and have expressed a range of preferences regarding how they receive 
fund disclosure (i.e., in paper or electronically). In the Fund 
Investor Experience RFC, the Commission sought information on 
investors' use of the internet to communicate about and find 
information on fund investments, as well as their preferences on the 
form and manner of disclosure delivery.\68\ In response, many investors 
indicated that they go to fund or intermediary websites to get 
information about a fund investment.\69\ Many investors also expressed 
a preference for receiving fund disclosure electronically, either 
through email, mobile application, or

[[Page 70724]]

website availability.\70\ Several other investors preferred to access 
most fund information electronically, with the exception of certain 
information they preferred to receive on paper.\71\ Other investors 
stated that they generally prefer to receive fund information in paper 
format.\72\ A few investors specifically suggested that paper should be 
the default delivery mechanism for a ``summary'' shareholder 
report.\73\ In addition, investor testing and surveys suggest that many 
investors would prefer enhanced availability of fund information on the 
internet in a layered disclosure framework, although some investors 
prefer to receive fund disclosures in paper format.\74\
---------------------------------------------------------------------------

    \68\ See Fund Investor Experience RFC, supra footnote 8, at 
Section II.B.2.
    \69\ See, e.g., Karlidag Comment Letter; Thomas Comment Letter; 
Jallah Comment Letter; Delmonte Comment Letter; Solo Comment Letter; 
Comment Letter of C. Scott (July 26, 2018) (``Scott Comment 
Letter''); Comment Letter of James McRitchie (Sept. 4, 2018) 
(``McRitchie Comment Letter'').
    \70\ See, e.g., Rojas Comment Letter; Jallah Comment Letter; 
Freedman Comment Letter; Nevin Comment Letter; Kirchoff Comment 
Letter; Arnold Comment Letter; Scott Comment Letter; Krus Comment 
Letter. Some funds responding to the Fund Investor Experience RFC 
also suggested that website disclosure is consistent with many 
investors' preferences. See, e.g., Capital Group Comment Letter; 
Comment Letter of Fidelity Investments (Oct. 31, 2018) (``Fidelity 
Comment Letter''); Comment Letter of Vanguard (Oct. 31, 2018) 
(``Vanguard Comment Letter'').
    \71\ Many of these investors preferred to receive statements in 
paper. See Comment Letter of Arthur Blanchard (Nov. 19, 2018) 
(``Blanchard Comment Letter''); Ewing Comment Letter; Joseph Comment 
Letter; Krus Comment Letter. Other investors appeared to have 
different preferences. See Comment Letter of Mark S. (Aug. 30, 2018) 
(preferring to receive ``important'' information by mail); Olstrom 
Comment Letter (preferring to receive tax forms in paper); Comment 
Letter of Carl Waranowksi (Nov. 25, 2018) (``Waranowski Comment 
Letter'') (preferring to receive ``important'' information in 
paper).
    \72\ See, e.g., Grano Comment Letter; Comment Letter of Jane D. 
Nelson (Aug. 30, 2018); Comment Letter of Duane Lee (Dec. 3, 2018) 
(``Lee Comment Letter''); Comment Letter of Mark Moran (Dec. 4, 
2018); Morton Comment Letter; Comment Letter of Brad Shockey (Oct. 
9, 2018).
    \73\ See Henry Comment Letter; Weaver Comment Letter.
    \74\ For example, the 2012 investor testing suggested that an 
investor looking for a fund's annual report is most likely to seek 
it out on the fund's website, rather than request it by mail or 
phone or by retrieving it from the Commission's EDGAR system. See 
2012 Report on Investor Testing of Fund Annual Reports supra 
footnote 26, at 72. Many investors indicated that they would prefer 
that fund information be made available in both electronic and paper 
versions, with a plurality of respondents preferring electronic 
transmission by email with the option to easily request a paper copy 
of a particular report, though a significant minority indicated that 
they would still prefer to receive a paper copy through the mail. 
Id. at 183. See also Broadridge Comment Letter I (providing data on 
surveyed investors' current methods for receiving mutual fund and 
ETF disclosure and preferred delivery methods that suggest that 
preferences are mixed, with 47% of investors primarily receiving 
fund disclosure by mail and 44% primarily receiving fund disclosure 
by email); CFA Comment Letter (stating that the following percent of 
respondents to a 2006 survey expressed interest in using the 
internet to: (1) Obtain general information about funds (59%); (2) 
research individual funds (58%); (3) receive periodic reports and 
disclosure documents (49%); (4) use a calculator to compare costs 
(47%); (5) communicate with a financial services professional (39%); 
or (6) purchase mutual funds (26%)); Broadridge Comment Letter II 
(providing the results of a survey in which 34% of investors said 
they were more likely to review a summary shareholder report if 
received by mail and 50% of investors said they were more likely to 
review such a report if received by email). See also infra footnote 
76 (discussing increasing internet access over the years).
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C. Developments Affecting Fund Disclosure and Marketing Practices
    In addition to evidence about investor preferences regarding fund 
disclosure, our proposal is informed by developments affecting fund 
disclosure and marketing practices. With respect to our proposed 
amendments to promote more concise, layered disclosure, these 
developments include advances in technology and the Commission's 
experience with summary prospectus disclosure, as well as the growing 
length and complexity of funds' shareholder reports since the mid-
1990s. Additionally, our proposed amendments to investment company 
advertising rules are informed by our observations about recent 
investment company marketing practices in light of increased industry 
focus on fees, and competition based on fees.
Advances in Technology
    For more than 20 years, the Commission has recognized the 
internet's important role in providing disclosure materials and other 
information to investors and maximizing investor access to 
information.\75\ During this time, technology has continued to evolve, 
and investors' access to the internet has increased. For example, as of 
2019, approximately 94% of households owning mutual funds had internet 
access, while only 68% of these households had internet access in 
2000.\76\ Moreover, advances in technology, including increasing use of 
mobile devices to access information, are expanding the avenues that 
funds and intermediaries can use to communicate with investors and make 
it easier to provide interactive or customizable information.\77\ We 
understand that many funds and financial intermediaries are using 
technology in an effort to communicate more effectively with fund 
investors and to respond to investor preferences, and continue to 
explore additional ways to use technology to better communicate with 
investors.\78\ The Commission, while considering the needs and 
preferences of investors, also has recognized that modernizing the 
manner in which funds and others make information available to 
investors allows them to leverage the benefits of technology and reduce 
fund costs.\79\
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    \75\ See, e.g., supra footnote 21. For a more-detailed 
discussion of other Commission releases that have involved using the 
internet to provide or improve access to information, see Rule 30e-3 
Adopting Release, supra footnote 14, at n.18; see also Exchange-
Traded Funds, Investment Company Act Release No. 33646 (Sept. 25, 
2019) [84 FR 57162 (Oct. 24, 2019)] (``ETF Adopting Release''), at 
n.229 (encouraging ETFs to consider whether there are technological 
means to make their disclosure more accessible).
    \76\ See Ownership of Mutual Funds, Shareholder Sentiment, and 
Use of the internet, ICI Research Perspectives (Oct. 2019) (``Study 
on Mutual Fund Investors' Use of the internet''), available at 
https://www.ici.org/pdf/per25-08.pdf; see also CFA Comment Letter 
(providing a 2014 report discussing the growth of internet usage).
    \77\ See, e.g., Vanguard Comment Letter; ICI Comment Letter I; 
CFA Comment Letter.
    \78\ See, e.g., Fidelity Comment Letter; Comment Letter of 
Putnam Investments (on behalf of the Mutual Fund Broker-Dealer 
Working Group) (Nov. 30, 2018) (``Putnam Comment Letter''); ICI 
Comment Letter I; Capital Group Comment Letter (stating that a 
growing percentage of fund shareholders and their advisers use the 
fund group's website to obtain information about its funds, its 
organization, and other investment insights); CFA Comment Letter 
(providing a 2014 study entitled ``Can the internet Transform 
Disclosures for the Better?'' that, among other things, reviewed the 
content and design of fund and intermediary websites). For example, 
we understand that several funds and financial intermediaries 
provide interactive features on their websites such as fund screener 
tools, expense calculators, and retirement planning tools and use 
mobile applications to engage with fund shareholders.
    \79\ See Rule 30e-3 Adopting Release, supra footnote 14; 
Variable Contract Summary Prospectus Adopting Release, supra 
footnote 27.
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Experience With Layered Disclosure, and the Growing Length and 
Complexity of Shareholder Reports Over Time
    The Commission also has taken multiple steps with respect to fund 
prospectuses to both recognize investors' preferences for concise and 
engaging disclosure of key information and ensure that additional 
information that may be of interest to some investors is available 
through a layered approach to disclosure.\80\ We believe these 
initiatives have benefitted investors. For example, research shows that 
the introduction of a more concise summary prospectus may allow 
investors to spend less time and effort to arrive at the same portfolio 
decision they would have made after reading the longer statutory 
prospectus.\81\ Approximately

[[Page 70725]]

93% of funds use summary prospectuses.\82\
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    \80\ See New Disclosure Option for Open-End Management 
Investment Companies, Investment Company Act Release No. 23065 (Mar. 
13, 1998) [63 FR 13968 (Mar. 23, 1998); 2009 Summary Prospectus 
Adopting Release, supra footnote 10; Variable Contract Summary 
Prospectus Adopting Release, supra footnote 27.
    \81\ See John Beshears, James Choi, David Laibson, and Brigitte 
Madrian, How Does Simplified Disclosure Affect Individuals' Mutual 
Fund Choices?, Explorations in the Economics of Aging, 75, 76 (David 
A. Wise ed., 2011), available at https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices.
    \82\ See supra footnote 12.
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    On the other hand, the Commission has not taken comprehensive steps 
to create a layered disclosure framework for funds' shareholder 
reports.\83\ Funds' shareholder reports generally have become longer 
and more complex over the years. For example, until 1994, funds were 
only required to provide certain financial information in their 
shareholder reports, generally consistent with the types of information 
that section 30(e) of the Investment Company Act identifies.\84\ During 
this time, however, many funds provided other information in these 
reports voluntarily, including information about general economic 
conditions, the fund's performance, and services provided to 
shareholders.\85\ Over the past two decades, the amount of information 
that funds are required to include in shareholder reports (or that 
funds otherwise voluntarily include in these reports) has increased 
substantially.\86\
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    \83\ The Commission has, however, adopted rules that permit 
streamlined disclosure of portfolio holdings in funds' shareholder 
reports. In 2004, the Commission adopted an approach that gives 
funds the option to include summary portfolio schedules in their 
shareholder reports, provided the complete portfolio schedule is 
filed on Form N-CSR and available, free of charge, to investors. See 
Shareholder Reports and Quarterly Portfolio Disclosure of Registered 
Management Investment Companies, Investment Company Act Release No. 
26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)], at Section II.B 
and paragraph accompanying n.111 (``February 2004 Shareholder Report 
Adopting Release'') (noting that these amendments were ``designed to 
streamline shareholder reports and help investors to focus on a 
fund's principal holdings, and thereby better evaluate the fund's 
risk profile and investment strategy,'' and would reduce printing 
and mailing costs for most funds).
    \84\ See, e.g., Registration Form Used by Open-End Management 
Investment Companies, Investment Company Act Release No. 13436 (Aug. 
12, 1983) [48 FR 37928, 37951 (Aug. 22, 1983)] (adopting Form N-1A, 
which included annual and semi-annual report requirements in what 
was then Item 23 of the form). In 1994, the Commission adopted 
amendments requiring funds to disclose information in their 
shareholder reports about the results of shareholder votes and any 
changes in and disagreements with accountants. See, e.g., Amendments 
to Proxy Rules for Registered Investment Companies, Investment 
Company Act Release No. 20614 (Oct. 13, 1994) [59 FR 52689 (Oct. 19, 
1994)]. In 1996, Congress added section 30(f) to the Investment 
Company Act, which allows the Commission to require that funds' 
semi-annual reports include such other information as the Commission 
deems necessary or appropriate in the public interest or for the 
protection of investors. National Securities Markets Improvement Act 
of 1996, Public Law 104-290, Section 207, 110 Stat. 3416, 3430 (Oct. 
11, 1996).
    \85\ See, e.g., Standardization of Financial Statement 
Requirements in Management Investment Company Registration 
Statements and Reports to Shareholders, Investment Company Act 
Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 1980)], at 
nn.3-4 and accompanying text.
    \86\ See, e.g., Role of Independent Directors of Investment 
Companies, Investment Company Act Release No. 24816 (Jan. 2, 2001) 
[66 FR 3734 (Jan. 16, 2001)] (``Independent Directors Release'') 
(requiring shareholder report disclosure regarding a fund's board of 
directors); Disclosure of Proxy Voting Policies and Proxy Voting 
Records by Registered Management Investment Companies, Investment 
Company Act Release No. 25922 (Jan. 31, 2003) [68 FR 6564 (Feb. 7, 
2003)] (requiring funds to disclose in their annual and semi-annual 
reports to shareholders the methods by which shareholders may obtain 
information about proxy voting); February 2004 Shareholder Report 
Adopting Release, supra footnote 83 (requiring funds to add 
shareholder report disclosure regarding fund expenses borne by 
shareholders, a tabular or graphic presentation of a fund's 
portfolio holdings by identifiable categories, and management's 
discussion of fund performance, while allowing funds to include a 
summary portfolio schedule in these reports); Disclosure Regarding 
Approval of Investment Advisory Contracts by Directors of Investment 
Companies, Investment Company Act Release No. 26486 (June 23, 2004) 
[69 FR 39798 (June 30, 2004)] (requiring shareholder report 
disclosure about the basis for the board's approval of advisory 
contracts during the most recent fiscal half-year).
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Developments Affecting Investment Company Advertisements
    In recent years, investment companies increasingly have been 
marketing themselves on the basis of costs in an effort to attract 
investors. For instance, we have observed some funds calling themselves 
``no-expense'' or ``zero-expense'' funds, or emphasizing their low 
expense ratios, despite the fact that investors may experience other 
investment costs.\87\ These other investment costs include, for 
example, securities lending costs or wrap program fees that may provide 
revenue to the fund's adviser, its affiliates, or others and that may 
effectively allow the fund to reduce its reported expense ratio because 
the prospectus fee table is not required to reflect the relevant 
category of costs. Investment company advertising rules currently place 
limits on how a fund may present its performance to promote 
comparability and prevent potentially misleading advertisements.\88\ 
These rules, however, generally do not prescribe the presentations of 
fees and expenses in advertisements to address similar concerns about 
comparability or potentially misleading information.\89\
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    \87\ A fund's expense ratio is the figure in its prospectus fee 
table that represents the fund's total annual operating expenses, 
expressed as a percent of the fund's average net assets. See also 
infra Section II.H.1.c (discussing costs that the expense ratio does 
not reflect).
    \88\ See, e.g., Amendments to Investment Company Advertising 
Rules, Investment Company Act Release No. 26195 (Sept. 29, 2003) [68 
FR 57760 (Oct. 6, 2003)]; Advertising by Investment Companies, 
Investment Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868 
(Feb. 10, 1988)] (``1988 Advertising Rules Release''); Mutual Fund 
Sales Literature Interpretive Rule, Investment Company Act Release 
No. 10915 (Oct. 26, 1979) [44 FR 64070 (Nov. 6, 1979)].
    \89\ While Commission rules require a fund to disclose maximum 
sales loads in some advertisements, and FINRA rules also limit how a 
fund advertisement may describe investment costs in some respects, 
these limitations currently apply only to a subset of fund 
advertisements. See infra Section II.H.2.
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II. Discussion

D. Overview of Proposed New Disclosure Framework

1. Executive Summary
    The amendments we are proposing would modify the disclosure 
framework for funds registered on Form N-1A to create a new layered 
disclosure approach designed to highlight key information for retail 
investors. The new disclosure approach is designed to tailor the 
information that investors receive to help investors better assess and 
monitor their fund investments and make informed investment decisions. 
We recognize that investors have different levels of knowledge and 
experience, and we seek to promote disclosure that is inviting and 
usable to a broad spectrum of investors.
    In order to help achieve these goals, the proposal includes the 
following principal elements:
     Shareholder Reports Tailored to the Needs of Retail 
Shareholders: Under the proposal, fund investors would continue to 
receive fund prospectuses in connection with their initial investment 
in a fund, as they do today. Thereafter, a shareholder would receive 
concise and visually engaging annual and semi-annual reports designed 
to highlight information that we believe is particularly important for 
retail shareholders to assess and monitor their fund investments on an 
ongoing basis. This information would include--among other things--fund 
expenses, performance, and portfolio holdings. We also propose to 
provide funds the flexibility to make electronic versions of their 
shareholder reports more user-friendly and interactive.
     Availability of Additional Information on Form N-CSR and 
Online: Information currently included in annual and semi-annual 
reports that may be less relevant to retail fund shareholders, and of 
more interest to financial professionals and other investors who desire 
more in-depth information, would be made available online and delivered 
free of charge in paper or electronically upon request by the fund (or 
intermediary through which shares of the fund may be purchased or 
sold). This information

[[Page 70726]]

also would be filed on a semi-annual basis with the Commission on Form 
N-CSR. This information would include, for example, the schedule of 
investments and other financial statement elements. Shareholder reports 
would contain cover page legends directing investors to websites 
containing this information.
     Amendments to Scope of Rule 30e-3 to Exclude Funds 
Registered on Form N-1A: The proposal contemplates that a fund's 
shareholder reports, as modified pursuant to the proposed rule and form 
amendments, would serve as the central source of fund disclosure for 
existing shareholders. To ensure that all fund investors would 
experience the anticipated benefits of the proposed new tailored 
disclosure framework, we are proposing to amend the scope of rule 30e-3 
to exclude open-end funds.\90\ Beginning as early as January 1, 2021, 
funds may begin relying on rule 30e-3, which generally permits funds to 
satisfy shareholder report transmission requirements by making these 
reports and other materials available online and providing a notice of 
the reports' online availability, instead of directly providing the 
reports to shareholders.\91\ The new proposed disclosure framework 
considers feedback that commenters provided in response to the Fund 
Investor Experience RFC and reflects the Commission's continuing 
efforts to search for better ways of providing investors with the 
disclosure that they need. In light of these and other considerations, 
we preliminarily believe that the proposed disclosure approach 
represents a more-effective means of improving investors' ability to 
access and use fund information, and of reducing expenses associated 
with printing and mailing, than continuing to permit open-end funds to 
rely on rule 30e-3.
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    \90\ We discuss the operational aspects of this proposed 
amendment to the scope of rule 30e-3, including compliance date 
issues, in Section II.G infra.
    \91\ Notwithstanding rule 30e-3, investors who have elected 
electronic delivery of fund documents or have opted in to paper 
delivery of shareholder reports receive delivery of shareholder 
reports pursuant to their elections. See infra footnote 532 and 
accompanying text.
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     Tailoring Required Disclosures to Needs of New versus 
Ongoing Fund Investors: It is currently common for fund shareholders to 
receive an updated annual prospectus each year. We are proposing new 
rule 498B, which would provide an alternative approach that uses 
layered disclosure, discussed in more detail below, to keep investors 
informed about their fund investment and updates to their fund that 
occur year over year. Under this proposed rule, new investors would 
receive a fund prospectus in connection with their initial investment 
in a fund, as they currently do, but funds would not deliver annual 
prospectus updates to investors thereafter. The proposed layered 
disclosure framework would instead rely on the shareholder report 
(including a summary in the annual report of material changes that 
occurred over the prior year), as well as timely notifications to 
shareholders regarding material fund changes as they occur, to keep 
investors informed about their fund investments and enable them to make 
informed decisions about whether to buy, sell, or hold fund shares. 
Current versions of the fund's prospectus would remain available online 
and would be delivered upon request in a manner consistent with the 
shareholder's delivery preference.
     Improvements to Prospectus Disclosure of Fund Fees and 
Risks; Request for Comment on Improving Fund Fee and Expense 
Disclosures: We recognize that fund fees and risks are two areas that 
investors find particularly important to assessing a prospective fund 
investment, and two disclosure areas that can be complex and confusing. 
We are proposing amendments to funds' prospectus disclosure that are 
designed to help investors more readily understand a fund's fees and 
risks, and that use layered disclosure principles that tailor 
disclosures of these topics to different types of investors' 
informational needs. We are also proposing amendments that would refine 
the scope of funds that are required to disclose the fees and expenses 
associated with investments in other funds as a component of a fund's 
bottom line annual expenses in the prospectus fee table. Furthermore, 
we are requesting comment on how we could improve the ways in which 
funds disclose their fees and expenses, in order to represent the full 
costs associated with a fund investment more accurately and to help 
investors better understand their investment costs.
     Fee and Expense Information in Fund Advertisements: 
Finally, we are proposing amendments that are designed to respond to 
developments that we have observed in fund advertising. The proposed 
amendments would require that presentations of investment company fees 
and expenses in advertisements and sales literature be consistent with 
relevant prospectus fee table presentations and be reasonably current. 
The proposed amendments also address representations of fund fees and 
expenses that could be materially misleading. The proposed advertising 
rule amendments would affect all registered investment company and BDC 
advertisements and would not be limited to open-end fund 
advertisements.
2. Considerations and Goals
Concerns and Considerations About Current Disclosure Framework
    The proposed new disclosure framework--particularly, the new 
tailored approach to disclosure with respect to fund shareholder 
reports and prospectuses--is designed to address the concern that 
shareholder report and prospectus disclosures may appear redundant or 
inconsistent to shareholders, as well as our belief that prospectus 
disclosure in particular may often be less relevant to the 
informational needs of a shareholder who is simply monitoring his or 
her fund investment. As a preliminary matter, fund prospectuses and 
shareholder reports have historically served different purposes. The 
prospectus acts as the principal selling document for investors to 
inform investment decisions and facilitate fund comparisons. The 
shareholder report, on the other hand, provides information to a fund's 
current shareholders about the fund's operations and performance during 
the past fiscal period. Moreover, the shareholder report and prospectus 
present certain of the same types of information (e.g., fund 
performance and expenses) differently in light of their intended 
audiences.\92\
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    \92\ For example, a shareholder report currently includes 
backward-looking information about a fund's actual ongoing expenses 
over the most recent fiscal half-year, while a prospectus includes 
forward-looking information about fees for new investments in a fund 
(i.e., sales charges) and the fund's projected future expenses. As 
another example, a shareholder report typically provides performance 
and other information as of the end of the fund's most recent fiscal 
year, while a prospectus presents fund performance as of the end of 
a calendar year to help prospective investors compare potential fund 
investments.
---------------------------------------------------------------------------

    As a result, there are ways in which the current disclosure 
framework may not tailor fund disclosure contents to the needs of 
different types of investors. Much of the information in a fund's 
prospectus, including disclosure about the fund's principal investment 
strategy and principal risks, often remains the same from year to year. 
Receiving continuing disclosure of this unchanging information 
therefore might not be useful to existing fund investors, although 
investors typically receive annual prospectus updates that include this 
content. On the other hand, to the extent a fund has a material change 
(e.g., it materially changes its principal investment strategy and has 
different

[[Page 70727]]

principal risks, or changes its fees), this information may be more 
salient to a shareholder's monitoring of his or her investments. Under 
the current disclosure framework, these changes might not be 
highlighted to shareholders.\93\ The fact that current fund disclosures 
might not meet investors' informational needs may contribute to 
investor disinterest or confusion. The potential for disinterest or 
confusion may be particularly pronounced when a shareholder receives 
prospectus and shareholder report disclosure close in time, which often 
occurs in the case of the annual report and the annual prospectus 
update.\94\
---------------------------------------------------------------------------

    \93\ For example, to the extent a fund has a known or expected 
increase in its fees and expenses for the current year, a fund 
shareholder would receive information about the new fee and expense 
levels in the annual prospectus update. That is, the prospectus fee 
table in year 1 would present fees as x%, and in year 2 would 
present fees as y%. But the prospectus would not necessarily 
highlight or explain the change from year to year, nor would the 
fund's shareholder reports.
    \94\ See supra footnote 20 and accompanying text.
---------------------------------------------------------------------------

    Although prospectus disclosure may be less well-suited for 
analyzing and monitoring an ongoing fund investment, some fund 
shareholders may be more likely to review a fund's prospectus instead 
of its shareholder reports based simply on length. Over the past two 
decades, the amount of information that funds are required to include 
in shareholder reports (or that funds otherwise voluntarily include in 
these reports) has increased substantially.\95\ This amount of 
disclosure may not correspond with investors' expressed preferences for 
concise, layered disclosure that highlights key information. The 
substantial length of shareholder reports also may make it more 
difficult for investors to understand and effectively use the 
information.\96\
---------------------------------------------------------------------------

    \95\ See supra footnote 19 and accompanying text (noting that 
the average page length of annual reports is approximately 134 
pages).
    \96\ See supra Section I.B.
---------------------------------------------------------------------------

    In addition, we have considered the extent to which modifying the 
disclosure framework for funds, for example by requiring funds to 
transmit the tailored shareholder reports that this proposal envisions, 
could result in cost savings.\97\ Shareholders generally bear these 
fund expenses, and therefore may be bearing costs for information they 
prefer not to be delivered to them. For example, retail shareholders 
may prefer not to have delivered to them information that is more 
technical in nature and may be more relevant for financial 
professionals and other investors who desire more in-depth information 
(such as complete fund financial statements, as opposed to receiving 
summary disclosure about fund holdings and expenses).
---------------------------------------------------------------------------

    \97\ See infra Section III.C.2.d (as discussed in this section, 
we anticipate that the proposed new disclosure framework would 
produce cost savings, due to reduced printing and mailing costs and 
processing fees, even after taking into account the effects of our 
proposed exclusion of open-end funds from the scope of rule 30e-3).
---------------------------------------------------------------------------

    This proposal reevaluates funds' disclosure framework in light of 
all of these considerations. The proposed new approach is based on the 
goal of promoting more-digestible, tailored disclosure that fund 
shareholders can use to monitor their ongoing fund investments 
efficiently and meaningfully, with layered information that may be less 
relevant to retail shareholders available online and upon request. 
Likewise, the proposed approach is designed to help a fund shareholder 
to use shareholder reports to compare funds he or she already owns and 
assess how the shareholder's mix of funds fits into his or her overall 
investment portfolio.
    The proposed approach to funds' overarching disclosure framework 
would be complemented by more-targeted proposed improvements to fund 
prospectus fee and risk disclosures, as well as proposed amendments to 
investment company advertising rules. Collectively, the proposed 
amendments are designed to facilitate investors' ability to make 
informed investment decisions and monitor their investments thereafter.
Tailoring Fund Disclosure Using Layered Disclosure Principles
    The layered disclosure approach underlying the proposed new 
disclosure framework would build on the Commission's experience in 
conforming required fund disclosures to the informational needs of 
different types of investors. In recent years, the Commission has 
adopted rules that rely on layered disclosure principles to tailor fund 
disclosures to the particular needs of retail investors, as well as 
financial professionals and other investors who desire more in-depth 
information.\98\ Similarly, in past years the Commission has taken into 
account the relative informational needs of new investors and ongoing 
shareholders in tailoring the requirements for investment company 
disclosures.\99\
---------------------------------------------------------------------------

    \98\ See 2009 Summary Prospectus Adopting Release, supra 
footnote 10; Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27; see also discussion at supra footnotes 5-6 and 
accompanying text.
    \99\ See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27. In particular, the Commission received positive 
feedback on its proposal to provide an ``initial summary 
prospectus'' to new investors in variable annuity and variable life 
insurance contracts, and an ``updating summary prospectus'' to 
investors each year after their initial investment in a variable 
contract. Id. at text accompanying nn.33 and 335. In part on the 
basis of that positive feedback, the Commission adopted that 
proposal.
---------------------------------------------------------------------------

    The proposed new disclosure framework also would reflect various 
stakeholders' suggestions and stated preferences for fund disclosure 
that more directly highlights key fund information and is tailored to 
investors' needs. For example, the Commission's Investor Advisory 
Committee has recommended that the Commission develop an approach to 
funds' shareholder reports that would rely on summary disclosure and 
layered disclosure principles.\100\ Similarly, the proposed new 
disclosure framework would reflect investor preferences as we 
understand them based on investor testing, surveys, and other 
information-gathering, which have consistently indicated that retail 
fund investors prefer concise disclosure that focuses on the most 
important fund information.\101\
---------------------------------------------------------------------------

    \100\ See Recommendation of the Investor Advisory Committee 
Regarding Promotion of Electronic Delivery and Development of a 
Summary Disclosure Document for Delivery of Investment Company 
Shareholder Reports (Dec. 7, 2017), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-promotion-of-electronic-delivery-and-development.pdf. 
The recommendation provided, among other things, that the Commission 
explore: (1) Methods to encourage a transition to electronic 
delivery that respect investor preferences and that increase the 
likelihood that investors will see and read important disclosure 
documents; and (2) development of a summary, layered disclosure 
document for shareholder reports that incorporates key information 
from the report along with prominent notice regarding how to obtain 
a copy of the full report, and would be designed to be delivered 
either by mail or by email (depending on the investors' delivery 
preferences). This proposal also takes into account the Investor 
Advisory Committee's recent recommendation on improving the 
effectiveness of investor disclosures (including in the context of 
fund disclosures). See IAC Disclosure Effectiveness Recommendation, 
supra footnote 26.
    \101\ See discussion at supra Section I.B.1.
---------------------------------------------------------------------------

Leveraging Technology To Modernize Funds' Disclosure Requirements
    In addition, the proposed new disclosure framework would leverage 
technology to modernize funds' disclosure requirements.\102\ Our

[[Page 70728]]

proposal would use the internet as a medium to provide information to 
investors and distinguish between information that investors receive 
directly (either in paper or electronically, depending on investors' 
preferences) and information that is available to investors online. The 
proposal also takes steps to encourage funds to use online tools to 
enhance and personalize the information that they provide to 
shareholders, as constantly developing online technology presents 
unique potential to enrich investors' experience in understanding and 
engaging with their fund investments.\103\
---------------------------------------------------------------------------

    \102\ Individuals' access to and use of the internet has 
increased significantly in the last few decades, including among 
demographic groups that have previously been less apt to use the 
internet. See Pew Research Center, internet/Broadband Fact Sheet 
(last updated June 12, 2019), available at https://www.pewresearch.org/internet/fact-sheet/internet-broadband. We 
understand these trends extend to individuals' use of online 
resources to manage their finances and investments. See, e.g., Can 
the internet Transform Disclosures for the Better? Consumer 
Federation of America (Jan. 2014), available at https://consumerfed.org/pdfs/can-the-internet-transform-disclosures-for-the-better.pdf.
    \103\ See infra Section II.B.4.
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Shareholder Report as the Central Source of Fund Disclosure for 
Existing Shareholders
    In proposing the new disclosure framework, which employs the 
shareholder report as the central source of fund disclosure for 
existing shareholders, we considered the extent to which permitting 
open-end funds to continue relying on rule 30e-3 to transmit 
shareholder reports would affect our policy goals. Since adopting rule 
30e-3, we have continued to analyze and hear from industry participants 
regarding further improvements to our disclosure regime. As a result, 
we now believe that a tailored shareholder report that highlights key 
information would provide better information for investors than the 
notices required under rule 30e-3. Furthermore, if a fund were 
permitted to rely upon both rule 30e-3 and proposed rule 498B, 
shareholders in such a fund would no longer directly receive 
shareholder reports or annual prospectus updates, and thus would not be 
sent any periodic regulatory disclosure documents.\104\ We believe the 
proposed new disclosure framework would also largely preserve the 
expected cost savings to funds and investors that funds would 
experience by choosing to rely on rule 30e-3.\105\
---------------------------------------------------------------------------

    \104\ See infra Section III.C.2.d.
    \105\ See id.
---------------------------------------------------------------------------

E. Annual Shareholder Report

    We are proposing to add new Item 27A to Form N-1A to specify the 
design and content of funds' annual and semi-annual reports. We also 
are proposing to remove the provisions in current Item 27 of Form N-1A 
that relate to annual and semi-annual reports.
    The table below summarizes the proposed content that funds would 
include in their annual reports or Form N-CSR reports in comparison to 
current shareholder report disclosure requirements.\106\ While the 
proposed content requirements for shareholder reports that are 
transmitted in paper would generally be the same as the requirements 
for reports that are transmitted electronically (and that appear online 
or are accessible through mobile electronic devices), we are proposing 
instructions that address electronic presentation and are designed to 
provide flexibility to enhance the usability of reports that appear 
online or on mobile devices.\107\
---------------------------------------------------------------------------

    \106\ This release separately discusses the proposed content 
requirements for funds' semi-annual reports. See infra Section II.C.
    \107\ See infra Section II.B.4.

                                         Table 1--Annual Report Contents
----------------------------------------------------------------------------------------------------------------
 Current annual shareholder report     Description of proposed    Proposed rule and form
disclosure (current Form provision)           amendments                 provisions         Discussed below in
----------------------------------------------------------------------------------------------------------------
                                     Add new identifying          Item 27A(b) of Form N-  Section II.B.2.a.
                                      information to the           1A.
                                      beginning of the annual
                                      report.
Expense example (Form N-1A Item      Retain in annual report in   Item 27A(c) of Form N-  Section II.B.2.b.
 27(d)(1)).                           a more concise form.         1A.
Management's discussion of fund      Retain in annual report in   Item 27A(d) of Form N-  Section II.B.2.c.
 performance (``MDFP'') (Form N-1A    summary form.                1A.
 Item 27(b)(7)).
                                     Add new fund statistics      Item 27A(e) of Form N-  Section II.B.2.d.
                                      section to the annual        1A.
                                      report.
Graphical representation of          Retain in annual report....  Item 27A(f) of Form N-  Section II.B.2.e.
 holdings (Form N-1A Item 27(d)(2)).                               1A.
                                     Add new material fund        Item 27A(g) of Form N-  Section II.B.2.f.
                                      changes section to the       1A.
                                      annual report.
Changes in and disagreements with    Retain in annual report in   Item 27A(h) of Form N-  Section II.B.2.g
 accountants (Form N-1A Item          summary form.                1A.
 27(b)(4)).
                                     The entirety of the          Item 8 of Form N-CSR..  Section II.D.1.c.
                                      currently-required          Rule 30e-1(b)(2) and
                                      disclosure would move to     (b)(3).
                                      Form N-CSR and would need
                                      to be available online and
                                      delivered (in paper or
                                      electronic format) upon
                                      request.
Statement regarding liquidity risk   Retain in annual report....  Item 27A(i) of Form N-  Section II.B.2.h.
 management program (Form N-1A Item                                1A.
 27(d)(6)(ii)).
Statement regarding the              Include a more general       Item 27A(j) of Form N-  Section II.B.2.i.
 availability of quarterly            reference to the             1A.
 portfolio schedule, proxy voting     availability of additional
 policies and procedures, and proxy   fund information in the
 voting record (Form N-1A Item        annual report.
 27(d)(3) through (5)).
                                     Add provision allowing       Item 27A(k) of Form N-  Section II.B.2.j.
                                      funds to optionally          1A.
                                      disclose in their annual
                                      reports how shareholders
                                      may revoke their consent
                                      to householding.

[[Page 70729]]

 
Financial statements, including      Move to Form N-CSR.........  Item 7(a) of Form N-    Section II.D.1.a.
 schedule of investments (Form N-1A  Would need to be available    CSR.
 Item 27(b)(1)).                      online and delivered (in    Rule 30e-1(b)(2) and
                                      paper or electronic          (b)(3).
                                      format) upon request.
Financial highlights (Form N-1A      Retain certain data points,  Item 7(b) of Form N-    Section II.D.1.b.
 Item 27(b)(2)).                      but generally move to Form   CSR.
                                      N-CSR.                      Rule 30e-1(b)(2) and
                                     Would need to be available    (b)(3).
                                      online and delivered (in
                                      paper or electronic
                                      format) upon request.
Results of any shareholder votes     Move to Form N-CSR.........  Item 9 of Form N-CSR..  Section II.D.1.d.
 during the period (Rule 30e-1(b)).  Would need to be available   Rule 30e-1(b)(2) and
                                      online and delivered (in     (b)(3).
                                      paper or electronic
                                      format) upon request.
Remuneration paid to directors,      Move to Form N-CSR.........  Item 10 of Form N-CSR.  Section II.D.1.e.
 officers, and others (Form N-1A     Would need to be available   Rule 30e-1(b)(2) and
 Item 27(b)(3)).                      online and delivered (in     (b)(3).
                                      paper or electronic
                                      format) upon request.
Statement regarding the basis for    Move to Form N-CSR.........  Item 11 of Form N-CSR.  Section II.D.1.f.
 the board's approval of investment  Would need to be available   Rule 30e-1(b)(2) and
 advisory contract (Form N-1A Item    online and delivered (in     (b)(3).
 27(d)(6)(i)).                        paper or electronic
                                      format) upon request.
Management information and           Remove from shareholder      ......................  Section II.E.
 statement regarding availability     reports, but information
 of additional information about      would remain available in
 fund directors (Form N-1A Item       a fund's SAI, which is
 27(b)(5) and (6)).                   available online or
                                      delivered upon request.
Rule 30e-3 disclosure, if            Remove from shareholder      ......................  Section II.G.
 applicable (Form N-1A Item           reports.
 27(d)(7)).
Funds have discretion to provide     Limit annual report          Instruction 1 to Item   Section II.B.1.b.
 other information in their           disclosure to that which     27A(a) of Form N-1A.
 shareholder reports (e.g.,           is permitted or required
 president's letters).                under proposed Item 27A of
                                      Form N-1A.
----------------------------------------------------------------------------------------------------------------

1. Scope of Annual Report Disclosure, and Registrants Subject to 
Amendments
    We propose to limit the scope of funds' annual reports in several 
respects to reduce their overall length and complexity. First, we 
propose to require a fund to prepare separate annual reports for each 
of its series. Second, we generally propose to limit the content a fund 
may include in its annual report.
a. Scope With Respect to Separate Series and Classes
    Many mutual funds and ETFs are organized as single registrants with 
several series (sometimes referred to as portfolios).\108\ Each series 
has its own investment objectives, policies, and restrictions. The 
Federal securities laws and Commission rules often treat each series as 
a separate fund.\109\ A single fund or series can have multiple share 
classes. Classes typically differ based on fee structure, with each 
class having a different sales load and distribution fee. Series and 
classes of a registrant are often marketed separately, without 
reference to other series or classes or to the registrant's name.\110\
---------------------------------------------------------------------------

    \108\ See sections 18(f)(1) and (2) of the Investment Company 
Act [15 U.S.C. 80a-18(f)(1) and (2)]; 17 CFR 270.18f-2 [rule 18f-2 
under the Investment Company Act].
    \109\ See, e.g., 17 CFR 270.22c-2(c)(2); 17 CFR 270.22e-4(a)(5); 
General Instruction A to Form N-1A (defining ``fund'' to mean a 
registrant or a separate series of the registrant).
    \110\ See Rulemaking for EDGAR System, Investment Company Act 
Release No. 26990 (July 18, 2005) [70 FR 43558 (July 27, 2005)], at 
text following n.17.
---------------------------------------------------------------------------

    Currently, fund registrants may prepare a single shareholder report 
that covers multiple series. We believe this approach contributes to 
the length and complexity of shareholder reports. For example, a 
shareholder that is invested in one series of the registrant would need 
to spend more time searching through the report to find disclosure 
related to his or her investment. Moreover, a shareholder report that 
provides information for multiple series may present an increased risk 
of shareholder confusion. For instance, if two series included in the 
same shareholder report were to have similar names, there could be a 
greater risk that a shareholder would mistakenly review information 
that does not relate to his or her investment. Because the length and 
complexity associated with multi-series shareholder reports are 
inconsistent with our goal of creating concise shareholder report 
disclosure that a shareholder can more easily use to assess and monitor 
his or her ongoing fund investment, we are proposing to require fund 
registrants to prepare separate annual reports for each series of the 
fund.\111\ As a result, a shareholder would receive an annual report 
that only addresses the series in which he or she is invested. We 
believe that this more-focused annual report would be more relevant to 
shareholders than a multi-series report and, accordingly, shareholders 
would be more likely to read such disclosure.
---------------------------------------------------------------------------

    \111\ See Instruction 4 to proposed Item 27A(a). Similarly, we 
have generally required that registrants present summary information 
separately for each fund in a multiple fund prospectus to promote 
the goal of concise, readable summaries. See 2009 Summary Prospectus 
Adopting Release, supra footnote 10, at text accompanying nn.43-60. 
Under the proposal, fund registrants could continue to include 
multiple shareholder reports that cover different series in a single 
Form N-CSR report filed on EDGAR. We do not believe this would 
affect the usability of the information for shareholders because 
shareholder reports for each series would separately be available 
online, and we understand that shareholders generally do not go to 
EDGAR to find fund shareholder reports. See, e.g., supra footnote 
74.
---------------------------------------------------------------------------

    Although we are proposing to restrict funds' annual reports to 
include only one series of a fund, our proposal would not require a 
shareholder report to cover

[[Page 70730]]

a single class of a multiple-class fund.\112\ Because different share 
classes of a fund represent interests in the same investment portfolio, 
much of the proposed shareholder report disclosure would be the same 
for all classes.\113\ For disclosure that would differ among classes, 
such as expenses and performance data, the amended disclosure 
requirements that we are proposing would specifically require funds to 
provide certain class-specific information.\114\
---------------------------------------------------------------------------

    \112\ See Instruction 4 to proposed Item 27A(a). This approach 
is similar to the approach taken in the summary prospectus, which 
similarly may describe more than one class of a fund. See rule 
498(b)(4) [17 CFR 230.498(b)(4)].
    \113\ For example, this would include, among other disclosure 
items, graphical representations of holdings, the required 
statistics (i.e., the size of the fund, its number of holdings, and 
portfolio turnover rate), the narrative discussion of factors that 
affected the fund's performance, and most categories of material 
fund changes.
    \114\ We discuss these proposed requirements in more detail 
below. See infra Section II.B.2.b (discussing the proposed 
requirement to provide expense information for each class) and 
Section II.B.2.c.ii (discussing the proposed requirement to disclose 
average annual total returns for 1-, 5-, and 10-year periods for 
each class).
---------------------------------------------------------------------------

    We request comment on the proposed scope of disclosure for the 
annual report, including the following:
    1. Would the proposed requirement that a fund registrant prepare 
separate annual reports for each of its series result in shareholder 
report disclosure that is easier for fund shareholders to navigate and 
assess? If not, why not? Would requiring separate annual reports for 
each series increase the reports' relevance to shareholders and 
increase the likelihood that shareholders would read them? If not, why 
not? How would this proposed requirement affect the approach fund 
registrants currently use to prepare and transmit shareholder reports? 
Are there ways to modify the proposed instruction that would further 
improve disclosure for shareholders or reduce burdens for fund 
registrants? Instead of the proposed instruction, should we continue to 
permit fund registrants to prepare a single annual report that covers 
multiple fund series, as they may today? If so, why, and should there 
be any limits on the number of series for which information is 
presented?
    2. Are there certain types of funds for which a multi-series 
presentation in an annual report may be useful to shareholders? If so, 
which types of funds, and what are the benefits of a multi-series 
presentation to shareholders? Should we permit certain types of funds, 
but not others, to prepare annual reports covering multiple series of 
the same fund?
    3. Are there ways we could allow multi-series presentations in 
annual reports while also promoting our goals of providing concise, 
readable disclosure to existing shareholders that is tailored to their 
informational needs? If so, how?
    4. A fund may have multiple share classes with differing fee 
structures. Should these multi-class funds be permitted to reflect only 
one or a subset of classes, rather than all share classes in a 
shareholder report so long as a fund produces a shareholder report that 
relates to each share class? Would such an approach reduce the 
complexity of the disclosure and provide more-tailored information that 
is specific to a shareholder's investment in the fund? Or, conversely, 
would such a requirement not benefit shareholders? For example, could 
it reduce shareholders' ability to compare classes of a fund? Should 
there be limits on the number or types of classes that a single annual 
report may cover to reduce potential complexity or length? For example, 
should we prohibit an annual report transmitted to retail shareholders 
from including disclosure related to a fund's institutional class? Are 
there potential complexities or burdens associated with such an 
approach? Please explain.
b. Scope of Content
    As a general matter, we are proposing to allow a fund to include in 
its annual report only the information that Item 27A of Form N-1A 
specifically permits or requires.\115\ We believe that allowing only 
the required or permitted information to appear in a fund's annual 
report would promote consistency of information presented to 
shareholders and would allow retail shareholders to focus on 
information particularly helpful in monitoring their investment in a 
fund.\116\ We also believe this approach would encourage more impartial 
information by preventing funds from adding information commonly used 
in marketing materials.
---------------------------------------------------------------------------

    \115\ See Instruction 3 to proposed Item 27A(a) of Form N-1A; 
see also infra Section II.B.2 (discussing the content requirements 
of the proposed annual report, as well as certain optional content 
that a fund may include in its annual report).
     We are, however, proposing flexibility with respect to the use 
of online tools to assist shareholders in understanding the contents 
of an annual report that appears online or otherwise is provided 
electronically. See Instruction 8 to proposed Item 27A(a) of Form N-
1A; see also discussion at section II.B.4 infra.
    \116\ Many of the proposed instructions to each requirement 
provide some flexibility so that a fund can tailor its presentation 
of information to match how the fund invests. For instance, a fund 
has the ability to select the categories that are reasonably 
designed to depict clearly the types of a fund's investments when 
preparing its graphical representation of holdings. See proposed 
Item 27A(f) of Form N-1A.
---------------------------------------------------------------------------

    We recognize, however, that there may be limited circumstances in 
which it may be appropriate for a fund to provide more or less 
information than what proposed Item 27A of Form N-1A would permit or 
require. Specifically, if a fund's particular circumstances may cause 
the required disclosures to be misleading, the proposal would allow the 
fund to add additional information to the report that is necessary to 
make the required disclosure items not misleading.\117\ As an example, 
if a fund changed its investment policies or structure during or since 
the period shown, the expense, performance, or holdings information 
that a fund must include in its annual report may require additional 
disclosure to render those presentations not misleading. Disclosure in 
response to this provision should generally be as brief as possible. 
Moreover, if a required disclosure is inapplicable, the proposed rule 
would permit the fund to omit the disclosure.\118\ Similarly, to 
promote better-tailored disclosure, a fund would be permitted to modify 
a required legend or narrative information if the modified language 
contains comparable information to what is otherwise required.\119\
---------------------------------------------------------------------------

    \117\ See Instruction 2 to proposed Item 27A of Form N-1A 
(permitting a fund to include disclosure that is required under 17 
CFR 270.8b-20 (rule 8b-20 under the Investment Company Act)); rule 
8b-20 under the Investment Company Act (providing, ``[i]n addition 
to the information expressly required to be included in a 
registration statement or report, there shall be added such further 
information, if any, as may be necessary to make the required 
statements, in the light of the circumstances under which they are 
made, not misleading'').
    \118\ See Instruction 7 to proposed Item 27A(a) of Form N-1A.
    \119\ See id.
---------------------------------------------------------------------------

    The proposed amendments to Form N-1A would not permit a fund to 
incorporate by reference any information into its annual report.\120\ 
That is, a fund could not refer to information that is located in other 
disclosure documents in order to satisfy the content requirements for 
an annual report. The limited number of proposed disclosure items in 
the annual report is designed to promote the goal of providing a 
concise, more-engaging report that gives shareholders key information 
to assess and monitor their ongoing fund investments.\121\ We do not 
believe that permitting funds to

[[Page 70731]]

incorporate information by reference into the shareholder report is 
consistent with this goal, because it would require shareholders to 
take an additional step to locate information that funds incorporate by 
reference into their reports. While the proposed rule would require or 
permit a fund's shareholder report to refer to other materials in some 
cases, those other materials would not incorporate information into the 
fund's shareholder report for purposes of satisfying the annual report 
disclosure requirements.\122\
---------------------------------------------------------------------------

    \120\ See Instruction 5 to proposed Item 27A(a). Incorporation 
by reference refers to the practice of, instead of including 
disclosure in a specific document, referring to another document 
that contains the specified information.
    \121\ See, e.g., Instructions 1, 3, and 5 to proposed Item 
27A(a) of Form N-1A.
    \122\ See, e.g., Instructions 8 and 9 to proposed Item 27A(a) of 
Form N-1A; proposed Items 27A(b)(4) and 27A(j) of Form N-1A.
---------------------------------------------------------------------------

    Although the proposed rule would only permit the inclusion of 
certain information in the annual report, it would not prevent a fund 
from referring shareholders to the availability of certain additional 
website information near the end of the report or providing additional 
information to shareholders in the same transmission as the annual 
report.\123\ For example, the proposed rule would not preclude a fund 
from providing a letter to investors explaining its management 
philosophy or investment outlook in the same transmission that includes 
the annual report. However, the proposal would require that the 
shareholder report be given greater prominence than these other 
materials, except for certain specified disclosure materials.\124\ We 
would generally consider a fund to satisfy the ``greater prominence'' 
requirement if, for example, the shareholder report is on top of a 
group of paper documents that are provided together or, in the case of 
an electronic transmission, the email or other message includes a 
direct link to the report or provides the report in full in the body of 
the message.\125\ This proposed requirement would not, however, apply 
to certain specified 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.\126\
---------------------------------------------------------------------------

    \123\ See proposed Item 27A(j) of Form N-1A; infra Section 
II.B.2.i (discussing the provision that would allow funds to refer 
to the availability of additional website information, if the fund 
reasonably believes shareholders would likely view the information 
as important).
    \124\ See Instruction 12 to proposed Item 27A(a) of Form N-1A. 
This is substantially similar to a requirement in rule 498, which 
provides that a fund's summary prospectus generally must be given 
greater prominence than other materials that accompany the summary 
prospectus. See rule 498(f)(2).
    \125\ These examples of how funds may satisfy the proposed 
prominence requirement are consistent with interpretations of 
similar requirements in other Commission rules and forms. See, e.g., 
2009 Summary Prospectus Adopting Release, supra footnote 10, at text 
accompanying n.220 (``Generally, we believe that the `greater 
prominence' requirement would be satisfied if the placement of the 
Summary Prospectus is more prominent than accompanying materials, 
e.g., the Summary Prospectus is on top of a group of paper documents 
that are provided together.''); General Instructions 10.C and 10.D 
of Form CRS (requiring a relationship summary delivered in paper 
format to be the first among any documents delivered at that time, 
and a relationship summary delivered electronically to be presented 
prominently in the electronic medium (e.g., as a direct link or in 
the body of an email or message)).
    \126\ See id.
---------------------------------------------------------------------------

    We request comment on the scope of content that the proposed rule 
would require or permit a fund to include in its annual report, 
including the following:
    5. Is it appropriate to restrict the content of a fund's annual 
report to include only the information the form would permit or 
require? If not, why not? Would these proposed limits on content create 
a more effective presentation for investors? Are there other approaches 
we should consider (such as permitting space in the annual report for 
funds to disclose other information they deem important to investors)? 
What are the benefits and drawbacks of shorter or longer disclosure, or 
a more flexible approach to disclosure, for investors relative to the 
proposed approach?
    6. Is it appropriate for funds to have flexibility to include other 
communications to shareholders in the same transmission as a 
shareholder report? Should the shareholder report be subject to the 
proposed prominence requirement? If not, should we require other 
prominence or formatting standards if the transmission includes other 
materials, or should we impose other requirements or limitations 
associated with materials that funds could transmit along with the 
shareholder report?
    7. As proposed, should we allow a fund to modify a required legend 
or narrative information as long as the modified language contains 
comparable information? If not, why not? Should we use this approach 
for all aspects of the annual report, or are there particular areas 
where requiring uniform language across all funds' annual reports would 
be particularly valuable to shareholders, for example, to facilitate 
comparisons or improve shareholder understanding? If so, how should we 
balance the potential value of uniform language with potential concerns 
that uniform language may not be well-tailored to a particular fund or 
its shareholders?
    8. Is it appropriate not to permit funds to incorporate information 
by reference into their annual reports, as proposed? If not, why not? 
Is there certain information that a fund should be permitted to 
incorporate by reference into its annual report? If so, what 
information, and why?
c. Scope With Respect to Other Registrants
    Our proposed amendments to annual reports would only apply to 
shareholder reports for investment companies registered on Form N-1A. 
These funds represent the vast majority of investment company assets 
under management.\127\ We also have recently adopted changes to the 
disclosure framework for closed-end funds and variable insurance 
contracts tailored to these investment companies' characteristics and, 
in the case of closed-end funds, to implement congressional 
directives.\128\ The recently adopted changes to closed-end fund 
disclosure include multiple changes to these funds' shareholder report 
disclosures, and we would like to understand funds' and investors' 
experience with this new disclosure framework before proposing 
additional disclosure amendments.\129\ Similarly, we anticipate that 
the recently adopted changes to the variable insurance contract 
disclosure framework would significantly change investors' experience 
with variable contract disclosure. While these changes are focused more 
on prospectus disclosure and not shareholder report disclosure, we 
would like to assess the impact of these changes prior to proposing 
additional disclosure changes for variable contracts.\130\ Our proposed 
amendments therefore do not extend at this time to other investment 
companies such as closed-end funds, unit investment trusts, or managed 
open-end investment companies not registered on Form N-1A (i.e., 
issuers of variable

[[Page 70732]]

annuity contracts registered on Form N-3).
---------------------------------------------------------------------------

    \127\ See infra Section III.B.1.
    \128\ See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27; Securities Offering Reform for Closed-End 
Investment Companies, Investment Company Act Release No. 33836 (Apr. 
8, 2020) [85 FR 33290 (Jun. 1, 2020)] (``Closed-End Fund Offering 
Reform Adopting Release'').
    \129\ See, e.g., Closed-End Fund Offering Reform Adopting 
Release, supra footnote 128, at Section II.I.2.a (discussing new 
annual report requirements for funds that file a short-form 
registration statement), Section II.I.2.b (discussing proposed MDFP 
disclosure that would appear in registered closed-end funds' annual 
reports), and Section II.I.5 (discussing enhancements to certain 
registered closed-end funds' annual report disclosure).
    \130\ Moreover, of the variable contract structures, only 
variable contracts with separate accounts structured as management 
investment companies--those registered on Form N-3--have annual and 
semi-annual shareholder reporting requirements under rule 30e-1.
---------------------------------------------------------------------------

    We request comment on the scope of entities that would be covered 
by our proposed amendments to annual reports, including the following:
    9. To what extent, if any, should the proposed amendments to 
shareholder reports be extended to other investment companies besides 
open-end mutual funds and ETFs organized as management investment 
companies?
    10. For example, ETFs can be organized as management investment 
companies registered on Form N-1A or as unit investment trusts 
(``UITs'') that are registered on Form N-8B-2 and subject to certain 
Commission exemptive orders. UIT ETFs are organized differently than 
and subject to a different disclosure framework than funds.\131\ For 
example, exemptive orders for UIT ETFs generally require these ETFs to 
transmit annual reports that include their financial statements, but 
the content of these ETFs' annual reports is not necessarily the same 
as the current content of funds' annual reports. Despite these 
differences between funds and UIT ETFs, should UIT ETFs be permitted to 
rely upon proposed rule 498B, or permitted or required to use a 
tailored annual report? If so, to what extent, if any, should the 
conditions to rely on proposed rule 498B or use a tailored annual 
report be modified for UIT ETFs? If a UIT ETF were to use a tailored 
annual report, should the content of its report differ from the content 
of a tailored annual report for open-end management companies? For 
example, should this ETF's financial statements remain in the report in 
accordance with its exemptive order, or should it be able to provide 
its financial statements through other means (e.g., on a website and 
through a Form N-CSR report, even though these ETFs are not otherwise 
required to file Form N-CSR reports), subject to potential conditions 
that the ETF provide other information in an annual report? Do 
shareholders in UIT ETFs have the same informational needs as fund 
shareholders? For example, do UIT ETFs' shareholders need the same 
performance information, or do their needs differ since a UIT ETF 
generally replicates an index?
---------------------------------------------------------------------------

    \131\ A UIT is an investment company organized under a trust 
indenture or similar instrument that issues redeemable securities. 
See section 4(2) of the Investment Company Act [15 U.S.C. 80a-4]. By 
statute, a UIT is unmanaged and its portfolio is fixed. A UIT does 
not have a board of directors, corporate officers, or an investment 
adviser to render advice during the life of the trust. ETFs 
organized as UITs seek to track the performance of an index by 
investing in the component securities of an index in the same 
approximate proportions as the index. See ETF Adopting Release, 
supra footnote 75, at nn.42, 44.
---------------------------------------------------------------------------

    11. Should the Commission amend the requirements for registered 
closed-end funds' and BDCs' annual reports, to reflect any of the 
amendments we are proposing for open-end funds' annual reports?\132\ As 
an example, the Commission recently adopted rules requiring: (1) 
Certain closed-end funds (registered closed-end funds, as well as BDCs) 
to include key information in their annual reports regarding fees and 
expenses, premiums and discounts, and outstanding senior securities 
that the funds currently disclose in their prospectuses; and (2) 
registered closed-end funds to provide management's discussion of fund 
performance in their annual reports to shareholders.\133\ If the 
Commission were to propose to tailor closed-end funds' shareholder 
reports in a manner that is similar to how we are proposing to tailor 
open-end funds' shareholder reports, how should such tailoring 
incorporate these recently adopted disclosure requirements, as well as 
the other content that currently appears in closed-end funds' 
shareholder reports? For example, should we propose to update the fee 
and expense information that appears in closed-end funds' shareholder 
reports to more closely match the proposed fund expense presentation 
that would appear in open-end funds' shareholder reports? As another 
example, would it be appropriate to require closed-end funds to file on 
Form N-CSR certain information that currently appears in their 
shareholder reports (such as their full financial statements) and make 
this information available on a website, instead of including it in 
their reports, as we are proposing for open-end funds?
---------------------------------------------------------------------------

    \132\ See also infra text accompanying footnote 645 (asking 
whether to extend any of the new requirements for funds' prospectus 
risk disclosure to the risk disclosure that certain closed-end funds 
are required to include in their annual reports).
    \133\ See supra footnote 129.
---------------------------------------------------------------------------

2. Contents of the Proposed Annual Report
    The following table outlines the information the proposed rule 
would generally require funds to include in their annual reports. As is 
the case today, the proposed annual report would not be subject to page 
or word limits. We are not proposing page or word limits because we 
believe such limits could constrain appropriate disclosure or lead 
funds to omit material information. However, we believe that the 
proposed limits on the contents of these reports would limit their 
length, which would support our goal of concise, readable 
disclosure.\134\
---------------------------------------------------------------------------

    \134\ For example, we believe funds generally would be able to 
reduce the length of their annual reports from more than 100 pages 
on average to a more concise presentation that is approximately 3 to 
4 pages in length for paper reports, or an equivalent length for 
electronic reports. For paper reports, the amendments may allow 
funds to deliver annual reports using a trifold self-mailer (or a 
similarly concise mailing). A trifold self-mailer can eliminate the 
need for an envelope or separate pieces of paper. It is generally a 
large piece of paper that is folded to create multiple pages of 
information within a self-contained piece of mail.

                                   Table 2--Outline of Proposed Annual Report
----------------------------------------------------------------------------------------------------------------
                                                                                          Current item of form N-
                                             Description           Proposed item of form  1A containing  similar
                                                                           N-1A                 requirements
----------------------------------------------------------------------------------------------------------------
Cover Page or Beginning of Report..  Fund/Class Name(s).........  Item 27A(b)...........  ......................
                                     Ticker Symbol(s)...........  Item 27A(b)...........  ......................
                                     Principal U.S. Market(s)     Item 27A(b)...........  ......................
                                      for ETFs.
                                     Statement Identifying as     Item 27A(b)...........  ......................
                                      ``Annual Shareholder
                                      Report''.
                                     Legend.....................  Item 27A(b)...........  ......................
Content............................  Expense Example............  Item 27A(c)...........  Item 27(d)(1).
                                     Management's Discussion of   Item 27A(d)...........  Item 27(b)(7).
                                      Fund Performance.
                                     Fund Statistics............  Item 27A(e)...........  ......................
                                     Graphical Representation of  Item 27A(f)...........  Item 27(d)(2).
                                      Holdings.
                                     Material Fund Changes......  Item 27A(g)...........  ......................

[[Page 70733]]

 
                                     Changes in and               Item 27A(h)...........  Item 27(b)(4).
                                      Disagreements with
                                      Accountants.
                                     Statement Regarding          Item 27A(i)...........  Item 27(d)(6)(ii).
                                      Liquidity Risk Management
                                      Program.
                                     Availability of Additional   Item 27A(j)...........  Item 27(d)(3) through
                                      Information.                                         (5).
                                     Householding Disclosure      Item 27A(k)...........  *.
                                      (optional).
----------------------------------------------------------------------------------------------------------------

    * Rule 30e-1(f)(3) currently requires a fund to explain, at least 
once a year, how a shareholder may revoke his or her consent to 
householding. This explanation is not currently required in funds' 
shareholder reports, and we similarly would not require it in the 
proposed annual report.
    To help market participants understand this proposed disclosure, 
Appendix A to this release includes a hypothetical annual report. This 
hypothetical annual report is provided solely for illustrative purposes 
and is not intended to imply that it would reflect a ``typical'' annual 
report under the proposed amendments. We also are providing the 
hypothetical annual report to illustrate for investors what a more 
concise, tailored shareholder report could look like and are providing 
a feedback flier that investors can use to provide their views on the 
hypothetical report and other issues in Appendix B.\135\
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    \135\ The hypothetical annual report is substantially similar to 
the prototype summary shareholder report that two commenters used in 
investor surveys. See supra footnote 44. For example, both of these 
sample reports provide information about a fund's expenses, 
performance, and holdings. The primary differences between the 
sample reports are that the hypothetical annual report would include 
a modified expense presentation, a performance line graph similar to 
current shareholder reports, and two new items related to fund 
statistics and material fund changes. Further, while the commenter 
that developed the prototype summary shareholder report supported 
the inclusion of liquidity risk management program disclosure, the 
prototype did not include this disclosure because the underlying 
requirement was not effective at that time. See ICI Comment Letter 
I.
---------------------------------------------------------------------------

    We discuss each of the proposed content requirements in detail 
below, including specific requests for comment regarding each proposed 
item of the annual report. In addition to the more-specific requests 
for comment below, we also request general comments on the proposed 
content requirements for funds' annual reports.
    12. In addition to the proposed content requirements for funds' 
annual reports, should we require or permit funds to provide additional 
information in their shareholder reports? For example, is there other 
information that funds typically include in their annual reports as a 
matter of practice or to comply with other regulatory requirements 
(e.g., tax-related disclosure under the Internal Revenue Code about the 
fund's distributions)? Would it be beneficial to shareholders to 
receive any additional information in the annual report, or should 
funds provide this information through other mechanisms (e.g., on their 
websites, in materials separately transmitted with the annual report, 
or in account statements)?
    13. Are the topics that funds would discuss in their annual reports 
under the proposed amendments appropriate to provide fund shareholders 
with key information for assessing and monitoring their fund 
investments? Are there additional topics that should be required? 
Please explain. Are any of the topics redundant with information that 
appears in other disclosure requirements? If so, which topics, and why 
are they redundant?
    14. How would the proposed amendments affect the length of funds' 
annual reports? Would the length of the proposed reports affect a 
fund's approach for delivering the full report in the mail, relative to 
its current approach for mailing annual reports?
    15. Would proposed Item 27A result in disclosure that is of an 
appropriate length to be engaging and accessible to fund shareholders, 
or should we take additional steps to limit the length or complexity of 
annual report disclosure? For example, should we impose page or word 
limits on annual reports? If so, what should they be? Should we limit 
the length of any particular section of the annual shareholder report, 
and if so, what should these limits be?
a. Cover Page or Beginning of the Report
    The proposed amendments to Form N-1A would require a fund to 
provide the following information on the cover page or at the beginning 
of the annual report:
     The name of the fund, as well as the class(es) to which 
the annual report relates;
     The exchange ticker symbol of the fund's shares, or the 
ticker symbol of each class adjacent to the class name;
     If the fund is an ETF, the principal U.S. market(s) on 
which the fund's shares are traded;
     A statement identifying the document as an ``annual 
shareholder report;'' and
     The following legend: ``This annual shareholder report 
contains important information about [the Fund] for the period of 
[beginning date] to [end date] [as well as certain changes to the 
Fund]. You can find additional information about the Fund at [Fund 
website address]. You can also request this information by contacting 
us at [toll-free telephone number and, as applicable, email address].'' 
\136\
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    \136\ See proposed Item 27A(b) of Form N-1A. The reference to 
the ``beginning'' of an annual report is designed to address 
circumstances in which there is not a physical page that would 
precede the report, for example, when the report appears online or 
on a mobile device. See infra Section II.B.4.
---------------------------------------------------------------------------

    Currently, funds are not required to include specific cover page 
information in their shareholder reports. However, we understand that, 
as a matter of practice, funds typically include identifying 
information--such as the fund's name, the period of time the report 
covers, and whether the report is an annual or semi-annual report--at 
the beginning of the report or on a cover page. We are proposing to 
require specific identifying information at the beginning of the annual 
report so that shareholders can readily identify the purpose and scope 
of the report. This is also substantially similar to information that 
must appear at the beginning of fund prospectuses.\137\
---------------------------------------------------------------------------

    \137\ See Item 1 of Form N-1A.
---------------------------------------------------------------------------

    The proposed legend is designed to help shareholders understand the 
purpose of the annual report, as well as the time period covered by the 
report. It also describes how a shareholder can obtain additional 
information about the

[[Page 70734]]

fund, consistent with similar legends that appear on the cover page of 
the summary prospectus.\138\ The website address a fund would provide 
in the legend would need to be specific enough to lead shareholders 
directly to the materials that would be required to be accessible on 
the fund's website under this proposal, including the fund's financial 
statements and financial highlights.\139\ Funds also would have 
discretion to include other ways a shareholder can find or request 
additional information about the fund, such as Quick Response Code 
(``QR code'') or referring the reader to mobile applications.\140\
---------------------------------------------------------------------------

    \138\ See rule 498(b)(1)(v).
    \139\ See Instruction 2 to proposed Item 27A(b); infra Section 
II.C. The website could be a central site with prominent links to 
the materials that would need to be accessible under the proposed 
amendments to rule 30e-1.
    \140\ A QR code is a two-dimensional barcode capable of encoding 
information such as a website address, text information, or contact 
information. For example, when included on print materials, these 
codes can be read using the camera on a smartphone to take the user 
directly to a specific website address.
---------------------------------------------------------------------------

    In addition, the proposed amendments would permit funds to include 
graphics, logos, and other design or text features to help shareholders 
identify the materials as the fund's annual report.\141\
---------------------------------------------------------------------------

    \141\ See Instruction 1 to proposed Item 27A(b) of Form N-1A.
---------------------------------------------------------------------------

    We request comment generally on the proposed content requirements 
for the cover page or beginning of the annual report, and specifically 
on the following issues:
    16. Is there additional information that we should permit or 
require funds to provide on the cover page or at the beginning of their 
annual reports? If so, what are the benefits of that additional 
information? For example, should we permit or require funds to include 
a table of contents, or would a table of contents add undue length to 
the shareholder report and provide limited benefits to shareholders 
given the general brevity of the report?
    17. Should we remove or modify any of the information the proposed 
rule would permit or require funds to include on the cover page or at 
the beginning of their annual report, and if so, what information and 
how should we modify it?
b. Fund Expenses
    We are proposing a simplified expense presentation in the annual 
report that would require a fund to provide the expenses associated 
with a hypothetical $10,000 investment in the fund during the preceding 
reporting period. In particular, the table must show: (1) An assumed 
$10,000 beginning account value; (2) total return during the period, 
before deducting expenses; (3) expenses in dollars paid during the 
period; (4) ending account value in dollars, based on net asset value 
return and the assumed $10,000 beginning account value; and (5) 
expenses as a percent of an investor's investment in the fund (i.e. 
expense ratio).\142\ ETFs must also include the ending value of the 
account based on market value return.\143\ The proposed expense example 
would appear as follows, and the individual aspects of the example are 
described in more detail below.
---------------------------------------------------------------------------

    \142\ See proposed Item 27A(c) of Form N-1A; see also discussion 
at infra Section II.B.4 and infra footnote 338 and accompanying text 
for a discussion of additional tools a fund can provide online to 
facilitate shareholder engagement.
    \143\ See proposed Item 27A(c) of Form N-1A.
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    What were your Fund costs for the period? (based on a hypothetical 
$10,000 investment)
[GRAPHIC] [TIFF OMITTED] TP05NO20.000


[[Page 70735]]


    Commenters on the Fund Investor Experience RFC stated that 
shareholders believe the information provided in the current 
shareholder report expense example is important because it helps them 
understand the costs associated with investing in the fund.\144\ The 
proposed expense information is intended to reflect shareholders' 
preferences to understand fee and expense information, while 
simplifying the expense example that currently appears in funds' 
shareholder reports.
---------------------------------------------------------------------------

    \144\ See, e.g., ICI Comment Letter I (stating that the 
information provided in the current expense example is responsive to 
investors' keen interest in knowing how much it will cost them to 
invest in a fund); see also Capital Group Comment Letter (noting 
that the current expense example provides investors with information 
on the cost of their investments).
---------------------------------------------------------------------------

    Funds' shareholder reports currently include an expense example 
consisting of two different tables.\145\
---------------------------------------------------------------------------

    \145\ See Item 27(d)(1) of Form N-1A. The instructions to this 
item require a fund to calculate the expense example using a fund's 
expense ratio for the preceding six months and not to include the 
impact of sales loads, if any.
---------------------------------------------------------------------------

     The first table shows the actual cost in dollars for a 
$1,000 investment in the fund over the prior six-month period based on 
the actual return of the fund. This presentation is intended to help a 
shareholder calculate the actual ongoing fund expenses, in dollars, 
that he or she has incurred.
     The second table shows the cost in dollars for a $1,000 
investment in the fund over the prior six-month period based on a 
hypothetical 5% annual return (and not, as for the first table, the 
actual return of the fund during that period). Because funds are 
required to use the same hypothetical annual return in calculating 
their expenses here, this second table is designed to help shareholders 
compare the expenses of their fund with those of other funds.\146\
---------------------------------------------------------------------------

    \146\ The first table does not permit a direct comparison of 
fund costs because positive performance would make fund expenses 
expressed as a dollar amount higher and negative performance would 
make fund expenses expressed as a dollar amount lower. So, for 
example, if two funds had the same fees, the fund with the better 
performance would appear more expensive. See February 2004 
Shareholder Report Adopting Release, supra footnote 83.
---------------------------------------------------------------------------

    Currently, the fund expenses presented in the shareholder report 
expense examples are different in several respects from those in the 
prospectus fee table and example. The shareholder report example is 
derived from a fund's financial statements and therefore reflects 
actual historical expenses that a shareholder incurred over the past 
year (i.e., backwards-looking expenses). The prospectus example, on the 
other hand, reflects hypothetical future expenses (i.e., forward-
looking expenses).\147\ Currently, the prospectus fee table also 
reflects sales loads that an investor would pay and the expenses 
associated with the fund's investments in another fund (referred to as 
Acquired Fund Fees and Expenses (``AFFE'')), whereas the shareholder 
report expense presentation does not, because these elements are not 
reflected in the fund's financial statements.\148\ Additionally, unlike 
the shareholder report example, the prospectus fee table must reflect 
any material changes in fees that occurred since the prior fiscal year 
and cannot reflect certain fee waivers.\149\
---------------------------------------------------------------------------

    \147\ See February 2004 Shareholder Report Adopting Release, 
supra footnote 83, at text following n.96.
    \148\ See Item 27(d)(1) of Form N-1A; see also Section II.H.1.g 
(discussing proposed changes to the disclosure requirements for AFFE 
in fund prospectuses, which would permit funds that invest 10% or 
less of their 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).
    \149\ See Instruction 3(d)(ii) and 3(e) of Item 3 of Form N-1A 
(prohibiting a fund from reflecting fee waivers unless they reduce 
the fund's operating expenses for no less than one year from the 
effective date of the fund's prospectus).
---------------------------------------------------------------------------

    The information about fund expenses that we are proposing funds 
include in the annual report is designed to simplify the expense 
example that currently appears in funds' shareholder reports, and to 
provide shareholders with additional tools to understand the expenses 
they paid during the prior fiscal year. The proposal would replace the 
two current expense examples in the shareholder report with one 
simplified expense table. The new table would vary from the current 
disclosures in several respects. First, under the proposal, funds would 
have to provide the expenses associated with a $10,000 investment in 
the fund, rather than the current $1,000 investment amount.\150\ We are 
proposing to increase the dollar value because we believe that $10,000 
is a more realistic investment amount for an individual shareholder 
today.\151\ Additionally, because Form N-1A requires funds to use an 
assumed $10,000 investment for the expense presentation in the 
prospectus, the proposal would align this aspect of the two expense 
presentations and promote a more consistent disclosure experience for 
investors.\152\ Similarly, we are proposing to align the rounding 
conventions of the expense presentations in the shareholder report with 
those of the prospectus.\153\
---------------------------------------------------------------------------

    \150\ See proposed Item 27A(c) of Form N-1A.
    \151\ See Registration Form Used by Open-End Management 
Investment Companies, Investment Company Act Release No. 23064 (Mar. 
13, 1998) [63 FR 13916 (Mar. 23, 1998] (``1998 Form N-1A Prospectus 
Amendments''), at n.74 and accompanying text (increasing the 
hypothetical investment to $10,000 in the prospectus example 
presentation because the Commission recognized that the typical fund 
investment was increasing in size). Because we are proposing to 
raise the hypothetical investment amount to $10,000, we are also 
proposing to similarly raise the required rounding conventions for 
dollar values in the table to the nearest dollar, rather than the 
nearest cent.
    \152\ But see supra footnotes 147 through 149 and accompanying 
text (discussing the key differences between the presentation of 
expense information in the prospectus and the shareholder report).
    \153\ See proposed Instruction 1(a) of Item 27A(c) of Form N-1A 
(requiring all percentages in the table to be rounded to the nearest 
hundredth of one percent and all dollar figures in the table to be 
rounded to the nearest dollar).
---------------------------------------------------------------------------

    Furthermore, funds would no longer be required to show the total 
amount of expenses along with hypothetical return information for the 
period. Instead, funds would continue to provide expense information 
along with actual return information, with amendments to this 
presentation of expenses that we believe would help show shareholders 
how much of their money was actually invested in the market (versus how 
much of their money was paid for fees and expenses).\154\ Like the 
current expense presentation, the proposed presentation would show an 
assumed beginning account value, an ending account value, and expenses 
paid during the period. However, rather than only requiring funds to 
disclose the ending account value net of fees (as they do today), we 
are proposing to require funds to disaggregate this amount. Funds would 
individually disclose: (1) The costs paid during the period, (2) the 
fund's total return during the period before costs were paid, and (3) 
the ending account value based on the fund's net asset value return. A 
fund would have to provide each of these figures as a mathematical 
expression (using ``+'', ``-'', and ``='' signs), as shown in the 
example above.\155\ Costs would have to be expressed as a negative 
amount (with a ``-'' sign preceding the cost amount), and total return, 
if negative during the period, also would have to be expressed as a 
negative amount with a ``-'' sign preceding it. Conversely, if the 
fund's total return were positive during the period, it would be 
preceded by a ``+'' sign.
---------------------------------------------------------------------------

    \154\ The expense example in the annual report would provide 
expense information that covers a 12-month reporting period.
    \155\ See proposed Instructions 1(b) of Item 27A(c) of Form N-1A 
(``Provide the amounts in each of the columns as a mathematical 
expression, as appropriate (i.e., include +, - and = symbols). Costs 
paid during the period must be expressed as a negative amount. Total 
return, if negative during the period, must be expressed as a 
negative amount.'').

---------------------------------------------------------------------------

[[Page 70736]]

    We believe that this presentation would facilitate a shareholder's 
understanding of how costs and performance affect his or her ending 
account value. Fund fees and expenses are central information for 
shareholders because they can significantly affect a fund's investment 
returns over time.\156\ We recognize that shareholders could benefit 
from additional transparency into the costs associated with investing 
in the fund. However, while some of these costs are fixed and easily 
quantifiable, others are variable and can be difficult to 
calculate.\157\
---------------------------------------------------------------------------

    \156\ See Fund Investor Experience RFC, supra footnote 8, at 
text accompanying n. 36. Some commenters on the Fund Investor 
Experience RFC expressed concern that fund disclosure may not 
accurately represent the full costs associated with a fund 
investment. See, e.g., Delmonte Comment Letter; Fowler Comment 
Letter; Blanchard Comment Letter.
    \157\ For example, some commenters on the Fund Investor 
Experience RFC discussed challenges associated with disclosing 
transaction costs, including a potential negative impact on 
investors' ability to understand fund costs. See, e.g., ICI Comment 
Letter I; Comment Letter of BlackRock, Inc. (Oct. 31, 2018) 
(``BlackRock Comment Letter''). Based on experience in certain 
jurisdictions that require transaction cost disclosure, these 
commenters indicated that transaction cost disclosure can confuse or 
mislead investors--including through reported transaction costs of 
zero or negative amounts in some instances in those jurisdictions--
because funds may use different calculation methods and certain 
calculation inputs are subjective in nature. See ICI Comment Letter 
I; see also Slippage Causes Confusion in MiFID II Fund Rules Row, 
Chris Flood, Financial Times (Jan. 26, 2018), available at https://www.ft.com/content/7b37016a-00fc-11e8-9650-9c0ad2d7c5b5.
---------------------------------------------------------------------------

    The proposed presentation is designed to help investors evaluate 
these costs by disclosing costs directly deducted from the fund's 
assets alongside the fund's return. The fund's return will reflect 
these costs as well as any performance expenses associated with the 
fund's portfolio management activities (such as the fund's securities 
lending activities and transaction costs associated with the fund 
purchasing and selling portfolio investments). Similarly, some fund 
expenses are paid directly as fees for investing in the fund, while 
others are performance expenses associated with the fund's portfolio 
management activities. We believe it is important for shareholders to 
appreciate fully the costs they pay to invest in a fund, and how 
performance expenses affect the fund's investment return. We also are 
proposing to require that funds qualitatively describe, in a footnote 
to the example, any of these performance expenses that are material as 
discussed below. We are not proposing to require a similar presentation 
based on hypothetical performance, because we believe that the primary 
purpose of a shareholder report is to provide shareholders with actual 
information about the fund's performance and expenses over the past 
year or half-year period.\158\
---------------------------------------------------------------------------

    \158\ See supra footnote 147 and accompanying text. While the 
current expense example based on a hypothetical 5% annual return was 
designed to help shareholders compare the expenses of their fund 
with those of other funds, we believe that the proposed requirement 
to present expense information as a percentage as well as a dollar 
amount also would provide this comparative value. See supra footnote 
146 and accompanying text; infra paragraph accompanying footnote 
161.
---------------------------------------------------------------------------

    We also are proposing certain ETF-specific disclosures that would 
provide shareholders more transparency into the unique cost structure 
of an ETF. Under our 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.\159\ This 
proposed requirement is designed to allow shareholders to understand 
any difference between the ETF's performance and market price, and to 
highlight for shareholders the indirect costs associated with investing 
in an ETF, including commissions and premium/discount costs.\160\
---------------------------------------------------------------------------

    \159\ We are also proposing conforming changes to Item 13(a) of 
Form N-1A to incorporate the requirement for ETFs to disclose total 
return based on the ETF's per share market value return in the 
financial highlights. See proposed amendments to General Instruction 
3 of Item 13(a) of Form N-1A.
    \160\ See proposed General Instruction 1(i)(i) of Item 27A(c) of 
Form N-1A. We also are proposing to maintain the current 
instructions specific to ETFs, including the requirement to state 
that investors may pay brokerage commissions on their purchases and 
sales of ETF shares, which are not reflected in the expense table, 
as well as the requirement to exclude any fees charged for the 
purchase and redemption of the ETF's creation units. See proposed 
General Instruction 1(i)(ii) and 1(i)(iii) of Item 27A of Form N-1A.
---------------------------------------------------------------------------

    Unlike the current expense presentation, we are proposing to 
require funds to present expense information in two formats: (1) As a 
dollar amount, as discussed above; and (2) as a percentage of a 
shareholder's investment in the fund (which would be a new addition to 
the current presentation). We believe that requiring two formats would 
provide shareholders with a more complete understanding of the expenses 
associated with their investments. The proposed new percentage-based 
expense information is designed to provide shareholders with a basis 
for comparing the level of current period expenses of different funds 
(as percentages are comparable). This addition would complement the 
dollar-based expense presentation, which is designed to permit 
shareholders to estimate the costs, in dollars, that they incurred over 
the reporting period.We are also proposing to require funds to give the 
expense columns (i.e., the ``costs paid'' and ``costs paid as a 
percentage of your investment'' columns) of the table more prominence 
than the remainder of the expense table to draw the attention of 
investors to these important data points. Funds would have flexibility 
to use various text and table features to satisfy this 
requirement.\161\
---------------------------------------------------------------------------

    \161\ See proposed General Instruction 1(c) of Item 27A(c) of 
Form N-1A (providing flexibility for funds to use, for example, 
graphics, larger font size, different border width or column 
shading, or different colors or font styles to satisfy this 
prominence requirement).
---------------------------------------------------------------------------

    We also are proposing several modifications to simplify other 
aspects of the required expense disclosure. First, we are proposing to 
remove the currently required narrative preamble to the expense table 
in its entirety.\162\ As a replacement for this preamble, we are 
proposing certain specified brief required footnotes to the table.\163\ 
We believe that the simplified expense table, along with the footnotes 
to the table that we would require funds to include, would provide 
shareholders with the most relevant information from the lengthy 
preamble that currently precedes the expense example.
---------------------------------------------------------------------------

    \162\ Currently, a fund must precede the expense example with a 
narrative preamble explaining that the purpose of the expense 
example disclosure is to help shareholders understand the ongoing 
costs of investing in the fund and to compare those costs with the 
ongoing costs of investing in other mutual funds. The preamble 
defines ongoing costs as fund expenses, including management fees 
and distribution [and/or service] (12b-1) fees. See Item 27(d)(1) of 
Form N-1A.
    \163\ See footnotes to the expense example in proposed Item 
27A(c).
---------------------------------------------------------------------------

    First, 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 that are included in the fund's total 
return, if material to the fund. For example, if applicable, the fund 
should explain that total return includes fund investment transaction 
costs, securities lending costs, or AFFE, and that these costs 
materially reduced the fund's return.\164\ We believe that requiring 
this qualitative discussion would give funds the opportunity to 
describe certain expenses that may be difficult to calculate, but that 
materially affect fund performance. Also, by requiring funds to 
describe these types of performance expenses in a footnote, while 
including the direct costs of the fund in the expense example, 
shareholders might be better able to appreciate the fact that the costs 
associated with their investment include both fixed costs and indirect 
variable costs.
---------------------------------------------------------------------------

    \164\ See Instruction 1(f) to proposed Item 27A(c)

---------------------------------------------------------------------------

[[Page 70737]]

    Furthermore, a 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.\165\ This would draw investor attention to the fact that 
there may be additional costs not reflected in the expense example, if 
applicable. Finally, if a fund's shareholder report covers a period of 
time that is less than a full reporting year, the fund would be 
required to include a footnote to the table noting this and explaining 
that expenses for a full reporting period would be higher than the 
figures shown.\166\
---------------------------------------------------------------------------

    \165\ See Instruction 1(g) to proposed Item 27A(c). Funds would 
not be required to disclose the amount of such fees.
    \166\ See Instruction 1(i) to proposed Item 27A(c). This would 
generally apply to newly formed funds that are required to file an 
annual or semi-annual report for a period less than the reporting 
period.
---------------------------------------------------------------------------

    We also are proposing certain modifications to the instructions 
associated with the computation of fund expenses to reflect the 
proposed changes to the expense example. We are proposing an 
instruction that would direct funds to calculate ``Costs paid'' by 
multiplying 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.\167\ The 
figure in the ``Cost paid as a percentage of your investment'' column, 
in turn, would be the fund's expense ratio as it appears in the fund's 
most recent audited financial statements or financial highlights.\168\ 
The figure in the ``Ending account value (based on net asset value 
return)'' column would similarly be derived from figures in the fund's 
audited financial statements or financial highlights. To calculate this 
figure, the fund would multiply $10,000 by the fund's net asset value 
return as it appears in the fund's most recent audited financial 
statements or financial highlights.\169\ The figure in the ``Total 
return before costs paid'' column would be calculated by subtracting 
$10,000 (the figure in the ``Beginning account value'' column) and the 
figure in the ``Costs paid'' column from the ``Ending account value 
(based on net asset value return)'' column.\170\ Additionally, for ETFs 
we are proposing an instruction for how an ETF should calculate the 
ETF's ending account based on market value return.\171\
---------------------------------------------------------------------------

    \167\ See Instruction 2(a) to proposed Item 27A(c) of Form N-1A.
    \168\ See proposed Instruction 2(c). In the semi-annual report, 
the fund's expense ratio would be calculated in the manner required 
by Instruction 4(b) to Item 13(a) of Form N-1A, using the expenses 
for the fund's most recent fiscal half-year. Id.
    \169\ See proposed Instruction 2(e). In the semi-annual report, 
the fund's ending account value would be calculated in the manner 
required by Instruction 3 to Item 13(a) of Form N-1A. Id.
    \170\ See proposed Instruction 2(d) of Item 27A(c) of Form N-1A.
    \171\ See proposed Instruction 2(f) of Item 27A(c) of Form N-1A 
(requiring funds to multiply $10,000 by the fund's market value 
return). In an ETF's annual report, an ETF would be required to use 
the market value return as it appears in the ETF's most recent 
audited financial statements or financial highlights in its 
calculations. In the semi-annual report, the fund's market value 
return should be calculated in the manner required by Instruction 3 
to Item 13(a) of Form N-1A. Id.
---------------------------------------------------------------------------

    We are proposing to maintain certain of the current instructions 
that we believe would continue to provide useful information to 
shareholders. If a fund incurred any ``extraordinary expenses'' during 
the reporting period, we are proposing to continue to allow the fund to 
briefly describe, in a footnote to the expense table, what the actual 
expenses would have been if these extraordinary expenses were not 
incurred.\172\ Similarly, if a fund is a feeder fund, we are proposing 
to continue to allow that fund to reflect the aggregate expenses of the 
feeder fund and the master fund in the expense table and to include a 
footnote stating that the expense table reflects the expenses of both 
the feeder and master funds.\173\ Additionally, if the shareholder 
report covers more than one class of a fund or more than one feeder 
fund that invests in the same master fund, the shareholder report may 
include a separate expense table, or a separate line item in the 
expense table, for each class or feeder fund.\174\
---------------------------------------------------------------------------

    \172\ See Instruction 1(k) to proposed Item 27A(c) of Form N-1A 
(defining ``extraordinary expenses'' as ``expenses that are 
distinguished by their unusual nature and by the infrequency of 
their occurrence. Unusual nature means the expense has a high degree 
of abnormality and is clearly unrelated to, or only incidentally 
related to, the ordinary and typical activities of the Fund, taking 
into account the environment in which the Fund operates. Infrequency 
of occurrence means the expense is not reasonably expected to recur 
in the foreseeable future, taking into consideration the environment 
in which the Fund operates. The environment of a Fund includes such 
factors as the characteristics of the industry or industries in 
which it operates, the geographical location of its operations, and 
the nature and extent of government regulation''); see also 
Instruction 2(a)(ii) to Item 27(d) of Form N-1A.
    \173\ See Instruction 1(d) to proposed Item 27A(c) of Form N-1A.
    \174\ See Instruction 1(e) to proposed Item 27A(c) of Form N-1A.
---------------------------------------------------------------------------

    We request comment on our proposed approach to revising the expense 
information that would appear in funds' annual reports, and 
specifically on the following issues:
    18. Would the information that would be included in the proposed 
expense example permit shareholders to estimate the actual costs, in 
dollars, that they incurred over the reporting period and provide 
shareholders with a basis for comparing expenses across different 
funds? If not, why not? Which, if any, of the proposed disclosure 
requirements should we modify? Is there a better way of describing the 
fund's expenses to shareholders in the annual report?
    19. Should we, as proposed, require funds to provide the costs in 
dollars associated with investing in the fund based on an assumed 
$10,000 investment? Should we increase the assumed investment amount 
from $1,000 to $10,000, as proposed? Should we use some other amount, 
and if so, what amount would be more appropriate and why?
    20. Should we, as proposed, align the rounding conventions included 
in the expense example instructions in the shareholder report with 
those included in the instructions to the prospectus expense table?
    21. Should we, as proposed, require funds to disclose individually: 
(1) The costs paid during the period, (2) the fund's total return 
during the period before costs were paid, and (3) the ending account 
value based on the fund's net asset value return? Why or why not? 
Instead, should we require funds to disclose the total return net of 
fees? Are the proposed calculation instructions for these figures 
appropriate? Why or why not? Would providing expense information in 
this disaggregated manner facilitate shareholder understanding of how 
costs and performance each affect the ending account value? Why or why 
not?
    22. Should we, as proposed, require funds to disclose the figures 
in the expense table as a mathematical expression? Would shareholders 
find this presentation useful?
    23. Should we, as proposed, require funds to use text features to 
highlight the columns showing costs paid during the period (both in 
dollars and as a percentage of the investment)? Would this approach 
draw shareholder attention to those figures? Is there a particular 
format that we should require to highlight these columns, instead of 
(as proposed) providing flexibility in how to highlight them?
    24. Should we require funds to provide the costs associated with 
investing in the fund as a percentage of a shareholder's investment in 
the fund (i.e., expense ratio)? Would this disclosure assist 
shareholders in comparing the level of current period expenses of 
different funds?
    25. Should we, as proposed, require ETFs to provide the ending 
value of the

[[Page 70738]]

account based on market value return, in addition to the value based on 
net asset value return? If so, should we require or permit ETFs to 
provide any additional information to explain the costs reflected in 
these two values to shareholders? For example, should we require or 
permit ETFs to provide a narrative explanation of what these values 
represent, how they differ from each other, and/or what impact they 
have on the fund's performance?
    26. Should we require, as proposed, funds to include the expense 
ratio and cost in dollars only for the period covered by the report? 
Should we instead require funds to include fund expense information 
over other historical periods, such as 5 years, 10 years, or some other 
period?
    27. Should we, as proposed, require funds to describe qualitatively 
other costs included in total return, if material to the fund? Would 
this requirement be helpful to investors, and if so, what types of 
investors would find the disclosure to be particularly helpful? If the 
disclosure would not be helpful to investors, why not? Should we 
instead permit, rather than require, funds to include these costs in 
the expense example or in a footnote? Should we require funds to 
separately disclose the amount of securities lending costs, or fund 
investment transaction costs, that the fund incurred during the period? 
Should we require funds to include in the footnote the amount of any 
acquired fund fees and expenses that the fund includes in its then-
effective prospectus fee table? Would quantifying acquired fund fees 
and expenses in the footnote be appropriate in light of the fact that 
acquired fund fees and expenses are not included in a fund's audited 
financial statements, and calculation of acquired fund fees and 
expenses can require a degree of estimation when the acquired funds 
have different fiscal year-ends than the acquiring fund? Would 
disclosing quantitative amounts of securities lending or fund 
investment transaction costs present the same or additional 
considerations? Is it appropriate for any or all of these costs to be 
included in a footnote? Should funds instead be required to include 
this information in the expense table itself? Is there another, more 
appropriate, place to include this information?
    28. Should we, as proposed, require funds to briefly explain in a 
footnote that the example does not reflect transaction costs associated 
with purchasing or selling fund shares? Alternatively, should we 
permit, rather than require, funds to include this footnote?
    29. Should we, as proposed, continue to allow a fund that is a 
feeder fund to reflect the aggregate expenses of the feeder fund and 
the master fund in the expense table and to include a footnote stating 
that the expense table reflects the expenses of both the feeder and 
master funds? Should we instead require feeder funds to separately 
disclose the fees associated with the feeder and the master funds, 
respectively?
    30. Do the proposed footnotes to the expense presentation 
adequately convey the information that was previously included in the 
preamble to the current expense examples? If not, what additional 
information should we require or permit funds to disclose, and in what 
format should funds have to present this additional disclosure? Instead 
of including the information in footnotes, is there a more appropriate 
location for the information? Is there any additional information that 
we should permit or require funds to convey in notes to the expense 
presentation? For example, if the fund plans to increase its fees 
materially and this change would be disclosed in the proposed 
``Material Fund Changes'' of the annual report, should we either permit 
or require the fund to cross-reference this disclosure as a note to the 
expense presentation?
    31. Should we adopt any additional or different expense disclosure 
requirements for certain types of funds? For example, in addition to 
what we proposed, are there any additional or different expenses that 
may only be relevant to ETFs (accounting for the unique characteristics 
of their structure) that we should require or permit ETFs to disclose?
    32. Should we allow funds to cross-reference additional resources 
that would allow each shareholder to calculate the actual expenses that 
he or she paid? For example, should we allow funds to cross-reference 
online expense calculators produced by third-party vendors? 
Alternatively, should we allow funds to cross-reference an online 
expense calculator provided by the Commission or FINRA, such as FINRA's 
fund analyzer tool? Since FINRA's fund analyzer only provides forward-
looking information, rather than the actual past expenses that 
shareholders have paid during the period, would this information be 
useful to shareholders?
    33. In what ways can technology make personalized expense 
information possible? For example, should funds or intermediaries 
provide calculators or other tools to help investors understand their 
individual investment costs? Have improvements in technology since 
2004, when the Commission considered requiring personalized expense 
information in quarterly account statements, made it easier for funds 
or intermediaries to provide personalized expense information in 
quarterly account statements or through other mechanisms? \175\ If 
funds were to provide personalized expense information, how can we 
design the disclosure to reduce potential investor concerns about 
sharing their personal information or about data security? Are there 
any other concerns associated with such disclosure?
---------------------------------------------------------------------------

    \175\ See February 2004 Shareholder Report Adopting Release, 
supra footnote 83, at paragraph accompanying n.36 (recognizing that 
a requirement for individualized expense disclosure in quarterly 
statements would have required costly systems changes for funds and 
intermediaries at that time).
---------------------------------------------------------------------------

    34. Should we require funds to submit interactive data files (for 
example, formatted using eXtensible Business Reporting Language 
(``XBRL'')) containing their expense example information? Why or why 
not? Would it be useful for shareholders to have access to the expense 
example in a structured data format? Would this meaningfully complement 
the current requirement that funds submit their prospectus risk/return 
summary information in Inline XBRL format, or would it be duplicative 
with this current requirement? Is there any other information from 
funds' shareholder reports that we should require funds to submit in a 
structured data format?
c. Management's Discussion of Fund Performance
    Given fund investors' interest in performance information for 
purposes of monitoring and assessing their ongoing fund investments, we 
propose largely to maintain the current requirements for the 
management's discussion of fund performance (``MDFP'') section of the 
annual report, with several proposed targeted changes.\176\ Currently, 
MDFP disclosure consists of the following:
---------------------------------------------------------------------------

    \176\ See supra footnote 47 and accompanying text (discussing 
information about investors' interest in shareholder report 
performance information, including the results of various investor 
testing and surveys in which approximately 60-80% of surveyed 
investors expressed interest in fund performance information or the 
narrative discussion of factors affecting the fund's performance).
---------------------------------------------------------------------------

     A narrative discussion of the factors that materially 
affected the fund's performance during the most recently completed 
fiscal year;
     A line graph providing account values for each of the most 
recently completed 10 fiscal years (or for the life of the fund, if 
shorter) based on an initial $10,000 investment in comparison to the 
returns of an appropriate broad-based securities

[[Page 70739]]

market index for the same period (as well as more narrowly based 
indexes that reflect the market sectors in which the fund invests, at 
the fund's discretion);
     A table showing the fund's average annual total returns 
for the past 1-, 5-, and 10-year periods (or for the life of the fund, 
if shorter);
     A statement accompanying the line graph and table to the 
effect that past performance does not predict future performance and 
that these presentations do not reflect the deduction of taxes that a 
shareholder would pay on fund distributions or the redemption of 
shares;
     A discussion of the effect of any policy or practice of 
maintaining a specified level of distributions to shareholders on the 
fund's investment strategies and per share net asset value, as well as 
the extent to which the fund's distribution policy resulted in 
distributions of capital; and
     For ETFs that do not provide certain premium or discount 
information on their websites, a table showing the number of days the 
fund shares traded at a premium or discount to net asset value.\177\
---------------------------------------------------------------------------

    \177\ See Item 27(b)(7) of current Form N-1A.
---------------------------------------------------------------------------

    We are proposing amendments to the MDFP requirements to make the 
disclosure more concise and to take into account that shareholders may 
no longer receive fund prospectuses--which include performance 
information--after their initial purchase of fund shares.\178\ These 
proposed amendments therefore would require the MDFP to include 
additional performance-related information that is available in fund 
prospectuses, including certain class-specific performance information 
and comparative information showing the average annual total returns of 
one or more relevant benchmarks. We also are proposing to amend the 
definition of an appropriate broad-based securities market index to 
clarify that all funds should compare their performance to the overall 
applicable securities market, for purposes of both fund annual reports 
and prospectuses.
---------------------------------------------------------------------------

    \178\ See infra Section II.F.
---------------------------------------------------------------------------

i. Narrative MDFP Disclosure
    We propose to retain the current requirement that funds' annual 
reports include a narrative discussion of factors that materially 
affected the fund's performance during the most recent fiscal year, 
with minor modifications to encourage concise disclosure.\179\ The 
narrative MDFP disclosure is designed to aid shareholders in assessing 
a fund's performance over the prior year.\180\ We continue to believe 
this disclosure provides information that helps shareholders understand 
and evaluate fund performance over that time period. However, based on 
staff review of current disclosures, we believe that some funds provide 
overly long narrative discussions that likely impede shareholders' 
ability to understand easily the key factors that affected the fund's 
performance. Therefore, we are proposing to amend the current 
requirement to specify that the disclosure must ``briefly summarize'' 
the ``key'' factors that materially affected the fund's performance 
during the last fiscal year, including the relevant market conditions 
and the investment strategies and techniques used by the fund's 
investment adviser.\181\ A proposed instruction would direct funds not 
to include lengthy, generic, or overly broad discussions of the factors 
that generally affected market performance during a fund's last fiscal 
year.\182\ The proposed instruction would also direct funds to use 
graphics or text features--such as bullet lists or tables--to present 
the key factors, as appropriate. We understand that some funds 
currently attempt to make their narrative disclosure easier for 
shareholders to understand by, for example, using tables or charts to 
show how the fund performed in comparison to a relevant benchmark or to 
identify the significant contributors to or detractors from the fund's 
performance by holding, industry, geographic region, or other relevant 
category. We believe these types of presentations may be helpful to 
shareholders, and funds could continue to include them in annual 
reports under the proposal.
---------------------------------------------------------------------------

    \179\ See Item 27(b)(7)(i) of Form N-1A; proposed Item 27A(d)(1) 
of Form N-1A. Currently, funds are required to discuss the factors 
that materially affected the fund's performance during the most 
recently completed fiscal year, including the relevant market 
conditions and the investment strategies and techniques used by the 
fund's investment adviser. Item 27(b)(7)(i) of Form N-1A.
    \180\ See February 2004 Shareholder Report Adopting Release, 
supra footnote 83, at paragraph accompanying n.96; Disclosure of 
Mutual Fund Performance and Portfolio Managers, Investment Company 
Act Release No. 19382 (Apr. 6, 1993) [58 FR 19050 (Apr. 12, 1993)] 
(``MDFP Adopting Release'').
    \181\ See proposed Item 27A(d)(1) of Form N-1A.
    \182\ See Instruction 1 to proposed Item 27A(d)(1) of Form N-1A.
---------------------------------------------------------------------------

    We recognize that funds currently may include additional 
information in their shareholder reports that is designed to help 
shareholders understand fund performance and market conditions, such as 
a fund president's letter to shareholders, interviews with portfolio 
managers, market commentary, and other similar information. Under the 
proposed amendments, a fund could not include this additional 
information in its annual report.\183\ We believe that information 
about the key factors affecting a fund's performance, which the 
proposal would require, would likely satisfy many fund shareholders' 
needs and would provide a more focused presentation. Although we 
understand that the additional information funds currently include in 
shareholder reports may be helpful to some shareholders, we believe the 
potential benefits of this information to a subset of shareholders, on 
balance, do not warrant the additional length they would contribute to 
the annual report. We also believe that allowing this discretionary 
information would not further our goal of presenting shareholders with 
the information that is most central to understanding their fund's 
performance. Funds would, however, be able to provide materials that 
include this additional information to shareholders in the same 
transmission as the annual report (e.g., in the same email or 
envelope), provided that the annual report is given greater 
prominence.\184\ Funds could also provide this additional information 
on their websites, as we understand many funds do today. Further, funds 
could refer to additional website information near the end of their 
shareholder reports if they reasonably believe that shareholders will 
likely view the information as important.\185\
---------------------------------------------------------------------------

    \183\ See supra Section II.B.1.b (discussing the proposed 
instruction that would permit funds only to include in their annual 
reports information that is permitted or required by proposed Item 
27A).
    \184\ Commission rules currently do not preclude a fund from 
including other materials in the same transmission as shareholder 
reports. Our proposal similarly would not limit a fund's ability to 
provide other materials in the same transmittal as the proposed 
annual report. We believe this would allow funds to communicate with 
shareholders more efficiently through a single transmittal without 
detracting from our goal of concise, readable shareholder reports. 
However, we are proposing to require that the annual report be given 
greater prominence than other materials, with the exception of 
certain other specified disclosure materials. See supra footnotes 
124-126 and accompanying text.
    \185\ See infra Section II.B.2.i.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to the narrative MDFP 
disclosure, including:
    35. Should we retain the requirement for a fund to include 
narrative MDFP disclosure in annual reports? Why or why not? Does this 
disclosure help shareholders better understand a fund's performance?
    36. Should we require the narrative MDFP disclosure to summarize 
briefly the key factors that materially affected

[[Page 70740]]

the fund's performance during the last fiscal year, as proposed? Would 
different instructions better further the Commission's goals of making 
narrative MDFP disclosure more concise so shareholders can understand 
more efficiently the key factors that affected a fund's performance? If 
so, what should those alternative instructions be, and how would they 
better further our goals?
    37. As proposed, should we direct funds to use graphics or text 
features, such as bullet lists or tables, to present the key factors, 
as appropriate? Should we require funds to use specific graphics or 
text features to help shareholders more readily understand the key 
factors affecting fund performance and to create consistency among 
annual reports? Or is a more flexible approach, like we propose, more 
appropriate to allow funds to develop presentations tailored to 
individual funds and the needs of their shareholders?
    38. Should we expressly limit the length of the narrative MDFP 
disclosure? If so, how (e.g., word or page limits)? If not, why not?
    39. Are there other ways we could require or encourage funds to 
provide concise narrative MDFP disclosure focused on the key factors 
that affected the fund's performance, beyond our proposed revisions and 
instruction directing funds not to include lengthy, generic, or overly 
broad discussions of the factors that generally affected market 
performance? For example, should we expressly require a discussion 
about the types of investments that drove fund performance, or can 
shareholders intuit this by reviewing the fund's investment strategy?
    40. Should we amend the narrative MDFP disclosure requirement to 
limit or expand the examples of the types of factors that funds should 
discuss? For example, should we refer to other factors, beyond the 
current references in this requirement to relevant market conditions 
and the investment strategies and techniques the fund's adviser used? 
Should we require funds to discuss holdings that significantly 
contributed to or detracted from their performance during the past 
fiscal year (e.g., by holding, industry, geographic region, or other 
relevant category), as many funds do today? Should we require or 
encourage funds to discuss other topics, such as: (1) The fund's 
performance in relation to its benchmark; (2) the reason for and effect 
of any large cash or temporary defensive position on fund performance; 
(3) the effect of any tax strategies, or the effects of taxes, on fund 
performance; or (4) whether the fund engages in high portfolio turnover 
and the effect of portfolio turnover on fund performance?
    41. Should we incorporate concepts or requirements from 
management's discussion and analysis requirements that apply to annual 
reports of operating companies and BDCs on Form 10-K? \186\ For 
example, should we require or encourage funds to disclose material 
financial and statistical data that the fund believes would enhance a 
shareholder's understanding of the fund's performance? As another 
example, would it be appropriate to require or permit forward-looking 
disclosure? If so, are there any related rules or rule amendments we 
should adopt to facilitate this disclosure? For instance, should we 
require or permit a fund to disclose when a key factor that materially 
affected the fund's performance for the last fiscal year is not 
expected to materially affect the fund's future performance (e.g., 
because the fund has sold the underlying investment or because of an 
unusual or infrequent event or transaction)?
---------------------------------------------------------------------------

    \186\ See, e.g., Item 303 of Regulation S-K; Management's 
Discussion and Analysis, Selected Financial Data, and Supplementary 
Financial Information, Securities Act Release No. 10750 (Jan. 30, 
2020) [85 FR 12068 (Feb. 28, 2020)].
---------------------------------------------------------------------------

    42. Are there ways we could prevent funds from providing generic or 
boilerplate narrative MDFP disclosure that does not change much from 
year to year? If so, how?
    43. Are there any best practices in narrative MDFP disclosure that 
we should encourage or require?
    44. Should we permit or require additional information in the 
annual report that is intended to help shareholders understand fund 
performance, such as interviews with portfolio managers or a 
president's letter? Is this additional information helpful to 
shareholders? If so, should it be included as part of the MDFP, or in 
some other part of a fund's annual report?
ii. Performance Line Graph and Request for Comment on Use of Market 
Indexes in Performance Disclosure
    We also are proposing to retain the requirements for the 
performance line graph currently included in annual reports, with 
certain amendments designed to improve the current presentation.\187\ 
The line graph generally shows the performance of a $10,000 investment 
in the fund and in an appropriate broad-based securities market index 
over a 10-year period.\188\ This disclosure is designed to permit a 
comparison of the performance of the fund with ``the market'' and to 
put the narrative discussion into perspective.\189\ In addition to 
required information about an appropriate broad-based securities market 
index's performance, a fund has the option to compare its performance 
to other indexes, including more narrowly based indexes that reflect 
the market sectors in which the fund invests.\190\ We continue to 
believe the line graph presentation helps shareholders understand how 
the fund has performed over a 10-year time horizon in comparison to an 
appropriate broad-based securities market index and other relevant 
indexes, as applicable.\191\ Because this presentation shows 
performance in dollar terms, based on an initial $10,000 investment, we 
believe the line graph may contribute to shareholders' understanding of 
fund performance--because some individuals may find it easier to assess 
dollar figures than percentages--and complements the percentage-based 
presentation in the average annual total returns table.\192\ We also 
believe the line graph helps illustrate the variability of a fund's 
returns (e.g., whether the fund's returns have been volatile or 
relatively consistent from year to year) and

[[Page 70741]]

therefore provides shareholders with some information about the risks 
of their fund investment. Moreover, the line graph presentation may 
help investors understand the general benefits of long-term investments 
(e.g., compound interest). We recognize potential critiques that the 
line graph may not show the variability of a fund's returns as clearly 
as certain other presentations (such as the bar chart we require in 
fund prospectuses that shows annual total returns as a percentage of an 
investment).\193\ However, given the other benefits of the line graph--
particularly that it presents performance in dollar terms that may be 
easier for some shareholders to assess--we are proposing to retain the 
line graph presentation.
---------------------------------------------------------------------------

    \187\ See Item 27(b)(7)(ii)(A) of Form N-1A; proposed Item 
27A(b)(2)(A).
    \188\ An ``appropriate broad-based securities market index'' is 
one that is administered by an organization that is not an 
affiliated person of the fund, its investment adviser, or principal 
underwriter, unless the index is widely recognized and used. See 
Instruction 5 to Item 27(b)(7)(ii) of current Form N-1A; Instruction 
6 to proposed Item 27A(d)(2) of Form N-1A.
    \189\ See MDFP Adopting Release, supra footnote 180, at 
paragraph accompanying n.17.
    \190\ See Instruction 6 to Item 27(b)(7)(ii) of Form N-1A; 
Instruction 7 to proposed Item 27A(d)(2) of Form N-1A.
    \191\ Many investors view performance information as important 
for purposes of monitoring a fund investment. See supra footnote 48 
and accompanying text. With respect to the performance line graph in 
particular, one study found that 55% of surveyed investors ranked 
the line graph and table of fund's performance in the top three most 
important categories of annual report information. Approximately 49% 
of surveyed investors classified this information as ``absolutely 
essential for any investor.'' See 2012 Report on Investor Testing of 
Fund Annual Reports, supra footnote 26, at 49, 51.
    \192\ See infra Section II.B.2.c.iii (discussing total returns 
table). To the extent that a fund chooses to provide tools to help 
shareholders better understand online or mobile presentations of 
annual reports, the ability to customize the investment amount and 
investment time horizon could be areas that lend themselves to add-
on functionality that funds may wish to build into these 
presentations. If a fund provides such tools, the default 
presentation would be required to be the values that the proposed 
Form N-1A requirements prescribe (e.g., an initial investment of 
$10,000 would be the default presentation for the line graph, 
although the tools would allow a shareholder to increase or reduce 
this investment amount). See discussion at infra Section II.B.4 and 
infra footnote 338 and accompanying text.
    \193\ See Item 4(b)(2)(ii) of Form N-1A (requiring a bar chart 
in a fund's prospectus that shows a fund's annual total returns for 
each of the last 10 calendar years (or the life of the fund, if 
shorter). Because the prospectus bar chart shows the percentage of 
returns for each year, it may more clearly show variations in a 
fund's returns than the line graph, which shows the cumulative 
performance of a $10,000 investment. For example, assume a fund 
experienced returns of negative 10% in year 1 and year 9. The bar 
chart would clearly show a negative 10% return in each of these 
years. However, in the line graph presentation, the negative 10% 
return in year 1 could appear as a much smaller change than a 
negative 10% return in year 9 (e.g., a $1,000 decrease on a $10,000 
investment in year 1 versus, for example, a $3,000 decrease in year 
9 if the account value had increased to $30,000 in year 8).
---------------------------------------------------------------------------

    We are proposing to retain the current requirement to present fund 
performance in relation to an appropriate broad-based securities market 
index because we continue to believe that performance disclosure 
without relevant context showing market performance would not provide 
the information that shareholders need to understand how their fund 
performed. For example, performance disclosure without this type of 
context would not give shareholders a sense of how their investments 
might have performed had their money been invested elsewhere. However, 
we request comment on this proposed requirement below.
    We also recognize potential critiques about the use of market 
indexes in presenting performance information. These include critiques 
that index licensing fees can be costly to funds (and, indirectly, to 
fund investors) and that, depending on the index selected, comparing a 
fund's performance against the index in some cases may be less 
effective in helping shareholders understand the fund's performance and 
risks. For example, because funds have discretion to choose an 
appropriate broad-based securities market index, a fund may choose an 
index that it is more likely to outperform to make it look like the 
fund is doing better than the corresponding market (for instance, this 
could occur if a bond fund selects a more conservative bond market 
index). In addition, index providers can experience errors or other 
difficulties in constructing, computing, or maintaining indexes. For 
example, an index that includes companies in emerging and frontier 
markets may experience data or computational errors if there is less 
information publicly available about these companies due to differences 
in regulatory, accounting, auditing, and financial recordkeeping 
standards.\194\
---------------------------------------------------------------------------

    \194\ See SEC Chairman Jay Clayton, PCAOB Chairman William D. 
Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of 
Corporation Finance Director William Hinman, SEC Division of 
Investment Management Director Dalia Blass, Emerging Market 
Investments Entail Significant Disclosure, Financial Reporting and 
Other Risks; Remedies are Limited (Apr. 21, 2020), available at 
https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting.
---------------------------------------------------------------------------

    While we propose largely to maintain the current line graph 
presentation and associated instructions, we are proposing three 
revisions to the instructions associated with the line graph. First, we 
propose to add a new instruction to clarify the scope of required 
disclosure in an annual report that covers multiple classes.\195\ The 
proposed instruction would require a fund to present performance 
information for at least one class in the line graph (in addition to 
the required information for an appropriate broad-based securities 
market index). The proposed instruction provides funds with discretion 
to determine which class or classes to present in the line graph, 
subject to certain limitations that are consistent with existing 
limitations on prospectus performance presentations.\196\
---------------------------------------------------------------------------

    \195\ See Instruction 13(a) to proposed Item 27A(d)(2).
    \196\ See current Instruction 3 to Item 4(b)(2) of Form N-1A 
(allowing a fund to select which class to include (e.g., the oldest 
class, the class with the greatest net assets) if the fund: (1) 
Selects the class with 10 or more years of annual returns if other 
classes have fewer than 10 years of annual returns; (2) selects the 
class with the longest period of annual returns when the classes all 
have fewer than 10 years of returns; and (3) if the fund provides 
annual total returns for a class that is different from the class 
selected for the most immediately preceding period, it explains in a 
footnote the reasons for selecting a different class).
---------------------------------------------------------------------------

    Second, we propose to remove an instruction that allows the line 
graph to cover periods longer than the past 10 fiscal years. We are 
concerned that this current instruction may introduce variability that 
reduces the benefits of the line graph. For example, as the time period 
on the line graph lengthens, any volatility of the fund's returns may 
become harder to identify because the scale of the line graph typically 
would need to cover a wider range of account values (e.g., a scale of 
$0 to $1,000,000 rather than $0 to $30,000) that reflects growth in the 
account. This increase in scale generally would make any particular 
increase or decrease in account value (e.g., an increase or decrease of 
$3,000) harder to identify. Further, this current instruction may 
result in performance presentations that could give rise to unrealistic 
investor expectations. For funds in existence for a long period of time 
(e.g., 40 years), a line graph that shows the performance of a $10,000 
investment at the outset of the fund may not be particularly relevant 
for the average shareholder, who likely has not been invested in the 
fund for such an extended period of time. The line graph also could 
show an ending account value that is substantially higher than the 
value of an initial $10,000 investment at the end of a 10-year period 
(e.g., an ending account value of $1,000,000 versus an ending account 
value of $25,000). While we propose to limit the line graph 
presentation to the fund's last 10 fiscal years, funds may include 
similar presentations covering longer periods of time on their websites 
or in other marketing materials.
    Third, we propose to clarify the definition of an appropriate 
broad-based securities market index. Currently, both a fund's 
prospectus and annual report must compare the fund's performance to an 
``appropriate broad-based securities market index.'' \197\ The 
Commission has described such an index as ``one that provides investors 
with a performance indicator of the overall applicable stock or bond 
markets, as applicable,'' while also stating that a fund would have 
``considerable flexibility in selecting a broad-based index that it 
believes best reflects the market(s) in which it invests.'' \198\ Our 
staff has observed varying practices with respect to the benchmarks 
funds use. Some funds, for example, disclose their performance against 
a benchmark index that may not provide a performance indicator of ``the 
overall applicable stock or bond markets,'' such as an index tied to a 
particular sector, industry, geographic location, asset class, or 
strategy (e.g.,

[[Page 70742]]

growth or value indexes).\199\ While indexes based on narrow segments 
of the market may be useful for comparison purposes, we believe that 
all funds should compare their performance to the overall market.
---------------------------------------------------------------------------

    \197\ See Item 4(b)(2)(iii) and Instruction 5 to Item 27(b)(7) 
of Form N-1A.
    \198\ In 1993, the Commission adopted rules requiring funds to 
compare their performance to a ``broad-based index in order to 
provide investors with a benchmark for evaluating fund performance 
that affords a greater basis for comparability than a narrow index 
would afford.'' See MDFP Adopting Release, supra footnote 180, at 
paragraph preceding nn.19-20, and n.21 and accompanying paragraph.
    \199\ When the Commission adopted the requirement to compare a 
fund's performance against an appropriate broad-based securities 
market index, the Commission clarified, ``An index would not be 
considered to be broad-based if it is composed of securities of 
firms in a particular industry or group of related industries.'' See 
id. at n.21.
---------------------------------------------------------------------------

    Therefore, we are proposing to include language that clarifies that 
a ``broad-based index'' is one that represents the overall applicable 
domestic or international equity or debt markets, as appropriate.\200\ 
This clarifying language would continue to provide a fund with 
flexibility in selecting a broad-based index that the fund believes 
best reflects the market(s) in which it invests. The form instructions 
also would continue to encourage a fund to include narrower indexes 
that reflect the market segments in which the fund invests in its 
performance presentation along with its appropriate broad-based 
securities market index.\201\ If a fund invests in both equity and debt 
securities, such as a balanced fund, the fund may include more than one 
appropriate broad-based securities market index. The fund may also 
include a blended index--one that combines the performance of more than 
one index, such as equity and debt indexes--as an additional index to 
supplement the appropriate broad-based securities market index(es) that 
the fund includes. The proposed amendments to the definition of an 
appropriate broad-based securities market index would affect 
performance presentations in fund prospectuses, as well as fund annual 
reports.\202\
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    \200\ See proposed Instruction 6 to proposed Item 27A(d)(2) of 
Form N-1A.
    \201\ See proposed Instruction 7 to proposed Item 27A(d)(2) of 
Form N-1A.
    \202\ See proposed Item 4(b)(2)(iii) of Form N-1A.
---------------------------------------------------------------------------

    We request comment on the proposed line graph presentation and on 
the use of market indexes more generally in performance presentations, 
including the following:
    45. Should we require the annual report to include the performance 
line graph, as proposed? Why or why not? Should we modify the proposed 
requirements for the line graph? For example, should the line graph 
show returns in terms of percentages instead of dollar values? Are 
there other presentations that would help shareholders better 
understand a fund's performance over the past 10 years (or for the life 
of the fund, if shorter) and the variability of its returns?
    46. We understand that the line graph can be difficult to read in 
black and white and may not fully illustrate volatility in the early 
years displayed in the graph.\203\ Are there other performance 
presentations that could better address these issues than the proposed 
approach and that would retain the benefits of the line graph 
presentation to shareholders? For example, should we replace the line 
graph with something similar to the bar chart required in fund 
prospectuses, which may be easier to read in black and white? \204\ 
Would this alternative presentation better show year-to-year 
volatility? Is the risk/return bar chart easy for shareholders to 
understand, or do shareholders prefer the line graph presentation that 
shows returns in terms of dollars rather than percentages? If we were 
to replace the line graph with something similar to the risk/return bar 
chart, should that alternative presentation present returns in terms of 
dollars instead of percentages?
---------------------------------------------------------------------------

    \203\ See supra footnote 193.
    \204\ See Item 4(b)(2)(ii) of Form N-1A.
---------------------------------------------------------------------------

    47. Should we require the line graph to cover at least one class of 
a fund when a single shareholder report covers multiple classes, as 
proposed? Alternatively, should the graph be limited to one class or 
required to cover more than one class? How can we make sure that the 
line graph remains readable but provides sufficient information to help 
shareholders understand fund performance and risks?
    48. Should we no longer allow funds to provide a line graph that 
covers periods longer than 10 years in their annual reports, as 
proposed? What are the benefits and drawbacks of permitting line graph 
presentations that cover more than 10 years, if a fund's registration 
statement has been effective for more than 10 years? If we were to 
continue to permit the line graph to cover a period of time that is 
longer than 10 years, should we limit the time period that the graph 
may cover in any way (e.g., limit the time period to no more than 20 
years)?
    49. Should we require funds to provide information in shareholder 
reports about the performance of an appropriate broad-based securities 
market index, as proposed? What are the advantages and disadvantages of 
this information? Does information about an appropriate broad-based 
securities market index's performance provide investors with a helpful 
performance indicator of the overall relevant market? \205\ If so, do 
these benefits justify the burdens, including costs to the fund (and 
ultimately its shareholders) of paying one or more index providers to 
allow the fund to include this information in the fund's disclosure? Is 
cost a significant factor for funds when they determine which, and how 
many, indexes to include in their shareholder reports? How are these 
costs assessed (for example, are they assessed on a per-disclosure 
basis or on some other basis)?
---------------------------------------------------------------------------

    \205\ See MDFP Adopting Release, supra footnote 180, at n.21 and 
accompanying text.
---------------------------------------------------------------------------

    50. Should we modify the definition of ``appropriate broad-based 
securities market index,'' as proposed? If not, why not? If so, is the 
proposed definition appropriate, or should we modify it in any way? For 
example, should we permit funds to use blended indexes only as 
secondary indexes, as proposed (as an index could be ``broad-based'' 
only if it represents the overall applicable equity or debt markets), 
or should we permit funds to use these indexes as primary appropriate 
broad-based securities market indexes under certain circumstances? If 
we were to permit this, what if any conditions would be appropriate to 
ensure that the index remains ``broad-based''? For example, should 
there be requirements limiting a fund to the number of indexes that 
could be blended for this purpose (e.g., 2), or the types of indexes 
that could be blended? Similarly, should we modify current requirements 
that permit funds to use non-securities market indexes only as 
secondary indexes, and not as appropriate broad-based securities market 
indexes? Are there concerns with certain funds using blended indexes or 
non-securities market indexes as secondary, rather than primary, 
indexes, such as concerns about investor understanding or costs 
associated with disclosing multiple indexes (e.g., index licensing 
fees)? Do blended or non-securities market indexes provide an 
appropriate point of comparison for an investor to evaluate his or her 
fund's performance? If we were to allow blended indexes or non-
securities market indexes as a primary index, how could we tailor this 
approach to make sure that investors receive a performance indicator of 
the overall applicable market? \206\ Is the proposed definition clear? 
For example, is it clear that an index composed of securities of firms 
in a particular industry or group of related industries would not be 
broad-based?
---------------------------------------------------------------------------

    \206\ See MDFP Adopting Release, supra footnote 180, at n.21 and 
accompanying text.

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[[Page 70743]]

    51. Are there other changes we should make to the definition of 
appropriate broad-based securities market index, or to the framework 
for providing index performance more generally? For example, are there 
ways we could facilitate an investor's ability to understand the 
relevance of an appropriate broad-based securities market index, while 
maintaining funds' flexibility to select an appropriate and cost-
effective benchmark? \207\ As another example, are there ways we could 
address concerns that some funds may choose an index for the purpose of 
making the fund's performance look better? Are there other instructions 
or guidance we could provide regarding the selection of an appropriate 
broad-based securities market index?
---------------------------------------------------------------------------

    \207\ See, e.g., Fowler Comment Letter (``Compare to a market 
measure I understand, and the asset class the fund holds.''); Ewing 
Comment Letter (``Compare against a market measure I know, like the 
S&P 500, not some obscure thing I never heard of.''); Frank W. 
Comment Letter; see also ICI Comment Letter I (requesting that the 
Commission be mindful of, and sensitive to, the fees and costs 
associated with including index information in a fund's prospectus).
---------------------------------------------------------------------------

    52. We are proposing to amend the definition of appropriate broad-
based securities market index for purposes of Form N-1A. Should the 
same amended definition apply to fund prospectuses and fund shareholder 
reports, as proposed? If not, why not? Should we make corresponding 
amendments to the definition of appropriate broad-based securities 
market index in Form N-2 with respect to MDFP requirements for 
registered closed-end funds? \208\ Why or why not?
---------------------------------------------------------------------------

    \208\ See Instruction 4.g(2)(F) to Item 24 of Form N-2, as 
amended by Closed-End Fund Offering Reform Adopting Release, supra 
footnote 128.
---------------------------------------------------------------------------

    53. Should funds have discretion to provide information in 
shareholder reports about the performance of more narrowly based 
indexes that reflect the market sectors in which the fund invests, as 
proposed? Is the information these indexes provide helpful to 
shareholders, or does additional index performance information make the 
disclosure more difficult for shareholders to understand?
    54. Should index providers be required to meet certain governance, 
due diligence, or other similar standards if an index's performance 
will be included in fund disclosure? Why or why not? If we imposed any 
such requirement, how would funds expect to determine whether those 
standards have been met?
    55. Are there alternative measures that we should permit or require 
funds to use to provide investors with comparative information about 
market performance, instead of an appropriate broad-based securities 
market index or more narrowly based indexes that reflect the market 
sectors in which the fund invests? If so, what alternative measures 
(e.g., the rate of inflation or a risk free rate), and why are those 
measures appropriate and preferable to the use of indexes? \209\
---------------------------------------------------------------------------

    \209\ For example, some market participants consider the 10-year 
U.S. Treasury note rate as a risk-free rate.
---------------------------------------------------------------------------

iii. Performance Table
    We are proposing to retain the current requirement that funds' 
annual reports include a table presenting average annual total returns 
for the past 1-, 5-, and 10-year periods, although we are proposing 
amendments to require three pieces of additional information. 
Specifically, the proposal would require that the table include: (1) 
The average annual total returns of an appropriate broad-based 
securities market index; (2) the fund's average annual total returns 
without sales charges (in addition to current disclosure that shows 
returns reflecting applicable sales charges); and (3) average annual 
total returns for each class that the report covers, in each case for 
the past 1-, 5-, and 10-year periods.\210\ The average annual total 
returns table is designed to assist shareholders in comparing the 
performance of different funds.\211\ We also believe that the table 
complements the line graph to help shareholders evaluate a fund's 
performance and risks.
---------------------------------------------------------------------------

    \210\ See Item 27(b)(7)(ii)(B) of Form N-1A; proposed Item 
27A(d)(2)(ii) of Form N-1A. Item 27(b)(7)(ii)(B) of Form N-1A 
currently requires the following:
    ``In a table placed within or next to the graph, provide the 
Fund's average annual total returns for the 1-, 5-, and 10-year 
periods as of the end of the last day of the most recent fiscal year 
(or for the life of the Fund, if shorter), but only for periods 
subsequent to the effective date of the Fund's registration 
statement. Average annual total returns should be computed in 
accordance with Item 26(b)(1).''
    \211\ See MDFP Adopting Release, supra footnote 180, at 
paragraph accompanying n.26. We recognize, however, that the table 
has certain limitations with respect to fund comparisons because it 
reflects fiscal year data and funds can have different fiscal year 
periods.
---------------------------------------------------------------------------

    The amendments we are proposing to the average annual total returns 
table are designed, in part, to better conform the table to a similar 
presentation that funds include in their prospectuses. Like the current 
prospectus disclosure regarding average annual total returns, we 
propose to require funds to include in the shareholder report table 
information about the average annual total returns of an appropriate 
broad-based securities market index.\212\ A fund would provide the 
index's returns for the same periods as its own returns (e.g., 1-, 5-, 
and 10-year periods). We understand that many funds already provide 
this information in their annual reports. We believe that requiring all 
funds to provide this information would help shareholders better 
understand a fund's performance and risks in the context of the broader 
market.\213\ We also believe that proposing this change would be 
beneficial because fund shareholders may no longer receive annual 
prospectus updates as a result of our proposed amendments to the 
prospectus delivery framework for existing fund shareholders.\214\ 
Consistent with the current prospectus performance presentation, the 
proposed amendments would permit funds to include returns information 
for one or more other relevant indexes, such as a more narrowly based 
index that reflects the market sectors in which the fund invests.\215\ 
We are proposing to permit funds to include more than one index in the 
table because we understand that in some cases this approach may help 
shareholders understand how the fund's performance compared to, for 
example, performance of both the broader market and the market sector 
in which the fund invests. These proposed amendments are designed to 
help shareholders more easily evaluate a fund's performance and risks 
relative to the market and to better align the information in the table 
with the current line graph presentation so a shareholder has 
contextual information to help assess both year-over-year returns and 
average annual returns over set periods. At the same time, we recognize 
concerns about the use of indexes in performance presentations, and we 
are seeking comment on our proposed approach.\216\
---------------------------------------------------------------------------

    \212\ See Item 4(b)(2)(iii) of Form N-1A (requiring that a 
fund's prospectus include a table showing its average annual total 
returns for 1-, 5-, and 10-calendar year periods, along with the 
returns of an appropriate broad-based securities market index for 
the same periods). The proposed amendments to the performance table 
would use the same amended definition of an appropriate broad-based 
securities market index as the proposed line graph presentation. See 
supra paragraph accompanying footnote 197.
    \213\ See 1998 Form N-1A Prospectus Amendments, supra footnote 
151, at text accompanying n.69 (discussing the purpose of the 
required prospectus disclosure regarding the average annual total 
returns of an appropriate broad-based securities market index).
    \214\ See infra Section II.E.
    \215\ See Instruction 2(b) to Item 4(b)(2) of current Form N-1A; 
Instruction 2(b) to proposed Item 4(b)(2) of Form N-1A (amending the 
cross reference to the description of other more narrowly based 
indexes from Instruction 6 to current Item 27(b)(7) to Instruction 7 
to proposed Item 27A(d)(2)); Instruction 7 to proposed Item 
27A(d)(2) of Form N-1A.
    \216\ See supra Section II.B.2.c.ii.

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[[Page 70744]]

    We further propose to modify the average annual total returns table 
to require funds to separately provide the average annual total returns 
with and without sales charges, as applicable.\217\ Currently, the 
table is only required to include average annual total returns that 
reflect sales charges.\218\ We believe comparative information about 
average annual total returns with and without sales charges may help 
shareholders better understand the impact of sales charges on the 
returns of their investments. We also believe that additional 
information about average annual total returns without sales charges 
may help shareholders better compare the fund's returns to that of a 
relevant index.\219\
---------------------------------------------------------------------------

    \217\ See proposed Item 27A(d)(2)(ii) of Form N-1A. One 
commenter on the Fund Investor Experience RFC prepared a mock 
summary shareholder report that included average annual total 
returns shown with and without sales charges, as applicable. See ICI 
Comment Letter I. Under the proposal, a fund that does not impose 
sales charges would only provide a single set of average annual 
total returns figures (i.e., returns without sales charges).
    \218\ See Item 27(b)(7)(ii)(B) of Form N-1A (requiring average 
annual total returns computed in accordance with Item 26(b)(1), 
which reflects sales charges in the calculation of returns). In 
connection with the proposed amendment, we propose to add a new 
computation instruction to explain that funds should calculate 
average annual total returns without sales charges in accordance 
with Item 26(b)(1) of Form N-1A, except the fund should not deduct 
sales charges as otherwise described in the instructions to that 
item. To provide a fund's 1-year annual total return without sales 
charges, a fund would use the same 1-year total return figure 
reflected in its most recent audited financial highlights. See 
Instruction 5 to proposed Item 27A(d)(2) of Form N-1A.
    \219\ Further, the proposed requirement to present the fund's 
annual total return without sales charges for the last fiscal year 
would align with audited information shareholders currently receive 
in the financial highlights section of shareholder reports. See Item 
27(b)(2) of Form N-1A; Instruction 3 to Item 13(a) of Form N-1A. We 
understand that some shareholders review financial highlights 
information when assessing and monitoring their fund investments. 
See, e.g., supra footnote 52.
---------------------------------------------------------------------------

    We also propose to add a new instruction for the average annual 
total returns table to require a fund to provide average annual total 
returns information for each class the shareholder report covers.\220\ 
This is consistent with the prospectus average annual total returns 
table, which must reflect average annual total returns for every class 
a prospectus covers.\221\ We believe it is important for shareholders 
to receive performance information that directly relates to the class 
in which they invest. Because each class can have different expenses 
that affect the class's returns, performance information for each class 
would allow a shareholder to understand the performance of his or her 
investment better and to compare performance among the classes the 
report covers.\222\ While the proposed shareholder report expense 
disclosure would include class-specific performance information for the 
reporting period, the average annual total returns table would provide 
class-specific performance information over a longer time period. 
Further, although the line graph in the annual report similarly 
provides longer-term performance information, it is not currently 
required to include information for each class (nor are we proposing to 
require this, because we recognize that additional lines in the graph 
for each class may make the graph difficult to read). Additionally, 
under the proposal, shareholders generally may not receive annual 
prospectus updates, which include class-specific returns, and would 
instead receive prompt notices of certain material changes that 
generally would not include this information. As a result of these 
considerations, we believe the average annual total returns table in 
the shareholder report should include information for each class the 
report includes.
---------------------------------------------------------------------------

    \220\ See Instruction 13(b) to proposed Item 27A(d)(2) of Form 
N-1A.
    \221\ See Instruction 3(c)(i) to Item 4(b)(2) of Form N-1A.
    \222\ See 1998 Form N-1A Prospectus Amendments, supra footnote 
213, at text accompanying n.66.
---------------------------------------------------------------------------

    Currently, funds must include a statement accompanying the line 
graph and table to the effect that past performance does not predict 
future performance, and that the line graph and table presentations do 
not reflect taxes that a shareholder would pay on fund distributions or 
redemptions.\223\ We propose to simplify the statement about past 
performance. Specifically, under the proposed amendments, a fund would 
be required to include a statement to the effect that the fund's past 
performance is not a good predictor of how the fund will perform in the 
future.\224\ We propose to require funds to use text features to make 
this statement noticeable and prominent through, for example, graphics, 
larger font size, or different colors or font styles.\225\ Under the 
proposal, funds would continue to be required to state that the 
disclosed performance information does not reflect the deduction of 
taxes that a shareholder would pay on fund distributions or the 
redemption of fund shares to alert investors to these tax 
consequences.\226\
---------------------------------------------------------------------------

    \223\ See Item 27(b)(7)(ii)(B) of Form N-1A.
    \224\ See proposed Item 27A(d)(2)(iii)(A) of Form N-1A. We also 
propose to make a conforming change to similar language that must 
appear in the prospectus. See proposed amendments to Item 4(b)(2) of 
Form N-1A.
    \225\ See proposed Item 27A(d)(2)(iii)(A) of Form N-1A.
    \226\ See proposed Item 27A(d)(2)(iii)(B) of Form N-1A.
---------------------------------------------------------------------------

    Additionally, we propose to add a new instruction allowing funds to 
add brief additional disclosure that would contextualize the line graph 
and average annual returns table they include in their shareholder 
reports. Specifically, the proposed instruction provides that if a 
material change occurred to the fund during the relevant performance 
period, such as a change in investment adviser or a change to the 
fund's investment strategies, the fund may include a brief legend or 
footnote to describe the material change and when it occurred.\227\ We 
believe this additional disclosure could help shareholders understand 
potential changes in fund performance related to material fund changes 
that have occurred during the relevant performance period.\228\ Under 
the proposal, funds would have discretion to determine when to disclose 
information about a prior material change to a fund in connection with 
its performance presentation. We are proposing a discretionary 
approach, instead of requiring funds to include this disclosure for all 
material changes, because we recognize that some material changes to a 
fund may not affect a fund's performance, or may have only an 
insignificant effect on performance. Although a fund generally would be 
able to use discretion to determine when to disclose a prior material 
change in connection with its performance presentation, a fund would 
need to disclose information about such a change if, absent that 
disclosure, the fund's performance presentation would otherwise be 
misleading.\229\
---------------------------------------------------------------------------

    \227\ See Instruction 14 to proposed Item 27A(d)(2). In 
addition, consistent with current Form N-1A requirements, if a fund 
uses an index in a shareholder report that is different from the 
index used for the immediately preceding reporting period, the later 
report would need to explain the reason(s) for the change and 
disclose the returns of both the new and former indexes. See 
Instruction 7 to Item 27(b)(7)(ii) of Form N-1A; Instruction 8 to 
proposed Item 27A(d)(2) of Form N-1A.
    \228\ See Blanchard Comment Letter (suggesting that identifying 
fund changes that may have changed a fund's performance would 
improve current fund performance presentations).
    \229\ See, e.g., rule 8b-20 under the Investment Company Act [17 
CFR 270.8b-20].
---------------------------------------------------------------------------

    While we believe it is beneficial for shareholders to receive 
information about a fund's performance in the annual report each year, 
we understand that funds provide more current, ongoing performance 
information through other mechanisms, such as their websites. We are 
proposing to require funds that provide updated performance

[[Page 70745]]

information through widely accessible mechanisms, such as fund 
websites, to include a statement in the shareholder report directing 
shareholders to where they can find this information.\230\ If a fund 
were to include such a statement, it also would be required to provide 
a means of facilitating access to the updated performance information, 
including, for example, a hyperlink to where the information may be 
found if the shareholder report is provided electronically or a URL 
address or QR code if the shareholder report is delivered in paper 
format.\231\
---------------------------------------------------------------------------

    \230\ See Instruction 15 to proposed Item 27A(d)(2).
    \231\ See Instruction 9 to proposed Item 27A(a); see also infra 
footnotes 342 and 343 and accompanying paragraph. Consistent with 
this instruction, a fund could provide a direct link to the updated 
performance information or a link to a central site that provides a 
direct link to the fund's updated performance information.
---------------------------------------------------------------------------

    We request comment on the proposed average annual total returns 
table and associated amendments, including the following:
    56. Should the annual report include the average annual total 
returns table, as proposed? Why or why not? Should we modify the 
proposed requirements for the table? If so, how?
    57. Should we require funds to include the average annual total 
returns of an appropriate broad-based securities market index and allow 
funds to include the returns of additional indexes in the average 
annual total returns table, as proposed, and as funds currently do in 
their prospectuses? Should we make any changes to this aspect of the 
proposal? Please explain.
    58. Should we require funds to include the average annual total 
returns of each class that the annual report covers, as proposed, and 
as funds currently do in their prospectuses? Should we modify this 
aspect of the proposal? For example, should we only require average 
annual total returns for one class or for a set number of classes? If 
so, should we provide funds with flexibility for determining which 
class to disclose in the average annual total returns table, similar to 
the proposed instruction for the line graph, or should we take a 
different approach? \232\ Are there ways to improve the design or 
presentation of the table, particularly when covering multiple classes?
---------------------------------------------------------------------------

    \232\ See supra footnote 196 and accompanying text.
---------------------------------------------------------------------------

    59. Should we modify the average annual total returns table to 
require funds to separately provide the average annual total returns 
with and without sales charges, as proposed? Would requiring 
information about average annual total returns without sales charges be 
helpful to shareholders, or would this information make the table too 
confusing or complex? Have we provided sufficient calculation 
instructions for funds to determine average annual total returns 
without sales charges? If not, what additional information do funds 
need for purposes of this calculation?
    60. Should we, as proposed, modify the statement that currently 
must accompany the line graph and table indicating that past 
performance does not predict future performance and retain the 
statement that the line graph and table presentations do not reflect 
taxes that a shareholder would pay on fund distributions or 
redemptions? Are there other ways we could make the statement about 
past performance more understandable for shareholders? Is the statement 
clarifying that performance does not reflect the deduction of taxes 
helpful to shareholders, or is it unnecessary boilerplate? If it is not 
helpful to shareholders, should we modify or remove this language?
    61. Should we, as proposed, allow a fund to include a brief legend 
or footnote to its line graph and average annual total returns table to 
describe a material change, such as a change in investment adviser or a 
change to the fund's investment strategies, that occurred to the fund 
during the relevant period? Would this provision provide shareholders 
with useful contextual information? If so, should we make the 
disclosure mandatory? If not, why not? Are there ways we could improve 
the utility or design of this provision? For example, are there ways we 
should modify the provision to limit any risk that funds might attempt 
to justify fund losses by referring to an unrelated change to the fund? 
Is the meaning of ``material change'' in this provision sufficiently 
clear, or do funds need more guidance to help them determine whether a 
change is material for purposes of this provision? Should we modify the 
standard for determining the types of changes that funds can disclose 
in connection with their shareholder report performance presentations? 
For example, rather than refer to material changes, should we identify 
specific types of changes that funds can disclose? If so, what types of 
changes should the provision cover (e.g., should it be limited to 
changes in investment advisers and changes in principal investment 
strategies, or should it include other changes)? If we retain a 
principles-based standard, should we use a different standard than 
material changes (e.g., significant changes)? Should we only allow a 
``brief'' legend or footnote, as proposed?
    62. Should we require funds that provide updated performance 
information through widely accessible mechanisms, such as fund 
websites, to include information in their annual reports directing 
shareholders to where they can find updated performance information, as 
proposed? Should we modify or clarify this requirement in any way? 
Should we instead permit, but not require, a fund to include this 
information in its annual report? As proposed, should we require funds 
that provide updated performance information on their websites to 
inform shareholders of this updated information in their annual 
shareholders reports and to direct shareholders to where the updated 
performance information is located? Should we require all funds to 
provide updated performance information on their websites? If so, what 
performance information? How often should it be updated?
iv. Other MDFP Amendments
    We propose to simplify the current requirement that a fund discuss 
in its annual report the effect of any policy or practice of 
maintaining a specified level of distribution to shareholders (a 
``stable distribution policy'') 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.\233\ The current disclosure requirement is 
meant to give shareholders a clearer picture of whether a fund had to 
distribute capital, as well as profits, to maintain its distribution 
rate.\234\ Under the proposed amendments, a fund that has a stable 
distribution policy and that was unable to maintain the specified level 
during the past fiscal year would need to disclose this.\235\ We also 
propose to maintain disclosure concerning distributions that resulted 
in returns of capital.\236\ By modifying this provision to focus on 
circumstances when a fund was unable to meet the specified level of 
distribution in its stable distribution policy or had distributions 
that resulted in returns of capital, the proposal is designed to result 
in disclosure that is more meaningful to shareholders than

[[Page 70746]]

the current requirement. In particular, we believe that the proposed 
disclosure about a fund's inability to maintain a specified level of 
distribution would be important to shareholders in funds that have 
stable distribution policies because they typically expect to receive 
regular distributions. As a result, the fund's inability to meet the 
specified level of distributions may affect a shareholder's investment 
decision (e.g., whether to continue to hold the fund). In addition, we 
believe that simplifying the language of this requirement, as proposed, 
could result in disclosure that is more understandable to shareholders 
because funds tend to use language in their disclosures that tracks the 
language of Commission form requirements. As most funds do not have 
stable distribution policies, we do not anticipate that this proposed 
disclosure requirement would add to the length of most shareholder 
reports.
---------------------------------------------------------------------------

    \233\ See Item 27(b)(7)(iii) of Form N-1A (requiring a fund to 
``[d]iscuss the effect of any policy or practice of maintaining a 
specified level of distributions to shareholders on the Fund's 
investment strategies and per share net asset value during the 
fiscal year [as well as] the extent to which the Fund's distribution 
policy resulted in distributions of capital'').
    \234\ See MDFP Adopting Release, supra footnote 180, at Section 
I.C.4.
    \235\ See proposed Item 27A(d)(3) of Form N-1A.
    \236\ See id.
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    The Commission recently adopted amendments to limit the requirement 
that ETFs provide premium and discount information in their annual 
reports to only those ETFs that do not provide premium and discount 
disclosure on their websites in accordance with 17 CFR 270.6c-11 
[Investment Company Act rule 6c-11].\237\ We are not proposing any 
amendments to this annual report requirement beyond a technical 
amendment to clarify that it only applies to ETFs.\238\ We believe that 
most ETFs will provide premium and discount information on their 
websites instead of in their annual reports.\239\
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    \237\ See Adopting Release, supra footnote 75; Item 27(b)(7)(iv) 
of Form N-1A.
    \238\ See proposed Item 27A(d)(4) of Form N-1A.
    \239\ See ETF Adopting Release, supra footnote 75, at paragraph 
accompanying n.499 (stating that the Commission believes that most 
ETFs not relying on rule 6c-11 will choose to comply with the 
website disclosure requirements in that rule).
---------------------------------------------------------------------------

    We request comment on the proposed amendments to the MDFP 
disclosure regarding stable distribution policies and on the ETF 
premium and discount information that would remain in the annual 
report, as well as on MDFP disclosure more generally, including:
    63. Should we modify the requirement that funds discuss the effects 
of any stable distribution policy under current Item 27(b)(7)(iii) in 
their annual reports, as proposed? Would the proposed requirement 
provide meaningful information to shareholders that is not otherwise 
available? Should we instead remove any specific disclosure 
requirements related to stable distribution policies? If we do not 
require this type of information in annual reports, should we require 
funds to make it available elsewhere?
    64. Should we continue to require ETFs that do not provide premium 
and discount information on their websites in accordance with 
Investment Company Act rule 6c-11 to include premium and discount 
information in their annual reports? If not, where should they disclose 
this information?
    65. Money market funds currently are not required to provide MDFP 
disclosure in their annual reports because the Commission has 
previously noted that the problems that MDFP disclosure seek to address 
with respect to investor understanding of performance do not appear to 
exist with respect to money market funds.\240\ The proposal similarly 
would not require money market funds to provide MDFP disclosure. Should 
we require some or all money market funds to provide performance 
information in their shareholder reports? For example, should we 
require money market funds to include performance information similar 
to what they must disclose in their prospectuses (e.g., 7-day yield, 
average annual total returns table, and performance bar chart) or 
similar to what other funds must disclose in their annual reports 
(e.g., performance line graph)? If so, should these requirements apply 
to all money market funds or to a subset of money market funds, such as 
only money market funds that rely on proposed rule 498B (i.e., whose 
shareholders receive prompt notice of certain material changes to the 
fund, with online access to the prospectus)?
---------------------------------------------------------------------------

    \240\ See MDFP Adopting Release, supra footnote 180, at Section 
I.C.5 (noting, however, that money market funds retain the option of 
providing investors with a discussion of their performance, 
including illustrative line graphs).
---------------------------------------------------------------------------

    66. Are there other changes we should make to current MDFP 
disclosure requirements? Please explain.
d. Fund Statistics
    We are proposing to require a fund to disclose certain fund 
statistics in its annual report, including the fund's: (1) Net assets, 
(2) total number of portfolio holdings, and (3) portfolio turnover 
rate. We are also proposing to permit a fund to disclose any additional 
statistics that the fund believes would help shareholders better 
understand the fund's activities and operation during the reporting 
period (e.g., tracking error, maturity, duration, average credit 
quality, or yield).\241\ Based on information we received in response 
to the recent Fund Investor Experience RFC, it is our understanding 
that investors prefer succinct fund disclosures in graphical format, 
and they are less likely to review information presented in long 
narratives.\242\ We believe that permitting funds to provide key fund 
statistics in a user-friendly format could enable funds to provide more 
meaningful information to investors, and encourage investors to focus 
on the more significant factors in evaluating the fund's operations.
---------------------------------------------------------------------------

    \241\ See proposed Item 27A(e).
    \242\ See Broadridge Comment Letter I (commenter conducted 
survey showing that investors are more likely to review fund 
disclosures if they are delivered in a summary format); see also ICI 
Comment Letter I (encouraging the Commission to allow funds to 
produce summary shareholder reports that are succinct and 
informative).
---------------------------------------------------------------------------

    We are proposing to require funds to include their net assets as of 
the end of the reporting period because we believe this disclosure 
would provide important context for other required information in the 
shareholder report.\243\ Under our proposal, funds would be required to 
provide a graphical presentation of holdings.\244\ A fund would have 
the flexibility to provide this graphical presentation either as a 
percentage of the fund's net asset value, total investments, or 
investment exposures.\245\ We believe that knowing the fund's net 
assets would allow a shareholder to appreciate better the impact of 
each holding on the overall performance of the fund.
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    \243\ Because the measure of a fund's net assets is included in 
the fund's audited financial statements, the fund would be required 
to use or derive such statistic from the fund's audited financial 
statements. See proposed Instruction 3 to proposed Item 27A(e).
     If a fund provides tools to help shareholders better understand 
online or mobile presentations of annual reports, it may wish to 
provide the ability for shareholders to refer to updated net assets 
when reviewing these presentations, so they are seeing current 
information. Because the measure of a fund's net assets that would 
appear in the annual report would be derived from the fund's audited 
financial statements, the ability to update this statistic (which 
updates would presumably not be based on audited financial 
statements) would have to be an add-on functionality, and not a 
replacement for the end-of-period statistic that would appear on 
online presentations. For example, a fund could include a pop-up box 
attached to the fund's net assets information showing the fund's net 
assets as of a more recent specified date. See discussion at infra 
Section II.B.4; see also infra footnote 338 and accompanying text 
(discussing the proposed instruction requiring that the default 
presentation that any electronically presented annual report uses 
must be the value that the applicable form requirement prescribes).
    \244\ See infra footnote 259. Because we are proposing to 
require that the fund statistics section appear adjacent to the 
graphical representation of holdings in the annual report, the net 
assets statistic would provide shareholders with relevant context 
for the holdings information that we believe would be helpful to 
shareholders. See infra Section II.B.3.
    \245\ See infra text accompanying footnote 264.
---------------------------------------------------------------------------

    Similarly, we are proposing to require funds to include the total 
number of portfolio holdings as of the end of the

[[Page 70747]]

reporting period.\246\ Investors historically have viewed information 
about a fund's holdings as important to their investment decision 
process.\247\ Many funds currently voluntarily provide the number of 
fund holdings on their websites, but Commission rules do not require 
them to do so. We believe that, together with the graphical holdings 
information and net assets, knowing the number of a fund's holdings 
could help investor to understand better the fund's diversification, 
which could in turn provide insight into the fund's susceptibility to 
market fluctuations.\248\ Accordingly, to help ensure that an investor 
has access to information about the total number of fund holdings and 
to help contextualize other information that funds disclose, we are 
proposing that funds include that information as of the end of the 
reporting period in their annual reports.
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    \246\ Because all portfolio holdings are included in a fund's 
audited financial statements, the fund would be required to use or 
derive this statistic from the fund's audited financial statements. 
See proposed Instruction 3 to proposed Item 27A(e) of Form N-1A; see 
also supra footnote 243 (discussing the use of online tools to 
supplement, rather than replace, statistics that are derived from a 
fund's audited financial statements).
    \247\ See e.g., 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 9 (noting that 45% of investors 
deemed a fund's portfolio holdings as ``absolutely essential 
information to any investor'').
    \248\ See, e.g. Morningstar's Investing Glossary, available at 
https://www.morningstar.com/InvGlossary/number_of_holdings_in_portfolio.aspx (noting that number of holdings 
information is meant to be a measure of portfolio risk because the 
lower the number of portfolio holdings, ``the more concentrated the 
fund is in a few companies or issues, and the more the fund is 
susceptible to the market fluctuations in these few holdings''). But 
see Concentrate on Concentration, FINRA Weekly Update, available at 
https://www.finra.org/investors/learn-to-invest/advanced-investing/concentration-risk (stating that a portfolio can be subject to 
concentration risk even when assets are invested in many different 
holdings).
---------------------------------------------------------------------------

    Finally, we are proposing to require funds to include their 
portfolio turnover rate as of the end of the reporting period.\249\ A 
higher portfolio turnover rate generally indicates higher transaction 
costs and may result in higher taxes.\250\ Therefore, we believe that a 
fund's portfolio turnover rate may provide shareholders with a more 
complete view of the costs associated with investing in the fund.
---------------------------------------------------------------------------

    \249\ Because a fund's portfolio turnover is included in the 
fund's audited financial highlights, the fund would be required to 
use or derive the portfolio turnover from the fund's audited 
financial highlights. See Instruction 3 to proposed Item 27A(e); see 
also supra footnote 243 (discussing the use of online tools to 
supplement, rather than replace, statistics that are derived from a 
fund's audited financial statements).
    \250\ See supra footnote 558.
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    Besides requiring funds to include their net assets, number of fund 
holdings, and portfolio turnover rate, we are providing flexibility for 
funds to disclose additional fund statistics if they are reasonably 
related to a fund's investment strategy. In general, funds would be 
limited in their ability to include information in their annual reports 
beyond that which Form N-1A would specifically permit or require.\251\ 
We are proposing an exception to this limitation because these 
additional fund statistics may help shareholders better understand the 
fund's activities and operation during its most recent fiscal year. 
Permitting funds to provide key fund statistics that are tailored to 
the fund's investment strategy could enable them to provide information 
that is meaningful to their specific shareholder base. The proposed 
flexibility to include additional ``statistics''--a term that we 
believe conveys a brief presentation of quantitative measures--is 
designed to provide information in a concise format that would assist 
shareholders in evaluating significant factors that reflect the fund's 
performance and operations. For example, a fund that has a stated 
investment objective of maintaining returns that correspond to the 
returns of a securities index might consider including its tracking 
error as an additional statistic. Similarly, a fund that invests 
primarily in fixed-income bonds might consider including statistics 
such as maturity, duration, average credit quality, or yield. In each 
case, these additional statistics would be reasonably related to the 
relevant fund's investment strategy and would help shareholders better 
understand the fund's activities and operations during the reporting 
period.
---------------------------------------------------------------------------

    \251\ For instance, funds have the ability to select the most 
appropriate categories when preparing their graphical representation 
of holdings. See proposed Item 27A(f) of Form N-1A.
---------------------------------------------------------------------------

    We are proposing several instructions that are designed to help 
shareholders more easily digest any additional statistics that funds 
would disclose in their annual reports, and to provide context for 
understanding the disclosed statistics. First, if a fund provides a 
statistic that is disclosed elsewhere on Form N-1A, the fund must 
follow any associated instructions describing the calculation method 
for the relevant statistic.\252\ Second, we are proposing an 
instruction that would encourage a fund to use tables, bullet lists, or 
other graphics or text features to disclose the statistics.\253\ This 
instruction is designed to promote the presentation of fund statistics 
in a useful format.\254\ Third, if a statistic is included in, or could 
be derived from, a fund's financial statements or financial highlights, 
we are proposing an instruction that would require a fund to use or 
derive such statistic from the fund's most recent financial statements 
or financial highlights.\255\ Fourth, we are proposing an instruction 
that would allow a fund to describe briefly the significance or 
limitations of any disclosed statistics in a parenthetical, footnote, 
or similar presentation.\256\ Finally, if a fund chooses to include 
additional statistics, we are proposing an instruction that would 
require additional statistics to be reasonably related to the fund's 
investment strategy.\257\ These proposed instructions are, in the 
aggregate, designed to help promote the integrity and consistency of 
the information that funds may choose to provide, while allowing funds 
to tailor their disclosure to increase its usefulness to investors.
---------------------------------------------------------------------------

    \252\ See Instruction 1 to proposed Item 27A(e). For example, a 
fund that chooses to disclose its yield as an additional statistic 
would have to calculate the yield pursuant to the requirements of 
Item 26(b)(2) of Form N-1A.
    \253\ We are not proposing to require such formatting to 
maintain flexibility and allow a fund to tailor the format of its 
disclosure to its unique characteristics.
    \254\ See Instruction 2 to proposed Item 27A(e).
    \255\ See proposed Instruction 3 to proposed Item 27A(e) of Form 
N-1A.
    \256\ See proposed Instruction 4 to proposed Item 27A(e). For 
example, a fund that chooses to disclose its tracking error may wish 
to include additional disclosure explaining that tracking error is 
the difference between a mutual fund portfolio's returns and its 
benchmark index, calculated on a scale between 0 and 1.0--with 1.0 
representing perfect correlation.
    \257\ See proposed Instruction 5 to proposed Item 27A(e). This 
proposed instruction is designed to limit the types of statistics a 
fund includes only to those that are most pertinent in light of a 
fund's investment strategy, and to prevent disclosure ``creep.''
---------------------------------------------------------------------------

    We seek comment on our proposal to require funds to provide 
important fund statistical information in the annual report and 
specifically on the following issues:
    67. Should we require a fund to include its size, in terms of its 
net assets, in the annual report, as proposed? Should we instead 
permit, but not require, a fund to include its net assets? Why or why 
not? What informational benefits would requiring this information in 
the annual report serve? For example, would knowing a fund's net assets 
provide shareholders with useful context for evaluating the required 
graphical representation of holdings that also would appear in the 
annual report?
    68. Are there any additional statistics we should require funds to 
disclose that would provide information about their size, or the change 
in their size over

[[Page 70748]]

time? For example, should we require a fund to provide the change in 
the fund's net asset value from one year to another over a five-year 
period, as is currently required in the financial highlights? Why or 
why not?
    69. Should we require a fund to include the total number of 
portfolio holdings in the annual report, as proposed? Should we instead 
permit, but not require, funds to include total number of portfolio 
holdings? Why or why not? What informational benefits would requiring 
this information in the annual report serve? For example, would knowing 
this information help shareholders evaluate other aspects of the fund's 
investment strategy, risks, and/or performance? Or, would this 
information be misleading to investors under certain circumstances (for 
example, if a fund has over 1,000 holdings but the majority of the 
fund's assets are invested in only 10-20 of those holdings)? Does the 
total number of portfolio holdings information serve as a useful 
statistic for a shareholder to help understand a fund's diversification 
and/or susceptibility to market fluctuations? Is the total number of 
holdings information a useful supplement to the graphical 
representation of holdings?
    70. Should we require a fund to include its portfolio turnover rate 
in the annual report, as proposed? Should we instead permit, but not 
require, funds to include portfolio turnover rate? Why or why not? What 
informational benefits would requiring this information in the annual 
report serve? For example, does the portfolio turnover rate information 
serve as a useful statistic for a shareholder to understand the costs 
associated with investing in the fund?
    71. Are there any other statistics that we should require funds to 
disclose in their annual reports? For example, should we require a fund 
to include information regarding its annual total return for each of 
the preceding five years or the fund's portfolio turnover rate, as is 
currently required in the financial highlights?
    72. Is it appropriate to allow a fund, as proposed, to include 
additional statistics that are reasonably related to the fund's 
investment strategy and that the fund believes would help shareholders 
better understand the fund's activities and operations during the 
reporting period? Why or why not? Should the Commission provide 
additional guidance on how to determine whether a statistic is 
reasonably related to the fund's investment strategy? Would allowing 
funds to include additional fund statistics in their shareholder 
reports result in disclosure that may be overly long, complex, 
technical and/or duplicative? The proposal would permit funds to 
include additional fund statistics online (for example, in online tools 
that funds may overlay onto the shareholder reports that they provide 
on their websites), but not in the version of the report that 
shareholders receive in paper format.\258\ Is this approach 
appropriate? Why or why not?
---------------------------------------------------------------------------

    \258\ See infra Section II.B.4.
---------------------------------------------------------------------------

    73. Would funds include additional statistics in their shareholder 
reports, as the proposed rule would permit? If so, what types of 
statistics would funds include, and how would these statistics help 
investors to understand the fund's investment strategy, risks, and/or 
performance? For example, would a fixed-income fund include statistics 
regarding yield, maturity, and/or duration?
    74. If a fund chooses to include in its annual report a statistic 
that Form N-1A requires the fund to disclose elsewhere, should we, as 
proposed, require such a fund to follow the Form N-1A instructions 
describing the calculation methodology for the relevant statistic? 
Should we place any additional limitations on the statistics funds 
would be allowed to include? For example, should we limit the number of 
additional statistics a fund could include? Should we specify the share 
class(es) tied to the statistics funds could disclose (e.g., require 
funds to include information only for the most expensive share class)? 
Should we only allow a fund to include a fund statistic that the fund 
otherwise discloses to shareholders and reports to the Commission, such 
as information the fund includes on Form N-PORT, Form N-CEN, or in the 
fund's financial statements, prospectus, or SAI? Should we include an 
instruction that would prohibit funds from including information 
generated by third-party vendors, such as Morningstar or Lipper ratings 
or sustainability rankings? If so, why, and what should this 
instruction specify?
    75. Is the proposed instruction that would encourage a fund to use 
graphics or text features, such as bullet lists or tables, as 
appropriate to disclose fund statistics helpful to promote succinct, 
useful presentations of information that will help shareholders 
understand their fund's investment strategy, risks, and/or performance? 
Should we require any particular presentation for the statistics that 
all funds would have to include in their annual report, and if so, what 
presentation and why?
    76. Should we, as proposed, allow funds to describe the 
significance or limitations of each disclosed statistic? If so, is the 
instruction that the additional disclosure be presented in a 
parenthetical, footnote, or similar presentation appropriate, or are 
there any more-specific requirements that we should include in the 
instruction? Should we require, rather than permit, this disclosure?
    77. Should we, as proposed, require additional statistics to be 
reasonably related to the fund's investment strategy? Would this 
limitation appropriately tailor the statistics a fund chooses to 
include to those that are most pertinent in light of a fund's 
investment strategy?
    78. Should we require a fund to organize the disclosure of the 
statistics in a manner that gives each statistic similar prominence? 
Would such a limitation prevent funds from obscuring statistics that 
reflect less favorably on the fund's performance returns? Are there 
other instructions that could achieve this goal? Would a ``similar 
prominence'' requirement for fund statistics result in any anomalous 
disclosure results, or the need for Commission clarification or 
guidance (for example, if certain statistics require more context than 
others, or certain statistics lend themselves better to graphic display 
than others)?
    79. Are there any additional instructions that we should include 
that would permit additional flexibility in presenting fund statistics? 
For example, if the value of a statistic significantly changed during 
the most recent fiscal year, should we allow or require funds to 
briefly describe the factors that contributed to the change? As another 
example, should we allow funds to provide comparative statistics, such 
as applying the same statistic to a relevant index or peer group in the 
same fiscal year? Would investors find this comparative information 
useful? If so, should we require, rather than permit, this disclosure? 
If the value of a statistic has significantly changed from the value 
disclosed in the fund's previous shareholder report, should we allow a 
fund to explain the factors that contributed to the change in value? 
Would shareholders find this information useful? If so, should we 
require, rather than permit, this disclosure?
e. Graphical Representation of Holdings
    We are proposing to retain the current requirements for the 
graphical representation of holdings that funds currently include in 
their shareholder reports, with certain revisions designed

[[Page 70749]]

to improve the current presentation. The graphical representation of 
holdings is one or more tables, charts, or graphs depicting the fund's 
portfolio holdings by category (for example, type of security, industry 
sector, geographic region, credit quality, or maturity) as of the end 
of the reporting period.\259\ The purpose of this presentation is to 
illustrate, in a concise and user-friendly format, the allocation of a 
fund's investments across particular categories of investments (such as 
asset classes).\260\ We understand that many investors, including 
investors responding to the Fund Investor Experience RFC, have viewed 
information about a fund's holdings as important to know when making an 
investment decision.\261\ We believe a layered approach to the 
disclosure of portfolio holdings, where a graphical representation of 
holdings is provided in the annual report and more detailed and current 
portfolio holdings information is available online and upon request, 
helps shareholders understand how the fund invested its assets. While 
currently investors receive both the graphical representation of 
holdings and a schedule of investments, we are only retaining the 
graphical representation of holdings, and not a more complete list of 
fund portfolio holdings, because we believe it provides a better 
summary presentation that shareholders can more easily review.\262\
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    \259\ See Item 27(d)(2) of current Form N-1A.
    \260\ See February 2004 Shareholder Report Adopting Release, 
supra footnote 83, at Section II.B.3.
    \261\ See, e.g., Baker Comment Letter; Scott Comment Letter; 
Stiles Comment Letter; Waranowski Comment Letter; Wilhelm Comment 
Letter; see also supra footnote 47; supra footnote 247 (stating that 
the 2012 Report on Investor Testing of Fund Annual Reports noted 
that 45% of investors deemed a fund's portfolio holdings as 
``absolutely essential information to any investor'').
    \262\ Investors have expressed a strong preference for including 
more tables, charts, and graphs in fund disclosure to make 
information more understandable to the average investor. See supra 
footnote 34.
    The full schedule of portfolio holdings will be available online 
and upon request on at least a quarterly basis. See proposed rule 
30e-1(b)(2). We discuss the availability of the schedule of 
investments in infra Sections II.D.1.a and II.D.2.a. See also rule 
6c-11 under the Investment Company Act, which requires daily 
portfolio holdings for ETFs relying on the rule.
---------------------------------------------------------------------------

    We are proposing two changes to the current requirements relating 
to the graphical representation of holdings. Currently, funds have the 
flexibility to base the tabular or graphic presentation of holdings on 
the fund's net asset value or total investments. We also are proposing 
to permit funds to show their holdings based on either the fund's net 
exposure, or total exposure, to particular categories of 
investments.\263\ As funds do today, a fund would have to disclose its 
graphical representation of holdings using categories, and with a basis 
of presentation (i.e., presented according to the fund's net asset 
value, total investments, or investment exposures) that is reasonably 
designed to depict clearly the types of investments made by the fund, 
given its investment objectives.\264\
---------------------------------------------------------------------------

    \263\ See proposed Item 27A(f) of Form N-1A.
    \264\ See id.; see also Item 27(d)(2) of current Form N-1A.
---------------------------------------------------------------------------

    The proposed amendment to allow investment exposure as a basis for 
presenting a fund's graphical representation of holdings is designed, 
in part, to provide a more meaningful presentation of holdings for 
funds that use derivatives to obtain investment exposures as part of 
their investment strategies.\265\ A graphical representation of 
holdings based on net asset value or total investments may not 
represent the true economic exposure of a fund that uses derivatives. 
For example, a fund that executes its strategy primarily through 
derivatives transactions (e.g., a managed futures fund or a commodity 
strategy fund) may invest a majority of its assets in government 
securities or money market funds, while a substantial portion of the 
fund's risks and returns may be derived from derivatives that compose 
only a small portion of its assets. In this situation, giving a fund 
the flexibility to present the graphical representation of holdings on 
an exposure basis could show a more accurate picture of the sources of 
the fund's investment risks and returns.\266\ A fund that uses ``net 
exposure'' or ``total exposure'' as a basis for representing its 
holdings would also be permitted to include a brief explanation of this 
presentation.
---------------------------------------------------------------------------

    \265\ See Use of Derivatives by Registered Investment Companies 
and Business Development Companies; Required Due Diligence by 
Broker-Dealers and Registered Investment Advisers Regarding Retail 
Customers' Transactions in Certain Leveraged/Inverse Investment 
Vehicles, Investment Company Act Release No. 33704 (Nov. 25, 2019) 
[85 FR 4446 (Jan. 24, 2020)] ``Derivatives Proposing Release''), at 
Section I.A (providing an overview of funds' use of derivatives).
    \266\ For example, the XYZ Commodity Strategy Fund might invest 
20% in commodity-linked derivatives and 75% in money market funds, 
such that the economic exposure of the fund would be the same as a 
95% direct investment in commodities. Under the proposal, the fund 
would be permitted to show 95% exposure to commodities in its 
graphical representation of holdings instead of showing both the 20% 
derivative position and 75% money market fund position. However, a 
fund would have to select a basis of presentation that is reasonably 
designed to depict clearly the types of investments made by the 
fund, given its investment objectives. See infra footnote 268 and 
accompanying text.
---------------------------------------------------------------------------

    The proposed amendment also is designed to provide a more 
meaningful presentation of holdings for certain funds that hold both 
long and short positions. Currently, the requirements for the graphical 
representation of holdings may not take into account both long and 
short positions. The proposed amendment provides clarity that funds 
that hold both long and short positions may present the long and short 
positions separately (i.e., total exposure), or show the combined 
effect of both positions (i.e., net exposure).\267\ We believe this 
additional flexibility will allow certain funds, such as funds with 
``long-short'' investment strategies, to provide representations that 
are tailored to their holdings and investment strategies. However, 
funds would not have full discretion to select their basis of 
presentation. They must select a basis of presentation (i.e., presented 
according to the fund's net asset value, total investments, or 
investment exposures) that is reasonably designed to depict clearly the 
types of investments made by the fund, given its investment 
objectives.\268\
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    \267\ As an example, if a fund had a 5% long position in XYZ 
Automotive Co and a 4% short position in QRS Automotive Inc., the 
fund might show (1) the 5% long position in the automotive industry 
and separately show a 4% short position (total exposure); or (2) the 
net position of 1% in the automotive industry (net exposure).
    \268\ See proposed Item 27A(f) of Form N-1A.
---------------------------------------------------------------------------

    We are also proposing a minor change with respect to funds that 
intend to depict portfolio holdings according to credit quality. 
Currently, such a fund must describe how the credit quality of its 
holdings was determined and, if credit ratings are used, the fund must 
explain why it selected a particular credit rating.\269\ We understand 
that there is diversity in practice as to the length of these 
disclosures, with some funds including a significant level of detail, 
while others include only relatively brief disclosure. We are proposing 
minor revisions instructing funds to keep these disclosures brief and 
concise.\270\ These proposed

[[Page 70750]]

amendments are designed to keep the narrative disclosures in the annual 
report brief.
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    \269\ See Item 27(d)(2) of current Form N-1A. Funds that choose 
to depict portfolio holdings according to credit quality must 
include a description of how the credit quality of the holdings was 
determined. This description should include a discussion of the 
credit quality evaluation process, the rationale for its selection, 
and an overview of the factors considered. If the fund uses credit 
ratings issued by a credit rating agency to depict credit quality, 
the fund should explain how the credit ratings were identified and 
selected, and include this description near, or as part of, the 
graphical representation. See Removal of Certain References to 
Credit Ratings under the Investment Company Act, Investment Company 
Act Release No. 30847 (Dec. 27, 2013) [79 FR 1316 (Jan. 8, 2014)], 
at Section III.B.
    \270\ See proposed Item 27A(f) of Form N-1A.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to the graphical 
representation of holdings disclosure requirements:
    80. Should we retain the graphical representation of holdings in 
annual reports? Why or why not? Does this graphical representation help 
shareholders better understand a fund's holdings?
    81. Are there any concerns about the current graphical 
representation of holdings presentation in shareholder reports? Are 
there any best practices we should encourage or require?
    82. For funds that take significant derivatives positions or hold 
both long and short positions, would an exposure-based presentation 
help shareholders better understand a fund's holdings? Should we permit 
all funds to present their holdings on an exposure basis, as proposed? 
Should we require certain funds to present their holdings on an 
exposure basis? Why or why not? If so, for what types of funds and fund 
strategies would an exposure-based presentation be particularly useful? 
Should we be more prescriptive as to how to calculate exposure? If so, 
how? Should an exposure presentation be on a net or total basis or 
permit flexibility? Why or why not? Should we permit funds to pick how 
they present their holdings or should we prescribe when funds should 
use net asset value, total investments, net exposure, or total 
exposure? If we prescribe the basis of presentation, how should we 
determine which type of fund uses which type of presentation?
    83. For funds that depict portfolio holdings according to credit 
quality, we are proposing to require that a fund briefly describe how 
the credit quality of its holdings was determined and, if credit 
ratings are used, the fund must concisely explain why it selected a 
particular credit rating. Is this additional disclosure about credit 
quality necessary and/or useful? If so, why? Would funds be able to 
succinctly provide this information? If not, why not?
    84. Should we expressly permit or require other types of 
presentations, such as top 10 holdings or changes in holdings over 
time? If so, what types of presentations and why? If not, why not?
    85. Should we permit or require other ways of presenting a fund's 
holdings? For example, instead of or in addition to the graphical 
representation of holdings, should we require disclosure of a fund's 
top holdings or a complete schedule of investments in the annual 
report? If so, what types of presentations should we require and why?
    86. Should we consider any other changes to the graphical 
representation of holdings requirements?
f. Material Fund Changes
    We propose to add a new section to the annual report to describe 
material changes to the 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.\271\ This proposed requirement is designed to highlight for 
fund shareholders the most salient information they typically receive 
through annual prospectus updates and tailor the presentation of this 
information to these existing shareholders' needs (as opposed to the 
needs of new or prospective investors for whom prospectus disclosure is 
primarily designed). We believe this new shareholder report disclosure 
would allow shareholders to better recognize and understand material 
changes to their fund investment, which may inform a shareholder's 
future investment decisions (i.e., whether to hold or sell the fund 
investment, or to purchase additional shares).
---------------------------------------------------------------------------

    \271\ See proposed Item 27A(g) of Form N-1A; see also supra 
footnote 20 (recognizing that funds generally must transmit annual 
reports within 60 days after fiscal year-end and funds' annual 
prospectus updates are typically finalized within 120 days after 
fiscal year-end) and infra paragraph accompanying footnote 287 
(discussing the annual report disclosure of material changes the 
fund plans to make in connection with its annual prospectus update).
---------------------------------------------------------------------------

    Under the proposal, a 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:
     A change in the fund's name (as described in Item 1(a)(1) 
of Form N-1A);
     A change in the fund's investment objectives or goals (as 
described in Item 2 of Form N-1A);
     An increase in the fund's ongoing annual fees, transaction 
fees, or maximum account fee (as described in Item 3 of Form N-1A); 
\272\
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    \272\ See infra Section II.H (discussing proposed amendments to 
Item 3 of Form N-1A). The proposed rule would only require funds to 
disclose material increases to the fund's ongoing annual fees, 
transaction fees (e.g., purchase charges or exit charges), or 
maximum account fee because we believe shareholders would be more 
interested in investment cost increases, rather than decreases. A 
fund may, however, voluntarily disclose material decreases to its 
fees and expenses in its annual report.
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     A change in the fund's principal investment strategies (as 
described in Item 4(a) of Form N-1A); \273\
---------------------------------------------------------------------------

    \273\ Under 17 CFR 270.35d-1 [Investment Company Act rule 35d-
1], a fund with a name that suggests investments in certain 
industries, investments, countries, or geographic regions generally 
must have a policy to invest at least 80% of the value of its assets 
in the relevant investments that its name suggests (a ``names rule 
investment policy''). This names rule investment policy is part of 
the fund's principal investment strategy. Under rule 35d-1, a fund 
must provide shareholders with at least 60 days prior notice of any 
change to its names rule investment policy under certain 
circumstances. See rule 35d-1(a)(2)(ii), (a)(3)(iii), and (c); 
Request for Comments on Fund Names, Investment Company Act Release 
No. 33809 (Mar. 2, 2020) [85 FR 13221 (Mar. 6, 2020)].
    If, under the proposed requirement to disclose certain material 
fund changes in the annual report, the fund provides notice of a 
change to its names rule investment policy, that notice would 
satisfy the requirements of rule 35d-1 if: (1) The annual report is 
provided to shareholders at least 60 days before the fund changes 
its names rule investment policy; (2) the annual report contains the 
statement required by rule 35d-1(c)(2) (e.g., ``Important Notice 
Regarding Change in Investment Policy''); (3) and the envelope in 
which the shareholder report is delivered (if applicable) has this 
same statement, as required by rule 35d-1(c)(3).
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     A change in the principal risks of investing in the fund 
(as described in Item 4(b) of Form N-1A);
     A change in the fund's investment adviser(s), including 
sub-adviser(s) (as described in Item 5(a) of Form N-1A); \274\ and
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    \274\ The proposal would not require a fund to disclose a change 
in a sub-adviser where Item 5 of Form N-1A would not require the 
fund to disclose the name of the sub-adviser in its prospectus. See 
Instructions 1 and 2 to Item 5 of Form N-1A.
---------------------------------------------------------------------------

     A change in the fund's portfolio manager(s) (as described 
in Item 5(b) of Form N-1A).
    Additionally, a fund could include any other material fund change 
that it would like to disclose to its shareholders.\275\
---------------------------------------------------------------------------

    \275\ For example, a fund may wish to disclose in its annual 
report plans to liquidate or merge the fund, even if previously 
disclosed to shareholders.
---------------------------------------------------------------------------

    This item would notify fund shareholders of material changes to the 
fund that have occurred or that the fund expects to make in its 
forthcoming annual prospectus update. Currently, fund shareholders 
typically receive information about these changes in: (1) Annual 
prospectus updates; or (2) other prospectus updates they may receive 
throughout the year (which can take the form of a prospectus 
``sticker'' or an updated copy of the fund's prospectus or, under the 
proposal, a notice of material change under proposed rule 498B).\276\ 
While fund shareholders

[[Page 70751]]

receive information about material changes today, we are concerned that 
material changes to a fund may not always be readily apparent to an 
existing shareholder. For example, changes that the annual prospectus 
update discusses may not be easy for an average shareholder to 
identify, as there is no requirement for a fund to identify or 
highlight changes to the fund in its prospectus.\277\ Instead, a fund 
only has to update the prospectus disclosure to reflect the substance 
of the change. For example, if a fee has changed, the prospectus 
disclosure would include the new fee, but the prospectus would not have 
to disclose the old fee or highlight that the fee had changed. Thus, we 
believe the proposed requirement to disclose material fund changes in 
the annual report may increase the salience of material fund changes 
for shareholders and help shareholders more efficiently monitor and 
assess their fund investments relative to current disclosure 
requirements.
---------------------------------------------------------------------------

    \276\ See supra footnote 13 and accompanying text; Comment 
Letter of Investment Company Institute (Oct. 1, 2019) (``ICI Comment 
Letter II'') (stating that respondents to an ICI member survey 
indicated that they primarily mail prospectus stickers to inform 
shareholders of material changes to the portfolio manager, material 
increases in fees, material (but nonfundamental) changes to the 
fund's investment objectives or strategies, changes to subadvisory 
agreements or subadvisers, changes in the fund's index or benchmark, 
changes to the fund's name, or planned fund mergers or 
liquidations). See also infra Section II.F.3.b (discussing proposed 
rule 498B's notice requirement).
    \277\ This also may be the case when a fund delivers an updated 
version of its prospectus to reflect material or other changes at 
other times throughout the year. However, a prospectus sticker that 
a fund instead may deliver for the same purpose typically would 
identify a change more explicitly.
     Some other types of registered investment companies currently 
are required to identify certain changes in their shareholder 
disclosure materials. See Variable Contract Summary Prospectus 
Adopting Release, supra footnote 27 (requiring updating summary 
prospectuses for variable contracts, which provide a brief 
description of any important changes with respect to the contract 
that occurred within the prior year to allow investors to better 
focus their attention on new or updated information relating to the 
contract); rule 8b-16(b) under the Investment Company Act (requiring 
certain registered closed-end funds to identify specific types of 
material changes in their annual reports).
---------------------------------------------------------------------------

    The categories of fund changes that we propose to require funds to 
disclose in their annual reports are meant to capture the types of 
material changes to prospectus disclosure that we believe are important 
to fund shareholders, that may influence their investment decisions, 
and that are more likely to occur. Specifically, the types of material 
changes that a fund would need to disclose in its annual report 
generally align with the key prospectus disclosure items the Commission 
requires in summary prospectuses (and in the summary section of 
statutory prospectuses) that we understand investors typically use to 
make investment decisions.\278\ We believe the annual report should 
help a shareholder monitor and assess his or her fund investment, which 
includes information to help a shareholder assess whether to maintain 
or change a fund investment. Because we understand that investors often 
use information about a fund's principal investment strategy, principal 
risks, fees, investment objectives or goals, name, investment adviser, 
and portfolio manager to inform initial investment decisions, we 
believe that material changes to these items may affect a shareholder's 
assessment of whether to hold, buy, or sell fund shares.\279\ In 
addition to the identified types of changes, funds could disclose other 
material changes on a discretionary basis, which we believe would 
provide flexibility to funds to highlight any additional material 
changes for investors concisely. Instead of identifying the types of 
material changes a fund must disclose and providing flexibility for 
funds to disclose other material changes, we considered proposing a 
more principles-based approach.\280\ However, we believe that our 
proposed approach would provide more certainty to funds about the types 
of changes they must disclose and enhance consistency of annual report 
disclosure across funds.
---------------------------------------------------------------------------

    \278\ See 2009 Summary Prospectus Adopting Release, supra 
footnote 10, at n.35 and accompanying text; see also Arnold Comment 
Letter; Baker Comment Letter; Dougle Comment Letter; Freeland 
Comment Letter; Wilhelm Comment Letter.
    \279\ See supra footnote 278; What US Households Consider When 
They Select Mutual Funds, 2018, ICI Research Perspective (May 2019), 
available at https://www.ici.org/pdf/per25-03.pdf.
    \280\ For example, we considered an approach that would direct 
funds to disclose all material changes, without identifying the 
categories of material changes they would need to disclose.
---------------------------------------------------------------------------

    Under the proposal, a fund would not be required to disclose 
material changes to other summary prospectus items (or to the 
corresponding items in the summary section of the statutory prospectus) 
because either they are unlikely to change, and we believe they are 
less likely to affect a shareholder's investment decisions (e.g., tax 
information or financial intermediary compensation), or the shareholder 
report already provides similar information (e.g., performance 
information). Additionally, information about shareholder voting 
results would not be required to be disclosed in the annual report 
because we believe that the material fund changes section of the report 
would reflect many of the types of material fund changes that may 
result from a shareholder vote.\281\ For example, if shareholders 
approve a change in the fund's concentration policy, implementing this 
change would likely affect the fund's principal investment strategy and 
principal risks and warrant shareholder report disclosure of the 
associated change to the fund's principal investment strategy and 
principal risks. Further, if shareholders approve a new investment 
advisory contract with a higher management fee, this would likely 
increase the fund's ongoing annual fees and would trigger disclosure 
under this item if the resulting increase was material.
---------------------------------------------------------------------------

    \281\ See infra Section II.D.1.d.
---------------------------------------------------------------------------

    A fund would be required to disclose a change in its annual report 
only if the change is material to the particular fund. A fund should 
base this materiality determination on the facts and circumstances of 
the fund and the specific change. For example, an index fund might 
determine that a change in its portfolio manager is not a ``material'' 
change that it would need to disclose in its annual report, given the 
nature of the manager's involvement in portfolio decisions for the 
fund. At the same time, a fund that changes its principal investment 
strategy from primarily investing in U.S. investment-grade bonds to 
primarily investing in emerging market high-yield bonds would disclose 
this change in its annual report, as well as through earlier 
communications to shareholders if the change already occurred.\282\
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    \282\ These earlier communications may include, for example, 
notices about a change in the fund's names rule investment policy, 
prospectus stickers, or notices under proposed rule 498B. See, e.g., 
supra footnotes 273 and 276 and infra Section II.F.3.b.
---------------------------------------------------------------------------

    To help shareholders understand the material changes, a fund would 
have to provide a concise description of each change that provides 
enough detail to allow shareholders to understand the change and how it 
may affect shareholders.\283\ For example, this could include stating 
that the fund's ongoing annual fees have increased from 0.55% to 0.65%, 
rather than simply stating that the fund's ongoing annual fees have 
changed or increased. As another example, if a fund's principal risks 
have materially changed, it could identify the newly identified or 
newly removed types of principal risks, rather than only stating that 
the principal risks have changed.
---------------------------------------------------------------------------

    \283\ See Instruction 1 to proposed Item 27A(g).
---------------------------------------------------------------------------

    Disclosure of material fund changes in the annual report would 
include a legend to the effect of the following:

    This is a summary of certain changes [and planned changes] to 
the Fund since [date]. For more complete information, you may

[[Page 70752]]

review the Fund's next prospectus, which we expect to be available 
by [date] at [website address] or upon request at [toll-free 
telephone number and, as applicable, email address].\284\
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    \284\ See Instruction 2 to proposed Item 27A(g) of Form N-1A. A 
fund would provide the internet address of the central site where a 
link to the fund's next prospectus will be available, if applicable, 
as well as a toll-free telephone number and, as applicable, the 
email address that shareholders can use to request copies of the 
fund's prospectus.

    The proposed legend would inform shareholders that they can obtain 
more information about a specific material change by consulting the 
fund's next annual prospectus update. It also would explain how 
shareholders may find or request a copy of the annual prospectus update 
once it is available.
    Under the proposed rule, funds generally would be required to 
disclose any enumerated material change that occurred since the 
beginning of the fund's most recently completed fiscal year, even if 
the fund already disclosed the material change to shareholders through 
other mechanisms during the year.\285\ For example, if a shareholder 
received a prospectus sticker discussing the change, the change would 
still appear in the annual report.\286\ As a result, the annual report 
would be a general repository for the enumerated material changes that 
occurred throughout the year. We believe it may be helpful for 
shareholders to be able to review a brief summary of all material 
changes that occurred during the year, instead of requiring 
shareholders to compile information from different sources if they want 
to understand all material changes for the year.
---------------------------------------------------------------------------

    \285\ However, the proposed rule would not require a fund to 
disclose a material change that it already disclosed in its last 
annual report. This could occur if, for example, a material change 
took place at the beginning of the last fiscal year before the fund 
transmitted the last annual report or the fund planned to make the 
material change in connection with its annual prospectus update for 
the last fiscal year. See Instruction 3 to proposed Item 27A(g) of 
Form N-1A.
    \286\ Under proposed rule 498B, a fund would need to timely 
notify existing shareholders of material fund changes. A fund also 
would have to disclose recent material changes in its annual report 
even if previously disclosed through a rule 498B notice. See infra 
Section II.F.3.b.
---------------------------------------------------------------------------

    Along with changes that occurred since the beginning of the last 
fiscal year, the fund's annual report also would have to disclose 
material changes that the fund plans to make in connection with 
updating its prospectus for the current fiscal year. We are proposing 
this requirement so the annual report could be the primary disclosure 
source for fund shareholders, and they generally would not need to 
review the fund's annual prospectus update (other than to gather 
additional information about a particular fund change of interest). For 
example, we believe it would be more efficient for a shareholder to be 
able to review a single report to assess and monitor his or her fund 
investment, instead of receiving an annual report and then subsequently 
receiving an annual prospectus update or notice of additional material 
changes approximately two months later.\287\ We understand that it is 
common for funds generally to be aware of material changes they plan to 
make in connection with updating their prospectuses before they 
transmit annual reports.\288\ However, we recognize that the fund's 
associated post-effective amendment making these changes to its 
prospectus may not be effective at the time the fund transmits its 
annual report and may be subject to the staff review process.\289\ As a 
result, the manner in which the fund describes the change in its 
prospectus may be subject to modification at the time the fund is 
required to transmit an annual report. Under these circumstances, we 
believe it would be appropriate for a fund to provide only a high-level 
description of the change because the exact disclosure regarding the 
change in the prospectus could be subject to modification. The proposed 
legend that would accompany this disclosure would direct shareholders 
to the fund's next prospectus for additional detail, and the fund would 
need to provide a date by which it expects the updated prospectus to be 
available. In any event, a fund would not have to use the same language 
describing the change in its annual report as it uses in its prospectus 
(although neither description of the change would be permitted to be 
misleading).
---------------------------------------------------------------------------

    \287\ See supra footnote 20 and accompanying text; infra Section 
II.F.3.b (discussing a proposed requirement that a fund provide 
timely notices of material fund changes to shareholders if the fund 
relies on proposed rule 498B to no longer deliver prospectuses to 
its shareholders).
    \288\ A fund typically must file a post-effective amendment to 
its registration statement that includes material changes at least 
60 days prior to the time the amendment is effective (that is, 
before the fund can use it), and a fund typically aims for the 
amendment to be effective within 120 days of its fiscal year-end. 
See generally 17 CFR 230.485 [rule 485 under the Securities Act]; 
supra footnote 20. As a result, we understand that funds typically 
have already prepared and filed these post-effective amendments 
within 60 days of fiscal year-end, before they must transmit annual 
reports under Commission rules. See rule 30e-1(c) under the 
Investment Company Act [17 CFR 270.30e-1(c)].
    \289\ Generally, the staff reviews post-effective amendments to 
fund registration statement that contain material changes (other 
than certain specific routine items). See generally rule 485 under 
the Securities Act.
---------------------------------------------------------------------------

    We acknowledge that there could be scenarios where a material 
change occurs shortly before a fund transmits its annual report and, as 
a result, it would be difficult for the fund to disclose the material 
change in the annual report while still transmitting the report to 
shareholders within the required period (60 days after the fund's 
fiscal year-end).\290\ For example, a fund's high-profile portfolio 
manager may resign shortly before the fund must transmit its annual 
report to shareholders. Under these circumstances, a fund (or 
intermediary) should provide a timely notice of the material change to 
shareholders under proposed rule 498B, if applicable, or through a 
prospectus sticker or annual prospectus update. The fund would also 
need to disclose the material change in its next annual report.\291\
---------------------------------------------------------------------------

    \290\ See rule 30e-1(c) [17 CFR 270.30e-1].
    \291\ As an example, assume a fund's fiscal year ends on 
December 31, 2020. As a result, it would be required to transmit its 
2020 annual report by March 1, 2021 (60 days after December 31) and 
would likely finalize its annual prospectus update by April 30, 2021 
(120 days after December 31). If the fund's high-profile portfolio 
manager resigned on February 25, 2021, and it were difficult for the 
fund to prepare disclosure about this change to include in its 2020 
annual report before March 1, 2021, the fund could instead disclose 
this change in its 2021 annual report. Shareholders would also 
receive more-timely notice of the change through other mechanisms, 
including the annual prospectus update, prospectus stickers, or 
notices under proposed rule 498B, depending on the circumstances. If 
the fund instead were able to disclose the change in its portfolio 
manager in the 2020 annual report, it would not be required to also 
disclose that change in its 2021 annual report or, if the fund 
relied on proposed rule 498B, in a notice under that rule. See 
Instruction 3 to proposed Item 27A(g) of Form N-1A; proposed rule 
498B(c)(2).
---------------------------------------------------------------------------

    We request comment on the proposed material fund changes section of 
the annual report, including the following:
    87. Should funds be required to disclose material fund changes in 
their annual reports, as proposed? Should all funds be required to 
disclose fund changes in their annual reports, as proposed, or should 
we exclude any subset of funds from this requirement (for example, 
should we exclude funds that do not rely on proposed rule 498B and that 
deliver annual prospectus updates to existing shareholders each year)? 
Instead of requiring disclosure about material changes in the annual 
report, should we require disclosure of these changes somewhere else, 
such as the prospectus or the fund's website? What location would be 
most appropriate for purposes of making the information available to 
shareholders? What location would be the most efficient for these 
purposes?
    88. Are the categories of fund changes in the proposed enumerated 
list the types of changes that are most relevant to fund shareholders 
and that may

[[Page 70753]]

influence their investment decisions? Are there other categories of 
material changes that should be disclosed in the annual report? For 
example, should funds be required to disclose all material changes that 
occur as a result of a shareholder vote, rather than just the ones 
included in the enumerated list?
    89. Is the scope of the categories of fund changes in the proposed 
enumerated list appropriate? If not, how should we modify the scope? 
For example, rather than requiring a fund to disclose material 
increases in a fund's ongoing annual fees, transaction fees, or maximum 
account fee (as described in proposed Item 3 of Form N-1A), should we 
require funds to disclose any material changes (that is, both increases 
and decreases) to fee and expense information described in its 
prospectus fee summary or fee table?
    90. Should we expand or reduce the scope of fee-related items that 
the material fund changes disclosure would include? For example, should 
we only require funds to disclose a material increase in ongoing annual 
fees because the annual report is directed to existing shareholders, or 
is it valuable for a fund shareholder to receive information about 
material increases to the fund's transaction fees in case he or she is 
considering purchasing additional shares in the fund? We understand 
that account fees are relatively rare and typically small in size. 
Should the proposed item refer to account fees, or should it only refer 
to ongoing annual fees and transaction fees? Additionally, we are 
proposing to allow funds that invest 10% or less of their total assets 
in acquired funds to disclose acquired fund fees and expenses in a 
footnote to the prospectus fee table, instead of in the bottom-line 
ongoing annual fees.\292\ Although such a fund's investments in 
acquired funds would be limited, are there circumstances in which its 
acquired fund fees and expenses could increase to such an extent that 
we should require the fund to disclose the increase in acquired fund 
fees and expenses in the annual report (e.g., as a separate material 
change, or as a material increase to the fund's ongoing annual fees if 
the fund's combined ongoing annual fees and acquired fund fees and 
expenses materially increase in the aggregate)?
---------------------------------------------------------------------------

    \292\ See infra Section II.H.1.g.
---------------------------------------------------------------------------

    91. Would disclosure about the identified categories of material 
changes be redundant with other shareholder report disclosure? For 
example, would funds discuss certain categories of material changes, 
such as material changes to the fund's principal investment strategy, 
in the narrative MDFP disclosure? If so, do the two disclosure items 
serve sufficiently different purposes, or should we modify the proposed 
requirements to limit potential redundancy? For example, if we require 
funds to disclose information about material strategy changes in the 
narrative MDFP disclosure and not in the material fund changes 
disclosure, would it be more difficult for shareholder to identify and 
understand information about material fund changes? Under that 
approach, where should a fund disclose information about a material 
strategy change the fund plans to make in its annual prospectus update?
    92. Instead of identifying particular types of material changes a 
fund must disclose in its annual report, as proposed, should we use a 
more principles-based or flexible framework for disclosing fund 
changes? For example, should we require funds to disclose all material 
changes without identifying particular categories of changes? Under a 
more principles-based or flexible framework, how could we make sure the 
disclosure focuses on fund changes that would be of interest to fund 
shareholders and is not unduly long or complex?
    93. Does the proposed provision allowing funds to disclose 
additional material changes on a discretionary basis provide funds with 
appropriate flexibility to consider their particular facts and 
circumstances? Would the benefits of this flexibility justify any 
resulting increase in the shareholder report's length and complexity? 
Should we provide more flexibility by permitting funds to disclose 
other changes that may not necessarily be material to the fund? If so, 
what types of other changes would funds disclose, and how would 
information about that change assist shareholders? Alternatively, 
should we not permit funds to optionally disclose other categories of 
material changes and instead limit the types of material changes funds 
can disclose in the annual report to only those listed in the form 
item?
    94. Should funds be required to disclose only material changes, as 
proposed? Would requiring funds to make a materiality assessment of 
relevant changes introduce unnecessary subjectivity into the 
disclosure? Or is a materiality threshold appropriate to limit the 
annual report disclosure to the types of changes that would be most 
important to shareholders? Would a different threshold be more 
appropriate? For example, should we require a fund to disclose 
``significant'' or ``substantial'' changes in its annual report? If so, 
why?
    95. As proposed, should funds be required to disclose any material 
changes in their annual reports that occurred since the beginning of 
the fund's last fiscal year (even if the fund has already disclosed any 
of these changes to existing shareholders, for example through 
prospectus supplements, notices under proposed rule 498B, or other non-
shareholder report mechanisms)? Would it be beneficial for shareholders 
to see all of these changes summarized in a single place? 
Alternatively, would this approach have unintended consequences, such 
as increased investor confusion?
    96. Should funds be required to disclose material changes that they 
plan to make in connection with updating their prospectuses under 
section 10(a)(3) of the Securities Act for the current fiscal year, as 
proposed? Does this proposed requirement raise timing concerns, 
compliance difficulties, liability risks, or other concerns that we 
have not adequately addressed? Are there certain types of changes where 
these concerns are more pronounced (e.g., where the parameters of the 
change are more likely to be modified between the time a fund transmits 
its annual report within 60-days after its fiscal year end and the time 
its post-effective amendment updating the relevant prospectus 
disclosure is effective, generally within 120 days after its fiscal 
year end)? How should we address any associated concerns? Are there 
other mechanisms, other than the annual report, that funds should be 
required or permitted to use to notify existing shareholders of these 
changes?
    97. How detailed should annual report disclosure of a fund change 
be? Should we require, as proposed, that the description of the change 
be concise but with sufficient detail to allow shareholders to 
understand the change and how the change may affect shareholders? If 
not, should the description of the change be more or less detailed than 
proposed? Please explain.
    98. Should funds be required to provide the proposed legend in the 
fund changes section of the annual report? Would the proposed 
requirement to provide an estimated date by which the fund's next 
prospectus will be available on its website or upon request present 
difficulties for funds or shareholders? What are those difficulties, 
and how could we address them? Would the proposed legend make it 
sufficiently clear to fund shareholders that the

[[Page 70754]]

prospectus with additional information about the change is not 
currently available but will be available at a later date? If not, how 
could we make this clearer?
g. Changes in and Disagreements With Accountants
    We are proposing to require funds to include a concise discussion 
of certain disagreements with accountants in the annual report. Funds 
currently are required to disclose certain information concerning 
changes in and disagreements with accountants in their shareholder 
reports. The current disclosure requirement is applicable only if a 
fund's accountant has resigned or was dismissed.\293\ In this case, the 
fund has to disclose the information that 17 CFR 229.304 [Item 304 of 
Regulation S-K] requires, concerning the circumstances surrounding the 
former accountant's dismissal or resignation, whether in the fund's two 
most recent fiscal years there were certain accounting-related 
disagreements with the former accountant, and other related 
information.\294\ We understand that funds rarely include disclosure 
about disagreements with accountants, and therefore we assume that the 
events that necessitate this disclosure rarely occur. In addition, we 
believe that current disclosure regarding these types of events may not 
be particularly investor-friendly because of the complexity of the 
accounting issues that may give rise to any disagreements.
---------------------------------------------------------------------------

    \293\ Specifically, the disclosure requirement is applicable 
when the independent accountant who was engaged as the principal 
accountant to audit the fund's financial statements, or an 
independent accountant who was previously engaged to audit a 
significant subsidiary and on whom the principal accountant 
expressed reliance in its report, has resigned or was dismissed.
    \294\ See 17 CFR 229.304; see also Item 27(b)(4) and Item 
27(c)(4) of Form N-1A.
    The types of disagreements that funds are required to disclose 
relate to--among other things--internal controls over financial 
reporting, management representations, the need to expand the scope 
of the audit based on information suggesting issues with a prior 
audit report, and questions regarding reliability of previous audit 
reports. See Items 304(a)(1)(v)(A)-(D) of Regulation S-K.
---------------------------------------------------------------------------

    However, we believe that retaining this disclosure in funds' 
shareholder reports in summary form continues to be important because 
this would put investors on notice of the dismissal or resignation of 
an accountant and the existence of a material disagreement with that 
accountant.\295\ We believe this shareholder report disclosure could 
discourage funds' audit ``opinion shopping.'' \296\ ``Opinion 
shopping'' generally refers to the search for an auditor that is 
willing to support a proposed accounting treatment that is designed to 
help a fund achieve its reporting objectives, even though that 
treatment could frustrate reliable reporting.\297\
---------------------------------------------------------------------------

    \295\ See, e.g., ICI Comment Letter I (noting that changes in 
and disagreements with accountants are not common, but when they do 
occur, this information is key information for shareholders).
    \296\ See Disclosure Amendments to Regulation S-K, Form 8-K and 
Schedule 14A Regarding Changes in Accountants and Potential Opinion 
Shopping Situations, Securities Act Release No. 6766 (Apr. 7, 1988) 
[53 FR 12924 (Apr. 12, 1988)] (``Changes in Accountants and 
Potential Opinion Shopping Adopting Release''); see also Foreign 
Issuer Reporting Enhancements, Securities Act Release No. 8959 
(Sept. 23, 2008) [73 FR at 58310 (Oct. 6, 2008)].
    \297\ See Changes in Accountants and Potential Opinion Shopping 
Adopting Release, supra footnote 296, at Section I.
---------------------------------------------------------------------------

    We propose to move the currently-required disclosure to Form N-CSR 
and to replace it in the annual report with a high-level summary of 
information that funds would report on Form N-CSR.\298\ Specifically, 
when a fund has a material disagreement with an accountant that has 
resigned or been dismissed, the fund would have to include in its 
annual report: (1) A statement of whether the former accountant 
resigned, declined to stand for re-election, or was dismissed and the 
date thereof; and (2) a brief, plain English description of 
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.\299\ Funds would not be required to disclose, 
and we would not expect funds to disclose, the absence of disagreements 
in response to this proposed disclosure requirement.
---------------------------------------------------------------------------

    \298\ See infra Section II.D.1.c (discussing proposed Form N-CSR 
filing requirement).
    \299\ See proposed Item 27A(h) of Form N-1A. This proposed 
disclosure requirement is applicable specifically in the 
circumstances that footnote 293, supra, describe.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to the current 
requirements to include disclosure about disagreements with accountants 
in funds' annual reports, including:
    99. Should we require funds to include high-level disclosure about 
changes in and disagreements with accountants in their annual reports, 
as proposed? Why or why not? Is the current disclosure requirement 
regarding changes in and disagreements with accountants helpful to fund 
shareholders? How frequently do the events that necessitate this 
disclosure occur? Would the proposed amendments improve shareholders' 
ability to understand this information?
    100. As proposed, funds would only need to disclose certain 
disagreements with accountants (those that occurred within the past two 
fiscal years and where the accountant either has resigned or was 
dismissed) in the annual report. Should we require any additional 
information about changes in or disagreements with accountants in the 
annual report? Are there any types of disagreements that funds should 
not have to include in their annual report? Which ones and why?
    101. Is there any other information about the fund's accountants or 
the fund's financial statements that we should require funds to 
disclose in the annual report?
h. Statement Regarding Liquidity Risk Management Program
    In 2016 and 2018, the Commission adopted a series of reforms 
designed to promote effective liquidity risk management across the 
open-end fund industry and enhance disclosure regarding fund liquidity 
and redemption practices.\300\ As part of these reforms, if a fund's 
board of directors has reviewed the fund's liquidity risk management 
program as required by 17 CFR 270.22e-4 [rule 22e-4 under the Act] 
during the fund's most recent fiscal half-year, the fund is required to 
briefly discuss the operation and effectiveness of the liquidity risk 
management program in its most recent shareholder report.\301\ In 
adopting this requirement, the Commission stated that it had considered 
commenters' suggestions that shareholder report disclosure would have 
the benefit of allowing funds to produce tailored disclosure suited to 
the particular liquidity risks and management practices of the specific 
fund.\302\
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    \300\ Investment Company Liquidity Risk Management Programs, 
Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 
82142 (Nov. 18, 2016)]; Investment Company Swing Pricing, Investment 
Company Act Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 
2016) (``2016 Liquidity Rule Release''); Investment Company 
Liquidity Disclosure, Investment Company Act of 1940 Release No. 
33142 (June 28, 2018) [83 FR 31859 (Jul. 10, 2018)] (``2018 
Liquidity Disclosure Release'').
    \301\ See Item 27(d)(6)(ii) of Form N-1A; see also 2018 
Liquidity Disclosure Release, supra footnote 300. The compliance 
date for larger entities was December 1, 2019 and for smaller 
entities was June 1, 2020.
    \302\ See 2018 Liquidity Disclosure Release, supra footnote 300, 
at n.47 and accompanying text.
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    We continue to believe that requiring funds to provide shareholders 
with information about the operation and effectiveness of the fund's 
liquidity risk management program (along with appropriate prospectus 
risk disclosure and MDFP disclosure) may help provide investors a 
comprehensive picture of the fund's liquidity risks and their

[[Page 70755]]

management. However, having reviewed shareholder report disclosures 
responsive to this requirement, we preliminarily believe that the 
disclosure in its current form is not well-suited to a concise 
shareholder report. The staff has observed that the shareholder report 
liquidity risk management disclosure often appears as a lengthy 
recitation of the requirements of rule 22e-4 and is not tailored to a 
particular fund. This disclosure does not lend itself to the type of 
focused disclosure that the proposed shareholder report is designed to 
include. Therefore, we propose to revise the disclosure requirements to 
emphasize that the disclosure must be tailored to each fund and be 
concise.\303\
---------------------------------------------------------------------------

    \303\ See proposed Item 27A(i) of Form N-1A.
---------------------------------------------------------------------------

    Given the nature and quality of the disclosure we have seen, we 
believe the statement regarding the fund's liquidity risk management 
program (``liquidity risk management disclosure'') should be more 
tailored, concise, and informative to help shareholders better 
understand how the fund is managing its liquidity risks, which in turn 
could inform the shareholders' ability to monitor their investments in 
the fund. Therefore, we propose replacing the current disclosure with a 
brief summary of:
     The key factors or market events that materially affected 
the fund's liquidity risk during the reporting period;
     The key features of the fund's liquidity risk management 
program; and
     The effectiveness of the fund's liquidity risk management 
program over the past year.\304\
---------------------------------------------------------------------------

    \304\ See proposed Item 27A(i) of Form N-1A.
---------------------------------------------------------------------------

    We are also proposing an instruction that a fund should, where 
appropriate, tailor the disclosure responsive to this requirement to 
the fund rather than rely on generic, standard disclosures.\305\ The 
disclosure should not include a recitation of all the elements of the 
fund's liquidity risk management program. Instead, it should include 
the key features of the program as they relate to the fund.\306\ For 
example, a loan fund may briefly describe any expedited settlement 
agreements, or an international fund may describe the availability of a 
line of credit or increasing its investments in highly liquid assets 
ahead of extended holidays (e.g., Chinese New Year). We believe this 
disclosure would help inform investors about the sources of the 
liquidity risk for the fund, the key steps fund management takes to 
ameliorate those risks, and a statement explaining whether those steps 
have been effective. We believe that requiring tailored disclosure 
would better inform investors, which is a benefit we considered in 
assessing any incremental additional burden.
---------------------------------------------------------------------------

    \305\ See Instruction 1 to proposed Item 27A(i) of Form N-1A. 
For example, using the same disclosure for all funds in a fund group 
may not be appropriate in light of this proposed instruction. 
However, we generally believe it would be appropriate for funds in a 
fund group with similar investments, and that are subject to the 
same liquidity risks, to use the same disclosure.
    \306\ Appendix A to this release contains a hypothetical annual 
report that was created solely for illustrative purposes and 
includes an example of the type of disclosure Item 27A(i) intends to 
elicit.
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    Finally, we propose to keep the timing requirements for the 
liquidity risk management disclosure consistent with the current 
requirements. We continue to believe it is appropriate to require a 
fund to include the liquidity risk management disclosure in the annual 
or semi-annual report following the period when the fund performed its 
required annual review of the liquidity risk management program, which 
may reduce costs and allow funds to provide more effective and timely 
disclosure.\307\
---------------------------------------------------------------------------

    \307\ See 2018 Liquidity Disclosure Release, supra footnote 300, 
at Section II.B.2.
     If the board were to review the liquidity risk management 
program more frequently than annually, a fund could choose to 
include the discussion of the program's operation and effectiveness 
over the past year in the fund's annual and/or semi-annual report, 
but this discussion would not be required to be included in both 
reports. See infra footnote 369 and accompanying text.
---------------------------------------------------------------------------

    We request comment on the proposed approach of including the 
liquidity risk management disclosure in the shareholder report:
    102. Should we require the liquidity risk management disclosure be 
included in the shareholder report, as proposed? Should we instead 
require it to be included in another disclosure document such as the 
fund's Form N-CSR, statutory prospectus or summary prospectus, or on 
the fund's website? If so, where should it be included?
    103. Would the proposed disclosure requirements provide 
shareholders the appropriate information to help them understand the 
fund's liquidity and liquidity risks and make more-informed investment 
decisions? Is the disclosure an improvement over the current disclosure 
requirements? Is the requirement to tailor the disclosure to each fund 
appropriate? If not, why not? How could the proposed disclosure 
requirements be improved?
    104. Should we continue to require the liquidity risk management 
disclosure to be included in the most recent shareholder report 
following the board's review of the program or, for consistency, should 
we only require the disclosure in the annual report?
    105. Rather than requiring all funds to include the liquidity risk 
management disclosure in their shareholder reports as proposed, should 
we instead require only a subset of funds to include this disclosure? 
For example, should we only require this disclosure for funds that hold 
less than 50% of their net assets in highly liquid investments? 
Alternatively, should all funds that have a highly liquid investment 
minimum be required to include this disclosure? Are there any concerns 
about funds identifying themselves through this disclosure as holding a 
certain percentage of assets that are not primarily highly liquid 
investments? If so, what are those concerns and how can they be 
addressed?
    106. Is there any other liquidity-related information that may be 
relevant to shareholders that funds should be required to disclose in 
the shareholder report or on Form N-CSR? Are there alternative 
approaches to providing relevant liquidity information to shareholders? 
If so, what are they, and why should we use them?
i. Availability of Additional Information
    We are proposing to require funds to include a statement in the 
annual report that informs investors about additional information that 
is available on the fund's website.\308\ Specifically, funds would have 
to provide a brief, plain English statement that certain additional 
fund information is available on the fund's website. This 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 a 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).\309\
---------------------------------------------------------------------------

    \308\ See proposed Item 27A(j) of Form N-1A.
    \309\ See Instruction 9 to proposed Item 27A(a) of Form N-1A; 
see also infra Section II.B.4.
---------------------------------------------------------------------------

    Under current shareholder report requirements, funds must include 
statements regarding the availability of the fund's: (1) Quarterly 
portfolio schedule, (2) proxy voting policies and procedures, and (3) 
proxy voting record.\310\ We believe that this information may be 
important to certain investors, and they may not know this information 
is available or how to find it.\311\ Because of the importance of this

[[Page 70756]]

information to some investors and consistent with a layered approach to 
fund disclosure that makes more-detailed or technical information 
available to those investors who find the information valuable, we 
believe it is important to continue to inform investors that this 
information is available and how to find it. The proposed new statement 
would consolidate several currently required statements about the 
availability of information (including the quarterly portfolio 
schedule, proxy voting policies and procedures, and proxy voting 
record) with a single statement that covers this same information.
---------------------------------------------------------------------------

    \310\ See Items 27(d)(3) through (5) of Form N-1A.
    \311\ See, e.g., 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26 (reports on investor preferences for 
shareholder report items); Investor Preferences Report, supra 
footnote 31 (reports on investor preferences with respect to fund 
disclosure items); Scott Comment Letter; Wilhelm Comment Letter; 
Stiles Comment Letter; McRitchie Comment Letter.
---------------------------------------------------------------------------

    We are also proposing to require funds to refer in the statement to 
other information that would not itself be included in the annual 
report under the proposal.\312\ First, because the annual report would 
no longer include financial statements, we believe it is appropriate to 
inform investors that this information is available. In addition, 
because the annual report briefly describes certain changes to the 
fund's prospectus, we believe it is important to remind investors about 
the availability of the current fund prospectus, which may provide 
additional context to the changes described in the report.
---------------------------------------------------------------------------

    \312\ See Instruction 1 to proposed Item 27A(a) and proposed 
Item 27A(j); see also infra Section II.B.3. If the annual report 
appears on a website or is otherwise provided electronically, funds 
must provide a means of facilitating access to this information, 
such as including a hyperlink to this information.
---------------------------------------------------------------------------

    We also propose to provide a fund with the flexibility to refer to 
other information available on the fund's website, if it reasonably 
believes that shareholders would likely view the information as 
important.\313\ For example, a fund may wish to refer investors to a 
document describing the benefits of certain types of investments, a 
description of credit ratings, additional performance presentations, or 
additional commentary about how the fund performed. We believe this 
flexibility is appropriate because funds may wish to provide additional 
information to investors that may be more tailored or relevant to a 
given fund. We also believe this flexibility is appropriate given the 
content limitations imposed on the proposed annual report.\314\ This 
additional information referred to in the annual report would have the 
same status under the Federal securities laws as any other website or 
other electronic content that the fund produces or disseminates. The 
fact that a shareholder report references other information available 
on a fund's website does not change the legal status of the referenced 
information. For instance, a performance presentation or description of 
credit ratings on a fund's website would be subject to the same legal 
requirements and have the same legal status regardless of whether the 
information was referenced in a shareholder report.\315\
---------------------------------------------------------------------------

    \313\ See Instruction 3 to proposed Item 27A(a) of Form N-1A.
    \314\ The proposed annual report may only include information 
that Item 27A of Form N-1A specifically permits or requires. See 
Instruction 3 to proposed Item 27A(a) of Form N-1A; see also 
discussion at supra Section II.B.1.b.
    \315\ See discussion at infra Section II.B.4.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to include disclosure 
about additional information that is available to investors outside of 
the annual report, including:
    107. Would this proposed disclosure requirement be useful to 
investors? Instead of requiring a statement that certain items are 
available online, should we require a statement that more generally 
indicates that additional information is available on the fund's 
website without listing particular items? Are there any other changes 
we should make to the proposed statement about the availability of 
additional information? Are there other information items that funds 
should be required to include in the statement? Why? Are there any 
information items that should be excluded? If so, why? Instead of one 
statement that certain items are available online, should we require 
shareholder reports to include hyperlinks throughout the report linking 
to additional related content that is available online (e.g., require a 
hyperlink in the ``Graphical Representation of Holdings'' section to 
the fund's portfolio schedule)? If so, what specific additional 
references and hyperlinks should we require and why?
    108. As proposed, funds would have the flexibility to refer 
investors to additional information that is available on the fund's 
website if the fund reasonably believes that shareholders would likely 
view the information as important. Should any limits be placed on this 
additional information? If so, why? For example, should it be limited 
to content that the fund has prepared?
    109. Should we permit or require funds to refer investors to 
information at Investor.gov, such as information about how to read a 
shareholder report? \316\ If not, why not?
---------------------------------------------------------------------------

    \316\ The Commission's Office of Investor Education and Advocacy 
maintains the website as an online resource to help investors make 
sound investment decisions and avoid fraud. The website includes 
investment bulletins, alerts, guidance and tools designed to assist 
investors, including those owning funds, in obtaining additional 
information and resources on understanding and managing their 
investments. See, e.g., Investor Bulletin: How to Read a Mutual Fund 
Shareholder Report (Apr. 3, 2013) (``How to Read a Mutual Fund 
Shareholder Report''), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-how-read-mutual-fund-shareholder; How to Read a Mutual Fund 
Prospectus (June 13, 2016), available at https://www.investor.gov/news-alerts/investor-bulletins/how-read-mutual-fund-prospectus-part-1-3-investment-objective-strateg.
---------------------------------------------------------------------------

    110. Are there any other changes that should be made to the 
disclosure requirement about the availability of additional 
information?
j. Householding
    We are proposing to retain the provision that permits funds to 
explain how to revoke consent to the householding of the annual 
report.\317\ Investors often invest in funds through a variety of 
individual and family accounts and, as a result, sometimes receive 
multiple copies of the same documents from those funds. To avoid 
duplication, Commission rules allow funds to deliver a single copy of a 
prospectus, proxy materials, and a shareholder report to investors who 
share the same address and meet certain other requirements.\318\ This 
practice is known as ``householding.''
---------------------------------------------------------------------------

    \317\ See current rule 30e-1(f) and proposed rule 30e-1(e) and 
proposed Item 27A(k) of Form N-1A.
    \318\ See 17 CFR 230.154 [rule 154 under the Securities Act] 
(permitting the householding of prospectuses); 17 CFR 240.14a-
3(e)(1) [rule 14a-3(e)(1) under the Exchange Act] (permitting the 
householding of proxy materials other than the proxy card); and rule 
30e-1 under the Investment Company Act (permitting the householding 
of shareholder reports).
---------------------------------------------------------------------------

    Rule 30e-1 permits and we propose to continue permitting the 
householding of fund shareholder reports if, in addition to the other 
conditions set forth in the rule, the fund has obtained from each 
investor written or implied consent to the householding of shareholder 
reports at such address.\319\ The rule requires funds that wish to 
household shareholder reports based on implied consent to send a notice 
to each investor stating, among other things, that the investors in the 
household will receive one report in the future unless the investors 
provide contrary instructions. In addition, at least once a year, funds 
relying on the householding provision must explain to investors who 
have provided written or implied consent

[[Page 70757]]

how they can revoke their consent. If relying on the householding 
provision, one way to satisfy this last requirement (to provide an 
annual notice) is to include a statement in the annual report. We 
propose to continue permitting funds to include this statement in the 
annual report.\320\
---------------------------------------------------------------------------

    \319\ See rule 30e-1(f); proposed rule 30e-1(b)(2).
    \320\ Because the proposed annual report may only include 
information that Item 27A of Form N-1A specifically permits or 
requires, the proposed householding provision is necessary to permit 
funds to include a householding statement in the report. See 
Instruction 3 to proposed Item 27A(a) of Form N-1A; see also 
discussion at supra Section II.B.1.b.
---------------------------------------------------------------------------

    We request comment on the proposed permitted inclusion of 
householding-related language in the annual report:
    111. Should funds be permitted to include language about how an 
investor can revoke consent to householding in the annual report? If 
not, why not? Should we prescribe specific householding-related 
language that funds could include in their annual reports? If so, why, 
and what should that language be?
    112. Should we consider any change to the householding disclosure 
requirements or to the rule provision that permits householding of 
shareholder reports? If so, why?
3. Format and Presentation of Annual Report
    In addition to the proposed content requirements for the annual 
report, we are proposing general instructions related to the format and 
presentation of the report. These proposed general instructions are 
designed to improve and simplify the presentation of shareholder 
reports and encourage funds to use plain-English, investor-friendly 
principles when drafting their reports.
    First, we are proposing an instruction specifying that the 
information in the annual reports would be required to appear in the 
same order as would be required under the proposed amendments to Form 
N-1A.\321\ We are requiring that information appear in a specific order 
so that the information that we believe to be most salient to 
shareholders, such as expenses, would appear first in the report, and 
to promote consistency and comparison across funds.\322\ The proposed 
ordering requirements also would place related content close together 
to help investors better understand the topics being discussed. For 
example, fund statistics and graphical representation of holdings both 
provide information about the fund's portfolio and therefore would be 
placed adjacent to one another.
---------------------------------------------------------------------------

    \321\ See Instruction 1 to proposed Item 27A(a) of Form N-1A. 
This proposed instruction would also include provisions that are 
applicable to an annual report that appears on a website or is 
otherwise provided electronically. See infra footnote 331 and 
accompanying text.
    \322\ While investors may be more likely to compare prospective 
investments using a prospectus, an investor may use the proposed 
annual report to compare funds he or she already owns and assess how 
the investor's mix of funds fits into his or her overall investment 
portfolio. A consistent presentation would assist in this analysis.
---------------------------------------------------------------------------

    In addition, the proposed general instructions to the shareholder 
report requirements are designed to promote effective communication 
between the fund and its investors. Therefore, we propose new 
requirements that funds use ``plain English'' principles for the 
organization, wording, and design of the annual report, taking into 
consideration fund shareholders' level of financial experience.\323\ 
Specifically, the proposed instructions would direct funds to be 
concise and direct and to use short sentences, active voice, and 
definite, concrete, everyday words. Funds would be instructed not to 
use legal jargon, highly technical business terms (unless they are 
clearly explained) or multiple negatives. Funds also would be 
instructed to write their annual report as if addressing the investor, 
using terms such as ``you'' or ``we.'' The proposed instructions also 
would direct funds to avoid the use of vague or imprecise boilerplate, 
as we believe this type of language would be unlikely to inform an 
investor effectively. The proposed instructions also direct funds to 
use white space, and implement other design features to make the annual 
report easy to read.
---------------------------------------------------------------------------

    \323\ See Instruction 6 to proposed Item 27A(a) of Form N-1A.
---------------------------------------------------------------------------

    Further, the proposed instructions would encourage funds to 
consider using, as appropriate, a question-and-answer format, charts, 
graphs, tables, bullet lists, and other graphics or text features as a 
way to help provide context for the information presented.\324\ We 
believe that these alternative ways of presenting information could 
increase readability and that this proposed instruction could encourage 
funds to use these presentation options, where appropriate.
---------------------------------------------------------------------------

    \324\ See Instruction 8 to proposed Item 27A(a) of Form N-1A; 
see also, e.g., Susan Kleimann, Making Disclosures Work for 
Consumers, Presentation to the SEC's Investor Advisory Committee 
(June 14, 2018) (``Kleimann''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf (encouraging, for example, using question-and-
answer format, the using headings to make structure clear, using a 
strong design grid to organize elements, making line length 
readable, and using common words and sentence constructions as ways 
of designing disclosure to promote readability).
---------------------------------------------------------------------------

    In addition, the proposed instructions would include legibility 
requirements for the body of every printed annual or semi-annual 
shareholder report and other tabular data.\325\ Those requirements 
would be consistent with the legibility requirements that apply to 
prospectuses.\326\ We believe that the proposed legibility requirements 
would help ensure that shareholder reports are easily readable by 
investors.
---------------------------------------------------------------------------

    \325\ See Instruction 13 to proposed Item 27A(a) of Form N-1A. 
In an annual or semi-annual shareholder report posted on a website 
or otherwise provided electronically, the proposed instructions 
would provide that a fund may satisfy legibility requirements 
applicable to printed documents by presenting all required 
information in a format that promotes effective communication as 
described in Instruction 8 to proposed Item 27A(a).
    \326\ 17 CFR 230.430 [Rule 420 under the Securities Act] 
generally provides that the body of all printed prospectuses and all 
notes to financial statements and other tabular data included 
therein be in roman type at least as large as legible 10-point 
modern type. However, where a prospectus is distributed through an 
electronic medium, rule 420 provides, in part, that issuers may 
satisfy legibility requirements applicable to all printed documents, 
by presenting all required information in a format readily 
communicated to investors.
---------------------------------------------------------------------------

    We request comment on the proposed general instructions regarding 
the format and presentation of the annual report, including:
    113. Would the proposed general instructions provide clear guidance 
to funds when preparing an annual report? Should any of the proposed 
instructions be modified or not be included? If so, which ones, how 
should they be modified (if applicable), and why?
    114. The proposed general instructions prescribe the order of 
information in the annual report. Is requiring a specific order for 
that information appropriate? Should the order be changed? If so, how? 
For instance, are there certain items that funds should disclose 
earlier (or later) in the report to be more consistent with 
shareholders' general areas of interest? Should we, for example, 
require disclosure of material fund changes earlier in the report? Does 
the proposed order of disclosure items appropriately place related 
items close together, or are there changes we could make to improve a 
shareholder's ability to understand how different disclosure items 
relate to one another?
    115. Would the proposed general instruction that directs funds to 
comply with legibility requirements assist investors by helping to 
promote the readability of shareholder reports? Are there other 
requirements that we should include to assist investors with the 
readability of shareholder reports?

[[Page 70758]]

    116. Are there other alternative ways of presenting information 
that we should encourage funds to consider using?
4. Electronic Annual Reports
    We recognize that fund shareholders may access their annual reports 
and other regulatory documents online, rather than (or in addition to) 
receiving the reports in paper format. Shareholders could elect to 
receive their annual reports through electronic delivery.\327\ 
Additionally, under our proposal, funds that rely either on rule 498 or 
on proposed rule 498B would have to make the most recent annual report 
available online.\328\ We also recognize that investors are 
increasingly relying on mobile applications for financial information, 
and we anticipate that funds may wish to make annual reports available 
in a format that these applications support (for example, electronic 
presentations other than a static email or PDF file). Presenting fund 
information--including annual reports--electronically has the potential 
advantage of permitting greater innovation and information-tailoring 
than the use of a static paper document. For example, funds could 
overlay electronic tools onto online disclosure, such as calculators, 
hover-over or pop-up information, and interactive features. Presenting 
information electronically could also improve the content of fund 
disclosures by, for example, allowing investors to customize certain 
fund disclosures, such as fees, expenses, and performance, based on an 
investor's individual circumstances. However, we appreciate that the 
use of electronic channels, and the overlay of electronic tools onto 
required regulatory documents, may present both practical and legal 
questions for fund registrants and other market participants.\329\
---------------------------------------------------------------------------

    \327\ Under this proposal, shareholder reports must be delivered 
in paper unless, consistent with Commission guidance, a shareholder 
elects electronic delivery. See supra footnote 21 and accompanying 
text.
    \328\ See infra Sections II.F.3.a and II.J.
    \329\ For example, the legal requirements associated with a 
particular online tool may vary based on what information is present 
and how it is presented. We discuss these issues in more detail 
below. In addition, it may be costly to produce, maintain and update 
electronic tools and produce tools that function well on a variety 
of devices (such as phones, tablets and computers).
---------------------------------------------------------------------------

    In light of this, we are proposing instructions that are designed 
to clarify requirements for electronic annual reports and to promote 
the use of interactive, user-friendly design features that may be 
tailored to meet individual investors' needs and improve investor 
engagement. We are tailoring certain proposed instructions to reflect 
that annual reports may be electronic as well as paper-based. First, 
the proposed requirements for the annual report's ``cover page'' are 
also applicable to the ``beginning'' of the report, which is designed 
to reflect that electronic reports may not have a physical page at 
their beginning.\330\ Similarly, the proposed instruction that would 
provide an ordering requirement for the contents of an annual report 
also includes a provision for annual reports that appear on a website 
or are otherwise provided electronically.\331\ This proposed 
instruction specifies that information should be organized in a manner 
that gives each item similar prominence, and presents the information 
in the same order, as that provided by the order the proposed 
instruction prescribes. For instance, an annual report available on a 
website could satisfy this requirement if each required disclosure item 
is presented with equal prominence in a separate tab and the order of 
the tabs follows the prescribed order, such as from left-to-right or 
top-to-bottom. Similarly, a mobile application could satisfy this 
requirement if the shareholder report navigation screen presents each 
shareholder report item with equal prominence and follows the 
prescribed order of information.\332\
---------------------------------------------------------------------------

    \330\ See supra footnote 136.
    \331\ See Instruction 1 to proposed Item 27A(a) of Form N-1A.
    \332\ See infra footnotes 338-340 and related discussion 
regarding the recordkeeping and record retention requirements 
associated with such electronic tools.
---------------------------------------------------------------------------

    We are also proposing instructions that would provide additional 
flexibility for funds to add additional tools and features to annual 
reports that appear on a website or are otherwise provided 
electronically.\333\ The proposed instructions would encourage funds to 
use online tools designed to enhance an investor's understanding of 
material in the annual reports. This could include, for example: Video 
or audio messages, mouse-over windows, pop-up definitions or 
explanations of difficult concepts, chat functionality, and expense 
calculators. It also includes other forms of electronic media, 
communications, or tools designed to enhance an investor's 
understanding of material in the annual report. For example, this could 
include the ability to customize expense, performance or holdings 
information, or to make performance information more interactive.\334\ 
We believe that permitting and encouraging these design features would 
allow for a more interactive and user-friendly experience and would 
improve investor engagement. When using interactive graphics or tools, 
funds are permitted to include instructions on their use and 
interpretation.\335\ In addition, the proposed general instructions 
clarify that any explanatory or supplemental information that funds 
provide as online tools may not obscure or impede understanding of the 
required disclosures.\336\
---------------------------------------------------------------------------

    \333\ See Instruction 8 to proposed Item 27A(a) of Form N-1A.
    \334\ For example, one feature may be the ability to hover over 
a point on the performance line graph to see the date and dollar 
value associated with that point.
    \335\ See Instruction 10 to proposed Item 27A(a) of Form N-1A.
    \336\ See id. (providing that any supplemental information may 
not, because of the nature, quantity, or manner of presentation, 
obscure or impede understanding of the information that must be 
included).
---------------------------------------------------------------------------

    The default presentation of the content of any electronically 
presented annual report must use the value that the applicable 
requirement under Item 27A prescribes.\337\ For example, while the 
default presentation in the expense example and performance line graph 
must be on a $10,000 assumed investment, a feature may permit an 
investor to enter a different amount but the investor must, as a 
default, be able to view the assumed amount.\338\ One result of this 
instruction would be that when the contents of a fund's annual reports 
are derived from the fund's audited financial statements, the default 
online presentation would be the audited figures.
---------------------------------------------------------------------------

    \337\ See Instruction 8 to proposed Item 27A(a) of Form N-1A.
    \338\ See Item 27A(c) and (d) of Form N-1A.
---------------------------------------------------------------------------

    Under the general instructions we are proposing, any information 
that is included in online tools that the fund uses, but that is not 
included in the annual report that the fund files on Form N-CSR, would 
have the same status under the Federal securities laws as any other 
website or other electronic content that the fund produces or 
disseminates.\339\ For example, if a fund includes a video providing 
more detail about the fund's investments and performance, the video 
may, based on the facts and circumstances, be an advertisement subject 
to rule 482.\340\

[[Page 70759]]

Under these circumstances, the fund would be subject to the same 
liability standard and filing requirements that attach to any other 
rule 482 advertisement. This proposed instruction is designed to remind 
funds about liability and any filing requirements associated with any 
additional information that a fund chooses to include with the online 
version of its annual report (other than the shareholder report 
information that it files with the Commission on Form N-CSR). This 
supplemental information would also be subject to a record retention 
requirement.\341\
---------------------------------------------------------------------------

    \339\ See Instruction 8 to proposed Item 27A(a) of Form N-1A. 
That instruction would provide, in part: ``Any information that is 
not included in the annual or semi-annual shareholder report filed 
on Form N-CSR shall have the same status, under the Federal 
securities laws, as any other website or electronic content that the 
Fund produces or disseminates.''
    \340\ 17 CFR 230.482. An investment company advertisement that 
complies with rule 482 is deemed to be a section 10(b) prospectus 
for purpose of section 5(b)(1) of the Securities Act. As a section 
10(b) prospectus, an investment company advertisement is subject to 
liability under section 12(a)(2) of the Securities Act and the 
antifraud provisions of the Federal securities laws.
    \341\ Section 31(a) of the Investment Company Act imposes 
recordkeeping obligations on registered investment companies, and 
also requires that each investment adviser (that is not a majority-
owned subsidiary), depositor, and principal underwriter for a 
registered investment company maintain and preserve such records as 
the Commission shall prescribe to record that person's transactions 
with the registered investment company. The Commission prescribes 
those recordkeeping requirements under 17 CFR 270.31a-1 [rule 31a-1] 
and rule 31a-2. Specifically, rule 31a-1 provides the records that a 
registered investment company must maintain; rule 31a-2 provides the 
retention period for those records.
    To address funds' retention of any supplemental information that 
a fund chooses to include in its online version of its annual report 
(other than the shareholder report information that the fund files 
with the Commission on Form N-CSR), we are proposing a conforming 
change to rule 31a-2 that would require that every investment 
company preserve for a period not less than six years, the first two 
years in an easily accessible place, any shareholder report required 
by Sec.  270.30e-1 (including any version posted on a website or 
otherwise provided electronically) that is not filed with the 
Commission in the exact form in which it was used. See proposed rule 
31a-2(a)(7).
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    Finally, we are proposing an instruction providing that if the 
shareholder report references other information that is available 
online, the report should include a link or some other means of 
immediately accessing that information.\342\ The proposed instruction 
states that, for example, the fund should provide hyperlinks to the 
fund's prospectus and financial statements if the information is 
available online. The proposed instruction also states that, in an 
annual report that is delivered in paper format, funds may include 
website addresses, QR codes, or other means of providing access to such 
information.\343\ We believe these approaches are consistent with a 
layered approach to disclosure, and that providing ready access to the 
information that a shareholder report references (but does not directly 
include) would be a convenient feature for investors. Under these 
requirements, a fund must include a link specific enough to lead 
investors directly to a specific item or alternatively to a central 
site with prominent links to the referenced information. For example, a 
reference to a fund's prospectus could include a direct link to the 
prospectus or might include a link to the landing page that includes 
prominent links to several fund documents, such as the summary 
prospectus, prospectus, SAI and annual reports. However, the link 
cannot lead investors to a home page or section of the fund's website 
other than on which the specified item is posted. This proposed 
requirement is designed to permit the investor easily to locate (i.e., 
without numerous clicks) the information in which he or she is 
interested.
---------------------------------------------------------------------------

    \342\ See Instruction 9 to proposed Item 27A(a) of Form N-1A.
    \343\ See id.
---------------------------------------------------------------------------

    We request comment on the proposed general instructions regarding 
electronic annual reports, including:
    117. Are the proposed instructions that are designed to reflect 
that annual reports may be electronic as well as paper-based 
appropriate? Specifically, would the requirements for the ``beginning'' 
of the shareholder report clarify the contents that the Commission 
would require to appear first in electronically presented annual 
reports? Similarly, is the proposed instruction permitting an 
``equivalent'' order (to that prescribed in Form N-1A) for annual 
reports that appear on a website or are otherwise provided 
electronically (such as a mobile application) appropriate, and is this 
instruction clear? If not, why not? Are there any other instructions 
that would help clarify content and format requirements for electronic 
annual reports?
    118. The proposed general instructions would encourage a fund to 
use online tools for annual reports that are available electronically. 
Would this proposed instruction help to explain the content required to 
be included in the annual report? Is permitting the additional 
information conveyed by these tools appropriate? Should there be any 
limits on the types of additional information that funds present along 
with electronic versions of their annual reports, in addition to the 
limits prescribed by the proposed instructions (e.g., that explanatory 
or supplemental information be responsive to the proposed shareholder 
report content requirements, that it not be misleading or impede 
understanding of the required disclosures, and that the default 
presentation contents in electronically presented shareholder reports 
be based on the same assumptions required by Item 27A)? For instance, 
should we permit a fund's expense presentation to include an 
explanation that compares a fund's expenses to its peer group?
    119. The federal securities laws generally do not prohibit a fund 
from posting a version of its annual or semi-annual shareholder report 
translated into a foreign language on its website.\344\ Further, we 
understand that funds occasionally will include online tools, such as 
translators, on their websites to assist non-English speaking investors 
and investors with disabilities to assess information about the fund. 
Should the Commission address the translation of a shareholder report 
or other documents filed with the Commission (such as a prospectus) 
into a foreign language and the transmission of those documents to 
shareholders? If so, what factors should the Commission consider? 
Should the Commission address foreign language shareholder reports (and 
foreign language versions of other fund regulatory materials) not only 
for open-end funds, but also other types of funds? If the Commission 
were to amend its rules to address the transmission of foreign language 
shareholder reports, should it also require foreign language versions 
of shareholder reports to be filed with the Commission?
---------------------------------------------------------------------------

    \344\ See supra paragraph accompanying footnotes 339 through 341 
and accompanying text (discussing the status under the Federal 
securities laws of information that funds include on their 
websites).
---------------------------------------------------------------------------

    120. As proposed, any additional information that a fund presents 
in connection with an electronic version of its annual report that is 
not included in the annual report filed on Form N-CSR would have the 
same status under the Federal securities laws as any other website or 
electronic content that the fund produces or disseminates. Is this 
approach appropriate? Notwithstanding this proposed instruction, should 
we require a fund to file this additional information with the 
Commission? If so, why, and through what channels should funds be 
required to file the additional information (e.g., on Form N-CSR)? Is 
it appropriate to provide investors additional information online that 
would not have to be provided in paper to investors who request paper 
documents? If not, why not?
    121. Is it appropriate to require that any electronic version of an 
annual report provide a means of facilitating access (such as a 
hyperlink) to any information that is referenced in the annual report 
that is available online? If not, why not? Similarly, is it appropriate 
to permit an annual report that is delivered in paper to include 
website addresses, QR codes, or other

[[Page 70760]]

means of facilitating access to such information? Should the use of 
website addresses and QR codes be required for annual reports delivered 
in paper?
    122. As proposed, the additional explanatory or supplemental 
information permitted in an electronic annual report may not, because 
of the nature, quantity, or manner of presentation, obscure or impede 
understanding of the information that must be included. Are these 
restrictions appropriate? If not, why not? Should this instruction also 
specify that any explanatory or supplemental information that funds 
provide as online tools be responsive to the proposed content 
requirements for shareholder reports? Could this additional restriction 
prevent funds from providing information that some shareholders might 
find useful? Or would it be helpful in furthering the goal of ensuring 
that explanatory or supplemental information not obscure understanding 
of the required disclosures?
    123. Rather than what we are proposing, should funds be able to 
transmit multiple-series annual reports to shareholders but be required 
to provide tools for tailoring the online presentation of the 
disclosure to an individual series? Should we require multi-class funds 
to provide tools for tailoring the online presentation of the 
disclosure to an individual class? Why or why not?
    124. When a fund's annual report is available on a website or 
otherwise available electronically, should the investor be warned when 
he or she leaves the annual report content and moves to other fund 
content? If so, why? Should all annual report content (particularly 
when shown on multiple pages or tabs), be clearly identified as being 
part of the annual report? If not, why not?
    125. Do the proposed general instructions sufficiently encourage 
electronic design and delivery of the annual report? Are the general 
instructions sufficiently flexible to permit delivery on phones, 
tablets, and other devices and to accommodate information conveyed via 
videos, interactive graphics, or tools and calculators? How can the 
Commission encourage funds to make fuller use of innovative technology 
to enable more interactive, user-friendly annual reports?

F. Semi-Annual Shareholder Report

    We are proposing to specify the design and content of funds' semi-
annual reports through new Item 27A of Form N-1A. These design and 
content specifications are similar to those we are proposing for funds' 
annual reports.\345\
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    \345\ See supra section II.B.
---------------------------------------------------------------------------

    The table below summarizes the proposed content that funds would 
include in their semi-annual reports and compares the proposal to 
current semi-annual report disclosure requirements.

                                 Table 3--Outline of Proposed Semi-Annual Report
----------------------------------------------------------------------------------------------------------------
                                                                                         Current item of form  N-
                                             Description        Proposed item of form N-  1A containing similar
                                                                           1A                  requirements
----------------------------------------------------------------------------------------------------------------
Cover Page or Beginning of Report....  Fund/Class Name(s).....  Item 27A(b).
                                       Ticker Symbol(s).......  Item 27A(b)............
                                       Principal U.S.           Item 27A(b).
                                        Market(s) for ETFs.
                                       Statement Identifying    Item 27A(b).
                                        as ``Semi-Annual
                                        Shareholder Report''.
                                       Legend.................  Item 27A(b).
Content..............................  Expense Example........  Item 27A(c)............  Item 27(d)(1).
                                       Management's Discussion  Item 27A(d)............  Item 27(b)(7).
                                        of Fund Performance
                                        (optional).
                                       Fund Statistics........  Item 27A(e)............
                                       Graphical                Item 27A(f)............  Item 27(d)(2).
                                        Representation of
                                        Holdings.
                                       Material Fund Changes    Item 27A(g)............
                                        (optional).
                                       Changes in and           Item 27A(h)............  Item 27(b)(4).
                                        Disagreements with
                                        Accountants.
                                       Statement Regarding      Item 27A(i)............  Item 27(d)(6)(ii)
                                        Liquidity Risk
                                        Management Program.
                                       Availability of          Item 27A(j)............  Item 27(d)(3) through
                                        Additional Information.                           (5).
----------------------------------------------------------------------------------------------------------------

1. Scope and Contents of the Proposed Semi-Annual Report
    As with the proposed annual report, we propose to limit the scope 
of funds' semi-annual reports in several respects to reduce the overall 
length and complexity of these reports. First, we propose to require a 
fund registrant to prepare separate semi-annual reports for each series 
of the fund.\346\ Second, we propose generally to limit the content a 
fund may include in its semi-annual report to the information that Item 
27A of Form N-1A specifically permits or requires.\347\ However, if a 
fund's particular circumstances may cause the required disclosures to 
be misleading, the fund may add additional information that is 
necessary to make the required disclosure items not misleading. 
Finally, the proposed amendments to Form N-1A would not permit a fund 
to incorporate by reference any information into its semi-annual 
report.\348\ Collectively, these restrictions parallel our proposed 
scope and content limitations for annual reports.\349\ As is the case 
today, the proposed semi-annual report would not be subject to page or 
word limits. As noted above, we believe a set limit could constrain 
appropriate disclosure or lead funds to omit material information. 
However, we believe that the proposed limits on the contents of 
shareholder reports should nonetheless limit their length in support of 
our goal of concise, readable disclosure.\350\
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    \346\ See Instruction 4 to proposed Item 27A of Form N-1A.
    \347\ See Instruction 3 to proposed Item 27A of Form N-1A.
    \348\ See Instruction 5 to proposed Item 27A of Form N-1A.
    \349\ See supra Section II.B.1.a and II.B.1.b; see also 
Instructions 3, 4, and 5 to proposed Item 27A of Form N-1A.
    \350\ Because we estimate that the proposed annual report would 
be approximately 3 to 4 pages in length, we similarly estimate that 
the proposed semi-annual report (which would include fewer required 
disclosure items than the proposed annual report) would be 
approximately 3 to 4 pages in length or shorter. In the case of 
paper delivery, this may allow funds to deliver semi-annual reports 
using a trifold self-mailer (or a similarly concise mailing). See 
supra footnote 134 and accompanying text.

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[[Page 70761]]

    The cover page or beginning of the proposed semi-annual report 
would essentially contain the same content as the annual report (with 
the only difference being references to a ``semi-annual report'' 
instead of an ``annual report'').\351\
---------------------------------------------------------------------------

    \351\ See proposed Item 27A(b) of Form N-1A; see also supra 
Section II.B.2.a.
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    Semi-annual reports currently include an expense example.\352\ The 
proposed semi-annual report would retain an expense example, which 
would be subject to the same content requirements as the expense 
example in the proposed annual report.\353\
---------------------------------------------------------------------------

    \352\ See Item 27(d)(1) of Form N-1A.
    \353\ See proposed Item 27A(c) of Form N-1A; see also supra 
Section II.B.2.b. The expense example in the semi-annual report 
would cover a 6-month reporting period.
---------------------------------------------------------------------------

    We do not currently require MDFP in semi-annual reports. Under our 
proposal, semi-annual reports similarly would not require MDFP, but 
funds could include this disclosure on an optional basis.\354\ We 
understand that it is currently common for funds to include MDFP in 
their semi-annual reports, and we believe that continuing to allow this 
disclosure would enable funds to identify factors that could help 
investors better contextualize other information disclosed in the semi-
annual report. However, any such disclosure would have to comply with 
the proposed content requirements for MDFP in annual reports.\355\
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    \354\ See proposed Item 27A(d) of Form N-1A.
    \355\ See supra Section II.B.2.c.
---------------------------------------------------------------------------

    Under our proposal, semi-annual reports, like annual reports, would 
have to include certain fund statistics, including the fund's: (1) Net 
assets, (2) total number of portfolio holdings, and (3) portfolio 
turnover rate.\356\ This new disclosure requirement for semi-annual 
reports would parallel proposed required disclosures in annual 
reports.\357\ As in annual reports, this proposed disclosure 
requirement is intended to provide succinct fund disclosures in a 
format that investors may be more likely to review than long 
narratives, and is designed to help contextualize other disclosures 
required in semi-annual reports.\358\ In addition, a fund could 
disclose any additional statistics that it believes would help 
shareholders better understand the fund's activities and operation 
during its most recent fiscal half-year.\359\
---------------------------------------------------------------------------

    \356\ See proposed Item 27A(e) of Form N-1A.
    \357\ We note, however, that semi-annual reports currently must 
disclose net assets and portfolio turnover rate as part of the 
requirement to disclose condensed financial information. See Item 
27(c)(2) of Form N-1A; see also supra footnotes 243 and 249 and 
Section II.B.2.d.
    \358\ See supra text accompanying footnotes 243 through 250.
    \359\ See proposed Item 27A(e) of Form N-1A; see also supra text 
accompanying and following footnote 251.
---------------------------------------------------------------------------

    Semi-annual reports currently include a graphical representation of 
holdings.\360\ For the same reasons that we propose to retain the 
current requirements for the graphical representation of holdings in 
the annual report (with revisions designed to improve the 
presentation), we propose to retain the current requirements for the 
graphical representation of holdings in funds' semi-annual 
reports.\361\ The graphical representation of holdings in the proposed 
semi-annual report would be subject to the same content requirements as 
in the proposed annual report.\362\
---------------------------------------------------------------------------

    \360\ See Item 27(d)(2) of Form N-1A.
    \361\ See supra footnotes 260-262 and accompanying text.
    \362\ See proposed Item 27A(f) of Form N-1A; see also supra 
Section II.B.2.e.
---------------------------------------------------------------------------

    We do not currently require a discussion of material changes to the 
fund in semi-annual reports. Under our proposal, such disclosure would 
still not be required, but funds could include this disclosure on an 
optional basis.\363\ We believe that permitting, but not requiring, 
this disclosure is appropriate because we anticipate that it would be 
common under the proposed rules for fund shareholders to receive 
notices of material changes as they occur throughout the year (i.e., 
the notices that proposed rule 498B would require, or as prospectus 
``stickers'' for those funds that do not rely on proposed rule 
498B).\364\ Requiring a discussion of material changes in the semi-
annual report could be duplicative in light of these other notices. 
However, we are permitting funds to include this disclosure in their 
semi-annual reports because we anticipate that there could be 
circumstances in which discussing material changes could help investors 
better contextualize other information in the semi-annual report. Any 
such disclosure would have to comply with the proposed content 
requirements for the discussion of material changes in annual 
reports.\365\
---------------------------------------------------------------------------

    \363\ See proposed Item 27A(g) of Form N-1A.
    \364\ See infra Section II.F.3.b (discussing the notices of 
material changes that the proposal would require, for funds relying 
on proposed rule 498B); see also infra footnote 870 and accompanying 
text (estimating that 90 percent of funds would rely on proposed 
rule 498B instead of sending annual prospectus updates to existing 
shareholders).
    \365\ See supra Section II.B.2.f.
---------------------------------------------------------------------------

    As discussed above, we are proposing to require funds to include, 
under certain conditions, a statement in their semi-annual or annual 
reports regarding their liquidity risk management program.\366\ This 
statement would include a brief summary of: (1) The key factors or 
market events that materially affected the fund's liquidity risk during 
the reporting period, (2) the key features of the fund's liquidity risk 
management program, and (3) the effectiveness of the fund's liquidity 
risk management program over the past year.\367\ Depending on the 
timing of the fund's board's review of the fund's liquidity risk 
management program, the fund would include the statement in either its 
annual or semi-annual report.\368\ If the board were to review the 
liquidity risk management program more frequently than annually, a fund 
could choose to include the discussion of the program's operation and 
effectiveness over the past year in the fund's annual and/or semi-
annual report, but this discussion would not be required to be included 
in both reports.\369\
---------------------------------------------------------------------------

    \366\ See supra Section II.B.2.g.
    \367\ See proposed Item 27A(i) of Form N-1A.
    \368\ See supra footnote 307 and accompanying text.
    \369\ See Instruction 3 to proposed Item 27A(i) of Form N-1A. 
Current Form N-1A includes the same instruction providing 
flexibility for a fund whose board reviews the liquidity risk 
management program more frequently than annually to include the 
discussion of the program in either the semi-annual report or the 
annual report, but not both. See Instruction to Item 27(d)(6)(ii) of 
Form N-1A.
---------------------------------------------------------------------------

    Under current shareholder report requirements, funds must include 
statements regarding the availability of certain information not 
included in the semi-annual report, namely the fund's: (1) Quarterly 
portfolio schedule; (2) proxy voting policies and procedures; and (3) 
proxy voting record.\370\ Under our proposal, the semi-annual report 
would have to similarly include a brief, plain English statement that 
certain additional fund information is available on the fund's website, 
including, as applicable, the fund's prospectus, financial statements, 
quarterly portfolio schedule, and proxy voting record.\371\ The 
statement could also reference other information on the fund's website 
that the fund reasonably believes shareholders would view as 
important.\372\ In addition, if the shareholder report appears on a 
fund's website or otherwise is provided electronically, the fund must 
provide a means of facilitating access to that additional information 
(such as a

[[Page 70762]]

hyperlink).\373\ Collectively, these requirements would be the same as 
the proposed requirements with regard to the availability of additional 
information in annual reports.\374\
---------------------------------------------------------------------------

    \370\ See Items 27(d)(3) through (5) of Form N-1A.
    \371\ See proposed Item 27A(j) of Form N-1A.
    \372\ Id.
    \373\ See Instruction 1 to proposed Item 27A(j) of Form N-1A.
    \374\ See id.; see also supra Section II.B.2.g.
---------------------------------------------------------------------------

    We request comment generally on the proposed scope and content 
requirements for funds' semi-annual reports, and specifically on the 
following issues:
    126. Is the proposed scope for semi-annual reports appropriate? To 
the extent the Commission changes the proposed scope of annual reports, 
should the Commission adopt those same changes for semi-annual reports? 
In contrast, are there any unique scope considerations for semi-annual 
reports, as opposed to annual reports?
    127. Are the proposed content requirements for semi-annual reports 
appropriate? To the extent that the Commission adopts changes to the 
proposed content requirements for annual reports, should the Commission 
adopt those same changes for semi-annual reports? In contrast, are 
there any unique content considerations for semi-annual reports, as 
opposed to annual reports? For example, are there any amendments we 
should make to the proposed MDFP requirement to clarify disclosure 
obligations in the context of a semi-annual reporting period, as 
opposed to an annual reporting period? As another example, should we 
require the statement regarding the fund's liquidity risk management 
program in both the annual and the semi-annual reports, instead of 
providing the flexibility to include this disclosure in either report 
(depending on the timing of the board's review of the program)?
    128. Is it appropriate to permit, but not require, funds to include 
MDFP and a discussion of material fund changes in their semi-annual 
reports? Why or why not? Would funds include this optional disclosure 
in their semi-annual reports, and if so, why? Should we permit any 
additional flexibility with regard to the content requirements of semi-
annual reports and, if so, are there any corresponding changes that we 
should make to the proposed form amendments to implement such 
flexibility?
    129. Should the Commission make any changes to the frequency of 
fund shareholder reports? For example, should the Commission require 
the transmittal of fund shareholder reports more or less frequently 
than on a semi-annual basis? \375\ To what extent would changes in the 
frequency of shareholder reports impact investors and their investment 
decision-making?
---------------------------------------------------------------------------

    \375\ See infra Section II.C.3.b (seeking comment on, among 
other things, an alternative approach in which the requirement to 
transmit a semi-annual report could be satisfied instead by updating 
certain information that appears on a fund website either semi-
annually or on some more-frequent basis).
---------------------------------------------------------------------------

2. Format and Presentation of Semi-Annual Report
    Under our proposal, as discussed below, the semi-annual report 
would be generally subject to the same format and presentation 
requirements as the annual report.\376\
---------------------------------------------------------------------------

    \376\ See Section II.B.3.
---------------------------------------------------------------------------

    Information in semi-annual reports would be required to appear in 
the same order as the corresponding form items appear in the proposed 
amendments to Form N-1A.\377\ Any information that a fund could choose 
to include in the semi-annual report would also be subject to this 
proposed ordering requirement (that is, it would have to be presented 
in the same order as the parallel mandatory disclosures in annual 
reports).\378\ Like the parallel requirement for annual reports, this 
proposed ordering requirement for semi-annual reports is designed to 
ensure that information we believe is most salient to shareholders 
would appear first in the report. The proposed ordering requirement 
also is designed to promote consistency and comparison across funds and 
would place related report contents close together.
---------------------------------------------------------------------------

    \377\ See Instruction 2 to proposed Item 27A(a) of Form N-1A. 
This proposed instruction would also include provisions that are 
applicable to a semi-annual report that appears on a website or is 
otherwise provided electronically. See infra Section II.C.3.
    \378\ Id.
---------------------------------------------------------------------------

    The other proposed instructions for annual reports' format and 
presentation discussed above also would apply to semi-annual reports. 
These include the proposed ``plain English'' instructions for the 
organization, wording, and design of the report.\379\ They also include 
the proposed instructions encouraging funds to consider using, as 
appropriate, a question-and-answer format, charts, graphs, tables, 
bullet lists, and other graphics or text features as a way to help 
provide context for the information presented.\380\
---------------------------------------------------------------------------

    \379\ See Instruction 6 to proposed Item 27A(a) of Form N-1A; 
see also supra footnote 323 and accompanying paragraph.
    \380\ See Instruction 8 to proposed Item 27A(a) of Form N-1A; 
see also supra footnote 324 and accompanying paragraph.
---------------------------------------------------------------------------

    We request comment generally on the proposed format and 
presentation requirements for funds' semi-annual reports, and 
specifically on the following issues:
    130. Are the proposed format and presentation requirements for 
semi-annual reports appropriate? To the extent that the Commission 
adopts rules that include changes to these requirements for annual 
reports, should the Commission adopt those same changes for semi-annual 
reports? In contrast, are there any unique considerations with regard 
to the format and presentation requirements for semi-annual reports, as 
opposed to annual reports?
    131. Under our proposal, semi-annual reports may optionally include 
certain disclosures that would be required to be included in annual 
reports.\381\ Is it appropriate to require any such optional 
disclosures to be presented in the same order as the information would 
be presented in annual reports? To what extent could this cause 
confusion for investors reading semi-annual reports, given that some 
semi-annual reports might contain additional optional disclosures 
interspersed between required disclosures? In contrast, to what extent 
would it be confusing to require these optional disclosures to be 
presented in a different order (e.g., following all required 
disclosures)?
---------------------------------------------------------------------------

    \381\ See supra footnotes 354 and 355 and accompanying text 
(discussing the proposal to permit, but not require, MDFP to be 
included in semi-annual reports) and supra footnotes 363 through 365 
(discussing the proposal to permit, but not require, a discussion of 
material fund changes to be included in semi-annual reports).
---------------------------------------------------------------------------

3. Electronic Semi-Annual Reports
a. Proposed Instructions and Requirements
    Our proposed 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.\382\ Among 
other things, these proposed instructions would (1) provide ordering 
and presentation requirements for semi-annual reports that appear on a 
website or are otherwise provided electronically, (2) 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 (3) 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.\383\
---------------------------------------------------------------------------

    \382\ See supra Section II.B.4.
    \383\ Id.
---------------------------------------------------------------------------

    We request comment generally on the proposed instructions regarding 
funds' electronic semi-annual reports, and specifically on the 
following issues:

[[Page 70763]]

    132. Are the proposed instructions regarding funds' electronic 
semi-annual reports appropriate? Should any of those instructions be 
modified or should any other revisions be made to the Commission's 
proposal with regard to electronic shareholder reports, in order to 
better reflect investor preferences or to encourage the use of 
electronic shareholder reports by funds?
b. Alternatives Involving Electronic Semi-Annual Reports
    Currently, funds are required to transmit semi-annual reports to 
shareholders, and--as with annual reports--they will be able to satisfy 
this requirement in certain cases under rule 30e-3 by posting the 
report (and certain other required materials) online and providing a 
notice of the reports' online availability.\384\ We considered 
proposing alternative requirements for transmitting semi-annual 
reports. For example, we considered allowing funds to satisfy the 
requirement to transmit semi-annual reports by filing certain 
information on Form N-CSR. Also, in light of current internet use 
trends, we considered allowing funds to satisfy the requirement to 
transmit a semi-annual report by updating certain information on a fund 
website either semi-annually or on some more-frequent basis.
---------------------------------------------------------------------------

    \384\ See supra footnote 22 and accompanying text. The 
Commission has previously interpreted the meaning of ``transmit'' in 
this context. See discussion of previous Commission guidance on the 
use of electronic media for delivery purposes, supra footnote 21.
---------------------------------------------------------------------------

    For example, we understand that many funds currently publish 
monthly or quarterly fact sheets online.\385\ These fact sheets tend to 
include much of the information that would appear in the proposed 
requirements for funds' semi-annual reports, and often present such 
information in a concise format that may be appealing to investors. We 
understand that some shareholders or financial professionals may use 
fact sheets to monitor fund investments because, among other reasons, 
fact sheets include more up-to-date performance information than 
shareholder reports or prospectuses. While we are not proposing an 
approach in which a fund's obligation to transmit semi-annual reports 
would be deemed to be satisfied if the fund were to merely post updated 
fact sheets (or similar documents) online on a semi-annual or more-
frequent basis, we are soliciting comment on potential disclosure 
alternatives that would leverage information that many funds already 
provide on their websites.
---------------------------------------------------------------------------

    \385\ See generally supra text following footnote 23.
---------------------------------------------------------------------------

    An approach that would leverage frequently updated website content, 
such as fund fact sheets, raises the consideration of how frequently 
required regulatory disclosures should ideally be provided to fund 
shareholders. Our proposed semi-annual report requirement parallels 
current requirements with regard to the frequency of shareholder 
reports, which are statutorily mandated to be transmitted on a semi-
annual basis.\386\ We are currently unaware of any evidence indicating 
that fund investors specifically desire shareholder reports to be 
provided less frequently.\387\ The proposed approach also reflects our 
view that the proposed amendments to the contents of annual and semi-
annual reports represent the information that would be most useful and 
salient to investors in assessing and monitoring their fund 
investments.
---------------------------------------------------------------------------

    \386\ See section 30(e) of the Investment Company Act.
    \387\ See, e.g., Broadridge Comment Letter II. See also ICI 
Comment Letter I (asserting that a streamlined shareholder report 
should be required on the same semi-annual frequency as the current 
shareholder report). But see supra footnotes 54 to 55 and 
accompanying text (discussing some investors' concerns about the 
volume and frequency of fund disclosure materials they currently 
receive).
---------------------------------------------------------------------------

    More generally, we considered the effects and benefits of a 
disclosure framework in which fund shareholders have regulatory 
information ``pushed'' to them on a semi-annual basis (e.g., the 
required direct transmission of shareholder reports twice a year) 
versus a hypothetical disclosure framework in which fund shareholders 
would have the onus to periodically ``pull'' regulatory disclosures 
from various sources (e.g., information that is periodically updated on 
a fund website).\388\ We are concerned that such a hypothetical 
disclosure framework would represent a significant change in current 
practices. We are also concerned that a ``pull''-only disclosure 
framework may not be aligned with investor preferences. Although we 
understand that some investors prefer receiving fund disclosure 
electronically (e.g., through email, mobile application, or website 
availability), we do not have evidence that these investors would 
prefer a disclosure approach in which they would receive no 
notification that updated disclosures are available.\389\ We recognize 
that a hypothetical disclosure framework could require funds to 
``push'' to investors a short notice that updated information is 
available online, similar to the current approach under rule 30e-3. 
However, rule 30e-3 contemplates notices being provided semi-annually. 
To the extent that, under the hypothetical disclosure framework, funds 
would update their online materials more frequently than semi-annually, 
providing notices each time that online materials were updated could be 
costly and could dissuade funds from updating these materials. 
Moreover, we understand that some investors generally prefer to receive 
at least certain fund information in paper format.\390\ We recognize 
that there are other possible permutations of these disclosure 
approaches (for example, providing a notice of updated online 
information only semi-annually or permitting a fund to rely on rule 
30e-3 with respect to the requirement to provide semi-annual reports, 
while continuing to require funds to provide annual reports directly to 
shareholders), and we request comment on these possible approaches 
below.
---------------------------------------------------------------------------

    \388\ For example, rule 30e-3 could be understood as a hybrid 
``push/pull'' disclosure framework in which notices are pushed out 
to investors to notify them that shareholders reports have been 
posted online and are available to be pulled down. See rule 30e-
3(c). In addition, rule 30e-3 allows shareholders to elect to remain 
in a pure ``push'' disclosure framework in which those shareholders 
will continue to have shareholder reports directly delivered to 
them. See rule 30e-3(f).
    \389\ See supra footnote 70 and accompanying text.
    \390\ See supra footnotes 71 and 72 and accompanying text.
---------------------------------------------------------------------------

    In addition, potential regulatory challenges and unintended 
consequences could result from such a hypothetical disclosure 
framework. For example, as discussed below, we seek comment regarding 
the extent to which this hypothetical framework could result in a 
bifurcated disclosure system. That is, we ask about the effects on fund 
investors if certain funds would no longer transmit semi-annual reports 
directly and instead would update information posted online, while 
other funds would continue to transmit semi-annual reports directly.
    We request comment generally on the alternatives to the proposed 
semi-annual report transmission requirement that we considered, and 
specifically on the following issues:
    133. Should the Commission require the direct transmission of semi-
annual reports, as proposed? Alternatively, should the Commission adopt 
different conditions for satisfying this transmission requirement? For 
example, should funds be permitted to satisfy this requirement by 
filing certain information on Form N-CSR, pursuant to certain 
conditions? If so, what information should be filed, and what 
conditions would be appropriate? As another example, under the 
proposal, funds registered on Form N-1A would no longer be permitted to 
rely on rule 30e-3 to satisfy annual and semi-annual

[[Page 70764]]

report transmission requirements.\391\ Should we instead continue to 
permit these funds to rely on rule 30e-3 as an alternative method of 
transmitting their semi-annual reports (while, as proposed, no longer 
permitting them to rely on the rule with respect to annual reports)? 
What evidence is there (for example, of investor preferences) to 
support different transmission requirements for semi-annual reports 
versus annual reports?
---------------------------------------------------------------------------

    \391\ See infra Section II.G.
---------------------------------------------------------------------------

    134. As a further alternative, would it be appropriate for the 
Commission to permit funds to satisfy their obligations to transmit 
semi-annual reports by updating certain information that appears on 
their websites (for example, updating a fund fact sheet), either semi-
annually or on some more frequent basis? If so, what frequency and 
which information would be appropriate? Would it be appropriate to 
require a fund's website to include all of the information that we are 
proposing that funds include in their semi-annual reports, a subset of 
this information, or different information? To what extent should the 
Commission specify the content, presentation, and/or accessibility 
requirements for such information, and what should these requirements 
be? How, if at all, should funds be required to inform shareholders 
that updated information is available on their websites? Should there 
be any other conditions for a fund to be able to satisfy its semi-
annual report transmission obligations in this way, and if so what 
should they be? To what extent should the Commission consider or 
address the fact that, pursuant to rule 482 under the Securities Act, 
fact sheets and other information that funds make available online are 
generally considered to be omitting prospectuses, and are thus subject 
to prospectus liability that does not apply to shareholder reports? 
Should information that funds make available online under this 
alternative be required to be filed with the Commission? To what extent 
would this alternative approach result in a bifurcated disclosure 
system, as described above? What would be the effects on investors and 
those who wish to review semi-annual reports, if semi-annual reports 
were only prepared by some, but not all, funds? Would this alternative 
be aligned with investor preferences for fund shareholder report 
disclosure? Would it otherwise raise any investor protection concerns, 
and if so, what concerns?
    135. Are there any further alternatives the Commission should 
consider with regard to semi-annual reports specifically, or reports 
that the fund would transmit on an other-than-annual basis generally? 
To what extent should any of these alternatives provide special 
consideration for electronic shareholder reports?

G. New Form N-CSR and Website Availability Requirements

    We are proposing to amend Form N-CSR and rule 30e-1 to implement 
our proposed layered disclosure framework.
    We are proposing to require funds to continue to file certain 
information, which is currently included in fund shareholder reports, 
on Form N-CSR.\392\ Section 30 of the Investment Company Act requires 
funds to file their shareholder reports, including certain information 
that must appear in their reports, with the Commission.\393\ Because we 
are proposing a framework in which certain information would no longer 
appear in funds' shareholder reports, we are proposing amendments to 
Form N-CSR that would create new filing requirements for this 
information in order to continue to require funds to file the 
information with the Commission.
---------------------------------------------------------------------------

    \392\ See proposed Items 7 through 11 of Form N-CSR.
    \393\ See Investment Company Act sections 30(a), 30(e); see also 
infra Table 4.
---------------------------------------------------------------------------

    This Form N-CSR filing requirement would further the proposed 
layered disclosure framework by making available a broader set of fund 
information than the information that appears in funds' annual and 
semi-annual reports. The information that would be filed on Form N-CSR 
is less retail-focused than the information that would appear in funds' 
annual and semi-annual reports, but as detailed below we believe that 
retaining the availability of this information would be important for 
investors who desire more in-depth information, financial 
professionals, and other market participants. The information included 
on Form N-CSR also would continue to provide shareholders and other 
market participants with access to historical, immutable data regarding 
the fund on EDGAR. This historical information also would facilitate 
the Commission's fund monitoring responsibilities and could create 
significant efficiencies in the location of information for data 
gathering, search, and alert functions used in those monitoring 
activities. For example, filing on EDGAR facilitates the financial 
statement reviews that section 408 of the Sarbanes-Oxley Act of 2002 
mandates. Additionally, because Form N-CSR is filed with the Commission 
on EDGAR, a fund can incorporate by reference information that is 
disclosed on Form N-CSR, including the fund's financial statements, 
into a fund's registration statement, subject to certain 
limitations.\394\ Finally, a fund's principal executive and financial 
officer(s) are required to certify the financial and other information 
included on Form N-CSR, and are subject to liability for material 
misstatements or omissions on Form N-CSR.\395\
---------------------------------------------------------------------------

    \394\ See 17 CFR 270.0-4 [rule 0-4 under the Investment Company 
Act] (additional rules on incorporation by reference for funds); 17 
CFR 230.411 [rule 411 under the Securities Act] (general rules on 
incorporation by reference in a prospectus); 17 CFR 232.303 [rule 
303 of Regulation S-T] (specific requirements for electronically 
filed documents); General Instruction D to Form N-1A.
    \395\ See 17 CFR 270.30a-2 [rule 30a-2 under the Investment 
Company Act] and Item 13(a)(2) of Form N-CSR; see also Certification 
of Disclosure in Companies' Quarterly and Annual Reports, Investment 
Company Act Release No. 25722 (Aug. 28, 2002) [67 FR 57275 (Sept. 
09, 2002)].
     The Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat. 
745 (2002) (the ``Sarbanes-Oxley Act'') requires the principal 
executive and principal financial officer of most management 
investment companies to provide two different certifications in 
their periodic reports. Section 302 of the Sarbanes-Oxley Act 
requires a certification that, among other things, relates to the 
accuracy of the information included in the N-CSR filing. Section 
906 of the Sarbanes-Oxley Act added new Section 1350 to Title 18 of 
the United States Code, which requires a certification that, among 
other things, represents that the N-CSR filing fairly presents, in 
all material respects, the fund's financial condition and results of 
operations, and is subject to specific Federal criminal provisions.
---------------------------------------------------------------------------

    The amendments that we are proposing to rule 30e-1 would require 
funds to make available on their website the information that they 
would newly have to file on Form N-CSR, and to deliver such information 
upon request, free of charge.\396\ These proposed website availability 
requirements are designed to provide ready access to this information 
for shareholders who find this information pertinent. The proposed 
requirements also would assist those investors who find it most 
convenient to locate fund materials on a website that is not EDGAR.
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    \396\ See proposed rule 30e-1(b)(2) (funds would be required to 
post online Items 7 through 11 of Form N-CSR as well as the fund's 
complete portfolio holdings, if any, as of the close of the 
company's most recent first and third fiscal quarters).
---------------------------------------------------------------------------

    The following table outlines the content that we propose to require 
funds to include in their Form N-CSR filings and make available online. 
This content is currently included in a fund's annual and semi-annual 
reports.

[[Page 70765]]



                Table 4--Outline of Proposed New Form N-CSR and Website Availability Requirements
----------------------------------------------------------------------------------------------------------------
                                        Current rule and form
 Description (and related statutory       requirement(s) for           Proposed new          Proposed website
            requirement)                  shareholder report       disclosure items for        availability
                                         disclosure  (if any)       filing on SEC forms        requirements
----------------------------------------------------------------------------------------------------------------
Financial statements for funds       Items 27(b)(1) and 27(c)(1)  Proposed Item 7(a) of   Proposed rule 30e-
 (required by section 30(e) of the    of Form N-1A.                Form N-CSR.             1(b)(2)(i).
 Investment Company Act).
Financial highlights for funds.....  Items 27(b)(2) and 27(c)(2)  Proposed Item 7(b) of   Proposed rule 30e-
                                      of Form N-1A.                Form N-CSR.             1(b)(2)(i).
Remuneration paid to directors,      Items 27(b)(3) and 27(c)(3)  Proposed Item 10 of     Proposed rule 30e-
 officers and others of funds         of Form N-1A.                Form N-CSR.             1(b)(2)(i).
 (required by section 30(e) of the
 Investment Company Act).
Changes in and disagreement with     Items 27(b)(4) and 27(c)(4)  Proposed Item 8 of      Proposed rule 30e-
 accountants for funds.               of Form N-1A; Item 304 of    Form N-CSR.             1(b)(2)(i).
                                      Regulation S-K.
Matters submitted to fund            Rule 30e-1(b)..............  Proposed Item 9 of      Proposed rule 30e-
 shareholders for a vote.                                          Form N-CSR.             1(b)(2)(i).
Statement regarding the basis for    Item 27(d)(6) of Form N-1A.  Proposed Item 11 of     Proposed rule 30e-
 the board's approval of investment                                Form N-CSR.             1(b)(2)(i).
 advisory contract.
Complete portfolio holdings as of    Currently required in Part   N/A...................  Proposed rule 30e-
 the close of the fund's most         F of Form N-PORT. Also                               1(b)(2)(ii).
 recent first and third fiscal        website availability of
 quarters.                            this information currently
                                      required for funds relying
                                      on rule 30e-3..
----------------------------------------------------------------------------------------------------------------

1. Proposed Form N-CSR Filing Requirements
a. Financial Statements
    We are proposing to require a fund to file its most recent complete 
annual or semi-annual financial statements on Form N-CSR, and provide 
certain data points from the financial statements in its annual and 
semi-annual reports, in lieu of including the fund's complete financial 
statements in its shareholder reports.\397\ Consistent with current 
requirements, the fund's annual financial statements would be audited 
and accompanied by any associated accountant's report, while the semi-
annual financial statements need not be audited.
---------------------------------------------------------------------------

    \397\ See proposed Item 7(a) of Form N-CSR; see also supra 
footnotes 198 through 211 and accompanying text (discussing the 
proposed requirement to include a graphical representation of a 
fund's holdings in the shareholder report).
---------------------------------------------------------------------------

    Currently, funds are required to include audited financial 
statements in their annual reports and unaudited financial statements 
in their semi-annual reports.\398\ Section 30(e) of the Investment 
Company Act provides that funds' annual and semi-annual reports include 
the fund's financial statements, which in turn must include a statement 
of assets and liabilities, a schedule of investments that shows the 
amount and value of each security owned by the fund on that date, a 
statement of operations, and a statement of changes in net assets.\399\ 
The annual report must include audited financial statements accompanied 
by a certificate of an independent public accountant.\400\ The 
financial statements (including the fund's schedule of portfolio 
investments) provide data regarding the values of the fund's portfolio 
investments as of the end of the reporting period. This provides a 
``snapshot'' of data at a particular point in time, or, for example in 
the case of the statement of operations, historical data over a 
specified time period.\401\
---------------------------------------------------------------------------

    \398\ See Item 27(b)(1) and 27(c)(1) of Form N-1A. A fund's 
audited financial statements must include, among other items: (1) An 
audited balance sheet, or statement of assets and liabilities, as of 
the end of the most recent fiscal year; (2) an audited statement of 
operations for the most recent fiscal year; (3) an audited statement 
of cash flows for the most recent fiscal year if necessary to comply 
with generally accepted accounting principles (``GAAP''); (4) 
audited changes in net assets for the two most recent fiscal years; 
and (5) a schedule of investments in securities of unaffiliated 
issuers. See 17 CFR 210.3-18 and 210.6-10 [rules 3-18 and 6-10 of 
Regulation S-X].
    \399\ See sections 30(e)(1) through (4) of the Investment 
Company Act [15 U.S.C. 80a-29(e)(1) through (4)], and section 
30(e)(6) of the Investment Company Act [15 U.S.C. 80a-29(e)(6)].
    \400\ See section 30(g) of the Investment Company Act [15 U.S.C. 
80a-29(g)].
    \401\ See Investment Company Reporting Modernization, Investment 
Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 
2015)] (``Reporting Modernization Proposing Release''), at text 
following n.55.
---------------------------------------------------------------------------

    The rules under Regulation S-X establish general requirements for 
portfolio holdings disclosures in fund financial statements. 
Information regarding a fund's schedule of portfolio investments is 
designed to enable shareholders to make more informed asset allocation 
decisions by allowing them to better monitor the extent to which their 
investment portfolios overlap. In addition, this information may 
provide shareholders--particularly those with facility in analyzing 
funds' individual portfolio holdings--with information about how a fund 
is complying with its stated investment objective and expose any 
deviation from the fund's investment objective (i.e., style 
drift).\402\ In lieu of providing a complete schedule of portfolio 
investments as part of the financial statements included in its 
shareholder report, a fund may provide a summary schedule of portfolio 
investments (``summary schedule'').\403\ The summary schedule must 
list, separately, the 50 largest issues and any other issue exceeding 
one percent of the net asset value of the fund at the close of the 
period.\404\
---------------------------------------------------------------------------

    \402\ See February 2004 Shareholder Report Adopting Release, 
supra footnote 83, at text accompanying n.32.
    \403\ See Instruction 1 to Item 27(b)(1) of Form N-1A 
(permitting the inclusion of Schedule VI- summary schedule of 
investments in securities of unaffiliated issuers under 17 CFR 
210.12-12C [Rule 12-12C of Regulation S-X] in lieu of Schedule 1--
Investments of securities of unaffiliated issuers under 17 CFR 
210.12-12 (Rule 12-12 of Regulation S-X)).
    \404\ See rule 12-12C, n.3 of Regulation S-X [17 CFR 210.12-
12C].
---------------------------------------------------------------------------

    Much of the length of funds' current annual and semi-annual reports 
is due to the inclusion of the complete financial statements.\405\ 
Commenters on the Fund Investor Experience RFC, as well as information 
from prior investor testing and surveys, suggest that some investors 
generally believe the financial statements, or information derived from

[[Page 70766]]

financial statements, is important.\406\ However, we understand that 
many shareholders may find the current shareholder report financial 
statement disclosure to be complex and difficult to understand. For 
example, the 2012 Report on Investor Testing of Fund Annual Reports 
noted that while about a quarter of investors surveyed expressed the 
view that financial statement information is important, the majority of 
investors did not find the financial statement section of the 
shareholder report easy to understand, and investor comprehension of 
the section was low.\407\ Similarly, one commenter on the Fund Investor 
Experience RFC stated that much of the information included in 
financial statements is of a technical nature with little importance to 
the average retail investor, and recommended that this information be 
included online.\408\
---------------------------------------------------------------------------

    \405\ See supra footnote 19 and accompanying text (discussing 
the typical length of funds' annual reports today).
    \406\ See supra footnotes 51 and 52 and accompanying text 
(summarizing research findings regarding the level of investor 
interest in financial statement information).
    \407\ See 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 15. The results of the 2012 Report on 
Investor Testing of Fund Annual Reports found that 24% of 
shareholders that were surveyed ranked the financial statements 
within the top three items of importance.
    \408\ See ICI Comment Letter I.
---------------------------------------------------------------------------

    We are proposing to require funds to provide the complete financial 
statements on Form N-CSR, while retaining the graphical representation 
of holdings in the annual and semi-annual reports.\409\ We believe that 
this layered approach to disclosure will help shareholders understand 
how the fund invests its assets. This approach is also designed to 
permit all shareholders, including retail shareholders, to monitor and 
assess their ongoing investment in the fund in a concise, easy-to-
understand pictorial format, while preserving access to the more 
complete financial statements for shareholders that find this broader 
information useful. The graphical representation of holdings in funds' 
shareholder reports is also in line with the preferences investors have 
expressed for including more tables, charts, and graphs in fund 
disclosure to make information more understandable to the average 
investor.\410\
---------------------------------------------------------------------------

    \409\ See proposed Item 7 of Form N-CSR (requiring funds to 
provide the complete financial statements on Form N-CSR); see also 
Item 27A(f) of Form N-1A (requiring shareholder reports to include 
the graphical representation of holdings).
    \410\ See Kleimann, supra footnote 324; see also supra footnote 
34.
---------------------------------------------------------------------------

    We also are proposing amendments to Form N-1A that would eliminate 
a fund's ability to provide a summary schedule in lieu of providing a 
complete schedule of portfolio investments as part of the financial 
statements. We believe that this is appropriate because the proposed 
annual and semi-annual reports would no longer include the complete 
financial statements (which includes the schedule of portfolio 
investments). Therefore, because a fund's full schedule of investments 
would only be included on Form N-CSR and on the fund website, we 
believe that allowing funds to use the summary schedule would be 
unnecessary and could potentially be confusing to shareholders. This 
proposed change would also reduce costs to the extent funds need not 
print and mail a complete schedule of portfolio investments as part of 
the financial statements unless a shareholder requests this 
information.\411\ Furthermore, because the proposed annual and semi-
annual reports are designed to help investors focus on the most salient 
features of the fund to better evaluate their investment, we do not 
believe it would be useful to shareholders, and may even be confusing, 
to allow funds to provide a summary schedule alongside the complete 
schedule of portfolio investments online.
---------------------------------------------------------------------------

    \411\ Under the proposal, this information would also appear 
online. As part of its proposal and adoption of rule 30e-3, the 
Commission similarly proposed to eliminate the ability of a fund 
relying on rule 30e-3 to provide a summary schedule in its 
shareholder report because the shareholder report would only be 
filed online and, therefore, the fund would not bear additional 
printing and mailing costs associated with providing the full 
schedule of investments. See Reporting Modernization Proposing 
Release at Section II.D.
     The Commission ultimately determined to retain the ability for 
a fund that relies on rule 30e-3 to provide a summary schedule in 
the Rule 30e-3 Adopting Release, and acknowledged that a fund may 
choose to use a summary schedule for cost considerations or 
otherwise. See Rule 30e-3 Adopting Release, supra footnote 14, at 
n.120. We believe the considerations underlying this proposal's 
treatment of the summary schedule are different because, unlike 
under rule 30e-3, no fund investors would have a shareholder report 
that includes the fund's financial statements directly transmitted 
to them. Under rule 30e-3, funds would still have to deliver 
shareholder reports that include full financial statements to any 
shareholder who so requests.
---------------------------------------------------------------------------

    We seek comment on our proposal to require funds to file their 
annual and semi-annual financial statements on Form N-CSR and make them 
available online rather than in a fund's shareholder reports, and 
specifically on the following issues:
    136. Would our proposed layered approach to disclosure of financial 
statement information--by providing the graphical representation of 
holdings in the annual and semi-annual report and the complete 
financial statements on Form N-CSR--help tailor information to 
shareholders based on their informational needs? Are there any other 
data elements from funds' financial statements that should be included 
in funds' annual and semi-annual reports, and if so, what elements and 
why would they be useful for retail shareholders?
    137. Is the direct transmission of audited financial statements, or 
a portion of them, important to fund investors, and if so, why? If 
important, would it be helpful to investors for any information in the 
annual report to be replicated verbatim from the audited financial 
statements, and for the report to make clear that certain information 
was audited? What information and why?
    138. Should we, as proposed, eliminate a fund's ability to provide 
a summary schedule in lieu of providing a complete schedule of 
portfolio investments as part of the financial statements? Should we 
instead either permit funds to continue providing a summary schedule as 
part of their financial statements, or require funds to include a 
summary schedule in their shareholder reports? Would the latter 
alternative provide an appropriate complement to the graphical 
representation of holdings, or would including the summary schedule in 
funds' shareholder reports be duplicative and/or confusing in light of 
the proposed requirement to include the graphical representation of 
holdings in funds' annual and semi-annual reports? If we were to 
continue to permit funds to provide a summary schedule as part of their 
financial statements, should we also require these funds to make their 
complete portfolio holdings, as of the close of the fund's most recent 
second and fourth fiscal quarters, available on a website (in addition 
to the proposed requirement discussed below that funds make their first 
and third fiscal quarters' complete portfolio holdings available 
online)? \412\ Should we permit a fund to make the summary schedule 
available online instead of the complete schedule of portfolio 
holdings? Why or why not?
---------------------------------------------------------------------------

    \412\ See infra Section II.D.2.a.
---------------------------------------------------------------------------

    139. Other than complete financial statements, is there any other 
financial information that funds should be required to file on N-CSR? 
Do investors and other market participants currently use the financial 
statement information that appears on EDGAR as part of funds' filed 
shareholder reports, and if so, how?
b. Financial Highlights
    We are proposing to require funds to file their financial 
highlights

[[Page 70767]]

information on Form N-CSR.\413\ This information is identical to the 
information currently required in fund shareholder reports. We are 
proposing that funds would not include financial highlights information 
in their annual or semi-annual reports, with the exception of certain 
specific data points as discussed below.
---------------------------------------------------------------------------

    \413\ See proposed Item 7(b) of Form N-CSR.
---------------------------------------------------------------------------

    Currently, funds are required to disclose the condensed financial 
information that Item 13(a) of Form N-1A requires (i.e., financial 
highlights) in their annual and semi-annual reports.\414\ The financial 
highlights include a summary table of financial information covering 
the preceding five years (or since the fund's inception, if less than 
five years).\415\ Under certain circumstances, a fund may incorporate 
by reference its financial highlights from a report to shareholders 
into its prospectus.\416\
---------------------------------------------------------------------------

    \414\ See Items 27(b)(2) and 27(c)(2) of Form N-1A. See also 
Item 13(a) of Form N-1A.
    \415\ The summary table contains information regarding changes 
in a fund's net asset value, total returns, portfolio turnover rate, 
and capital distributions, among other things, during the preceding 
five years. See Item 13(a) of Form N-1A.
    \416\ See Instruction 4(e) to Item 13 of Form N-1A. A fund 
currently may incorporate the financial highlights from a 
shareholder report into the prospectus if the fund delivers the 
shareholder report simultaneously with the prospectus or if the 
shareholder report has been previously delivered to shareholders. A 
fund that incorporates the financial highlights by reference must 
include a statement in its prospectus explaining that: (1) 
Additional information about the fund's investments is available in 
the annual and semi-annual reports to shareholders; (2) the fund's 
annual report provides a discussion of the market conditions and 
investment strategies that significantly affected the fund's 
performance during its last fiscal year; and (3) the fund's annual 
and semi-annual reports are available, without charge, upon request. 
A fund must also explain how shareholders may make inquiries to the 
fund, provide a telephone number for shareholders to call to request 
the annual or semi-annual report, and state whether the fund makes 
available its annual and semi-annual reports, free of charge, on the 
fund's website. See Item 1(b)(1) of Form N-1A.
---------------------------------------------------------------------------

    The information contained in a fund's financial highlights is 
generally designed to help investors evaluate the fund's historical 
performance and fund manager's investment management expertise.\417\ 
For example, disclosure of changes in a fund's total return over a 
five-year period is designed to give a shareholder information 
regarding the fund's performance trends over time (i.e., volatile vs. 
steady returns).\418\ Similarly, 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.\419\
---------------------------------------------------------------------------

    \417\ See Improving Descriptions of Risk by Mutual Funds and 
Other Investment Companies, Investment Company Act Release No. 20974 
(Mar. 29, 1995) [60 FR 17172 (Apr. 4, 1995)].
    \418\ See How to Read a Mutual Fund Shareholder Report, supra 
footnote 316.
    \419\ Id.
---------------------------------------------------------------------------

    While we would require funds to file the entirety of their 
financial highlights on Form N-CSR, we are also proposing to retain 
certain elements of the financial highlight information in funds' 
annual and semi-annual reports. These retained elements are those that 
we understand may be particularly helpful for shareholders to evaluate 
a fund's performance. This layered disclosure approach is designed to 
retain the financial highlight information that we believe would be 
most salient to retail shareholders in funds' shareholder reports, 
while preserving the entirety of this information on Form N-CSR for 
those shareholders to whom the broader information would be 
useful.\420\ While one industry survey found that the average retail 
shareholder finds most of the items from the financial highlights 
section difficult to understand, this survey also concluded that a 
majority of shareholders found the total return and expense ratio 
information important for shareholders to monitor and assess their 
investments in a fund.\421\ Accordingly, we are proposing that a fund 
would have to disclose its expense ratio in the ``Fund Expenses'' 
section of the proposed annual and semi-annual reports.\422\ Also, 
while funds' shareholder reports would no longer include annual total 
returns for each of the preceding five years, the MDFP section of the 
annual report would continue to include certain information regarding a 
fund's annual total returns.\423\ Shareholders also would continue to 
be able to assess performance trends over time using the performance 
line graph and performance table that would appear in the annual 
report.\424\ Finally, we would require annual and semi-annual reports 
to include funds' disclosure of their net assets and portfolio turnover 
rate (which are also data elements from the fund's financial 
highlights) as of the end of the period covered by the report.\425\ We 
believe that all of these data elements that would appear in the 
proposed annual and semi-annual reports would together serve as a 
snapshot--of both period-end data and data over time--that would 
provide retail shareholders with the financial highlights data that 
they have indicated they find most useful. Investors who want to 
continue to have access to all of the information that currently 
appears in funds' financial highlights would continue to be able to 
access this information on Form N-CSR and online.\426\
---------------------------------------------------------------------------

    \420\ See 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 138 (noting that a few of the 
investors who were surveyed indicated that they saw value in the 
financial highlights information and stated that financial 
highlights provided them with a snapshot of the fund and important 
fund performance trend data that is easy to digest).
    \421\ See ICI Comment Letter I (noting that shareholders from 
all age and income groups supported the inclusion of total return 
and expense ratio information in a summary shareholder report and 
indicated that it was important to include a graphical 
representation of these key measures. The survey also noted that 
two-thirds of mutual fund investors who read very little of the 
current shareholder report and found it difficult to understand, 
still indicated the total return and expense ratio chart was very 
important and needed to be kept in the summary shareholder report).
    \422\ See proposed Item 27A(c) of Form N-1A. The expense ratio 
would be based on the fund's net expenses under GAAP and would 
reflect any interest or dividend expense.
    \423\ See proposed Item 27A(d)(2)(B) of Form N-1A. Our proposal 
would require a fund to continue to disclose its average annual 
total returns for the 1-, 5-, and 10-year periods as of the end of 
the last day of the most recent fiscal year (or for the life of the 
fund, if shorter) in its annual report, as funds do today.
    \424\ See supra Sections II.B.2.c.ii, II.B.2.c.iii.
    \425\ See supra Section II.B.2.d.
    \426\ The information that would be available online includes 
detailed year-over-year comparisons over the past five years of per-
share information associated with net investment income, net gains 
or losses on securities and distributions, as well as expense ratio, 
portfolio turnover and return information.
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    Item 13 of Form N-1A currently requires a fund to include financial 
highlights information in its prospectus, and an instruction to this 
item permits a fund to incorporate this information from a shareholder 
report under rule 30e-1 by reference into its prospectus.\427\ Because, 
under the proposal, funds' shareholder reports would no longer include 
financial highlights, we are proposing to amend the current instruction 
to allow a fund to incorporate by reference into its prospectus its 
financial highlights from Form N-CSR.\428\ For existing shareholders 
that have received the fund's shareholder report, a fund would be 
required to include a legend stating that additional information about 
the Fund's annual and semi-annual financial statements is available in 
Form N-CSR.\429\ For new investors in the

[[Page 70768]]

fund, the fund would be required to provide the fund's most recent 
shareholder report along with its prospectus.\430\ This provision 
parallels the current provision that allows a fund to incorporate by 
reference its financial highlights from the fund's shareholder report.
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    \427\ A fund may incorporate this information by reference if 
the fund delivers the shareholder report with the prospectus or, if 
the report has been previously delivered (e.g., to a current 
shareholder), the fund includes the statement that Item 1(b)(1) of 
Form N-1A requires (i.e., a statement that additional information 
about the fund's investments is available in the fund's annual and 
semi-annual reports to shareholders). See Instruction (4)(e) to Item 
13 of Form N-1A.
    \428\ See proposed amendments to Instruction (4)(e) to Item 13 
of Form N-1A.
    \429\ See proposed amendments to Item 1(b)(1) of Form N-1A. The 
required statement would state (among other things) that: (1) 
Additional information about the fund's investments is available in 
the fund's annual report to shareholders and in Form N-CSR; (2) the 
fund's annual report and Form N-CSR are available, without charge, 
upon request. A fund must also explain how shareholders may make 
inquiries to the fund, provide a telephone number for shareholders 
to call to request the fund's annual report and Form N-CSR, and 
state whether the fund makes available Form N-CSR, free of charge, 
on the fund's website. See Item 1(b)(1) of Form N-1A.
    \430\ See proposed amendments to Instruction 4(e) to Item 13 of 
Form N-1A, current Instruction 4(e) to Item 13 of Form N-1A 
(allowing a fund to incorporate by reference its financial 
highlights from its shareholder report into the prospectus so long 
as the fund delivers the shareholder report with the prospectus 
(i.e., for new shareholders)). If the shareholder report has been 
previously delivered (e.g., to a current shareholder), the fund must 
include a statement clarifying that the financial highlights are 
being incorporated by reference pursuant to the requirements of Item 
1(b)(1) of Form N-1A).
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    Finally, as discussed above, we also are proposing amendments to 
Item 13(a) of Form N-1A to require an ETF to disclose its total return 
based on the ETF's per share market value return as of the end of the 
period.\431\ This would align the information provided in the financial 
highlights with the expense information included in the annual and 
semi-annual reports.
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    \431\ See supra footnote 159. We are also proposing amendments 
to the instructions pertaining to total return calculations that 
would specify how an ETF should calculate its total return based on 
its per share market value. See proposed Instruction 3(a)(5) of Item 
13(a) of Form N-1A.
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    We seek comment on our proposal to require financial highlights 
information to be disclosed on Form N-CSR, and specifically on the 
following issues:
    140. Should we, as proposed, layer the information that appears in 
funds' financial highlight information to preserve the most retail-
focused disclosure in funds' shareholder reports, while making the full 
financial highlights available on Form N-CSR and online? Would this 
proposed layered approach help tailor disclosure to shareholders based 
on their informational needs? If not, what changes should we make to 
the proposed approach?
    141. Should we, as proposed, revise the Form N-1A instruction to 
permit funds to incorporate by reference their financial highlights 
from Form N-CSR into their prospectuses? Why or why not? If so, should 
we require funds to include a statement explaining that the fund's 
financial statements are included on Form N-CSR, that Form N-CSR is 
available, without charge, upon request, and how a shareholder may make 
inquiries to request Form N-CSR, and whether the fund makes available 
Form N-CSR on the fund's website?
    142. Should we, as proposed, require ETFs to disclose market value 
return in their financial highlights? Would shareholders find this 
information useful? Because we are proposing to require this 
information to be included in the fund expenses section of the 
shareholder report, is it useful for shareholders to have this 
information in both the financial highlights and in the shareholder 
report?
    143. Rather than allowing funds to incorporate by reference their 
financial highlights from Form N-CSR, should we instead remove the 
current Form N-1A instruction permitting funds to incorporate their 
financial highlights by reference into their prospectuses (thereby 
requiring funds to include their financial highlights in their 
prospectuses instead of incorporating this information by reference)? 
If we were to require funds to include their financial highlights in 
their prospectuses, should it be necessary for them to also file this 
information on Form N-CSR? Would shareholders benefit from having 
access to this information on Form N-CSR in addition to the prospectus? 
How burdensome would it be for a fund to include financial highlights 
into their prospectuses and also file that information on Form N-CSR? 
\432\
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    \432\ Under section 10(a)(3) of the Securities Act, funds 
typically update their prospectuses within 120 days of the end of 
fiscal year-end, and, typically, updated prospectuses are delivered 
to existing shareholders soon thereafter. See supra footnotes 11 and 
20 (discussing the transmittal requirements for fund prospectuses).
---------------------------------------------------------------------------

    144. Rather than requiring the full financial highlights to be 
filed on Form N-CSR, should we require funds to file and post only 
certain data points from the financial highlights? If so, which ones? 
Do investors and other market participants currently use the financial 
highlights information that appears on EDGAR as part of funds' filed 
shareholder reports, and if so, how?
c. Changes in and Disagreement With Accountants for Funds
    We are proposing to require a fund to file on Form N-CSR the 
disclosures that Item 304 of Regulation S-K currently requires, 
concerning changes in and disagreements with accountants.\433\ As 
discussed above, funds must currently include this information in their 
shareholder reports.\434\ The proposed Form N-CSR filing requirement 
would complement the proposed requirement for funds to include a high-
level summary of changes in and disagreements with accountants in their 
annual reports.
---------------------------------------------------------------------------

    \433\ See proposed Item 8 of Form N-CSR.
    \434\ See supra footnote 293 and accompanying text.
---------------------------------------------------------------------------

    While the disclosure that we are proposing funds to include in 
their shareholder reports would be designed to put shareholders on 
notice of the dismissal or resignation of an accountant and the 
existence of a material disagreement with that accountant, the 
information that funds would report on Form N-CSR would provide 
additional, more nuanced and technical disclosure that may be 
informative to some shareholders and other market participants. For 
example, this disclosure could be meaningful as it indicates that the 
fund has especially challenging, subjective, and/or complex accounting 
policies and financial statement disclosures or the accountant could 
not resolve audit findings. Moreover, we believe that it is appropriate 
to retain this disclosure in a location that includes audited financial 
information (as proposed, Form N-CSR) to provide those investors, 
financial professionals, and other market participants who review and 
analyze this disclosure with appropriate contextual information.
    We seek comment on our proposal to require a fund to disclose on 
Form N-CSR the information required by Item 304 of Regulation S-K. We 
specifically request comment on the following issues:
    145. Should we, as proposed, require a fund to file the information 
required by Item 304 of Regulation S-K on Form N-CSR? Why or why not?
    146. Would requiring the Item 304 information to be filed on Form 
N-CSR be useful to investors, financial professionals, or other market 
participants? If so, what types of audiences would find this 
information to be particularly useful, and why? If not, why not?
    147. Is the proposed Form N-CSR disclosure requirement appropriate 
and necessary in light of the proposed summary information about 
changes in and disagreements with accountants that we propose funds to 
include in their shareholder reports? If not, why not?
    148. Rather than the proposed approach, should we instead amend 
and/or streamline the requirement to disclose Item 304 information and 
retain the amended disclosure in the fund's annual report? Why or why 
not? Do investors and other market participants currently use the Item 
304 information that appears on EDGAR as part of funds'

[[Page 70769]]

filed shareholder reports, and if so, how?
d. Matters Submitted for a Shareholder Vote
    We are proposing to require funds to include information about 
matters submitted for a shareholder vote on Form N-CSR, rather than in 
their shareholder reports.\435\ This information is identical to the 
information currently required in fund shareholder reports. Currently, 
when a matter is submitted to a vote of shareholders, funds must 
disclose information regarding the substance of these matters, along 
with the results of such votes, in several ways. First, shareholders 
receive proxy statements that include detailed descriptions of issues 
brought before shareholders for their vote.\436\ If a matter is 
submitted to a vote of fund shareholders during the period covered by 
an annual or semi-annual report, the fund must include certain 
information regarding the vote results in that report.\437\ 
Furthermore, funds are required to disclose on Form N-CEN whether the 
fund submitted any matters for a shareholder vote during the reporting 
period.\438\ Shareholder voting plays a valuable role in fund 
regulation, and providing information regarding shareholder votes keeps 
shareholders informed and may operate as a deterrent to self-dealing by 
the fund's adviser.\439\
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    \435\ See proposed Item 9 of Form N-CSR (requiring a fund to 
file on Form N-CSR the information that the fund currently provides 
in its shareholder reports pursuant to rule 30e-1(b)). See also 
infra footnote 437 (detailing the disclosure requirements with 
respect to matters submitted for a shareholder vote). The 
information regarding matters submitted for a shareholder vote that 
would be disclosed on Form N-CSR is identical to the information 
currently included in fund shareholder reports.
    \436\ See e.g. Schedule 14A [17 CFR 240.14a-101] under the 
Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (providing 
the content requirements for investment company proxy statements).
    \437\ See rule 30e-1(b). This disclosure must include: (1) The 
date of the meeting and whether it was an annual or special meeting; 
(2) if the meeting involved the election of directors, the name of 
each director elected at the meeting and the name of each other 
director whose term of office as a director continued after the 
meeting; and (3) a brief description of each matter voted upon at 
the meeting and the number of votes cast for, against or withheld, 
as well as the number of abstentions and broker non-votes as to each 
such matter, including a separate tabulation with respect to each 
matter or nominee for office.
    \438\ See Item B.10 of Form N-CEN.
    \439\ See e.g., Amendments to Proxy Rules for Registered 
Investment Companies, Investment Company Act Release No. 19957 (Dec. 
16, 1993) [58 FR 67729 (Dec. 22, 1993)] at text following n.6.
---------------------------------------------------------------------------

    The proposed amendments to the disclosure requirements for matters 
submitted for a shareholder vote are designed to further our proposed 
layered approach to shareholder report disclosure. The approach we are 
proposing also reflects our understanding that many retail shareholders 
tend not to review the information regarding vote results currently 
required in the shareholder report.\440\
---------------------------------------------------------------------------

    \440\ See 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 50 (stating that only 4% of investors 
say they review the discussion of the results of shareholder votes 
included in their annual and semi-annual reports).
---------------------------------------------------------------------------

    Under our proposal, funds' annual and semi-annual reports would no 
longer include information about the results of shareholder votes, but 
shareholders would continue to receive information about these matters 
through other channels. Shareholders would continue to receive a 
detailed description of matters submitted for a shareholder vote in 
fund proxy statements. Furthermore, because the proposed annual report 
would require funds to describe certain material changes that have 
occurred in the fiscal year, shareholders would receive disclosure of 
certain material changes that have resulted from shareholder 
votes.\441\ If it would be valuable to a shareholder to review 
additional information about the outcome of matters submitted for a 
shareholder vote, the shareholder would continue to have access to this 
more-detailed information, which the fund would file on Form N-CSR. For 
example, we anticipate that certain shareholders, particularly 
investors who desire more in-depth information, and other market 
participants would want to continue to have ready access to information 
about shareholder votes, to the extent they express investor 
preferences on matters such as changes in the fund's fundamental 
policies, investment advisory agreements, board of directors, and 
organizational documents.
---------------------------------------------------------------------------

    \441\ See supra Section II.B.2.f.
---------------------------------------------------------------------------

    We seek comment on our proposal to require funds to disclose the 
matters submitted to a vote of shareholders on Form N-CSR rather than 
the fund's shareholder reports, and specifically on the following 
issues:
    149. Should we, as proposed, require funds to file the information 
regarding matters submitted for a shareholder vote on Form N-CSR? Why 
or why not? Alternatively, should we only require funds to disclose the 
information regarding matters submitted for a shareholder vote on the 
fund's website, and not also require funds to file this information 
with the Commission on Form N-CSR? Why or why not? Do investors and 
other market participants currently use the information regarding 
matters submitted for a shareholder vote that appears on EDGAR as part 
of funds' filed shareholder reports, and if so, how?
    150. Would requiring this information to be filed on Form N-CSR be 
useful to investors, financial professionals, or other market 
participants? If so what types of audiences would find this information 
to be particularly useful, and why? If not, why not? If so, should we 
include information regarding matters submitted for a shareholder vote, 
or any summary of this information, in the proposed annual report? Why 
or why not?
    151. Are there certain types of matters submitted for a shareholder 
vote that shareholders find more important than others? If so, what are 
they? Should we require funds to include in their annual and semi-
annual reports the results of only certain matters submitted to a 
shareholder vote that retail shareholders find most pertinent? What 
matters would those be?
    152. Rather than the proposed approach to disclosure regarding 
matters submitted for a shareholder vote, should we instead amend and/
or simplify the current shareholder report disclosure requirement? If 
so, should we retain the amended disclosure in funds' annual and semi-
annual reports? Why or why not?
e. Remuneration Paid to Directors, Officers, and Others
    We are proposing to require funds to file the aggregate 
remuneration the fund paid to its directors, officers, and certain 
affiliated persons on Form N-CSR.\442\ This information is identical to 
the information currently required in fund shareholder reports. Funds 
currently provide this information in their annual reports under 
section 30(e) of the Investment Company Act.\443\
---------------------------------------------------------------------------

    \442\ See proposed Item 10 of Form N-CSR.
    \443\ See section 30(e)(5) of the Investment Company Act [15 
U.S.C. 80a-30(e)(5)] (permitting the Commission to require that 
funds transmit to shareholders, at least semi-annually, reports 
containing, among other things, a statement of aggregate 
remuneration paid by the fund during the period covered by the 
report to officers, directors, and certain affiliated persons); see 
also Items 27(b)(3) and 27(c)(3) of Form N-1A. Funds are required to 
disclose aggregate remuneration paid to: (1) All directors and all 
members of any advisory board for regular compensation; (2) each 
director and each member of an advisory board for special 
compensation; (3) all officers; and (4) each person of whom any 
officer or director of the fund is an affiliated person.
---------------------------------------------------------------------------

    As the Commission has noted, because of the substantial influence a 
fund's investment adviser has in determining its own remuneration, as 
well as the remuneration paid to directors and officers of the fund,

[[Page 70770]]

availability of information about remuneration paid to the fund's 
directors and officers may help shareholders to analyze the use of 
corporate funds and assets, and to assess the value the fund's 
directors and officers bring to the fund.\444\ In addition to the 
aggregate remuneration disclosure in a fund's shareholder report, a 
fund is currently required to provide detailed disclosures regarding 
compensation paid to each of the directors, members of any advisory 
board, and certain officers and affiliates in the fund's SAI.\445\
---------------------------------------------------------------------------

    \444\ See Disclosure of Management Remuneration, Investment 
Company Act Release No. 9900 (Aug. 18, 1977) [42 FR 43058 (Aug. 26, 
1977)] at text accompanying nn.15 and 16 (noting that full public 
disclosure of remuneration paid to officers, directors and other 
persons is necessary for shareholders to make ``informed voting and 
investment decisions, regardless of whether the [fund's] board of 
directors or its security holders have approved the remuneration 
package received by management because of the substantial influence 
of management in determining its remuneration'').
    \445\ See Item 17(c) of Form N-1A (requiring a fund to disclose 
certain compensation information for each of the fund's directors 
and for each member of any advisory board who receives compensation 
from the fund, and for each of the three highest paid officers or 
any affiliated person of the fund who received aggregate 
compensation from the fund for the most recently completed fiscal 
year exceeding $60,000).
---------------------------------------------------------------------------

    Based on the comments the Commission received on the Fund Investor 
Experience RFC, as well as information from prior investor testing and 
surveys, we understand that retail shareholders generally do not find 
remuneration information useful in the shareholder report and seldom 
review this section of the current shareholder report.\446\ One 
commenter also stated that information regarding the remuneration of 
directors is technical, and recommended that this information instead 
be included online.\447\ Because we believe that this type of 
information is not directly pertinent to a retail shareholder's 
understanding of the fund's operation and performance, and because 
similar information is available in the fund's SAI, we are proposing to 
remove the current remuneration disclosure from the shareholder 
reports. Investors who desire more in-depth information, financial 
professionals, and other market participants who would find 
remuneration-related information valuable (for example, in monitoring 
fund management) would continue to be able to find it in the fund's SAI 
(where compensation information is disclosed for each director), as 
well as in Form N-CSR filings (where compensation information is 
aggregated, as it is in shareholder reports today).
---------------------------------------------------------------------------

    \446\ See 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 50 (stating that only 7% of investors 
say they review the discussion regarding fund directors and officers 
included in their annual and semi-annual reports); see also 
Broadridge Comment Letter I.
    \447\ See ICI Comment Letter I.
---------------------------------------------------------------------------

    We seek comment on our proposal to require funds to disclose 
information about remuneration paid to directors, officers and others 
on Form N-CSR rather than the fund's annual reports, and specifically 
on the following issues:
    153. Should we require funds to include information concerning 
remuneration paid to directors, officers and others in the proposed 
annual report? If so, why?
    154. Is this remuneration information useful to investors, 
financial professionals, or other market participants? If so what types 
of audiences would find this information to be particularly useful, and 
why? If not, why not?
    155. Rather than removing this disclosure entirely from the annual 
report, should we require funds to provide certain data points 
regarding remuneration paid to directors, officers and others in their 
annual reports? For example, should we require disclosure of 
remuneration paid to directors in the fund's shareholder report if it 
exceeds a certain threshold? Or, should we require a fund to disclose 
in its annual report any changes to director or officer remuneration 
during the reporting period?
    156. Because more detailed information regarding compensation paid 
to directors and officers already must appear in a fund's SAI, would 
the proposed aggregated remuneration information filed on Form N-CSR 
meaningfully and usefully supplement this current SAI disclosure? If 
so, how? Or would the proposed aggregated remuneration information be 
duplicative of existing SAI disclosures? Do investors and other market 
participants currently use the information regarding compensation paid 
to directors and officers that appears on EDGAR as part of funds' filed 
shareholder reports, and if so, how?
f. Statement Regarding Basis for Approval of Investment Advisory 
Contract
    Currently, funds are required to provide a statement, in the annual 
and semi-annual reports, regarding the basis for the board's approval 
of the fund's investment advisory contract.\448\ We are proposing to 
require funds to provide this information on Form N-CSR, rather than in 
the fund's shareholder reports.\449\ This information is identical to 
the information currently required in fund shareholder reports.
---------------------------------------------------------------------------

    \448\ See Item 27(d)(6) of Form N-1A.
    \449\ See proposed Item 11 of Form N-CSR. We are also proposing 
to eliminate Item 10(a)(1)(iii) of Form N-1A which requires funds to 
include, in the SAI, a statement noting that a discussion regarding 
the basis for the board's approval of any investment advisory 
contract is available in the fund's annual or semi-annual report, as 
applicable, and providing the period covered by the relevant report.
---------------------------------------------------------------------------

    Under current shareholder report disclosure requirements, if the 
board of directors approved any investment advisory contract during the 
fund's most recent fiscal half-year, the fund is required to discuss in 
reasonable detail the material factors and the conclusions with respect 
thereto that formed the basis for the board's approval. When the 
Commission adopted these requirements in 2004, it stated that the 
purpose of this requirement was to ``encourage funds to provide a 
meaningful explanation of the board's basis for approving an investment 
advisory contract,'' which, in turn, the Commission hoped would 
encourage boards to ``consider investment advisory contracts more 
carefully and investors to consider more carefully the costs and value 
of the services rendered by the fund's investment adviser.'' \450\
---------------------------------------------------------------------------

    \450\ See Disclosure Regarding Approval Of Investment Advisory 
Contracts By Directors Of Investment Companies, Investment Company 
Act Release No. 26486 (June 23, 2004) [69 FR 39798 (June 30, 2004)] 
(``Disclosure Regarding Approval of Advisory Contracts Release''), 
at text following n.23.
---------------------------------------------------------------------------

    We continue to believe that requiring funds to provide shareholders 
with information regarding the board's review of investment advisory 
contracts preserves transparency with respect to those contracts, and 
fees paid for advisory services, assists investors in making informed 
investment decisions, and encourages fund boards to engage in vigorous 
and independent oversight of advisory contracts.\451\ However, we 
preliminarily believe that this disclosure is not well suited to the 
fund's shareholder report because it pertains less directly to a retail 
shareholder's understanding of the operations and performance of the 
fund and does not lend itself to the type of focused disclosure that 
the proposed annual report is designed to include. Because of the 
nature and quantity of information in this disclosure, we therefore 
believe that it may be better suited to appear in a different location 
that would continue to permit access to fund shareholders and other 
market participants who find this information to be particularly useful 
and

[[Page 70771]]

meaningful.\452\ We believe that providing this information on Form N-
CSR would continue to allow these persons effectively to consider the 
costs and value of the services that the fund's investment adviser 
renders.\453\
---------------------------------------------------------------------------

    \451\ See id. at n.18.
    \452\ See 2012 Report on Investor Testing of Fund Annual 
Reports, supra footnote 26, at 49 (noting that only 5% of investors 
surveyed ranked the discussion of board approvals of advisory 
contracts within the top three most important areas of information 
provided in shareholder reports).
    \453\ Fund shareholders also would receive disclosure about the 
factors that form the basis for the board's approval of the advisory 
contract if a fund's advisory contract were to require a shareholder 
vote. In this case, the fund would be required to include in its 
proxy statement a discussion of the material factors the board 
considered as part of its decision to approve the fund's investment 
advisory contract. See Item 22(c)(11) of Schedule 14A.
---------------------------------------------------------------------------

    We seek comment on our proposal to require funds to disclose the 
basis for the board's approval of the fund's investment advisory 
contract on Form N-CSR rather than in the fund's shareholder reports, 
including the following specific issues:
    157. Should we, as proposed, remove the information regarding the 
basis for the board's approval of a fund's advisory contract from 
shareholder reports? Should we instead amend and/or simplify this 
disclosure requirement and/or retain the amended disclosure in funds' 
annual and semi-annual reports? Would this amended disclosure be useful 
for retail shareholders to use to monitor and assess their ongoing 
investment in a fund?
    158. Should we, as proposed, require funds to file the information 
regarding the board's approval of a fund's advisory contract on Form N-
CSR? Why or why not? Do investors and other market participants 
currently use the information regarding the board's approval of a 
fund's advisory contract that appears on EDGAR as part of funds' filed 
shareholder reports, and if so, how?
2. Proposed Website Availability Requirements
a. Website Content Requirements
    We are proposing to require a fund to post online all of the 
information that the proposal would newly require on Form N-CSR.\454\ 
The fund would have to make this information available from 70 days 
after the end of the relevant fiscal period until 70 days following the 
next respective fiscal period.\455\ Currently, funds are required to 
file reports on Form N-CSR not later than 70 days after the close of 
the fund's fiscal half-year.\456\ Therefore, our proposal would align 
the timing of the availability of the information provided online with 
when reports on Form N-CSR are filed.
---------------------------------------------------------------------------

    \454\ See infra sentence accompanying footnote 470 (under our 
proposal, funds would have the option to satisfy this website 
availability by posting online its most recent report on Form N-
CSR).
    \455\ See proposed rule 30e-1(b)(2)(i) (requiring a fund to 
disclose Items 7 through 11 of Form N-CSR on a website no later than 
70 days after the end of the fiscal half-year or fiscal year of the 
fund until 70 days after the end of the next fiscal half-year or 
fiscal year of the fund, respectively).
    \456\ While rule 30e-1(c) requires a shareholder report to be 
transmitted to shareholders within 60 days after the close of the 
relevant period, we believe it is appropriate to align the 
availability of information online with the filing of Form N-CSR, 
because the online information would be filed on Form N-CSR.
---------------------------------------------------------------------------

    In addition, we are also proposing to require a fund (other than a 
money market fund) to make its complete portfolio holdings, as of the 
close of the fund's most recent first and third fiscal quarters, 
available on a website.\457\ A fund would have to make this information 
available within 70 days after the close of each such quarter.\458\ A 
fund's portfolio holdings information for its first and third fiscal 
quarters would have to remain publicly accessible online for a full 
fiscal year.\459\
---------------------------------------------------------------------------

    \457\ See proposed rule 30e-1(b)(2)(ii).
    \458\ Under this proposed requirement, the portfolio holdings 
for each of the first and third fiscal quarters would be required to 
appear on a website no later than 70 days after the close of each of 
the first and third fiscal quarters, respectively. For example, a 
fund with a December 31 fiscal year end would be required to make 
its complete portfolio holdings for the first quarter ending March 
31 of the next year available within 70 days after the end of the 
first quarter.
    \459\ Proposed rule 30e-1(b)(2)(ii).
---------------------------------------------------------------------------

    This portfolio holdings information would complement the second and 
fourth fiscal quarter portfolio holdings information that we also are 
proposing to require funds to make available on a website (as part of 
the proposed requirement to make their financial statements available 
online).\460\ The proposed requirement to post first and third quarter 
portfolio holdings online is therefore designed to provide investors 
and other market participants with easy access to a full year of 
complete portfolio holdings information in one location. Funds are 
currently required to disclose their holdings as of the end of each 
fiscal quarter in reports on Form N-PORT filed with the Commission 
(which are available on EDGAR). However, all open-end funds are not 
currently required to send holdings information as of the end of the 
first- and third-quarters to shareholders or to make that information 
accessible on a website other than EDGAR.\461\ The proposed requirement 
would provide centralized access to this information, rather than 
requiring investors to access the fund's reports on Form N-PORT for 
each of those periods separately.\462\ Also, we anticipate that the 
portfolio holdings information that funds would make available online 
would be available in a more user-friendly presentation than the 
information that funds report on N-PORT in structured data format.
---------------------------------------------------------------------------

    \460\ See supra Section II.D.1.a.
     To conform the format and content of the portfolio holdings 
schedules for the first and third quarters to those schedules 
presented in the fund's financial statements for the second and 
fourth quarters, the proposed rule would require the schedules for 
the first and third quarters to be presented in accordance with 
Sec. Sec.  210.12-12 through 210.12-14 of Regulation S-X, which need 
not be audited. See proposed rule 30e-1(b)(2)(ii).
    \461\ But see rule 30e-3(b)(1)(iv) (requiring funds that rely on 
rule 30e-3 to make holdings information as of the end of the first 
and third quarters available on the fund's website). Our proposal 
would ensure that all investors have convenient access to the most 
recent four quarters of portfolio holdings in a central location.
    \462\ See Part F of Form N-PORT (requiring N-PORT filers to 
provide, as exhibits to Form N-PORT, the fund's complete portfolio 
holdings for the end of the first and third quarters of the fund's 
fiscal year, as of the close of the period, no later than 60 days 
after the end of the reporting period).
---------------------------------------------------------------------------

    We seek comment on the proposed requirements for website content 
that funds would have to make available under the proposals, including 
the following specific issues:
    159. Should we, as proposed, require a fund to post online all of 
the information that would newly be filed on Form N-CSR?
    160. How often should funds be required to update the information 
that appears online? For example, should we require a fund to update 
its online financial statement information more or less frequently than 
semi-annually or its online portfolio holdings information more or less 
frequently than quarterly? Should we instead, for example, require 
funds to update all information that appears online monthly or as soon 
as it becomes available? Why or why not?
    161. What is the appropriate time period for a fund to have to make 
the newly required Form N-CSR information available online? Should we, 
as proposed, allow funds to delay the availability of materials online 
by 70 days after the end of the relevant fiscal period? Because funds 
send their annual and semi-annual reports 60 days after the end of the 
fiscal period, should we similarly adopt a 60-day delay for the online 
accessibility of information that funds would file on Form N-CSR?
    162. How long should each of the newly required Form N-CSR 
materials have to remain accessible online? Should we, as proposed, 
require funds to maintain the required information on their websites 
for a full fiscal year? Is it useful for investors to have this

[[Page 70772]]

information available for a full fiscal year? Should we require the 
information to be available for a period longer or shorter than a full 
fiscal year (such as two years, or six months)?
    163. Should we require only certain Form N-CSR items to be 
available for a full fiscal year? If so, which items should we require 
funds to make available for a full year and why? For example, how long 
should funds be required to maintain the portfolio holdings information 
that appears online? Should we, as proposed, require a fund to maintain 
its holdings information as of the close of each fiscal quarter for a 
full fiscal year? Would shareholders find this useful? As another 
example, should we require funds to maintain only their financial 
statements and portfolio holdings information for a full fiscal year, 
while permitting funds to remove the remainder of Form N-CSR 
information from their websites on a semi-annual basis?
    164. Should we, as proposed, require the portfolio holdings 
information for the first and third quarters to be presented in 
accordance with the schedules set forth in Sec. Sec.  210.12-12 through 
210.12-14 of Regulation S-X?
    165. Should we require any additional disclosure on fund websites 
to clarify to investors that portfolio holdings information for the 
fund's second and fourth quarters is available online as part of the 
fund's financial statements?
    166. Should we adopt a specific format for how a fund should 
present its first and third fiscal quarter information online? If so, 
what should it be? For example, should we require this information be 
posted in XML format or a PDF form?
    167. Rather than requiring funds to maintain all four most recent 
fiscal quarters of portfolio holdings information on fund websites, 
should we instead require funds to only provide portfolio holdings 
information for their most recent fiscal quarter (or some other period, 
such as the fund's most recent two fiscal quarters)? Alternatively, 
should we require funds to maintain additional portfolio holdings 
information on their websites, such as the past two or five years of 
information?
    168. As funds would be required to file their portfolio holdings 
information as of the close of their second and fourth fiscal quarters 
on Form N-CSR as part of their financial statements, should we also 
require funds to file the portfolio holdings information as of the 
close of their first and third fiscal quarters on Form N-CSR? Would it 
be useful for investors or any other market participants--for example, 
data aggregators--to have historical holdings data for all of a fund's 
fiscal quarters filed on a single Commission form (as opposed to having 
to aggregate this information either from information filed on Form N-
CSR and the portfolio holdings filed as exhibits to Form N-PORT, or 
from information that funds would otherwise be required to make 
available online on websites other than EDGAR)? Is it easier for data 
aggregators to collect information from a single Commission form? Does 
easier access to information by data aggregators increase the flow of 
information to investors?
    169. Instead of requiring complete portfolio holdings information, 
should we require funds only to disclose a subset of holdings, such as 
the top ten largest holdings, for each quarter on their websites and/or 
in the proposed annual report?
b. Accessibility and Presentation Requirements
    Under our proposal, funds also would have to comply with certain 
conditions designed to ensure the accessibility of information that is 
required to appear online.\463\ First, the website address where the 
required information appears must be specified on the cover page or 
beginning of the shareholder report and could not be the address of the 
Commission's electronic filing system.\464\ Second, the materials 
required to appear online would have to be presented in a format 
convenient for both reading online and printing on paper, and persons 
accessing the materials would have to be able to retain permanently 
(free of charge) an electronic copy of the materials in this 
format.\465\ These conditions are designed to ensure that information 
appearing online pursuant to the proposed rule is user-friendly and 
allows shareholders the same ease of reference and retention abilities 
they would have with paper copies of the information.
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    \463\ Proposed rule 30e-1(b)(2). These requirements are similar 
to the accessibility requirements of rule 30e-3 and rule 498 under 
the Securities Act (permitting funds to use a summary prospectus to 
satisfy prospectus delivery obligations) and rule 14a-16 under the 
Securities Exchange Act (requiring issuers and other soliciting 
persons to furnish proxy materials by posting these materials on a 
public website and notifying shareholders of the availability of 
these materials and how to access them).
    \464\ Proposed rule 30e-1(b)(2)(i) through (iii). The 
Commission's electronic filing system for fund documents is EDGAR. 
Rule 498 under the Securities Act includes a similar requirement. 
See 17 CFR 230.498(b)(1)(v)(A).
    \465\ Proposed rules 30e-1(b)(2)(iv) and (v); see also infra 
footnote 529 (discussing similar provisions in proposed rule 
498B(e)(2)(ii) and parallel provisions in current rule 
498(f)(3)(ii)).
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    The rule as proposed also would include a safe harbor provision 
providing that a fund shall have satisfied its obligations to transmit 
shareholder reports even if it did not meet the posting requirements of 
the rule for a temporary period of time.\466\ In order to rely on this 
safe harbor, a fund would have to have reasonable procedures in place 
to help ensure that the required materials appear on its website in the 
manner required by the rule and take prompt action to correct 
noncompliance with these website availability requirements.\467\ The 
proposed rule would require prompt action as soon as practicable 
following the earlier of the time at which the fund knows, or 
reasonably should have known, that the required documents are not 
available in the manner prescribed by the proposed rule.
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    \466\ See proposed rule 30e-1(b)(2)(vi). The rule provides that 
the requirements in paragraphs (b)(2)(i) through (v) of the rule 
(i.e., the posting requirements) shall be deemed to be met, 
notwithstanding the fact that the materials required by paragraphs 
(b)(2)(i) and (ii) of the rule are not available for a period of 
time in the manner required by the posting requirements, so long as 
certain conditions are met. See id.
    \467\ See proposed rule 30e-1(b)(2)(vi)(A) and (B).
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    We are proposing this safe harbor because we recognize that there 
may be times when, due to events beyond a fund's control, such as 
system outages or other technological issues or natural disasters, a 
fund may temporarily not be in compliance with the web posting 
requirements of the proposed rule.\468\ Providing for this safe harbor 
by rule may obviate the need to provide exemptive relief from the 
proposed rule's conditions under these very limited and extenuating 
circumstances, as we have done from time to time.\469\
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    \468\ Compare rule 30e-3 (providing a similar safe harbor 
provision for funds that rely on rule 30e-3 for the same reasons) 
and rule 498(e)(4) of the Securities Act (providing a similar safe 
harbor under the summary prospectus rule for the same reasons) with 
proposed rule 30e-1(b)(2)(vi).
    \469\ See, e.g., Exchange Act Release No. 81760 (Sept. 28, 2017) 
[82 FR 46335 (Oct. 4, 2017)] (exemptive relief for individuals and 
entities affected by Hurricanes Harvey, Irma, or Maria); Securities 
Act Release No. 10416 (Sept. 27, 2017) [82 FR 45722 (Oct. 2, 2017)] 
(Regulation Crowdfunding and Regulation A relief and assistance for 
individuals and entities affected by Hurricanes Harvey, Irma, or 
Maria); see also Rule 30e-3 Adopting Release, supra footnote 14, at 
n.135.
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    Finally, we are proposing to provide funds with some flexibility on 
how online information is presented. Under our proposal, funds would 
have the option to satisfy the website availability requirement for the 
information that the fund would newly have to file on Form N-CSR by 
posting its most recent report

[[Page 70773]]

on Form N-CSR, free of charge, on the website specified on the cover 
page or beginning of the shareholder report.\470\ The proposed rule 
also provides funds flexibility to post the online information 
separately for each series of the fund or grouped by types of materials 
and/or by series.\471\ If a fund were to group the information on its 
website by type of materials and/or by series, the grouped information 
would have to meet certain presentation requirements, including that 
the grouped information: (1) Is presented in a format designed to 
communicate the information effectively, (2) clearly distinguishes the 
different types of materials and/or each series (as applicable), and 
(3) provides a means of easily locating the relevant information 
(including, for example, a table of contents that includes hyperlinks 
to the specified materials and series).\472\ This proposed provision is 
designed to allow funds to tailor the presentation of information on 
their websites to the unique aspects of their funds, while presenting 
the information in a manner that facilitates shareholder access. For 
example, for a fund complex that includes several funds, each with 
multiple classes, the fund complex's website could include a master 
table of contents that contains hyperlinks to the specific materials 
for each fund and each class.
---------------------------------------------------------------------------

    \470\ See proposed rule 30e-1(b)(2)(i).
    \471\ See proposed rule 30e-1(b)(2)(vii).
    \472\ See id.
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    We seek comments on the proposed website availability requirements, 
including:
    170. The rule as proposed would require that the materials required 
to be accessible online be publicly accessible, free of charge, at the 
website specified at the cover page or beginning of the shareholder 
report, and does not expressly require that the website be the fund's 
website. Should the rule require that the materials be accessible at 
the fund's website? Why or why not?
    171. The rule as proposed would require that the website 
information be presented in a format or formats that are convenient for 
both reading online and printing on paper. Are these proposed format 
requirements appropriate? Should we instead require that the materials 
be presented in a format or formats that are human-readable and capable 
of being printed on paper in human-readable format? Why or why not?
    172. Are there any additional presentation or formatting 
requirements that we should adopt to facilitate investor access to the 
information that would appear online? For example, should we require 
that each item appear separately on the fund's website under a relevant 
header instead of permitting, as proposed, a fund to post its Form N-
CSR to satisfy the requirement to make certain information that the 
fund would file on Form N-CSR available online?
    173. The proposed rule would contain a safe harbor for instances in 
which the online materials are not available for a temporary period of 
time. Is the safe harbor as proposed appropriate, or should we modify 
it in any way? For example, should the rule be more prescriptive as to 
the period of time in which a fund must take action to resolve any 
issues?
    174. Should we, as proposed, provide funds the flexibility to 
either post the online information separately for each series of the 
fund or to group the information by types of materials? Why or why not? 
Should we, as proposed, allow funds to group the material by type or by 
series? Are there other type of groupings that we should allow? If we 
allow funds to group the information posted online, should we require 
the grouped information to meet the presentation requirements discussed 
above? Are there any additional presentation requirements that we 
should consider?
3. Proposed Delivery Upon Request Requirements
    We are proposing to require funds to send, at no cost to the 
requestor and by U.S. first class mail or other reasonably prompt 
means, a paper copy of any of the materials discussed above to any 
person requesting such a copy within three business days \473\ after 
receiving a request for a paper copy.\474\ A fund must also send, at no 
cost to the requestor by email or other reasonably prompt means, an 
electronic copy of any of the materials discussed above within three 
business days after receiving a request for an electronic copy.\475\ 
These requirements would apply also to any financial intermediary 
through which shares of the fund may be purchased or sold. We 
understand that some investors continue to prefer to receive 
information in paper format, and therefore our proposal is designed to 
allow shareholders to have ready access to the fund information that 
appears online in print format, if they so prefer, or to receive 
electronic copies of this same information.\476\
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    \473\ The three-business-day timeframe also appears in similar 
existing conditions with respect to requests for copies of other 
similar documents. Based on staff experience in these other 
contexts, we believe that three business days generally is an 
appropriate time frame to send shareholders paper copies of 
information. See, e.g., rule 498(f)(1) (parallel delivery upon 
request requirements for funds and intermediaries relying on rule 
498); see also Instruction 3 to Item 1 of Form N-1A (requiring the 
SAI and shareholder reports to be sent within three business days of 
receipt of a request).
    \474\ See proposed rule 30e-1(b)(3)(i); see also supra Section 
II.C. This information includes: The fund's most recent financial 
statements and financial highlights; changes in and disagreements 
with fund accountants; matters submitted for a shareholder vote; 
remuneration paid to directors, officers, and others; a statement 
regarding the basis for the board's approval of the fund's 
investment advisory contract; and portfolio holdings information as 
of the close of the most recent first and third fiscal quarters.
    \475\ See proposed rule 30e-1(b)(3)(ii). The proposed 
requirement to send an electronic copy of materials may be satisfied 
by sending a direct link to the online materials; provided that a 
current version of the materials is directly accessible through the 
link from the time that the email is sent through the date that is 
six months after the date that the email is sent and the email 
explains both how long the link will remain useable and that, if the 
recipient desires to retain a copy of the materials, he or she 
should access and save the materials.
    \476\ See supra footnote 71 (discussing the 2012 Report on 
Investing Testing of Fund Annual Reports, which stated that there 
was a lack of consensus among shareholders who participated in the 
survey regarding their preferences for receiving information about 
their fund investments in print or electronically).
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    We seek comment on our proposal to require funds to provide 
shareholders, upon request, paper or electronic copies of the 
information that the proposed rule would require to appear online, 
including the following issues:
    175. Are the proposed delivery upon request provisions appropriate? 
Is the delivery time frame that the provisions would require 
appropriate? For example, would a fund experience challenges sending a 
paper copy of the information to a requesting shareholder within three 
business days, and if so what would these challenges be? Would other 
time frames for sending a paper copy be more appropriate, and if so, 
what should these time frames be?
    176. Do funds require additional clarity regarding what would 
qualify as a ``reasonably prompt means'' of delivering an electronic 
copy of any of the materials discussed above? If so, what type of 
guidance should the Commission provide?
    177. Should we incorporate a provision in rule 30e-1 that would 
permit investors the option to notify the fund (or the shareholder's 
financial intermediary) that the investor wishes to receive paper 
copies of reports on a going forward basis? Why or why not?

H. Disclosure Item Proposed To Be Removed From Shareholder Report and 
Not Filed on Form N-CSR

    In general, we are proposing that the disclosure items that funds 
currently have to include in their annual and

[[Page 70774]]

semi-annual reports would either be retained in those reports (some 
items in a simplified form, and some items only in the annual report), 
or instead filed on Form N-CSR and made available online. However, with 
respect to the management information table that currently appears in 
funds' annual reports, we are proposing to remove this disclosure item 
from the shareholder report without requiring its disclosure 
elsewhere.\477\
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    \477\ We are also proposing to remove the requirement that a 
fund provide a statement in the annual report that the SAI includes 
additional information about fund directors. This requirement would 
be replaced by a more general statement on the cover page of the 
proposed shareholder report that describes how a shareholder can 
obtain additional information about the fund. See supra footnote 137 
(discussing this proposed requirement) and proposed Item 27A(b)(4) 
of Form N-1A.
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    Currently, a fund is required to disclose certain information about 
each of the fund's directors and officers in the annual report 
(``management information table'').\478\ This information is also 
included in the fund's SAI.\479\ The Commission adopted these 
requirements in order to provide shareholders with basic information 
about the identity and experience of the fund's directors and to 
highlight for shareholders any potential conflicts of interests that 
the fund's directors and officers may have that would be relevant to 
shareholders.\480\
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    \478\ See Item 27(b)(5) of Form N-1A. For each director and 
officer, a fund must disclose: (1) Name, address, and age; (2) 
position(s) held with the fund; (3) term of office and length of 
time served with the fund; (4) principal occupation(s) during the 
past five years; (5) number of portfolios in the fund complex 
overseen by the director; and (6) other directorships held by the 
director.
    \479\ See Item 17(a)(1) of Form N-1A (requiring the inclusion of 
the management information table in the fund's SAI).
     In addition, when a fund solicits a shareholder vote with 
respect to the election of directors or executive officers, the fund 
must provide shareholders with a proxy statement that includes 
information regarding the candidates for election similar to the 
management information table. See Item 22(b) of Schedule 14A.
    \480\ See Independent Directors Release, supra footnote 86 at 
text following n.69.
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    While we continue to believe that shareholders should have access 
to information regarding fund directors, we believe it is unnecessary 
to include this disclosure in multiple disclosure documents. We also 
preliminarily believe that the management information table is not well 
suited to the fund's shareholder report because it pertains less 
directly to retail shareholders' understanding of the operations and 
performance of the fund and does not lend itself to the type of focused 
disclosure that the proposed annual and semi-annual reports are 
designed to include.\481\
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    \481\ See ICI Comment Letter I (recommending that the management 
information table not be included in the annual report because it is 
technical in nature).
---------------------------------------------------------------------------

    We considered whether we should propose to require funds to file 
the management information table on Form N-CSR or to post it online. We 
determined, however, not to propose such a requirement because the 
information included in the management information table does not 
frequently, or significantly, change from year to year. The most 
significant changes to this information usually occur when the fund has 
an election of directors, which would require disclosure of this 
information for the candidates standing for election in the relevant 
fund proxy statement. The results of such an election would be 
reflected in the fund's SAI, which is updated annually. Therefore, we 
believe that it would be unnecessarily duplicative for funds to also 
include this information on Form N-CSR.
    We seek comment on our proposal to remove the management 
information table from the annual report, and specifically on the 
following issues:
    178. Should we require funds to include the management information 
table in the proposed annual report? If so, why? Should this 
information also be included in the proposed semi-annual report? Is the 
management information table useful to shareholders to monitor and 
assess their ongoing investment in a fund? Why or why not?
    179. Rather than removing this disclosure entirely from the 
shareholder report, should we require funds to provide certain data 
points regarding fund management (for example, any subset of the 
disclosure about directors and officers that funds currently have to 
include in the management information table) in their shareholder 
reports? If so, what information and why, and should it be included in 
the semi-annual report as well as the annual report? For example, 
should we require disclosure of other directorships held by the 
director? Should we require disclosure of information in the management 
information table only with respect to interested directors? Or should 
we require a fund to disclose in its shareholder reports only if any 
changes have occurred during the reporting period with respect to 
management information (other than changes that the proposed rules 
already would require funds to disclose in the annual report's 
discussion of fund changes)?
    180. Should we require funds to file the management information 
table on Form N-CSR? Should we require funds to post this table online? 
Should we require funds to do both? Would shareholders benefit from 
having the information in one or both locations? What benefit would 
this provide to shareholders and other market participants, in light of 
the fact that this disclosure already appears in the SAI and in proxy 
statements for the election of directors?

I. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under 
Proposed Disclosure Framework

1. Overview
    In addition to the changes we are proposing to the requirements for 
fund shareholder reports, we are also proposing new rule 498B, which 
would address shareholders' continued receipt of annual prospectus 
updates following their initial investment in an open-end fund. Like 
the proposed new requirements for funds' shareholder reports, proposed 
rule 498B uses layered disclosure concepts to tailor funds' required 
disclosures to the informational needs of different types of investors. 
Under the proposed rule, investors would continue to receive a 
prospectus in connection with their initial fund investment, as they do 
today. Thereafter, a shareholder would no longer receive annual 
prospectus updates, in light of the fact that the fund's current 
prospectus would be available online, and the shareholder would be 
receiving (1) tailored shareholder reports (which would include a 
summary of material fund changes in annual reports), and (2) timely 
notifications regarding material fund changes as they occur. This new 
rule is designed to further the disclosure goals discussed above, 
including improving fund disclosure by tailoring it to the needs of new 
versus existing investors, addressing concerns about duplicative and 
overlapping disclosure materials, and responding to investors' 
expressed preferences for simplified, layered disclosure that 
highlights key information.\482\
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    \482\ See generally supra Section II.A.
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Legal Operation of Proposed Rule 498B
    Specifically, proposed rule 498B would allow a fund to satisfy any 
obligations under section 5(b)(2) of the Securities Act to have a 
statutory prospectus precede or accompany the carrying or delivery of a 
security to the fund's existing shareholders to be satisfied under 
specific conditions. Those conditions would be: (1) The existing 
shareholders have been

[[Page 70775]]

previously sent or given a prospectus in order to satisfy any 
obligation under section 5(b)(2) of the Securities Act, such as in 
connection with their initial investment in the fund; (2) certain 
specified disclosure materials (including, among other things, current 
summary and statutory prospectuses) appear online; and (3) existing 
shareholders receive notices of certain material changes to the fund 
when those changes occur.\483\ The proposed rule also includes delivery 
upon request and website presentation requirements (which are not 
conditions of reliance on the proposed rule to satisfy prospectus 
delivery obligations), including that a fund must: (1) Deliver, in a 
manner consistent with the requester's delivery preference, a copy of 
any of the fund documents that the rule would require to be made 
available online, at no charge to the requester, subject to certain 
additional conditions; and (2) ensure that those fund documents 
required to appear online are presented in a format convenient for both 
reading online and printing on paper, and can be permanently retained 
in such a format by persons accessing those materials, free of 
charge.\484\
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    \483\ See proposed rule 498B(b) and (c). Under our proposal, 
existing shareholders would also receive annual and semi-annual 
reports pursuant to proposed rule 30e-1 and proposed Item 27A of 
Form N-1A.
    \484\ See proposed rule 498B(d).
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Proposed Rule 498B and the Legal Responsibility for Misleading 
Disclosures
    The proposed rule would not relieve funds of any legal 
responsibility for misleading disclosures with regard to the fund 
documents required to be made available online. In particular, a fund 
that relies upon the layered disclosure framework in proposed rule 498B 
would be subject to the same prospectus and registration statement 
liability and anti-fraud provisions as if the fund had sent or given 
those prospectuses to existing shareholders.\485\ Those liability 
provisions would apply to the summary and statutory prospectuses 
required to appear online, together with information incorporated 
therein by reference.
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    \485\ See, e.g., sections 11, 12(a)(2), and 17(a)(2) of the 
Securities Act. Under section 11 of the Securities Act, purchasers 
of an issuer's securities have private rights of action for untrue 
statements of material facts or omissions of material facts required 
to be included in the registration statement or necessary to make 
the statements in the registration statement not misleading. Under 
section 12(a)(2) of the Securities Act, sellers have liability to 
purchasers for offers or sales by means of a prospectus or oral 
communication that includes an untrue statement of material fact or 
omits to state a material fact that makes the statements made, based 
on the circumstances under which they were made, not misleading. 
Section 17(a)(2) of the Securities Act is a general antifraud 
provision which makes it unlawful for any person in the offer and 
sale of a security to obtain money or property by means of any 
untrue statement of a material fact or any omission to state a 
material fact necessary in order to make the statements made, in 
light of the circumstances under which they were made, not 
misleading. See also infra footnotes 514 and 658.
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2. Scope of Proposed New Rule 498B
Delivery Obligations for New Investors and Existing Shareholders
    The proposed new rule is designed to tailor delivery obligations 
for new investors and existing shareholders in open-end funds 
registered on Form N-1A, to match their respective informational needs. 
For this reason, proposed rule 498B would continue to require that 
investors receive a fund prospectus in connection with their initial 
fund investment, and would affect funds' prospectus delivery 
obligations only as they apply to existing shareholders. The prospectus 
provides forward-looking information and acts as the principal selling 
document for potential investors. It provides certain key information, 
including disclosures regarding the fund's: (1) Investment objectives; 
(2) costs; (3) principal investment strategies, principal risks, and 
performance; (4) investment advisers and portfolio managers; (5) 
purchase and sale of fund shares; (6) tax information; and (7) 
financial intermediary compensation.\486\ We believe it is important 
for new investors making an initial investment decision to receive a 
prospectus that includes this information to inform their investment 
decisions and facilitate fund comparisons. The proposed shareholder 
reports would contain similar information to some of those prospectus 
disclosures where we believe that both new investors and existing 
shareholders would benefit from receiving this information to make 
informed decisions about whether to buy, sell, or hold fund 
shares.\487\
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    \486\ See Items 2 through 8 of Form N-1A; see also proposed rule 
498(b)(2) (requiring a summary prospectus to contain disclosures 
required by Items 2 through 8 of Form N-1A); 2009 Summary Prospectus 
Adopting Release, supra footnote 10 (stating that the information 
required in the summary prospectus is key information that is 
important to an investment decision).
    \487\ For example, both the proposed annual and semi-annual 
reports and the prospectus would include fund fee information (the 
shareholder reports in the form of the expense example, and the 
prospectus in the form of the fee table). See supra Section II.B.2.b 
and infra Section II.H.1.
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Definition of ``Existing Shareholder'' Under Proposed Rule 498B
    For the purposes of proposed rule 498B, an ``existing shareholder'' 
would generally be a shareholder to whom a summary or statutory fund 
prospectus was sent or given to satisfy any obligation under section 
5(b)(2) of the Securities Act and who has held fund shares continuously 
since that time.\488\ This definition is designed to ensure that after 
an investor has received a prospectus, that investor would have 
received notice regarding all subsequent material changes to the fund. 
The investor would have received notice of these changes either through 
prospectus amendments or supplements that would be sent or given per 
current practice to investors that hold fund shares (before the fund 
relies on proposed rule 498B), or via notices of material changes that 
proposed rule 498B would require (after the fund relies on proposed 
rule 498B). We believe that the definition's requirement that the 
shareholder continuously hold the fund shares is necessary because, if 
the investor purchased fund shares and then subsequently sold these 
shares, that investor would not receive notification of material fund 
changes that occurred when he or she did not hold fund shares. In this 
case, we believe it would be appropriate for such an investor to once 
again receive a fund prospectus before falling under a disclosure 
framework that provides information tailored to continuously existing 
investors.
---------------------------------------------------------------------------

    \488\ See proposed rule 498B(a)(2).
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    For purposes of the proposed rule 498B, an ``existing shareholder'' 
of a money market fund also would generally be a shareholder to whom a 
summary or statutory fund prospectus was sent or given to satisfy any 
obligation under section 5(b)(2) of the Securities Act. However, the 
requirement that the shareholder must have continuously held fund 
shares since that time would differ under the proposed rule with 
respect to shareholders in a money market fund. This difference would 
recognize the manner in which money market funds are used by investors 
and practices that we understand are generally common with money market 
funds. Money market funds are often used as cash vehicles with frequent 
withdrawals and deposits, and thus a money market fund investor who has 
sold all shares may often purchase additional shares shortly 
thereafter. For this reason, we understand that money market funds 
generally send or give prospectus

[[Page 70776]]

supplements and amendments to former shareholders who maintain accounts 
in those funds. Similarly, we understand that money market funds 
generally apply the same treatment to beneficial owners of such 
accounts opened through financial intermediaries, such as brokerage 
clients who have their cash deposited in a money market fund sweep 
account maintained in the name of the broker but for which the 
brokerage client is a beneficial owner. Therefore the definition of 
``existing shareholder'' would also include a shareholder in a money 
market fund who has continuously maintained (or been a beneficial owner 
of) an account with that fund because a fund prospectus has been sent 
or given to that shareholder.\489\
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    \489\ See proposed rule 498B(a)(2). The proposed rule would 
further define ``account'' as any contractual or other business 
relationship between a person and a fund to effect transactions in 
securities issued by the fund, including the purchase or sale of 
securities.
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Scope Excludes Variable Annuity and Variable Life Insurance Contracts
    Proposed rule 498B would be available only with respect to funds 
registered on Form N-1A.\490\ Proposed rule 498B would not apply to 
investors that hold the fund through a separate account funding a 
variable annuity contract offered on Form N-4 or a variable life 
insurance contract offered on Form N-6.\491\ The Commission recently 
adopted 17 CFR 230.498A [rule 498A], which provides that prospectus 
delivery requirements under section 5(b)(2) of the Securities Act are 
satisfied with respect to those investors if the fund's current 
prospectuses and certain other documents appear online and certain 
other conditions are met.\492\ Rule 498A, like the disclosure framework 
for funds that we are proposing, relies on a layered disclosure 
approach that tailors the disclosure that investors receive to the 
informational needs of both new and ongoing investors in variable 
contracts. The conditions associated with the satisfaction of 
prospectus delivery requirements pursuant to rule 498A are tailored to 
the unique nature of variable annuity and variable life insurance 
contracts, and provide disclosures and protections that we believe are 
more appropriate for investors in those contracts (compared to 
disclosures and protections associated with the satisfaction of 
prospectus delivery requirements pursuant to proposed rule 498B).\493\ 
Accordingly, we are not proposing to make proposed rule 498B available 
for those products.
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    \490\ See proposed rule 498B(a)(2) and (3).
    \491\ See proposed rule 498B(a)(2); see also generally Form N-4 
[17 CFR 239.17b and 274.11c] and Form N-6 [17 CFR 239.17c and 
274.11d].
    \492\ See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27 (adopting rule 498A under the Securities Act); 
rule 498A(j) (providing a new option to satisfy prospectus delivery 
requirements for mutual funds available through separate accounts 
funding a variable contract).
    \493\ For example, rule 498A permits prospectus delivery 
requirements for funds serving as underlying investment options 
under a variable contract to be satisfied if, among other things, an 
initial summary prospectus is used that provides investors with 
certain key summary information about those funds. See rule 
498A(j)(1)(i). This condition is designed to further the use of 
initial summary prospectuses for variable contracts, and is tailored 
to enhance the ability of variable contract investors to make 
informed investment decisions regarding how to allocate their 
investments in the variable contract. See Variable Contract Summary 
Prospectus Adopting Release, supra footnote 27, at Section II.B.2.
---------------------------------------------------------------------------

    We seek comment on the scope of our proposed new rule 498B and 
specifically on the following issues:
    181. Is the way that the proposed new rule would address existing 
fund shareholders' continued receipt of annual prospectus updates 
appropriate, in light of the other aspects of the rules and rule 
amendments we are proposing? Would existing shareholders be receiving 
the right set of information under the proposal, and would such 
information be delivered or made available in an appropriate manner?
    182. Should we make proposed rule 498B mandatory for all funds 
(instead of a permissive rule, as proposed)? If so, why? Would a 
permissive rule result in confusion for fund shareholders (because 
existing shareholders in funds that choose not to rely on the rule 
would continue to receive annual prospectus updates year over year), or 
produce any other detrimental effects? What would be funds' primary 
considerations in determining whether to rely on proposed rule 498B?
    183. Would the proposed rule's layered disclosure approach 
adequately protect existing shareholders who have no or limited 
internet access or who prefer not to receive information about their 
investments over the internet?
    184. Should we modify the proposed scope of the rule in any way? 
For example, should the scope be extended to include new investors, or 
investors that hold the fund through a separate account funding a 
variable insurance contract? Why or why not?
    185. Is the definition for ``existing shareholder'' under the 
proposed rule appropriate? If not, how should we revise this 
definition? Is it appropriate that, as proposed, the definition of 
``existing shareholder'' includes a shareholder in a money market fund 
who has continuously maintained (or been a beneficial owner of) an 
account with that fund because a fund prospectus has been sent or given 
to that shareholder? Do commenters agree that money market funds 
generally continue to send or give prospectus supplements to former 
shareholders, so long as those shareholders maintain (or are beneficial 
owners of) an account with the money market fund? Are there any general 
limitations on this industry practice or other limitations that we 
should add with regard to this provision in the proposed rule? Should 
the proposed definition of ``existing shareholder'' also include 
specific provisions for certain types of funds other than money market 
funds, and if so, what types of funds, and what should these provisions 
be, and why? For example, should the rule generally reference funds 
used for cash management purposes, as opposed to (or in addition to) 
simply referencing money market funds?
    186. Proposed rule 498B's layered disclosure framework for existing 
shareholders would only apply to open-end management investment 
companies. To what extent, if any, should we extend this aspect of our 
proposal to other types of investment companies? If we were to do this, 
should we modify any of the conditions to rely on proposed rule 498B, 
and if so, how? For example, proposed rule 498B is designed to work in 
conjunction with our proposed amendments to funds' shareholder reports. 
How should we modify the rule to apply in contexts where other types of 
investment companies (for example, registered closed-end funds and 
BDCs, and ETFs that are organized as unit investment trusts) have 
different shareholder report requirements than those we propose for 
open-end management investment companies? Please address the utility 
and policy implications of implementing a layered disclosure framework 
for existing shareholders, similar to that which proposed rule 498B 
would create, in the context of other types of investment companies.
    187. If we were to adopt proposed rule 498B, how should we evaluate 
the effectiveness of the new framework? What methods or approaches 
should we use to evaluate it, and what areas of the new framework 
should we focus on in any such review?
3. Conditions To Rely Upon Proposed New Rule 498B
    A fund would have to satisfy certain conditions in order to rely on 
the proposed new layered disclosure framework for existing 
shareholders, as outlined below. Failure to satisfy any of these 
conditions would mean that the fund could not rely on proposed rule

[[Page 70777]]

498B to satisfy prospectus delivery obligations to existing 
shareholders.
a. Website Availability of Certain Fund Documents
    To rely on rule 498B, a fund would have to make certain materials 
publicly accessible, free of charge, at the website address specified 
on the cover page or at the beginning of the fund's annual and semi-
annual reports.\494\ These materials would include: The fund's current 
summary and statutory prospectus, SAI, and most recent annual and semi-
annual shareholder reports (collectively, the ``rule 498B online fund 
documents'').\495\ This set of documents would be identical to the set 
of documents that are publicly accessible online for funds currently 
relying on rule 498. This proposed condition is designed to implement 
the contemplated layered disclosure approach by ensuring that current 
versions of the fund's summary prospectus, statutory prospectus, and 
SAI would be available online so that existing shareholders who did not 
receive those documents would have ready access to them in a 
convenient, centralized location, together with other relevant 
documents for existing shareholders such as the most recent annual and 
semi-annual shareholder reports.
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    \494\ See proposed rule 498B(c)(1); see also proposed rule 
498(e) (providing requirements regarding website availability of 
certain fund documents).
    \495\ The rule 498B online fund documents would not include 
information required to be filed on Form N-CSR and made available 
online on a semi-annual basis, as discussed above. See supra Section 
II.D.2. However, this and other information (including information 
provided in Form N-CSR) that the proposed amendments to rule 30e-1 
would require a fund to make available online would have to be made 
available at the same website address where the rule 498B online 
fund documents would appear (e.g., the website specified on the 
cover page or at the beginning of the fund's annual and semi-annual 
shareholder reports). See supra footnote 464 and accompanying text.
---------------------------------------------------------------------------

    The reference to ``current'' versions is designed to ensure that 
amendments or supplements to those documents are included in the rule 
498B online fund documents as a condition of reliance on proposed rule 
498B. Because funds generally continuously offer and sell shares, funds 
effectively must continuously maintain a current prospectus to satisfy 
their ongoing obligations to deliver the fund's prospectus to new 
investors.\496\ Thus, a fund relying on proposed rule 498B would be 
required to maintain current versions of the rule 498B online fund 
documents so long as the fund is engaged in a continuous offering. 
Proposed rule 498B would not specify a time frame for maintaining 
current versions of these documents online, but when the document is no 
longer ``current,'' a fund would have to replace it with the current 
version.\497\
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    \496\ See generally supra footnotes 11 through 13.
    \497\ But see rule 498(e) (specifying the time frame for posting 
current versions of the documents it requires to appear online 
(i.e., on or before the time that the summary prospectus is sent or 
given and until 90 days after the date the fund security is carried 
or delivered (in the case of reliance on rule 498(c)) or the date 
that the communication is sent or given (in the case of reliance on 
rule 498(d))).
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    Under the proposal, a fund would be required to include a summary 
prospectus as one of the rule 498B online fund documents.\498\ While 
funds' use of a summary prospectus is optional under rule 498, we 
estimate that currently 93% of all funds use a summary prospectus.\499\ 
Without requiring a summary prospectus, proposed rule 498B's new 
layered disclosure framework for existing shareholders could result in 
funds having less incentive to use a summary prospectus.\500\ We 
believe it is important to make available both a summary prospectus and 
the statutory prospectus to continue the current approach for funds, 
which gives investors the option to choose the amount and type of 
information to review.\501\ To the extent that existing shareholders 
might find it useful to review a fund prospectus (for example, in 
connection with a prospective additional investment in the fund), this 
condition would continue to make summary information about the fund 
available online, which we believe investors may be more likely to use 
and understand than the lengthier statutory prospectus.\502\
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    \498\ The proposed rule specifies that the current summary 
prospectus that the fund makes available online must comply with the 
requirements described in rule 498(b). See proposed rule 498B(a)(7).
    \499\ See supra footnote 82.
    \500\ For example, the option that proposed rule 498B would 
provide would reduce--or possibly fully eliminate--the cost savings 
currently associated with printing and mailing a summary prospectus 
as opposed to the statutory prospectus, because those summary 
prospectuses would be made available online instead of being printed 
and mailed. See also 2009 Summary Prospectus Adopting Release, supra 
footnote 10, at nn.400 and 401 (discussing the cost savings 
associated with printing and mailing a mutual fund summary 
prospectus).
    \501\ The layered disclosure framework represented by the 
summary prospectus was designed to provide investors with ``ready 
access to the information that investors need, want, and choose to 
review in connection with a mutual fund purchase decision.'' See 
2009 Summary Prospectus Adopting Release, supra footnote 10, at 
Section III.B.1. In adopting the summary prospectus framework, the 
Commission stated: ``We believe that the new rule will result in 
funds providing investors with more useable information than they 
receive today in a format that investors are more likely to use and 
understand.'' Id.
    Further, commenters have expressed an overall preference for 
concise, layered summary disclosure. See supra footnotes 27 through 
30 and accompanying text.
    \502\ See 2009 Summary Prospectus Adopting Release, supra 
footnote 10, at paragraph accompanying n.195; Variable Contract 
Summary Prospectus Adopting Release, supra footnote 27, at text 
accompanying and following n.1038.
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    Although funds would be required to prepare a summary prospectus to 
comply with the conditions of rule 498B, a statutory prospectus could 
still be used to satisfy prospectus delivery obligations under section 
5(b)(2) of the Securities Act. We understand that some funds that 
prepare summary prospectuses still choose to deliver a statutory 
prospectus under certain circumstances. For example, we understand that 
certain funds that prepare summary prospectuses still choose to send or 
give a statutory prospectus when investors are invested in multiple 
series covered by a single statutory prospectus. Likewise, certain 
funds may choose to send or give a statutory prospectus for certain 
product lines where the fund believes it would be helpful for investors 
to see the full suite of fund options (e.g., target date funds, sector 
funds, or target risk funds), to the extent that multiple series of the 
fund are described in a single statutory prospectus.\503\
---------------------------------------------------------------------------

    \503\ See rule 498(a)(3) and (b)(4) under the Securities Act 
(collectively limiting the scope of a summary prospectus to a single 
fund, or series).
---------------------------------------------------------------------------

    The proposed rule would include additional conditions regarding the 
format, or formats, in which the rule 498B online fund documents would 
be presented on the website. First, the format must be human-readable 
and capable of being printed on paper in human-readable format.\504\ 
This requirement is designed to help ensure that the information 
provided will be user-friendly, both online and when printed. This 
would impose a standard of usability on the online information that is 
comparable to the readability of a paper document.
---------------------------------------------------------------------------

    \504\ Proposed rule 498B(c)(1)(ii)(A).
---------------------------------------------------------------------------

    Second, the format must provide persons with the ability to move 
back and forth within documents and between certain documents. 
Specifically, the format must permit persons accessing the statutory 
prospectus or SAI to move directly back and forth between each section 
heading in a table of contents of such document and the corresponding 
section of the document.\505\ Similarly, the format must permit persons 
accessing the summary prospectus to move directly back and forth 
between: (1) Each section of the

[[Page 70778]]

summary prospectus and any section of the statutory prospectus and the 
SAI that provides additional detail concerning that section of the 
summary prospectus; or (2) links located at both the beginning and end 
of the summary prospectus, or that remain continuously visible to 
persons accessing the summary prospectus, and tables of contents of the 
prospectuses and the SAI.\506\ These requirements are designed to 
result in online information that is in a better and more usable format 
than the same information when provided in paper. Being able to move 
directly within and between documents would be more efficient than the 
equivalent task in a paper document (i.e., flipping through multiple 
pages).
---------------------------------------------------------------------------

    \505\ Proposed rule 498B(c)(1)(ii)(B).
    \506\ Proposed rule 498B(c)(1)(ii)(C).
---------------------------------------------------------------------------

    Additionally, documents required to appear online would be subject 
to retention requirements that would require that persons accessing the 
rule 498B online fund documents would have to be able permanently to 
retain, free of charge, an electronic version of such materials in a 
format that is human-readable and permits persons accessing the 
statutory prospectus or SAI to move directly back and forth between 
each section heading in a table of contents and the corresponding 
section of the document.\507\ This condition would provide shareholders 
with the same retention capabilities they would have with paper copies 
of the information, while still maintaining the technological 
enhancements associated with the electronic versions of the materials.
---------------------------------------------------------------------------

    \507\ Proposed rule 498B(c)(1)(iii).
---------------------------------------------------------------------------

    Further, there would be a safe harbor available if the rule 498B 
online fund documents were temporarily unavailable at the specified 
website, provided that the fund meets certain conditions.\508\ Those 
conditions would be substantially similar to the conditions associated 
with the proposed safe harbor provision addressing the website 
availability of the materials that the fund files on Form N-CSR.\509\ 
As with that safe harbor, we recognize that there may be times when, 
due to events beyond a fund's control, a fund may temporarily not be in 
compliance with the web posting requirements of proposed rule 498B. 
Providing for this safe harbor by rule may obviate the need to provide 
exemptive relief from the proposed rule's conditions under extenuating 
circumstances, as we have done from time to time.\510\
---------------------------------------------------------------------------

    \508\ Proposed rule 498B(c)(1)(iv).
    \509\ See proposed rule 30e-1(b)(2)(vi); see supra footnotes 479 
through 481 and accompanying text.
    \510\ See also supra footnote 469 (discussing similar safe 
harbor in the context of proposed rule 30e-1).
---------------------------------------------------------------------------

    These website availability conditions are modeled on the parallel 
conditions that rule 498 includes, requiring funds that wish to rely on 
that rule's summary prospectus option to make certain materials 
available online.\511\ We believe that this would create efficiencies 
for funds that wish to rely on proposed rule 498B, because many of 
these funds would likely be familiar with these conditions and would 
already have compliance processes in place pursuant to rule 498 to the 
extent that these funds choose to send or give summary prospectuses to 
new shareholders.
---------------------------------------------------------------------------

    \511\ See rule 498(e).
---------------------------------------------------------------------------

    We generally seek comment on the proposed website availability 
requirements, and specifically on the following issues:
    188. Are the proposed website availability requirements an 
appropriate condition to rely on proposed rule 498B? Why or why not?
    189. Are the proposed rule 498B online fund documents--the fund's 
current summary and statutory prospectus, SAI, and most recent annual 
and semi-annual shareholder reports--an appropriate set of materials 
for funds to have to make available online in order to rely on the 
proposed rule? Why or why not? Should this set of materials include any 
additional materials? Should we modify the proposed rule to reduce in 
any way the set of materials funds would have to make available online? 
Are there any revisions or simplifications that we should make to 
account for the information that the proposed amendments to rule 30e-1 
would require a fund to post online? If so, should we make any 
conforming changes to proposed rule 30e-1? In addition to requiring the 
fund's most recent annual and semi-annual shareholder report to appear 
online, should we also include a requirement that the fund (or a 
financial intermediary through which shares of the fund may be 
purchased or sold) must have provided existing shareholders with a 
paper or electronic copy of the fund's most recent annual and semi-
annual report as a condition of reliance on the proposed rule? 
Alternatively, should we include as a condition of reliance that the 
fund must adopt policies and procedures reasonably designed to ensure 
delivery of the fund's most recent annual and semi-annual shareholder 
reports?
    190. Is it appropriate effectively to require funds that wish to 
rely on proposed rule 498B to prepare a summary prospectus that 
complies with the requirements outlined in rule 498(b)? To what extent 
is it important to make summary prospectuses available to investors? 
Should we, as proposed, include a summary prospectus among the list of 
rule 498B online fund documents? If we do not require a summary 
prospectus to be included, what would be the effects on investors? 
Would funds continue to prepare summary prospectuses, and if not, what 
would be the effects on investors? Under proposed rule 498B, updated 
prospectuses would generally be posted online instead of being printed 
and mailed to existing shareholders, and therefore there would be fewer 
economic incentives for funds to prepare and use a shorter summary 
prospectus in addition to the required statutory prospectus. If funds 
cease to prepare summary prospectuses, should we rescind rule 498 since 
that rule would essentially be moot? If so, what would be the effects 
on investors? \512\
---------------------------------------------------------------------------

    \512\ See, e.g., supra footnote 501 and accompanying text.
---------------------------------------------------------------------------

    191. The website availability conditions in proposed rule 498B are 
modeled on the parallel conditions in rule 498. If we modify any of the 
website availability conditions in proposed rule 498B that have 
parallel conditions in rule 498 (and rule 498A), should we similarly 
modify the parallel conditions of rule 498 and/or rule 498A? Should 
proposed rule 498B include parallel provisions to any other conditions 
in rule 498 and, if so, which ones and why? For example, should 
proposed rule 498B include a provision similar to that in rule 
498(b)(3)(iii) specifying when information is conveyed to a person for 
purposes of 17 CFR 230.159 [rule 159 under the Securities Act]? Are 
there provisions not included in current rule 498 that we should 
include in rule 498B?
    192. Although we estimate that 93% of funds currently use a summary 
prospectus, are there significant issues that could prevent a fund from 
preparing a summary prospectus and that would therefore prevent the 
fund from relying on the proposed prospectus delivery option? If not, 
and to the extent that a summary prospectus would provide investors 
with summary information that they might be more likely to use and 
understand relative to the broader (and potentially more complex) 
disclosures in a statutory prospectus, should we require funds relying 
upon proposed rule 498B to use

[[Page 70779]]

a summary prospectus to satisfy prospectus delivery obligations (as 
opposed to allowing satisfaction of such obligations via a statutory 
prospectus)?
    193. Are there any aspects of the proposed website availability 
provisions of proposed rule 498B that should be harmonized, modified or 
clarified to reflect the different purposes of or interactions between 
rule 498 and proposed rule 498B? For example, to the extent that 
proposed rule 498B(c)(1) largely restates the web posting framework 
reflected in proposed rule 498(e), should proposed rule 498B instead 
reference, in whole or in part, the requirements of proposed rule 
498(e)? If so, how should we address the fact that the website 
availability requirements of rule 498 are based upon the assumption 
that a summary prospectus will be sent or given to shareholders, which 
would not necessarily be the case under proposed rule 498B (because the 
rules would operate independently of one another, and a fund relying on 
rule 498B would not also have to rely on rule 498)? For example, rule 
498 provides that the documents required to be made available online 
must appear at the website address specified in the summary prospectus 
sent or given to investors, whereas under proposed rule 498B existing 
shareholders would not be sent or given a summary prospectus.
    194. Rule 498 specifies the time frame for posting current versions 
of the documents it requires to appear online.\513\ Proposed rule 498B, 
on the other hand, specifies that ``current'' versions of the required 
online materials must appear online, and we envision that this 
requirement would in effect dictate the required time frame for posting 
(i.e., when the prospectus, SAI, or annual or semi-annual shareholder 
report is no longer current, it would be replaced online with a current 
version). Should we revise proposed rule 498B to parallel the 
provisions in rule 498(e) regarding when the required online materials 
must be accessible and when they must be removed? If so, how should we 
address the fact that no prospectuses would be delivered to existing 
investors under proposed rule 498B (whereas under rule 498, the time 
frame for web posting is triggered by the delivery of a summary 
prospectus)?
---------------------------------------------------------------------------

    \513\ The time frame for posting current versions of the 
documents is on or before the time that the summary prospectus is 
sent or given and until 90 days after the date the fund security is 
carried or delivered (in the case of reliance on rule 498(c)) or the 
date that the communication is sent or given (in the case of 
reliance on rule 498(d)).
---------------------------------------------------------------------------

    195. Are there alternate website posting frameworks that would be 
more appropriate for us to incorporate into rule 498B, rather than--as 
proposed--a framework that reflects the website posting requirement of 
rule 498?
b. Notice of Material Changes
    Funds generally maintain current prospectuses by filing annual 
post-effective amendments to their registration statement and, as 
necessary, supplementing or ``stickering'' the prospectus or SAI to 
reflect material or other changes to the information disclosed.\514\ 
Rather than bearing the expense of sending a prospectus with each 
confirmation of an investor's purchase of additional shares, which 
often occurs on a periodic basis (e.g., monthly), most registrants 
instead send copies of the new prospectus (or prospectus supplement or 
sticker) to all investors each time it is updated (or whenever the 
supplement or sticker is issued).
---------------------------------------------------------------------------

    \514\ See section 10(a)(3) of the Securities Act (requiring, 
among other things, that a prospectus used more than nine months 
after the effective date of a registration statement be updated so 
that the information contained therein shall not be more than 16 
months old); see also section 11 of the Securities Act (providing a 
civil remedy for a registration statement that contains ``an untrue 
statement of a material fact or omits to state a material fact 
required to be stated therein or necessary to make the statements 
therein not misleading.''); rule 408 under the Securities Act [17 
CFR 230.408(a)] (requiring registrants to include, in addition to 
the information expressly required to be included in a registration 
statement, such further material information, if any, as may be 
necessary to make the required statements, in the light of the 
circumstances under which they are made, not misleading).
    Additionally, funds may supplement or ``sticker'' their 
prospectus or SAI. See generally rule 497 under the Securities Act.
---------------------------------------------------------------------------

    Under the layered disclosure framework that proposed rule 498B 
would create, existing shareholders would receive shareholder reports 
to keep them informed about their ongoing fund investments in lieu of 
receiving annual prospectus updates. Consequently, existing 
shareholders would no longer be required to have prospectus supplements 
or amended prospectuses delivered to them. Therefore, proposed rule 
498B includes a requirement that is designed to help ensure that 
existing shareholders would continue to be informed in a timely manner 
regarding material changes to the fund (which, for shareholders in 
funds that are not relying on rule 498B, would otherwise be disclosed 
in updates to the prospectus). Absent this condition, existing 
shareholders potentially would not receive notice of a material change 
to the fund until the next annual shareholder report.\515\
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    \515\ As discussed above, the proposed annual shareholder report 
would include a discussion of any material changes that have 
occurred since the beginning of the fund's last fiscal year, or that 
the fund plans to make in connection with updating its prospectus 
under section 10(a)(3) of the Securities Act for the current fiscal 
year, with regard to certain topics. See supra Section II.B.2.f. 
Under our proposal, such disclosure of material changes could be 
optionally included in semi-annual shareholder reports, but would 
not be required. See supra text accompanying footnote 365.
---------------------------------------------------------------------------

    Specifically, if there is a material change with respect to certain 
topics that the proposed rule specifies, a fund relying on proposed 
rule 498B would have to send or give existing shareholders notice of 
that change.\516\ This provision would not apply to changes previously 
disclosed in the fund's most recent annual report to shareholders. The 
particular topics would be the same types of material changes in the 
proposed annual report.\517\ We believe this approach would have 
certain benefits over a more principles-based approach, such as a more 
general requirement that a fund must send notice of ``any material 
change'' to the fund. Specifically, we believe that the proposed 
approach would provide more certainty to funds about the types of 
changes that would necessitate notice to shareholders, and would 
enhance consistency of such disclosures across funds and across 
disclosure documents. These types of material changes also generally 
align with the prospectus disclosure items the Commission requires in 
summary prospectuses (and in the summary section of statutory 
prospectuses) and that we understand investors typically use to make 
investment decisions.\518\

[[Page 70780]]

We understand that investors often use information about these topics 
to inform initial investment decisions, and similarly we believe that 
material changes to these items may affect an existing shareholder's 
assessment of whether to continue to hold, buy, or sell fund shares. In 
addition funds could disclose other material changes on a discretionary 
basis, which we believe would provide flexibility to funds to highlight 
changes that they believe would be of significance to existing 
shareholders.
---------------------------------------------------------------------------

    \516\ The fund also would have to file a post-effective 
amendment to its prospectus or a prospectus supplement with the 
Commission. See rules 485 and 497 under the Securities Act 
(providing requirements for filing post-effective amendments and 
prospectus supplements).
    \517\ See proposed rule 498B(c)(2) (referencing Item 27A(g) of 
Form N-1A with regard to the scope of topics for which notice of 
material changes would be required (and permitted) to be provided to 
existing shareholders); see also Item 27A(g) of proposed Form N-1A, 
which would require disclosure of any material changes with regard 
to:
    (1) The fund's name;
    (2) The fund's investment objectives or goals;
    (3) With respect to material increases, the fund's ongoing 
annual fees, transaction fees, or maximum account fee;
    (4) The fund's principal investment strategies;
    (5) The principal risks of investing in the fund;
    (6) The fund's investment adviser(s); and
    (7) The fund's portfolio manager(s).
    The fund also may describe other material changes that it would 
like to disclose to its shareholders under Item 27A(g) of proposed 
Form N-1A.
    \518\ For example, among other things, the proposed notice would 
require disclosure of changes in the fund's investment objectives or 
goals, ongoing annual fees, principal investment strategies, and 
principal risks of investing in the fund, which generally align with 
summary and statutory prospectus disclosures required by Items 2, 3, 
and 4 respectively of Form N-1A. Compare Item 27A(g) of proposed 
Form N-1A with Items 2 through 8 of proposed Form N-1A.
---------------------------------------------------------------------------

    To help ensure shareholders receive notice in a timely manner, the 
proposed rule would require the notice to be provided within three 
business days of either the effective date of the fund's post-effective 
amendment filing or the filing date of the prospectus supplement 
filing, by first-class mail or other means designed to ensure equally 
prompt receipt.\519\ Further, the proposed rule would not specify the 
form of this notice. Therefore, a fund could satisfy this requirement, 
for example, by sending existing shareholders the prospectus supplement 
filed with the Commission, an amended prospectus which reflects the 
material change, or another form of notice that discusses the 
change.\520\
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    \519\ See proposed rule 498B(c)(2). If the shareholder does not 
specify a delivery preference, the proposed rule would require that 
the notice be provided in paper. However, notices of material 
changes could also be delivered electronically, consistent with 
current Commission guidance, if a shareholder elects electronic 
delivery. See, e.g., supra footnote 21.
    \520\ If a fund sends a separate notice to existing 
shareholders, the fund must file that notice with the Commission as 
an attachment to the post-effective amendment or prospectus 
supplement filed with the Commission regarding that change. See 
rules 485 and 497 under the Securities Act (providing requirements 
for filing post-effective amendments and prospectus supplements).
---------------------------------------------------------------------------

    Proposed rule 498B would allow ``householding'' of notices of 
material changes if the notice satisfies rule 154 under the Securities 
Act.\521\ Rule 154 generally provides that funds may deliver a single 
copy of a prospectus to investors who share the same address, pursuant 
to certain other requirements.\522\ Accordingly, funds that wish to 
household notices of material changes, based on implied consent, would 
send a notice to each investor at a shared address stating, among other 
things, that the investors at the shared address would receive one 
notice of material change(s) in the future unless the investors provide 
contrary instructions. In addition, at least once a year, funds relying 
on the householding provision would be required to explain to investors 
who have provided written or implied consent how they can revoke their 
consent, and this explanation must be reasonably designed to reach 
these investors. We anticipate that a fund would generally choose to 
provide this explanation in the notices of material changes that it 
provides under proposed rule 498B, and/or in the annual shareholder 
report.
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    \521\ See proposed rule 498B(c)(2).
    \522\ Rule 154 provides, among other things, that prospectus 
delivery obligations may be satisfied if a person delivers a 
prospectus to investors at the same address, the prospectus is 
delivered to the investors as a group, and the investors consent to 
such group delivery. Rule 154 provides certain conditions under 
which consent may be implied, and further provides that the 
investors must receive annual notice regarding how they may revoke 
their consent.
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    We generally seek comment on the proposed condition regarding 
notice of material changes, and specifically seek comment on the 
following issues:
    196. Is the proposed requirement regarding notices of material 
changes to the fund an appropriate condition to rely on proposed rule 
498B? Why or why not?
    197. Are the conditions that would necessitate a notice of material 
changes appropriate? For example, are the categories of topics 
identified in proposed rule 498B for which material changes would 
require notice to existing shareholders appropriate? Are those the 
topics that are most relevant to fund shareholders and their investment 
decisions? Does the proposed provision allowing funds to disclose 
additional material changes on a discretionary basis provide funds with 
appropriate flexibility to address their individual facts and 
circumstances? To the extent that the Commission adopts rules that 
include changes to the conditions that would necessitate disclosure of 
fund changes in shareholder reports, should the Commission adopt those 
same changes to the corresponding notice of fund changes that would be 
required pursuant to proposed rule 498B? In contrast, are there any 
considerations with regard to the disclosure of fund changes that apply 
uniquely to the notice contemplated by proposed rule 498B, as opposed 
to the proposed disclosure of fund changes in shareholder reports?
    198. Are the requirements for sending the notice of material 
changes appropriate? Should the rule, as proposed, require the notice 
to be provided within three business days of either the effective date 
of the fund's post-effective amendment filing or the filing date of the 
prospectus supplement filing? Would a longer or shorter period be 
appropriate? Should the rule, as proposed, require the notice be 
provided by first-class mail or other means designed to ensure equally 
prompt receipt? Is this requirement sufficiently clear, or should 
additional delivery methods be specified in the rule? Would these 
requirements, together with the requirements to post online updated 
prospectuses and other additional information, provide sufficient 
notice to investors of material fund changes? As an alternative to the 
proposed requirements for sending the notice of material changes, 
should the rule instead require a fund to post notices of material 
changes on its website? Would this approach provide investors with 
sufficient notice of material fund changes, if notice were not sent 
(either in paper or electronically) directly to investors?
    199. Are there any revisions the Commission should make to this 
aspect of the proposal? For example, instead of allowing flexibility 
regarding the form of this notice, should the Commission specify a 
particular format or presentation? If so, what format and why? 
Likewise, instead of identifying specific topics that would necessitate 
notice of material changes to existing shareholders, should the 
Commission adopt a more principles-based approach (that, for example, 
only requires a fund to send notices of ``material changes'')? If so, 
why, and what should the alternative approach require?
4. Other Requirements
a. Delivery Upon Request of Certain Fund Documents
    We are proposing to require a fund (or financial intermediary 
through which shares of the fund may be purchased or sold) to deliver, 
in a manner consistent with the person's delivery preference, a copy of 
the rule 498B online fund documents to any person requesting such a 
copy. The fund or intermediary must send requested paper documents at 
no cost to the requestor, by U.S. first class mail or other reasonably 
prompt means, within three business days after receiving the request 
for a paper copy.\523\ The proposed rule would also require a fund or 
intermediary to send electronic copies of these documents upon request 
within three business

[[Page 70781]]

days.\524\ The proposed rule would provide that the requirement to send 
an electronic copy of a document may be satisfied by sending a direct 
link to the online document, so long as certain conditions are 
met.\525\ First, a current version of the document would have to be 
directly accessible through the link from the time that the email is 
sent through the date that is six months after the date that the email 
is sent. Second, the email would have to explain both how long the link 
will remain useable and that, if the recipient desires to retain a copy 
of the document, he or she should access and save the document.
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    \523\ Proposed rule 498B(d)(1)(i); see also rule 498(f)(1) 
(parallel requirements for funds and intermediaries relying on rule 
498). The three-business-day timeframe also appears in similar 
existing conditions with respect to requests for copies of other 
similar documents. See, e.g., Instruction 3 to Item 1 of Form N-1A 
(requiring the SAI and shareholder reports to be sent within three 
business days of receipt of a request).
    \524\ Proposed rule 498B(d)(1)(ii); see also rule 498(f)(2) 
(parallel requirements for funds and intermediaries relying on rule 
498).
    \525\ Proposed rule 498B(d)(1)(ii); see also rule 498(f)(1) 
(parallel requirements for funds and intermediaries relying on rule 
498).
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    Collectively, these requirements are designed to help ensure that 
an investor has prompt access to the required information in a format 
that he or she prefers. Under our proposal, an existing shareholder 
would no longer receive annual prospectus updates, or supplements or 
updates to the prospectus that the fund makes between annual updates, 
but would be able to review those and other relevant documents online 
and also receive those documents directly, in paper or electronic 
format, upon request. Rule 498 would continue to require a fund to send 
specified fund documents to shareholders upon request, if the fund 
relies upon rule 498 to satisfy its prospectus delivery obligations or 
to send communications after the effective date of the fund's 
registration statement.\526\ However, the delivery upon request 
obligations of rule 498 would not apply with respect to existing 
shareholders if the fund were to rely on proposed rule 498B.\527\ Thus, 
under our proposal, we are including delivery upon request provisions 
as conditions of proposed rule 498B that are parallel to the delivery 
upon request provisions of rule 498.
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    \526\ The delivery upon request provisions in proposed rule 498 
would be essentially identical to the parallel provisions in 
proposed rule 498B, including the scope of the documents that would 
be subject to those provisions. Compare proposed rule 498(f)(1) with 
proposed rule 498B(d).
    \527\ See proposed rule 498(f)(1).
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    We seek comment on the delivery upon request provisions of proposed 
rule 498B, and specifically on the following issues:
    200. Are the delivery upon request provisions of proposed rule 498B 
appropriate? Are they necessary in light of the parallel provisions in 
rule 498? Is it necessary to have delivery upon request provisions in 
proposed rule 498B, in light of the fact that the materials subject to 
these provisions would be required to be available online? Why or why 
not? Are these considerations different than in rule 498 and/or rule 
498A, and should the delivery upon request provisions be retained in 
rule 498 and/or rule 498A? Why or why not?
    201. Should we modify the delivery upon request provisions of 
proposed rule 498B in any way, and if so, how? For example, should any 
of the terminology or concepts in the proposed requirement to deliver 
an electronic copy of a requested document be revised to reflect 
technological developments or to ensure that they are consistent with 
the goal of technological neutrality (e.g., email, direct link)? Should 
persons relying on proposed rule 498B be required to send the rule 498B 
online fund documents to any requestor within three business days of 
such request, as proposed? Likewise, if persons relying on proposed 
rule 498B send a direct link to an online document in response to a 
request for electronic delivery of that document, should we require a 
current version of that document to be directly accessible through the 
link from the time that the email is sent through the date that is six 
months after the date that the email is sent, as proposed? In either 
case, would a different time period be appropriate? If we do modify any 
of the delivery upon request provisions of proposed rule 498B, should 
we similarly modify the parallel provisions in rule 498 and/or rule 
498A?
    202. How does the proposed rule affect shareholders' ability to 
request paper copies of the rule 498B online fund documents? Are there 
any changes to the proposed rule that we should consider to make the 
process for requesting paper copies more convenient for shareholders? 
Should we require funds to make available to shareholders a way to opt 
into automatic annual delivery of future summary or statutory 
prospectuses in a paper format without having to specifically request 
them each year? What would the operational challenges of this approach 
be? Should we allow funds to give shareholders the option of automatic 
delivery in paper?
    203. The delivery upon request provisions of proposed rule 498B 
would not apply to the information funds must post online pursuant to 
proposed rule 30e-1, because proposed rule 30e-1 has its own delivery 
upon request provisions. Should we revise proposed rule 498B's delivery 
upon request provisions in any way to account for the information that 
proposed rule 30e-1 would address, and if so, are there any conforming 
changes that we should make to proposed rule 30e-1?
b. Convenient for Reading and Printing
    In addition, the proposed rule would require the rule 498B online 
fund documents to be presented in a format that is convenient for both 
reading online and printing on paper.\528\ This requirement is designed 
to ensure that the information appearing online would be user-friendly, 
both online and when printed. In addition, the proposed rule would 
require persons accessing the rule 498B online fund documents to be 
able to retain electronic versions permanently, free of charge, in a 
format that is convenient for both reading online and printing on 
paper.\529\ Collectively, these requirements impose on the online 
information a standard of usability that is comparable to the 
readability and retention of a paper document.
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    \528\ Proposed rule 498B(d)(2)(i); see also rule 498(f)(3)(i) 
(parallel provision in the rule governing the use of mutual fund 
summary prospectuses). We recognize that a format that is convenient 
for reading online might not be the same format that is convenient 
for printing on paper. A fund could comply with the proposed 
requirement by presenting the online fund documents on a website in 
a format that is convenient for reading online, and, separately, 
making these same documents available on the website in a format 
that is convenient for printing on paper (e.g., by making a 
``printer-friendly version'' available). We understand that funds 
commonly use this approach in complying with rule 498.
    \529\ Proposed rule 498B(d)(2)(ii); see also rule 498(f)(3)(ii) 
(parallel provision in the rule governing the use of mutual fund 
summary prospectuses).
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    We seek comment on these ``convenient for reading and printing'' 
provisions of proposed rule 498B and specifically on the following 
issues:
    204. Are the ``convenient for reading and printing'' provisions of 
proposed rule 498B appropriate? Are they necessary in light of parallel 
provisions in rule 498? Should we modify these provisions in any way? 
If so, how, and should we also modify the parallel provisions of rule 
498 and/or rule 498A? Is the phrase ``convenient for reading and 
printing'' sufficiently clear or should we provide additional guidance 
or rule text?
    205. How would the proposed rule affect shareholders' ability to 
read and print rule 498B online fund documents? Are there any changes 
to the proposed rule that we should consider to make reading and 
printing such documents more convenient for shareholders?
    206. The ``convenient for reading and printing'' provisions of 
proposed rule 498B would not encompass the information funds would be 
required to post online pursuant to proposed rule

[[Page 70782]]

30e-1, because proposed rule 30e-1 contains similar ``convenient for 
reading and printing'' provisions that would cover that information. 
Should we revise proposed rule 498B's ``convenient for reading and 
printing'' provisions in any way to account for the information that 
proposed rule 30e-1 would require funds to make available online and, 
if so, are there any conforming changes that we should make to proposed 
rule 30e-1?
c. Compliance With Other Requirements
    The delivery upon request and ``convenient for reading and 
printing'' requirements would not be conditions of reliance on proposed 
rule 498B. We are proposing that failure to comply with these 
requirements would not negate a person's ability to rely on proposed 
rule 498B to satisfy its delivery obligations under section 5(b)(2) of 
the Securities Act.\530\ Such failure would, however, constitute a 
violation of proposed rule 498B.
---------------------------------------------------------------------------

    \530\ See proposed rule 498B(d)(3); see also rule 498(f)(5) 
(parallel provision in the rule governing the use of mutual fund 
summary prospectuses).
---------------------------------------------------------------------------

    We recognize that a fund could inadvertently violate the delivery 
upon request and ``convenient for reading and printing'' requirements 
of the rule. For example, weather issues or other forces outside of the 
fund's control could present challenges for compliance with the three-
business-day deadline. Likewise, whether a particular format is 
convenient for reading online and printing depends on a number of 
factors and must be decided on a case-by-case basis.\531\ In order to 
provide greater certainty to market participants and funds who seek to 
rely upon the rule, these requirements would not be conditions to rely 
upon proposed rule 498B, as discussed in the paragraph above. We seek 
comment on this provision of proposed rule 498B and specifically on the 
following issues:
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    \531\ See 2009 Summary Prospectus Adopting Release, supra 
footnote 10, at nn.272 and 273 and accompanying text (relevant 
factors include the manner in which the online version renders 
charts, tables, and other graphics; the extent to which the online 
materials include search and other capabilities of the internet to 
enhance investors' access to information and include access to any 
software necessary to view the online version; and the time required 
to download the online materials).
---------------------------------------------------------------------------

    207. Should compliance with any or all of the proposed delivery 
upon request or ``convenient for reading and printing'' requirements be 
a condition of reliance on proposed rule 498B? That is, should failure 
to comply with these requirements result in a violation of section 
5(b)(2) of the Securities Act? Alternatively, should the failure to 
comply with these requirements be a violation of Commission rules that 
does not result in an inability to rely on the rule or a violation of 
section 5(b)(2)?

J. Amendments Narrowing Scope of Rule 30e-3

    Subject to conditions, rule 30e-3 generally permits investment 
companies to satisfy shareholder report transmission requirements by 
making these reports and other materials available online and providing 
a notice of that availability instead of directly mailing the report 
(or emailing an electronic version of the report) to shareholders.\532\ 
We are proposing to amend the scope of rule 30e-3 to exclude investment 
companies registered on Form N-1A, which would be sending tailored 
annual and semi-annual reports under the proposal. We are also 
proposing conforming amendments to Form N-1A that would remove the 
current statement that rule 30e-3 requires to appear on a fund's 
summary and statutory prospectus and annual and semi-annual reports 
informing investors of the change in delivery format options if the 
fund intends to rely on rule 30e-3 prior to January 1, 2022.\533\
---------------------------------------------------------------------------

    \532\ Rule 30e-3 Adopting Release, supra footnote 14.
    \533\ See proposed Form N-1A; see rule 498(b)(1)(vi) and (vii); 
paragraph (a)(5) to Item 1 of Form N-1A; paragraph (d)(8) to Item 27 
of Form N-1A.
---------------------------------------------------------------------------

    When the Commission adopted rule 30e-3 in 2018, it stated that the 
rule's new ``notice and access'' option for transmitting shareholder 
reports was intended to modernize the manner in which funds deliver 
periodic information to investors.\534\ The Commission also stated that 
it believed that the new rule would improve investors' ability to 
access and use this information (for example, by providing investors 
with access to at least a full year of complete portfolio holdings 
information in one location), while reducing expenses associated with 
printing and mailing that are borne by funds, and ultimately, by their 
investors.\535\ Furthermore, the Commission stated that it continues to 
search for better ways of providing investors with the disclosure that 
they need to evaluate funds in which they are considering investing or 
currently hold shares.\536\ As part of these general efforts, the 
Commission noted that it was issuing--at the same time that it adopted 
rule 30e-3--the Fund Investor Experience RFC, which was directed at 
investors regarding ways in which fund disclosure, including 
shareholder reports, may be improved.\537\
---------------------------------------------------------------------------

    \534\ See Rule 30e-3 Adopting Release, supra footnote 14, at 
paragraph accompanying n.18.
    \535\ Id.
    \536\ Id. at paragraph accompanying nn.20 and 21.
    \537\ Id. at n.20 and accompanying text; see also Fund Investor 
Experience RFC, supra footnote 8.
---------------------------------------------------------------------------

    As discussed above, the new proposed disclosure framework considers 
feedback that commenters provided in response to the Fund Investor 
Experience RFC and reflects the Commission's continuing efforts to 
search for better ways of providing investors with the disclosure that 
they need. The proposed movement away from a notice and access model 
for open-end fund shareholder report transmission--and towards a model 
that contemplates direct transmission of concise shareholder reports--
reflects our understanding based on responses to the Fund Investor 
Experience RFC, prior investor testing and surveys, and other 
disclosure reform initiatives that shareholders strongly prefer layered 
disclosure.\538\ It also reflects a model that certain commenters to 
the Fund Investor Experience RFC specifically suggested fund investors 
would find to be useful.\539\ Furthermore, the proposed approach 
reflects the Commission's recent experience with tailoring investment 
company disclosure requirements to the needs of new versus existing 
investors.\540\ In light of all of these considerations, we 
preliminarily believe that the proposed disclosure approach represents 
a more-effective means of improving investors' ability to access and 
use fund information, and of reducing expenses associated with printing 
and mailing, than continuing to permit open-end funds to rely on rule 
30e-3.\541\
---------------------------------------------------------------------------

    \538\ See supra Section I.B.1.
    \539\ See supra footnote 44 and accompanying text; see also 
supra footnote 100 and accompanying and following text (discussing 
Investor Advisory Committee recommendation that the Commission 
develop an approach to funds' shareholder reports that would rely on 
summary disclosure and layered disclosure principles).
    \540\ See supra footnote 99 and accompanying text.
    \541\ See infra Section III.C.2.d (discussing the estimated 
reduction of printing and mailing costs under the proposed 
approach).
---------------------------------------------------------------------------

    Although funds can generally begin relying on rule 30e-3 on January 
1, 2022, funds may rely on rule 30e-3 prior to that date if they 
include certain legends on fund prospectuses and shareholder reports 
stating that shareholder reports will eventually be available online 
and no longer will be sent to shareholders.\542\ We required an 
extended transition period and related disclosures in connection with 
implementation of rule 30e-3 to alert

[[Page 70783]]

investors that they would no longer be receiving reports in the mail 
and to provide time for affected investors to tell their fund or 
financial intermediary that they wished to continue receiving reports 
in paper, if that was their preference. Under this proposal, in 
contrast, investors would be receiving this information directly, and 
so there would not be a need to provide time for investors to express a 
different preference. Shareholders receiving the annual and semi-annual 
reports that this proposal contemplates would be receiving tailored 
information more directly than they would via the rule 30e-3 notice. 
However, if this proposal is adopted, a fund that has previously relied 
on rule 30e-3 might wish to communicate to investors the change and 
could, for example, do so in an annual report sent to investors.\543\
---------------------------------------------------------------------------

    \542\ See Rule 30e-3 Adopting Release, supra footnote 14, at 
text following n.257.
    \543\ See supra footnote 275 and accompanying text.
---------------------------------------------------------------------------

    We generally seek comment on the proposed amendments to rule 30e-3, 
and specifically seek comment on the following issues:
    208. The proposed amendments would exclude investment companies 
registered on Form N-1A from relying on rule 30e-3. Is such exclusion 
appropriate, in light of our goals of ensuring that all investors in 
these funds experience the anticipated benefits of the new tailored 
disclosure framework? Is the proposed approach to the transmission of 
shareholder reports preferable to the optional shareholder report 
transmission method that rule 30e-3 currently provides, in terms of the 
goal of improving investors' ability to access and use fund 
information, and reducing expenses associated with printing and 
mailing? Does the proposed approach more closely align with 
shareholders' preferences than the approach under rule 30e-3? Does the 
proposed approach represent a better way of providing investors with 
the disclosure they need to monitor their fund investments and make 
informed investment decisions? Are there any other considerations we 
should take into account in evaluating whether to adopt the proposed 
approach in lieu of continuing to permit open-end funds to rely on rule 
30e-3's notice and access model?
    209. If we were to adopt the proposed rules and amendments for 
tailored shareholder reports, should we also allow open-end funds to 
continue to rely on rule 30e-3? \544\ Why or why not? If we were to 
permit funds to continue relying on rule 30e-3, are there any changes 
we should make to the proposed rules and amendments in light of this? 
For example, should we prohibit funds that are relying on rule 30e-3 
from also relying on proposed rule 498B?
---------------------------------------------------------------------------

    \544\ See generally Sections II.B through II.D and requests for 
comment in supra Section II.C.3.b.
---------------------------------------------------------------------------

    210. To what extent, if any, should the scope of these amendments 
be extended to exclude other types of investment companies from relying 
on rule 30e-3? If we were to do this, how should we modify the rule to 
apply (or not) in contexts where other types of investment companies 
(for example, registered closed-end funds and BDCs, and ETFs that are 
organized as unit investment trusts) have different shareholder report 
requirements and would not have the layered disclosure framework for 
existing investors that we propose for open-end management investment 
companies?
    211. Under our proposal, funds planning to rely or currently 
relying on rule 30e-3 would not be required to provide notice to 
investors of the proposed amendments to rule 30e-3 because the 
amendments would result in those investors directly receiving 
information tailored to their informational needs. Should we require 
such notice to investors and, if so, to what extent should we specify 
the form, timing, and substance of such notice?
    212. Are there any difficulties that funds that have already begun 
to rely on rule 30e-3 would encounter in complying with the proposed 
changes to the scope of rule 30e-3? What difficulties would these be, 
and what Commission actions could help mitigate these difficulties? 
Should the Commission, for example, provide a longer compliance period 
in connection with any adoption of the proposed amendments to rule 30e-
3? If so, should we delay the effectiveness of rule 498B for the same 
period of time to avoid a period where existing shareholders do not 
directly receive either a shareholder report or an annual prospectus 
update?

K. Proposed Amendments To Fund Prospectus Disclosure Requirements

    We are also proposing several amendments to the content of funds' 
prospectuses. Specifically, two of the critical elements in prospectus 
disclosure relate to (1) fees and (2) risks, and we are proposing 
certain changes that we believe will improve disclosure regarding these 
topics. Our goal is to provide greater clarity and more comparable 
information with regard to fees and risks and by doing so, improve 
investor comprehension and facilitate investors' ability to make 
informed investment decisions.\545\
---------------------------------------------------------------------------

    \545\ See supra Section II.A.
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1. Improved Prospectus Fee Disclosures
    In addition to proposing amendments to fee presentation in 
shareholder reports, we are proposing improvements to prospectus 
disclosure about fund fees. These fee presentations are different 
because the annual report expense presentation is designed to help fund 
shareholders assess and monitor their ongoing fund investments looking 
back over the prior period, while the prospectus disclosure helps 
investors assess a prospective fund investment and is based on the 
fund's current estimated fees.
    When considering investing in a fund, fees and expenses are an 
important factor investors should consider. Fees and expenses can 
significantly affect a fund's returns. For example, a fund with higher 
costs must have higher returns than a fund with lower costs to generate 
the same performance. In addition, differences in costs that appear to 
be small, for example on an annual basis, may have a large impact when 
comparing returns of funds over time. Funds disclose their fees in the 
prospectus and the annual and semi-annual reports. The presentations in 
each of these contexts disclose information about fees and expenses in 
a standardized format to help investors compare that information across 
funds. Despite these existing disclosure requirements and educational 
efforts, the degree to which investors understand fund fees and 
expenses remains a significant source of focus and attention, and the 
Commission and staff have continually sought to improve investors' 
understanding in this area.\546\
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    \546\ See, e.g., Investor Bulletin: Mutual Fund Fees and 
Expenses (May 12, 2014), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-mutual-fund-fees-expenses; How to Read a Mutual Fund Shareholder 
Report, supra footnote 316.
---------------------------------------------------------------------------

    We are proposing revisions to simplify the presentation of fees and 
expenses in the prospectus and help increase investor 
comprehension.\547\ These proposed amendments respond to feedback that 
commenters provided in response to the Fund Investor Experience 
RFC.\548\ We are proposing to

[[Page 70784]]

replace the current fee table in the summary section of the statutory 
prospectus with a ``fee summary.'' \549\ The goal of this simplified 
fee summary would be to streamline the presentation of fees and provide 
an easier-to-understand presentation that includes fewer data points to 
help provide a clearer picture of the total costs of investing in a 
fund. The current fee table, which includes additional detail, would be 
moved to the statutory prospectus, where it could be used by investors 
who want additional details about fund fees to supplement the fee 
summary.\550\ In addition, we are proposing to replace certain terms in 
the current fee table with terms that we believe investors would more 
easily understand (these terms would also be used in the fee summary, 
as applicable).
---------------------------------------------------------------------------

    \547\ See Items 3, 8A, and 27A of proposed Form N-1A. Similarly, 
we are proposing revisions to simplify fee and expense presentations 
in annual and semi-annual reports. See supra Sections II.B.2.b and 
II.C.1.
    \548\ The Fund Investor Experience RFC Feedback Flier solicited 
feedback on the presentation of fees. In response to the question, 
``Do you think funds clearly disclose their fees and expenses?'' 21 
of 34 commenters (or 62%) responded that fund fees are not clearly 
disclosed. In response to the question ``How could funds improve the 
disclosure of fees and expenses?'' 21 of 27 commenters (or 78%) 
responded that fund fee presentations should be simplified.
    See also Recommendation of the Investor Advisory Committee 
Regarding Mutual Fund Disclosure (Apr. 14, 2016), available at 
https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-mf-fee-disclosure-041916.pdf (``Through testing, the 
Commission could identify ways to simplify and clarify the fee 
table'').
    \549\ See proposed Item 3 to Form N-1A.
    \550\ See proposed Item 8A of Form N-1A.
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    We are also proposing to permit funds that make limited investments 
in other funds to disclose AFFE, the fees and expenses associated with 
those investments, in a footnote to the fee table and fee summary 
instead of reflecting AFFE as a line item in the fee table and fee 
summary (as all funds do today).\551\ This proposed amendment is 
designed to enhance consistency of funds' prospectus fee disclosure in 
recognition that, for funds whose investments in other funds are 
limited, the fees and expenses of the underlying funds may more closely 
resemble other costs of investment that are not currently reflected in 
the prospectus fee table.
---------------------------------------------------------------------------

    \551\ See supra footnote 148 and accompanying text (noting that 
a fund's shareholder expense presentation does not reflect AFFE 
because this is not included in a fund's financial statements); see 
also infra footnotes 605 and 606 and accompanying text (discussing 
current AFFE disclosure requirements).
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a. Current Prospectus Fee Disclosure
    Currently, funds must provide two separate presentations of fee 
information in the prospectus: (1) A table under the heading ``Fees and 
Expenses of the Fund,'' (the ``fee table'') which shows shareholder 
transaction fees and annual fund operating expenses, generally in terms 
of a percentage of the amount invested in the fund; and (2) an example, 
which is a hypothetical calculation that shows the estimated expenses, 
in dollars, that an investor will pay for investing in a fund over 
different time periods.\552\
---------------------------------------------------------------------------

    \552\ See Item 3 of Form N-1A.
---------------------------------------------------------------------------

    The fee table currently includes two categories of fees: 
``shareholder fees'' and ``annual fund operating expenses.'' 
Shareholder fees are charges that investors pay directly--they are 
deducted from the amount that an investor invests in the fund. These 
charges typically appear as a percentage of the amount invested, and 
include:
     Sales charges (also known as ``loads''), which generally 
pay investment professionals compensation for selling shares of a fund 
to an investor; and
     Other applicable fees related to redemptions, exchanges, 
and account fees.
    Some shareholder transaction fees appear as a dollar amount in the 
fee table.
    Annual fund operating expenses are charges that an investor pays 
indirectly, because these charges are deducted from fund assets. Annual 
fund operating expenses appear as a percentage of net assets and 
generally include:
     ``Management fees,'' which a fund pays to its investment 
adviser for deciding which investments the fund buys and sells and for 
providing other related services;
     ``Rule 12b-1 fees,'' which pay for marketing and selling 
fund shares;
     ``Other expenses,'' which represent various categories, 
such as auditing, legal, custodial, transfer agency fees, and interest 
expense; and
     For funds that invest in other funds, AFFE (the fees and 
expenses of acquired funds).\553\
---------------------------------------------------------------------------

    \553\ Id., see also 17 CFR 270.12b-1 [rule 12b-1 under the 
Investment Company Act].
---------------------------------------------------------------------------

    A fund may also reflect certain waivers that may reduce the fund's 
total fees.\554\
---------------------------------------------------------------------------

    \554\ Instruction 3(e) to Item 3 Form N-1A.
---------------------------------------------------------------------------

    The example is a hypothetical calculation that shows the estimated 
expenses that an investor will pay for investing in a fund over 
different time periods. The goal of the example is to provide a means 
for investors to compare expense levels of funds with different fee 
structures over varying investment periods.\555\ The example appears in 
dollar amounts, based on a hypothetical investment of $10,000, and 
assumes a 5% annual return over the course of 1, 3, 5, and 10 
years.\556\
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    \555\ See Consolidated Disclosure of Mutual Fund Expenses, 
Investment Company Act Release No. 16244 (Feb. 1, 1988) [53 FR 3192 
(Feb. 4, 1988)].
    \556\ The example does not reflect purchase charges on 
reinvested dividends and other distributions (as applicable).
     If a fund imposes a fee or other charge when an investor sells 
(redeems) his or her shares, the fund must disclose two expense 
examples. The first example shows the estimated expenses of 
investing in the fund if the investor continues to hold his or her 
shares throughout the 1-, 3-, 5- and 10-year periods. The second 
example shows an investor's estimated investment expense if he or 
she sells (redeems) shares at the end of the 1-, 3-, 5- or 10- year 
periods.
---------------------------------------------------------------------------

    Funds must also include brief disclosure regarding portfolio 
turnover immediately following the fee table example.\557\ 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 when fund shares are held in a taxable 
account. The portfolio turnover rate will vary depending on the fund's 
investment strategy. This disclosure is designed to help investors 
understand the effect of portfolio turnover, and the resulting 
transaction costs, on fund expenses and performance.\558\
---------------------------------------------------------------------------

    \557\ Item 3 of Form N-1A.
    \558\ Summary Prospectus Adopting Release, supra footnote 10, at 
Section III.A.3.d.
---------------------------------------------------------------------------

b. Proposed Fee Summary
    We propose to require 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.\559\ The fee summary 
would be included in the summary section of the statutory prospectus 
(or, for funds that rely on rule 498, the summary prospectus), which 
funds provide investors at their initial purchase. The full fee table 
would be included in the statutory prospectus for those who want the 
additional level of detail. This is a layered disclosure approach 
designed to provide investors with concise, key information relating to 
the fund in the summary fee disclosure, with access to more detailed 
information elsewhere.\560\ The information in the fee summary would 
incorporate a subset of the information that appears in the fee table, 
and the fees that appear in the fee

[[Page 70785]]

summary would be the same as any corresponding fees in the fee table.
---------------------------------------------------------------------------

    \559\ Proposed Item 3 of Form N-1A; see also 2009 Summary 
Prospectus Adopting Release, supra footnote 10, at 41-42 (commenters 
suggest an abbreviated fee presentation and the Commission stated, 
``this idea deserves further consideration, and we will consider it 
for possible future rulemaking'').
    \560\ The statutory prospectus, which would include the full fee 
table, would be available online if the fund relies on rule 498 and 
delivers a stand-alone summary prospectus. In cases where the fund 
does not rely on 498, the investor would receive the statutory 
prospectus on paper and could flip from the fee summary to the full 
fee table.
---------------------------------------------------------------------------

    We are proposing that the fee summary begin with a narrative 
statement that the fee summary shows amounts the investor could pay to 
buy, hold, and sell shares of the fund and that these costs reduce the 
value of the investment. The narrative statement also would state that 
the investor may pay other fees, such as brokerage commissions and 
other fees to financial intermediaries. This would occur, for example, 
in the case of ETFs or ``clean shares.'' \561\ The narrative must state 
that these charges are not reflected in the fee summary and example. We 
are not proposing to require that the fee summary and example include 
these fees, because we understand that financial intermediaries that 
distribute the fund typically determine such fees, and that the amount 
may vary across financial intermediaries and distribution channels.
---------------------------------------------------------------------------

    \561\ Clean shares are share classes offered without sales loads 
or any asset-based distribution or sales fees. Investors purchasing 
and selling clean shares may be required to pay a commission to a 
broker.
---------------------------------------------------------------------------

    The body of the fee summary would consist of two sections: (1) A 
summary fee table showing the fund's transaction fees, maximum account 
fee (if applicable), and ongoing annual fees, and (2) a simplified 
version of the example. The proposed requirements for the fee summary 
are shown in the following chart, with current fee table line items 
shown on the left and corresponding items in the fee summary on the 
right. We discuss the proposed changes in more detail below.
BILLING CODE 8011-01-P

[[Page 70786]]

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[[Page 70787]]


[GRAPHIC] [TIFF OMITTED] TP05NO20.002

BILLING CODE 8011-01-C
    We seek comment on the proposed new fee summary, and specifically 
on the following issues:
    213. Is the proposed new fee summary appropriate? If so, is it also 
appropriate for the current full fee table to appear in the fund's 
prospectus outside the summary section of the prospectus (or, for funds 
that rely on rule 498, outside of the fund's summary prospectus)? Is 
this ``layered'' format appropriate for fee disclosure?
c. Proposed Summary Fee Table
    We propose to require a simplified fee summary in the summary 
section of the prospectus that is designed to improve investor 
understanding of fees and expenses. The proposed summary fee table 
would change the current fee table heading ``Shareholder Fees'' to 
``Transaction Fees,'' which we believe is a more plain-English term to 
describe fees paid each time an investor buys or sells shares of the 
fund. The line items under the heading ``Transaction Fees'' would 
generally encompass the same types of fees that currently appear as 
line items under the ``Shareholder Fees'' heading. However, we propose 
to re-title the line items with more plain-English descriptions, to 
increase investor comprehension. The proposed line items under the 
heading ``Transaction Fees'' that are parallel to line items currently 
appearing under the heading ``Shareholder Fees'' include:
     Any ``Purchase Charge'' to purchase shares, and any ``Exit 
Charge'' to sell shares; \562\
---------------------------------------------------------------------------

    \562\ These line items are currently titled ``Maximum Sales 
Charge (Load) Imposed on Purchases'' and ``Maximum Deferred Sales 
Charge (Load),'' respectively. See Item 3 of Form N-1A; see also 
supra Table 5.
---------------------------------------------------------------------------

     The ``Maximum Purchase Charge Imposed on Reinvested 
Dividends [and Other Distributions]''; \563\
---------------------------------------------------------------------------

    \563\ This line item is currently titled ``Maximum Sales Charge 
(Load) Imposed on Reinvested Dividends [and Other Distributions].'' 
See Item 3 of Form N-1A; see also supra Table 5.
---------------------------------------------------------------------------

     Any ``Early Exit Fee,'' which would show the redemption 
fee charged for exiting the fund early (and is distinguished from sales 
charges, which are covered under the ``Exit Charge'' line item); \564\
---------------------------------------------------------------------------

    \564\ This line item is currently titled ``Redemption Fee.'' See 
Item 3 of Form N-1A; see also supra Table 5.
---------------------------------------------------------------------------

     Any ``Exchange Fee,'' which is a charge that may be 
imposed on an investor who wishes to move assets from one fund in a 
fund group to another.\565\
---------------------------------------------------------------------------

    \565\ This line item title is the same as the line item title 
that currently appears in Form N-1A under the heading ``Shareholder 
Fees.'' See Item 3 of Form N-1A; see also supra Table 5.
---------------------------------------------------------------------------

    The one line item that currently appears under the heading 
``Shareholder Fees'' that would not appear under the proposed 
``Transaction Fees'' heading is the ``Maximum Account Fee.'' This fee 
is not a transaction fee, so we are proposing to include it as its own 
separate heading in the summary fee table.\566\
---------------------------------------------------------------------------

    \566\ Proposed Instruction 3 to Item 3 of Form N-1A; see also 
supra Table 5.

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[[Page 70788]]

    The fee summary is designed to be a focused presentation of 
transaction costs and, consequently, we are proposing to instruct funds 
that any transaction fee equaling $0 should not be included in the 
summary fee table (and the applicable line item that would appear in 
Form N-1A should be omitted from the summary fee table).\567\ We 
understand that certain of these fees are not common in practice (e.g., 
account fees, and increasingly, exit charges). Therefore, even though 
there are a number of line items that would appear under ``Transaction 
Fees'' in Form N-1A, we do not expect that most funds would have to 
include all of these line items in their fee disclosure. As a result, 
we do not anticipate that the proposed amendments to the form would 
detract from the focused nature of the fee summary. While we are 
proposing to consolidate the line items that currently appear under 
``Annual Fund Operating Expenses,'' as we discuss in more detail below, 
we are not similarly proposing to consolidate the corresponding line 
items that would appear under ``Transaction Fees.'' The imposition of 
transaction fees depends on whether an investor buys or sells shares of 
a fund, and will therefore be different for each investor. Accordingly, 
consolidation of transaction fees would be confusing to an investor who 
would be unable to determine whether and when he or she would bear 
those fees.
---------------------------------------------------------------------------

    \567\ Proposed Instruction 2 to Item 3 of Form N-1A. However, a 
multiclass fund that shows a charge and line item because one class 
imposes a charge may show 0 as the charge for other classes. Id.
---------------------------------------------------------------------------

    For each of the line items under the ``Transaction Fees'' heading, 
and the ``Maximum Account Fee,'' a fund would have to indicate the 
maximum amount that the fee could be (and state that the fee is ``up 
to'' the stated amount), if the fund offers sales charge 
discounts.\568\ This presentation would indicate to the reader that the 
actual sales charge may in fact be lower than the maximum fee disclosed 
in the fee summary.
---------------------------------------------------------------------------

    \568\ Proposed Instruction 2 to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    The proposed fee summary would change the current fee table heading 
``Annual Fund Operating Expenses'' to ``Ongoing Annual Fees.'' This new 
heading is designed to convey, in plain English, that there are charges 
that an investor will have to pay each year. The ``Ongoing Annual 
Fees'' entry in the proposed summary fee table would consist of one 
line item showing the total amount that the investor would pay 
annually. Rather than an itemized list of Ongoing Annual Fees, this 
proposed fee presentation would show a total, ``bottom line'' figure 
that investors can expect to pay. This is a figure that investors could 
compare across funds in evaluating the ongoing annual fees associated 
with each fund.
    The proposed summary fee table would, like the current prospectus 
fee presentation, address expense reimbursements and fee waiver 
arrangements. If the fund's full fee table in the statutory prospectus 
were to show an expense reimbursement or fee waiver arrangement (a 
``discount''), our proposal would permit an additional line item in the 
proposed summary fee table: ``Ongoing Annual Fees with Temporary 
Discount.'' \569\ This line item would reflect the amount of ongoing 
annual fees after any discount, which would more precisely reflect the 
fees that the investor will pay while the discount is in place.\570\ 
This line item would appear after the ``Ongoing Annual Fees'' line item 
that does not reflect the discount, because we believe that the 
``gross'' figure should be the most prominent, given that expense 
reimbursement and fee waivers are generally only temporary. Further, we 
are proposing that this optional Ongoing Annual Fees line item be 
accompanied by a footnote stating the expected termination date of the 
discount.\571\
---------------------------------------------------------------------------

    \569\ Proposed Instruction 4(b) to Item 3 of Form N-1A.
    \570\ See current Instruction 3(e) to Item 3 of Form N-1A. Based 
on XBRL data filed on the EDGAR system as of June 1, 2019, of the 
more than 32,000 fund classes, approximately 53% described a fee 
waiver in the prospectus fee table.
    The proposed line item would be permitted, not required, just as 
the current provision on expense reimbursements or fee waivers is 
also permissive. Id. We believe that, as a practical matter, a fund 
would likely choose to disclose the ongoing annual fees with the 
expense reimbursements or fee waivers because that would be a lower 
amount than ongoing annual fees without those reductions.
    \571\ Instruction 4(b) to Item 3 of proposed Form N-1A; see also 
supra Table 5.
---------------------------------------------------------------------------

    We propose to require that each line item in the summary fee table 
show the cost investors could pay in dollars assuming a $10,000 
investment, as well as the same charge shown as a percentage of 
assets.\572\ Research suggests that investors may better appreciate the 
impact of costs when expressed as a dollar amount rather than a 
percentage of assets.\573\ While this proposed addition would add some 
marginal length to the fee summary, we do not believe the length is 
inappropriate when balanced against the need to communicate the impact 
of costs to investors effectively. Also, we believe that the proposed 
tabular presentation of the fee summary is an efficient way to present 
fee information, including the new dollar-based presentation, in a 
manner that investors can easily read and understand.\574\
---------------------------------------------------------------------------

    \572\ Proposed Instruction 2, proposed Instruction 3, and 
proposed Instruction 4(c) to Item 3 of Form N-1A.
    \573\ Cf. Numerical Information Format and Investment Decisions: 
Implications for the Disposition Effect and the Status Quo Bias, 
Rubaltelli et al., The Journal of Behavioral Finance, 2005, Vol. 6, 
No. 1, 19-26); see also Government Accountability Office, Statement 
of Richard J. Hillman, Director, Financial Markets and Community 
Investment before the U.S. Senate Committee on Governmental Affairs 
Subcommittee on Financial Management, the Budget and International 
Security, ``Mutual Funds: Additional Disclosures Could Increase 
Transparency of Fees and Other Practices,'' (Jan. 27, 2004), 
available at https://www.gao.gov/assets/120/110547.pdf; Justine S. 
Hastings & Lydia Tejeda-Ashton, Financial Literacy, Information, and 
Demand Elasticity: Survey and Experimental Evidence from Mexico, 
NBER Working Paper 14538 (Dec. 2008), available at https://www.nber.org/papers/w14538 (finding that providing fee disclosures 
to Mexican investors in peso rather than percentage terms caused 
financially inexperienced investors to focus on fees).
    \574\ See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27 (requiring a tabular presentation of fees in 
variable contract summary prospectuses).
---------------------------------------------------------------------------

    Under the proposal, the ``Ongoing Annual Fee'' amount generally 
would be the same figure that funds currently report as ``Total Annual 
Fund Operating Expenses'' (i.e., the fund's expense ratio).\575\ In 
addition to direct and fixed fees, such as management fees, this 
expense ratio figure currently includes certain performance expenses 
that are not operating costs reflected in a fund's statement of 
operations but rather are indirect expenses paid by the fund to 
generate performance and excludes other such expenses. Performance 
expenses currently reflected in a fund's expense ratio include AFFE, 
interest expense, and dividends paid on short sales (although AFFE is 
not included in the fund's statement of operations).\576\ However, the 
expense ratio does not currently reflect all or even most of the 
material performance expenses that similarly affect the fund's 
performance. These include costs associated with the fund's securities 
lending activities and transaction costs. For example, funds that lend 
securities generate income from securities lending that is included in 
the fund's performance. To generate that income, the fund incurs 
certain expenses, such as fees to the securities lending agent. 
Further, it is our understanding that the income generated is used to 
offset the fund's

[[Page 70789]]

operating costs.\577\ Transaction costs are the costs a fund incurs 
when it buys or sells portfolio investments. These costs include 
commissions, spread costs, market impact costs, and opportunity 
costs.\578\
---------------------------------------------------------------------------

    \575\ The ``Ongoing Annual Fee'' amount may differ from the 
currently reported ``Total Annual Fund Operating Expenses'' figure 
to the extent that a fund discloses AFFE in a footnote instead of 
reflecting that amount in the ``Ongoing Annual Fee'' figure under 
the proposed amendments. See infra Section II.H.1.g.
    \576\ See infra Section II.H.1.g (proposing certain amendments 
to the scope of AFFE disclosure).
    \577\ Funds typically engage a securities lending agent to 
administer their securities lending programs and compensate these 
agents with a share of the revenue generated by the lending program. 
Some funds use securities lending agents that are affiliated with 
the fund's investment adviser and so this additional revenue may be 
used to defray some of the fund's direct costs, such as advisory 
fees. The portion of securities lending revenue paid to the 
securities lending agent is not reflected in the fund's fee table. 
Thus, using this revenue to reduce other costs of investing in the 
fund (where that reduction is reflected in the fee table) may make 
the fund appear to be less expensive.
    \578\ Commissions generally refer to charges that a broker 
collects to act as agent for a customer when executing and clearing 
trades. Spread costs are incurred indirectly when a fund buys a 
security from a dealer at the ``asked'' price (which is above 
current value) or sells a security to a dealer at the ``bid'' price 
(which is below current value). Market impact costs are incurred 
when the price of a security changes as a result of the effort to 
purchase or sell the security. Opportunity cost is the cost of 
missed trades. For more information about these categories of costs, 
see Concept Release: Request for Comments on Measures to Improve 
Disclosure of Mutual Fund Transaction Costs, Investment Company Act 
Release No. 26313 (Dec. 18, 2003) [68 FR 74820 (Dec. 24, 2003)] 
(``Transaction Costs Concept Release''), at Section II.
---------------------------------------------------------------------------

    Although a fund's fee table does not reflect securities lending 
costs and fund transaction costs, a fund's prospectus and SAI include, 
in locations other than the fee table, other information about these 
costs. For example, a fund's total return in the prospectus performance 
presentation reflects these costs.\579\ However, an investor reviewing 
a fund's total return cannot identify whether the fund's securities 
lending or trading activity had a positive or negative effect on the 
fund's returns, or the overall costs associated with these activities. 
In fact, an investor would likewise not be able to ascertain the effect 
of the performance expenses currently included on the fund's return. 
However, beyond inclusion in the total return, funds also provide 
certain information about securities lending income, expenses, and 
services in their SAIs.\580\ Funds also report information about their 
securities lending activities on Form N-CEN.\581\ On transaction costs, 
prospectuses provide a fund's portfolio turnover rate, and SAIs include 
the amount of brokerage commissions the fund paid.\582\ This 
information can help investors understand how fund transaction costs 
may vary among different funds.\583\
---------------------------------------------------------------------------

    \579\ Transaction costs are included in a fund's total return 
because, under generally accepted accounting principles, they are 
either included as part of the cost basis of securities purchased or 
subtracted from the net proceeds of securities sold and ultimately 
are reflected as changes in the realized and unrealized gain or loss 
on portfolio securities in the fund's financial statements.
    \580\ See Item 19(i)(1) of Form N-1A. Among other things, this 
includes the dollar amount of fees or compensation paid by the fund 
for securities lending activities and related services, including 
fees paid to the securities lending agent from a revenue split, 
other fees that are not included in the revenue split (such as fees 
paid for cash collateral management services, administrative fees, 
and indemnification fees), and rebates paid to the borrower.
    \581\ See Item C.6 of Form N-CEN (requiring a fund to report 
certain information about its securities lending activity, 
including: (1) Whether it is authorized to engage in securities 
lending transactions; (2) whether it lent its securities during the 
relevant period; (3) certain information about its securities 
lending agent(s); (4) certain information about any cash collateral 
manager (who is not also the fund's securities lending agent); (5) 
types of payments made to securities lending agents or cash 
collateral managers; (6) the monthly average of the value of the 
portfolio securities on loan during the relevant period; and (7) net 
income from securities lending activity).
    \582\ See Item 3 of current Form N-1A; Items 3 and 8A of 
proposed Form N-1A; and Item 21(a) of Form N-1A. Money market funds 
are not required to provide annual portfolio turnover rates because 
many of their investments would already be excluded from the 
portfolio turnover rate calculation (which excludes securities whose 
maturities or expiration dates at the time of acquisition were one 
year or less). See, e.g., Instruction 4(d) to Item 13 of Form N-1A 
(providing calculation instructions for portfolio turnover rates); 
see also MDFP Adopting Release, supra footnote 180, at n.3.
    \583\ See, e.g., Transaction Costs Concept Release, supra 
footnote 578, at paragraph accompanying n.4.
---------------------------------------------------------------------------

    While we require funds to provide some information related to their 
securities lending costs and transaction costs, we understand that 
there could be benefits in providing investors a more complete or 
focused disclosure in one location regarding performance expenses. 
Among other benefits, this could include more transparent cost 
information that would allow investors to better compare funds. At the 
same time, there are complexities associated with requiring funds to 
disclose this information in their prospectus fee tables and in the 
proposed summary fee table. For instance, what is the best way to 
include the information in a manner that reflects the corresponding 
income (or loss) to the fund from the particular activity? Moreover, 
there are some challenges associated with measuring certain performance 
expenses, such as transaction costs, including the potential for 
inconsistent or inaccurate measurements that may confuse or mislead 
investors.\584\ While we are not, at this time, proposing to modify 
fund prospectus disclosure to address these performance expenses, we 
are soliciting input on whether and how to include these performance 
expenses in the fund's prospectus. We note, in particular, our 
modifications of the shareholder report expense presentation that would 
take a new approach to the presentation of fees and expenses designed 
to reflect both the direct, fixed fees as well as the material 
performance expenses by requiring disclosure of the fund's net 
performance together with qualitative disclosure on the material 
expenses to performance.\585\
---------------------------------------------------------------------------

    \584\ See supra footnote 157 (discussing commenters' views on 
the challenges associated with transaction cost disclosure in 
certain jurisdictions).
    \585\ See supra Section II.B.2.b.
---------------------------------------------------------------------------

    We seek comment on the proposed summary fee table and on the scope 
of costs and performance expenses it would reflect, and specifically on 
the following issues:
    214. Is it helpful to investors to require simplified, ``bottom 
line'' disclosure of the ongoing annual fees they will pay with their 
fund investment in the fee summary, and more-detailed disclosure about 
the components of the ongoing annual fees in the full fee table? Is it 
investor-friendly to provide for one total figure for ongoing annual 
fees and not permit a fund to include subcategories of such expenses in 
the fee summary? Should we also consolidate any or all of the 
transaction fees reported in the proposed fee summary? If so, how 
should Form N-1A instruct funds to consolidate this information?
    215. Is it appropriate, as proposed, that the summary fee table 
show the fund's transaction fees, maximum account fee, and ongoing 
annual fees? Are there any other general types of fees and charges that 
the summary fee table should include? If so, which ones?
    216. Is it appropriate not to require in the proposed summary or 
full fee table or example disclosure of brokerage commissions and other 
fees to financial intermediaries? Do commenters agree with our approach 
not to require such fees because financial intermediaries that 
distribute the fund typically determine such fees, and the amount may 
vary among financial intermediaries and distribution channels? Are 
there reasons such fees should be disclosed?
    217. Some investors commenting on the Fund Investor Experience RFC 
expressed interest in a single, ``all-in'' presentation of investment 
costs (or in personalized fee disclosure more generally) that would 
reflect both fund and intermediary costs.\586\ Other

[[Page 70790]]

commenters indicated that preparing combined or personalized expense 
information could present some challenges, including the potential need 
for coordination and information-sharing between funds and 
intermediaries.\587\ Should funds provide more comprehensive fee and 
expense presentations that account for both fund and intermediary 
costs? If so, how? For example, are there ways we could better 
integrate information an investor receives about fund costs in fund 
prospectuses and information an investor receives about intermediary 
costs in a Form CRS relationship summary? \588\ If so, how? Should any 
integrated presentation of costs provide illustrative, standardized 
information about fund and intermediary costs, or should it provide 
investor-specific information? As another example, if a fund is only or 
primarily offered through one or more known wrap fee programs, should 
fund disclosure materials recognize the wrap fee program costs? \589\ 
Would this approach present challenges to funds or intermediaries? If 
so, what are those challenges, and how could we address them? If we 
modify fee and expense presentations to account for both fund and 
intermediary costs, should we also require performance information that 
recognizes both sets of costs? Would the proposed presentation of fees 
in terms of dollar amounts, in addition to the currently required 
percentage amounts, be useful to investors? Should an investment amount 
other than $10,000 be used? If so, what would be the appropriate 
amount?
---------------------------------------------------------------------------

    \586\ See, e.g., Waranowski Comment Letter: Wilhelm Comment 
Letter; Fowler Comment Letter; Balke Comment Letter; Hague Comment 
Letter; Woods Comment Letter; Lee Comment Letter. Some commenters 
did not want to receive more personalized information, including 
personalized fee information, with a few of these commenters 
expressing particular concern about sharing personal information. 
See, e.g., Grano Comment Letter; Wilhelm Comment Letter.
    \587\ See ICI Comment Letter I.
    \588\ See, e.g., Item 3.A of Form CRS (requiring a relationship 
summary to include summary information about principal fees and 
costs, a description of other fees and costs, and specific 
references to more detailed information about fees and costs); Form 
CRS Adopting Release, supra footnote 27.
    \589\ A wrap fee program generally involves an investment 
account where an investor is charged a single, bundled, or ``wrap'' 
fee for investment advice, brokerage services, administrative 
expenses, and other fees and expenses.
---------------------------------------------------------------------------

    218. Is the narrative statement that we are proposing to precede 
the fee summary useful and appropriate? Is it helpful to note that fees 
reduce the value of an investment? Is it helpful to include the 
statement, as proposed, that investors may pay other fees, such as 
brokerage commissions and other fees to financial intermediaries, which 
are not reflected in the summary fee table or the expense example? What 
changes, if any, should the Commission make to the proposed narrative 
statement?
    219. As proposed, the ``Transaction Fees'' heading in the summary 
fee table would include specified line items: Purchase Charge, Exit 
Charge, Maximum Purchase Charge Imposed on Reinvested Dividends, Early 
Exit Fee, and Exchange Fee. Should the ``Transaction Fees'' heading 
include all of these line items, or should the Commission limit this 
fee presentation in any way (e.g., by only permitting a fund to include 
the purchase charge and exit fee in the summary fee table)? Would the 
proposed inclusion of all of these line items detract from a focused 
presentation of transaction costs? Do commenters agree with our 
expectation that most funds would not include all of these line items, 
given the proposed instruction that any transaction fee equaling $0 
should not be included?
    220. Is it appropriate to move the current ``Maximum Account Fee'' 
line item to its own section in the summary fee table in light of the 
proposed change of the headings in the fee table from ``Shareholder 
Fees'' to ``Transaction Fees''?
    221. Is it appropriate to require a fund to indicate the highest 
amount that the fee could be (and to state in its disclosure, as 
proposed, that a particular fee is ``up to'' that amount if the fund 
offers fee discounts)? Is this an effective means of indicating that 
charges may be lower than the maximum fee that the fund discloses in 
the summary?
    222. Is the proposed optional ``Ongoing Annual Fees with Temporary 
Discount'' line item appropriate? If so, is it also appropriate to 
require a fund to disclose the gross figure before any such waivers, as 
proposed? Should these two line items appear adjacent to one another in 
the summary fee table, as proposed?
    223. Should we modify the types of fund costs that funds currently 
must include in their expense ratios, which funds would disclose in the 
proposed summary fee table and the full fee table? For example, should 
the reported expense ratio include any performance expenses--such as 
securities lending costs or fund transaction costs--that it does not 
currently include? If so, how should funds measure each newly disclosed 
category of performance expenses? For example, should securities 
lending costs be disclosed as a percentage of net assets in the 
prospectus, based on current disclosure of these costs in the SAI? 
Alternatively, should performance expenses that are currently included 
in the expense ratio, such as interest expense or dividends paid on 
short sales, not be included as a component of the expense ratio? \590\ 
Should the presentation distinguish between direct fees and expenses 
(i.e., operating expenses) versus performance expenses associated with 
portfolio management activities that detract from fund performance 
(such as interest expenses, dividends paid on short sales, AFFE, 
securities lending costs, and fund transaction costs) and, if so, how?
---------------------------------------------------------------------------

    \590\ See, e.g., ICI Comment Letter I; Comment Letter of 
Teachers Insurance and Annuity Association of America (Oct. 31, 
2018). These two commenters suggested that funds should no longer be 
required to disclose interest expense and dividends paid on short 
sales in prospectus fee tables to: (1) Enhance consistency with the 
approach to other investing costs, such as transaction costs; (2) 
provide a more stable measure of ongoing operating expenses; and (3) 
address concerns that fee table disclosure may focus investors on 
these costs without explaining that the strategy leading to these 
costs may also lead to higher net returns. These commenters 
suggested that disclosure about these costs should appear in fund 
financial statements and the SAI. AFFE is another type of 
performance expense currently included in the expense ratio. We 
discuss and request comment on AFFE disclosure more specifically 
below. See infra Section II.H.1.g.
---------------------------------------------------------------------------

    224. Should a fund's prospectus include additional disclosure about 
performance expenses, in lieu of including these expenses in the fund's 
expense ratio? If so, should the disclosure be quantitative or 
qualitative? If quantitative, how should funds measure each newly 
disclosed category of fund cost? \591\ If qualitative, how should funds 
concisely describe the fee or expense? Where should the additional 
information appear? For instance, should funds disclose these costs in 
a footnote accompanying the fee table and fee summary? As one example, 
should a fund that qualitatively or quantitatively discloses these 
costs, if material to the fund, in a footnote to its shareholder report 
expense presentation under the proposal also qualitatively or 
quantitatively disclose these costs in a footnote to its prospectus fee 
table and fee summary? \592\ Why or why not? Alternatively, should 
funds disclose these costs in connection with the prospectus's 
presentation of fund performance under Item 4 of Form N-1A given they 
can detract from performance? If so, should they, for example, be 
required to disclose the top three--or some other number--types of 
costs that detracted from fund performance?
---------------------------------------------------------------------------

    \591\ Unlike a fund's direct costs, many performance expenses 
are not reported in a fund's financial statements and therefore are 
not included in the fund's expense ratio.
    \592\ See supra paragraph accompanying footnote 164 (discussing 
the proposed shareholder report requirement).
---------------------------------------------------------------------------

    225. If funds were to provide additional disclosure of securities

[[Page 70791]]

lending costs, should they also be permitted and/or required to explain 
that these costs may improve a fund's performance or, in certain cases, 
permit a fund to reduce its fees? If so, how could this information 
best be presented to help investors understand these potential 
considerations without adding unnecessary length or complexity to the 
prospectus?
    226. If funds were to provide additional disclosure about 
securities lending costs or fund transaction costs in prospectuses, 
would this disclosure complement existing disclosure requirements in 
the prospectus, SAI, and Form N-CEN? Or should we remove or modify 
those existing disclosure requirements?
    227. How would modifying prospectus disclosure to reflect 
securities lending costs, fund transaction costs, or other performance 
expenses of a fund's portfolio management activities affect investors? 
What disclosure modifications would help investors better understand 
these costs, and conversely, are there any disclosure modifications 
that would contribute to investor confusion or potential 
misinterpretation? For example, how would reflecting additional costs 
in the proposed summary fee table or other quantitative presentation 
affect investment decisions? If we were to modify the fee presentation 
in a way that might change a fund's fees, how should we inform 
investors of the changed requirements or transition to the new 
requirements in a way that minimizes investor confusion? For example, 
if a fund's fee under current requirements is 0.50%, but under any new 
requirements that same fund, operating in the same manner, might have a 
fee of 0.75%. How can we help investors understand this change?
    228. Do investors need more information about how a fund's adviser 
and its affiliates may receive compensation from a fund, either to 
better understand fund costs or to understand potential conflicts of 
interest? For example, some funds use securities lending agents that 
are affiliated with the fund's investment adviser, which can result in 
the adviser and its affiliates receiving compensation from a fund in a 
way that the prospectus fee table does not reflect.\593\ As another 
example, some funds use affiliated broker-dealers when transacting in 
portfolio investments, which can result in the costs associated with 
these transactions accruing to affiliated persons of the fund. However, 
affiliated parties also could be less expensive or provide better 
services than those provided by unaffiliated parties. If investors 
would benefit from additional information about compensation that the 
fund's adviser and its affiliates may receive from the fund, where 
should this disclosure appear? Should it be quantitative or 
qualitative? For instance, should funds disclose any revenue paid to 
the fund's adviser or its affiliates that the fee table does not 
reflect (e.g., outside of the management fee), as a percent of fund 
assets or a percent of the fund's total expenses? If so, where should 
this disclosure appear (e.g., in the prospectus fee table, a discussion 
accompanying the table, or elsewhere)? Should a fund be permitted or 
required to disclose why it selected an affiliated service provider 
instead of an unaffiliated third party?
---------------------------------------------------------------------------

    \593\ See supra footnote 577.
---------------------------------------------------------------------------

    229. Do investors need additional information to help them compare 
the fees and expenses of different classes of a fund, or other aspects 
of a fund investment that differ between classes (e.g., fund 
performance)? For instance, do investors need more information to help 
them determine whether they are eligible to invest in a particular 
class or to compare fees, performance, or other aspects of different 
classes? If so, how should funds provide this information? How could we 
help investors better understand class eligibility, particularly when a 
prospectus (or shareholder report) could only cover a subset of a 
fund's classes?
    230. Are there ways we could reduce complexities associated with 
funds offering multiple share classes with different fee structures? 
For example, should funds more clearly present their classes based on 
investor eligibility? What are the challenges of such an approach?
    231. Are there ways we could facilitate an investor's ability to 
calculate costs and compare different funds? For instance, are there 
steps we could take to improve investors' familiarity with, or access 
to, interactive calculators or fund comparison tools? \594\
---------------------------------------------------------------------------

    \594\ For example, FINRA's Fund Analyzer tool can help investors 
compare the costs of different fund investments. This tool is 
available at https://tools.finra.org/fund_analyzer/.
---------------------------------------------------------------------------

d. Proposed Simplified Example
    In addition, we propose to simplify the example in the fee summary. 
We are proposing to modify the current narrative that precedes the 
example slightly, to enhance clarity and brevity.\595\ We are also 
proposing to decrease the number of time periods that the expense 
example must show. While the current example shows expenses over 1, 3, 
5, and 10-year periods, the proposed example would show costs over 1 
year and 10 years (or 1 year and 3 years in the case of a new 
fund).\596\ We believe that having fewer time periods would help to 
simplify the example. At the same time, we believe that requiring a 
fund to present expenses over 1 and 10 years would provide meaningful 
disclosure regarding the effect of fees in both the short-term and 
long-term.\597\ We understand that investors typically hold mutual fund 
shares for a relatively long term. For example, one commenter estimated 
that two-thirds of fund investors have owned their funds for at least 
10 years, and 80% of fund investors have held their fund investments 
for 5 years or more.\598\ The 10-year time frame is addressed to the 
long-term nature of many fund investments. Investors wishing 
information for the interim 3 and 5 year periods could find that 
information in the full fee table.
---------------------------------------------------------------------------

    \595\ The current narrative states, ``This Example is intended 
to help you compare the cost of investing in the Fund with the cost 
of investing in other mutual funds.'' The proposed narrative states, 
more simply, ``This example may help you understand the costs of 
investing in the Fund.'' See supra Table 5.
     The assumptions in the proposed example relating to the amount 
invested in the fund, investment return, and the fund's operating 
expenses are substantively identical to those in the current form, 
with slight changes designed to state them more simply. In addition, 
the current form shows, first, expenses if the investor redeems 
shares at the end of the period, and, second, expenses if the 
investor does not redeem. The proposal reverses this order because 
we believe that most investors treat these as long-term investments 
and so are less likely to redeem their shares.
    \596\ Instruction 5(a) to Item 3 of proposed Form N-1A; see also 
Item 3 of Form N-1A and Item 8A of proposed Form N-1A; supra Table 
5.
    \597\ We are not proposing similar changes for the performance 
presentation (average annual returns), see Items 4(b)(2) and 
27(b)(7)(ii) of Form N-1A; Item 27A(d)(2) of proposed Form N-1A) 
which, in addition, presents information over an interim period 
(five years), because unlike the expense example where the fees 
reflected are consistent over the period shown, performance 
information changes from year-to-year, and we believe it is 
important to illustrate this variability of returns over an interim 
period.
    \598\ See Broadridge Comment Letter II.
---------------------------------------------------------------------------

    We considered proposing to incorporate elements of the proposed 
shareholder report expense presentation into the prospectus in lieu of 
simplifying the current fee example. As discussed above, the proposed 
shareholder report expense presentation would disclose costs directly 
deducted from the fund's assets alongside the fund's return, which in 
turn would reflect direct costs as well as any performance expenses 
associated with the fund's portfolio management

[[Page 70792]]

activities.\599\ While the shareholder report expense presentation 
would not itemize these performance expenses, funds would be required 
to discuss them qualitatively if material to the fund, in a footnote to 
the expense presentation.\600\ In addition to helping investors 
understand that a fund has performance expenses that are in addition to 
a fund's direct costs, the proposed shareholder report presentation has 
other benefits. For example, the shareholder report presents a fund's 
fees alongside its performance to help shareholders understand how 
costs and performance each affect the value of his or her investment.
---------------------------------------------------------------------------

    \599\ See supra Section II.B.2.b.
    \600\ See supra footnote 164 and accompanying text.
---------------------------------------------------------------------------

    However, unlike the shareholder report presentation, the prospectus 
fee table, fee summary, and example reflect hypothetical future 
expenses (i.e., forward-looking expenses). The prospectus fee 
presentation--while also based on a fund's financial statements--
reflects sales loads, the expenses associated with the fund's 
investments in other funds, material changes to fund expenses, 
estimated expenses for new funds, and only certain fee waiver 
arrangements. These additional fee elements make it difficult to import 
a presentation similar to the backward-looking shareholder report 
expense presentation into the prospectus. Also, a shareholder report-
type approach based on backward-looking information would be difficult 
to implement for new funds with short or no performance history. 
Moreover, because the proposed shareholder report presentation shows 
expenses for the past fiscal year only, it would not illustrate the 
long-term effect of fund fees for investors. Given these 
considerations, we are not proposing to incorporate elements of the 
proposed shareholder report presentation into the prospectus.
    We seek comment on the proposed simplified example, and 
specifically on the following issues:
    232. Is the proposed simplified example presentation appropriate, 
and would it be useful to investors? Would restricting the example to 
including expense information for 1- and 10-year periods accomplish the 
goal of streamlining the fee summary, while providing meaningful 
disclosure? Should the simplified example include different time 
periods, and if so, which ones? Is the proposal to require new funds to 
present expense information for 1- and 3-year periods appropriate?
    233. Instead of providing an expense example in the prospectus that 
shows estimated costs over set intervals of time based on an assumed 5% 
annual return, should funds base their expense example on the fund's 
actual historic performance? For example, should the expense example be 
based on the fund's gross performance over the past 1, 5 and 10 years? 
If so, how should funds that do not have a long-enough performance 
history be treated? Would investors benefit from a presentation based 
on actual rather than hypothetical investment returns? If not, why not?
    234. If we were to require using an assumed annual return, as is 
the case today, would the assumed 5% annual return continue to be 
appropriate? If not, what is a more appropriate assumption and why? 
Should the assumption be different for different fund types? For 
example, should a money market fund have a lower assumed investment 
return than an equity fund? What are the benefits and drawbacks of 
using a higher or lower assumed annual return?
    235. Instead of the current fee table example and the proposed 
simplified example in the prospectus, should the examples more closely 
resemble the expense presentation in the proposed shareholder report? 
If so, how should the proposed annual report presentation be modified 
to show the impact of transaction fees (such as purchase and exit 
charges)? Should the presentation be based only on costs that are 
directly deducted from fund assets, or all of the fees reflected in the 
fee table (which may include AFFE)? How should the longer-term impact 
of fees be reflected? For example, certain fund share classes may be 
intended for investors with a short time horizon and have higher 
ongoing annual expenses while other classes may be intended for longer-
term investors and have higher up-front charges but over the long run 
may be less expensive. How should the proposed annual report 
presentation be modified for use in the prospectus to help distinguish 
the differences in share classes over both the short and long term? How 
should new funds that do not have any performance history present an 
example?
    236. Do the different presentations of fund fees and expenses in 
prospectuses and shareholder reports currently contribute to investor 
confusion? Would our proposed amendments to fee and expense 
presentations in both documents increase, reduce, or have minimal 
effect on the potential for investor confusion? How could we modify the 
presentations to reduce the potential for investor confusion? For 
instance, one difference is that the prospectus fee table may reflect 
the costs associated with investments in other funds (i.e., AFFE) while 
the annual report does not directly reflect these expenses. For 
example, a fund of funds may show an expense ratio of 0.20% in its 
annual report but reflect expenses of 1.00% in its prospectus fee table 
because the prospectus presentation also reflects the costs associated 
with investment in other funds. How can we address these differences to 
minimize the potential for investor confusion?
e. Proposed Fee Summary Formatting Requirements
    We are proposing that a fund generally would not be permitted to 
include footnotes and other extraneous disclosure in the fee summary. 
We believe this is consistent with the goal of the proposed simplified 
fee table, which is to streamline the presentation of fees and to 
provide an easier-to-understand presentation with fewer data points and 
a clearer picture of the total costs of investing in the fund. We are 
proposing an exception if omitting a footnote would cause the 
disclosure to be materially misleading such that the fees borne by 
investors would be materially higher than presented in the fee 
summary.\601\ For example, if a fund charges a ``fulcrum fee,'' by 
which the advisory fee varies depending on the performance of the fund, 
the fee in the current year could be greater than the fee reflected in 
the fee summary.
---------------------------------------------------------------------------

    \601\ See proposed Instruction 1(c) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    We seek comment on the proposed fee summary formatting 
requirements, and specifically on the following issues:
    237. Is it appropriate to limit the use of footnotes in the fee 
summary, as proposed? Are there circumstances where footnotes would be 
useful to investors that the proposed instruction would not permit?
f. New, Simplified Fee Terminology
    In addition to proposing to create the fee summary, we are also 
proposing changes in some terminology that funds would use to describe 
fees in the prospectus. These changes are designed to enhance the 
presentation of fees and investors' understanding of these fees. The 
changes we are proposing in the terminology used in the fee table would 
flow through to the fee summary, as applicable. Plain language plays an 
important role in investors' ability to use and understand fund 
disclosures.\602\ The terminology changes we propose

[[Page 70793]]

are designed to be more consistent with everyday language and to 
effectively communicate the nature of the fees the fund charges. Unless 
otherwise discussed in this release, although we are proposing to 
substitute some terms that would appear in Form N-1A and funds' 
prospectuses, we intend the meaning of these terms to remain unchanged. 
Below is a chart showing captions and terms that the current fee table 
references, along with their replacements.\603\
---------------------------------------------------------------------------

    \602\ See Fund Investor Experience RFC, supra footnote 8, at 
Section II.C.1.
    \603\ This chart shows proposed captions or terms for the fee 
tables in Items 3 and 8A of proposed Form N-1A. These changes in 
terminology flow through to other sections of the proposed form. See 
Items 4, 12, 13, 17, 23, 26, 27A.

                                 Table 6
------------------------------------------------------------------------
Current caption or term, and Form N-  Proposed caption or term, and Form
            1A location                         N-1A location
------------------------------------------------------------------------
Shareholder Fees (Item 3)..........  Transaction Fees (Items 3 and 8A).
Annual Fund Operating Expenses       Ongoing Annual Fees (Items 3 and
 (Item 3).                            8A).
Maximum Sales Charge (Load) Imposed  Purchase Charge (Items 3 and 8A).
 on Purchases (Item 3).
Maximum Deferred Sales Charge        Exit Charge (Items 3 and 8A).
 (Load) (Item 3).
Redemption Fee (Item 3)............  Early Exit Fee (Items 3 and 8A).
Total Annual Fund Operating          Ongoing Annual Fees (Items 3 and
 Expenses (Item 3).                   8A).
Distribution [and/or Service] (12b-  Selling Fees (Item 8A).
 1) Fees (Item 3).
Fee Waiver [and/or Expense           Temporary Discount (Items 3 and
 Reimbursement] (Item 3).             8A).
Total Annual Fund Operating          [Total] Ongoing Annual Fees with
 Expenses After Fee Waiver [and/or    Temporary Discount (Items 3 and
 Expense Reimbursement] (Item 3).     8A).
------------------------------------------------------------------------

    We seek comment on the proposed fee terminology, and specifically 
on the following issues:
    238. Are the proposed changes to the current terminology helpful? 
Are there other terms currently used in the form that could be 
simplified? Would our proposed changes in terminology contribute to 
more understandable disclosure?
g. Acquired Fund Fees and Expenses
    We are also proposing to 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, the amendments we are proposing would permit funds that 
invest 10% or less of their 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. Funds that 
invest more than 10% of their total assets in acquired funds would 
continue to present AFFE as a line item in the prospectus fee table and 
include AFFE in the bottom-line expense figure, as they do today.
    Currently, any fund that invests in acquired funds--which include 
investments in other investment companies and in private funds that 
would be investment companies but for sections 3(c)(1) or 3(c)(7) of 
the Investment Company Act--must disclose the amount of fees and 
expenses the fund indirectly incurs from these investments in the 
fund's fee table.\604\ This disclosure generally appears as a separate 
AFFE line item in the fee table, although a fund may reflect AFFE in 
the ``other expenses'' fee table line item (without separately 
identifying the AFFE amount) if AFFE does not exceed 0.01 percent, or 
one basis point, of the fund's average net assets.\605\ As a result, 
regardless of the size of a fund's investments in acquired funds, AFFE 
currently is a component of the line items that, summed together, 
produce the fund's bottom-line annual fund operating expenses (which we 
propose to rename to ``total ongoing annual fees'') in its fee table. 
AFFE disclosure is designed to provide investors with a better 
understanding of the costs of investing in a fund that invests in other 
funds, which have their own expenses that may be as high as--or higher 
than--the acquiring fund's expenses.\606\ As recognized above, AFFE is 
a performance expense that is not an operating cost reflected in a 
fund's statement of operations. Instead, it is an indirect expense paid 
by the fund to generate performance.\607\
---------------------------------------------------------------------------

    \604\ The AFFE amount is composed of the following types of fees 
and expenses attributable to the fund's investment in acquired funds 
over the relevant period: Each acquired fund's total annual 
operating expense ratio, any transaction fees the fund paid to 
acquire or dispose of shares in any acquired fund (e.g., sales loads 
or redemption fees), and incentive allocations where the fund 
allocates capital to the adviser of the acquired fund (or its 
affiliate) based on a percentage of the fund's income, capital 
gains, and/or appreciation in the acquired fund. Form N-1A provides 
calculation instructions for determining the AFFE amount. See 
Instruction 3(f) to Item 3 of current Form N-1A.
    \605\ See id.
    \606\ See Fund of Funds Investments, Investment Company Act 
Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)], at 
text accompanying n.67.
    \607\ See supra Section II.H.1.c.
---------------------------------------------------------------------------

    Some commenters on the Fund Investor Experience RFC and on the 
Commission's 2018 proposal related to fund of funds arrangements have 
expressed certain concerns about current AFFE disclosure 
requirements.\608\ For example, several commenters have suggested that 
fee table disclosure should focus on a fund's operating expenses and 
should not incorporate AFFE.\609\ Some of these commenters have 
expressed concern that combining operating expenses with indirect AFFE 
costs may confuse investors by over-emphasizing AFFE costs and that 
combining expenses in this way does not align with a fund's financial 
statements.\610\ Several commenters have also expressed particular 
concern about treating BDCs as acquired fund investments and have 
recommended excluding BDC investments from AFFE.\611\ One of these

[[Page 70794]]

commenters suggested that the Commission remove AFFE from the 
prospectus fee table and require funds to disclose AFFE amounts in an 
accompanying footnote to address these concerns.\612\ On the other 
hand, other commenters have expressed general support for AFFE 
disclosure.\613\ Two commenters stated that AFFE disclosure provides 
investors with necessary information to understand the layering of fees 
in a fund of funds arrangement and to compare similar funds.\614\
---------------------------------------------------------------------------

    \608\ See Fund of Funds Arrangements, Investment Company Act 
Release No. 33329 (Dec. 19, 2018) [84 FR 1286 (Feb. 1, 2019)] 
(``Fund of Funds Proposing Release''), at nn.176-179 and 
accompanying text. Comments on the Fund of Funds Proposing Release 
cited in this release are available at https://www.sec.gov/comments/s7-27-18/s72718.htm.
    \609\ See, e.g., Comment Letter of Investment Company Institute 
(Apr. 30, 2019) on File No. S7-27-18; Comment Letter of PIMCO (May 
1, 2019) on File No. S7-27-18; Comment Letter of Invesco Ltd. (Apr. 
30, 2019) on File No. S7-27-18 (``Invesco Fund of Funds Comment 
Letter''); Comment Letter of Chapman and Cutler LLP (May 2, 2019) on 
File No. S7-27-18 (``Chapman and Cutler Fund of Funds Comment 
Letter''); Comment Letter of SIFMA Asset Management Group (May 2, 
2019) on File No. S7-27-18.
    \610\ See, e.g., Chapman and Cutler Fund of Funds Comment 
Letter; Invesco Fund of Funds Comment Letter.
    \611\ See, e.g., Comment Letter of Small Business Investor 
Alliance (Apr. 30, 2019) on File No. S7-27-18 (stating that AFFE 
disclosure distorts an acquiring fund's expense ratio and has 
disproportionately harmed BDCs because this disclosure requirement 
has led to funds no longer investing in BDCs and several index 
providers dropping BDCs from their indexes); Comment Letter of TPG 
Specialty Lending, Inc. (May 2, 2019) on File No. S7-27-18; Comment 
Letter of Coalition for Business Development (May 2, 2019) on File 
No. S7-27-18; Comment Letter of Alternative Credit Council (May 2, 
2019) on File No. S7-27-18 (stating that AFFE disclosure overstates 
the costs of a fund investing in a BDC because it essentially 
requires double-counting of a BDC's operating expenses and that 
because AFFE disclosure has effectively resulted in funds no longer 
investing in BDCs, it has restricted the market for BDCs, limited 
institutional ownership of BDCs, and reduced investor choice); ICI 
Comment Letter I.
    \612\ See Comment Letter of Dechert LLP (May 2, 2019) on File 
No. S7-27-18.
    \613\ See, e.g., Comment Letter of Anonymous (Dec. 28, 2018) on 
File No. S7-27-18; Comment Letter of Kauff Laton Miller LLP (May 13, 
2019) on File No. S7-27-18 (``Kauff Laton Fund of Funds Comment 
Letter''); Comment Letter of Law Office of William Coudert Rand on 
File No. S7-27-18 (May 14, 2019) (``Rand Fund of Funds Comment 
Letter'').
    \614\ See Kauff Laton Fund of Funds Comment Letter; Rand Fund of 
Funds Comment Letter.
---------------------------------------------------------------------------

    We agree that AFFE information is valuable and can help investors 
to understand the layered fees and expenses associated with a fund of 
funds arrangement and to compare similar funds. We believe this 
information is particularly important when a fund substantially invests 
in other funds such that the fund is, in essence, managed significantly 
at the acquired fund level. At the same time, we are sensitive to the 
concern that requiring every fund to include AFFE in its fee table as a 
component of the fund's ongoing annual fees reduces consistency with 
the fund's financial statements and may in some cases magnify the 
presentation of AFFE by requiring fee table disclosure of this discrete 
category of performance expenses even though the fund does not invest 
significantly in acquired funds and may incur other indirect costs that 
are not reflected in the fee table. We understand these factors may 
contribute to investor confusion.
    As a result of these considerations, we are proposing to permit 
funds that invest 10% or less of their total assets in acquired funds 
to omit the AFFE line item in the fee table that is a component of the 
fund's bottom line ongoing annual fees, and instead disclose the amount 
of the fund's AFFE in footnotes to the fee table and fee summary. The 
proposed amendments are designed to maintain the benefits of 
transparent AFFE disclosure for investors and to provide more 
consistent disclosure of information related to indirect costs. Where a 
fund invests in other funds to a limited extent--10% or less of its 
total assets (consistent with statutory limits on funds' investments in 
other funds)--the fees and expenses of the acquired funds may more 
closely resemble other indirect costs, such as transaction costs, and 
these types of indirect costs each would not be reflected in the 
prospectus fee table.\615\ Specifically, the proposal would provide for 
more consistent treatment with other indirect costs by removing AFFE as 
a line item that represents a component of the bottom line ongoing 
annual fees figure in such a fund's fee table and fee summary, while 
retaining information about the amount of AFFE in footnotes 
accompanying the fee table and fee summary.
---------------------------------------------------------------------------

    \615\ See section 12(d)(1)(A)(iii) of the Investment Company Act 
[15 U.S.C. 80a-12(d)(1)(A)(iii) (10% limit on total assets of an 
acquiring fund that may be invested in all acquired funds); see also 
supra paragraph accompanying footnote 577 (discussing indirect costs 
that the prospectus fee table does not reflect). Congress 
established the 10% limit in part based on a concern about the 
potential for excessive fees when one fund invests in another. See 
Fund of Funds Proposing Release, supra footnote 608, at n.14 and 
accompanying text. While funds may under certain circumstances 
invest more than 10% of their total assets in acquired funds under 
other statutory provisions, Commission rules, or exemptive orders, 
we are proposing to use the 10% figure from section 12(d)(1)(A)(iii) 
as a threshold for determining when a fund's investments in acquired 
funds is a significant component of its investment strategy such 
that fee table disclosure of AFFE is needed.
---------------------------------------------------------------------------

    Conversely, under the proposal, a fund that invests more than 10% 
of its total assets in acquired funds would continue to 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. 
We believe it is appropriate to retain the current AFFE disclosure 
requirement for this category of funds because, when investing in 
acquired funds is a significant component of a fund's investment 
strategy, AFFE can represent a significant part of the fund's ongoing 
annual fees and is more akin to an ongoing operating expense the fund 
would incur if it were managing the acquired fund's underlying 
portfolio investments directly. For example, we understand that certain 
funds, such as certain target date funds, have no, or very low, 
management fees at the acquiring fund level, with the majority of fees 
borne at the acquired fund level. For these funds, a fee table with no 
AFFE line item has the potential to confuse investors in that it could 
show 0 or close to 0 ongoing annual fees.
    To determine whether a fund may omit AFFE from its prospectus fee 
table, the proposal would use a 10% threshold based on the average of 
the fund's investments in acquired funds (excluding money market funds) 
divided by the fund's total assets.\616\ To calculate the 10% 
threshold, a fund would:
---------------------------------------------------------------------------

    \616\ See proposed Instruction 4(f)(ii) to proposed Item 8A of 
Form N-1A. We are also proposing to remove the language in current 
Instruction 3(f)(i) to Item 3 of Form N-1A that provides, ``In the 
event the fees and expenses incurred indirectly by the Fund as a 
result of investment in shares of one or more Acquired Funds do not 
exceed 0.01 percent (one basis point) of average net assets of the 
Fund, the Fund may include these fees and expenses under the 
subcaption `Other Expenses' in lieu of this disclosure 
requirement.'' We believe that our proposal to permit funds that 
hold limited acquired fund investments to disclose AFFE in a 
footnote instead of the fee table would result in funds never, or 
very rarely, qualifying to disclose AFFE under the ``other 
expenses'' line item under this instruction.
---------------------------------------------------------------------------

     Divide the fund's investments in acquired funds (excluding 
money market funds) by the fund's total assets at the end of each of 
the 12 months that make up the prior fiscal year. This will produce 12 
data items (or fewer if the fund has not been in operation for a full 
fiscal year).
     Calculate the average of the 12 data items. If this figure 
is 10% or less, the fund may omit AFFE from its prospectus fee table 
and instead include the prescribed footnote.
    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. It also would help mitigate any gaming concerns by 
limiting funds' ability to reduce their investments in other funds to 
stay below the 10% threshold only on a given date. The month-end 
calculation is also aligned with Form N-PORT requirements for month-end 
portfolio data, which may reduce the need for funds to collect new data 
under the proposal and facilitate verifications that a fund may 
disclose AFFE in a footnote.\617\ We also propose to omit all money 
market fund investments from the 10% calculation.\618\ We understand

[[Page 70795]]

that funds, including funds that invest significantly in other funds, 
typically invest in money market funds for cash management purposes 
rather than to pursue the fund's investment objective through an 
investment in another fund.\619\
---------------------------------------------------------------------------

    \617\ Because a new fund would not have this monthly data, a new 
fund should base the 10% threshold on assumptions of the percent of 
acquired funds in which the new fund expects to invest. See proposed 
Instruction 4(f)(vii) to proposed Item 8A of Form N-1A. Currently, 
new funds make similar assumptions about expected acquired fund 
investments for purposes of disclosing the amount of AFFE. See 
Instruction 3(f)(vi) to Item 3 of current Form N-1A.
    \618\ The Commission previously has determined that money market 
funds, which did not exist in 1940, do not raise the concerns 
underlying section 12(d)(1) of the Investment Company Act and has 
permitted funds to invest an unlimited amount of their uninvested 
cash in money market funds rather than directly in short-term 
instruments. See 17 CFR 270.12d1-1 (rule 12d1-1).
    This proposed instruction does not change the current treatment 
of money market funds with respect to the calculation of AFFE.
    \619\ Some funds, such as target date funds, may hold money 
market funds consistent with stated asset allocation objectives 
(particularly when they reach or pass their stated target date). 
However, these same funds tend to invest significantly in other 
funds as well, making them ineligible to move AFFE disclosure to a 
footnote under the proposal.
---------------------------------------------------------------------------

    While the calculation of the 10% threshold would be based on 
monthly data, the proposal would not require a fund to assess whether 
it may disclose AFFE in a footnote to the fee table on a monthly basis 
or to update its prospectus fee table based solely on such monthly 
assessments. Instead, a fund would assess whether it is below the 10% 
threshold when it otherwise must update its prospectus fee table (e.g., 
at the time of its annual prospectus update) based on information as of 
its prior fiscal year.\620\ However, if there is a material change to 
the amount a fund invests in other funds (such as due to a change to 
the fund's strategies) or its AFFE, we would expect the fund to update 
its prospectus to reflect the change just as it would for any other 
material changes to its annual ongoing fees.\621\ We propose to permit, 
rather than require, a fund with limited acquired fund investments to 
disclose AFFE in a footnote to limit burdens on funds that would prefer 
to consistently disclose AFFE in the fee table instead of monitoring 
the amount of acquired fund investments to determine eligibility for 
the footnote-based approach. Moreover, we recognize that a fund that 
tends to maintain acquired fund investments close to the 10% threshold 
may prefer to disclose AFFE in the fee table each year instead of 
moving the disclosure back and forth between the footnote and the fee 
table, which could lead to investor confusion.
---------------------------------------------------------------------------

    \620\ This is consistent with the calculation of ongoing annual 
fees which is also based on amounts incurred during the fund's most 
recent fiscal year. See proposed Instruction 4(d) to Item 3 of Form 
N-1A and proposed Instruction 4(d) to proposed Item 8A of Form N-1A.
    \621\ See proposed Instruction 4(d)(ii) to Item 3 of Form N-1A 
and proposed Instruction 4(d)(ii) to proposed Item 8A of Form N-1A.
---------------------------------------------------------------------------

    The footnote that a fund eligible to use the new AFFE presentation 
would be permitted to use would have to include: (1) The amount of the 
fund's AFFE, and (2) a statement that the fund's total ongoing annual 
fees in the table and fee summary would be higher if these fees and 
expenses were included.\622\ We believe this requirement would provide 
investors with AFFE information they could use to compare funds and 
would help them understand the relevance of a fund's AFFE amount. The 
footnote to the fee table would be tagged using XBRL, so the AFFE 
amount would continue to be available not only to investors viewing the 
prospectus and summary prospectus, but also to data aggregators and 
other market participants.\623\
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    \622\ See proposed Instruction 4(d) to Item 3 and proposed 
Instruction 4(f)(ii) to proposed Item 8A of Form N-1A.
    \623\ See infra Section II.H.1.i (discussing structured data 
requirements for the prospectus fee table).
---------------------------------------------------------------------------

    In addition to amending the scope of funds that must disclose AFFE 
in the prospectus fee table and fee summary, we are proposing two 
technical amendments to AFFE disclosure requirements. First, we propose 
to correct the manner in which a fund that has been in operation for 
less than a full year calculates AFFE. Specifically, rather than 
calculating this figure using the number of days in the fund's fiscal 
year, we propose to require such a fund to use the number of days since 
the date the fund made its first investment.\624\ We believe this would 
result in a more accurate calculation for new funds. For example, if a 
fund made its first investment six months ago and owned other funds for 
that entire period, the current AFFE calculation would provide a figure 
that is half of the actual fees attributable to the underlying funds. 
This is because the numerator would be based on the six-month holding 
period (e.g., 182 days) and the denominator would be based on the full 
fiscal year (i.e., 365 or 366 days). Under our proposed revision, both 
the numerator and denominator would be based on the same period of 
time. We understand that some new funds already use the number of days 
since the fund made its first investment in the denominator.
---------------------------------------------------------------------------

    \624\ See Instruction 4(f)(ii) to proposed Item 8A of Form N-1A.
---------------------------------------------------------------------------

    Second, we propose to amend an optional footnote instruction. This 
instruction 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.\625\ We 
propose to amend this instruction to permit funds to explain that the 
total ongoing annual fees in the fee table do not correlate to the 
expense presentation in the fund's shareholder reports.\626\ We believe 
the shareholder report would be a better point of comparison under the 
proposal because shareholders would receive the shareholder report 
directly, while a fund's financial highlights would be available online 
and delivered upon request.
---------------------------------------------------------------------------

    \625\ See Instruction 3(f)(vii) to Item 3 of current Form N-1A.
    \626\ See Instruction 4(f)(viii) to proposed Item 8A of Form N-
1A. Under the proposal, funds could still refer to the financial 
highlights in this optional footnote if they chose to do so.
     See also discussion at supra footnote 430 and accompanying text 
(stating that Item 13 of Form N-1A requires a fund to include 
financial highlights information in its prospectus, and discussing 
funds' ability to incorporate this information into the prospectus 
by reference so long as the fund delivers the shareholder report 
with the prospectus (i.e., for new shareholders)).
---------------------------------------------------------------------------

    We request comment on the proposed amendments to AFFE disclosure, 
including the following:
    239. Should we amend AFFE disclosure requirements to allow funds 
that invest 10% or less of total assets in acquired funds to omit the 
AFFE amount from the fee table and instead disclose the amount of a 
fund's AFFE in a footnote to the fee summary and fee table, as 
proposed? If not, why not? Instead of permitting funds with limited 
acquired fund investments to disclose the amount of a fund's AFFE in a 
footnote, should we require all such funds to disclose AFFE in a 
footnote? Would a mandatory approach reduce, increase, or have no 
effect on the potential for investor confusion relative to the proposed 
approach? Should we permit or require all funds, regardless of the 
magnitude of their acquired fund investments, to include AFFE in a 
footnote?
    240. Should we modify the proposed method for determining whether a 
fund may disclose AFFE in a footnote instead of in its bottom line 
ongoing annual fees in the fee table and fee summary? If so, how? 
Should we modify the 10% threshold? For example, instead of requiring a 
fund to measure the monthly average of its investments in acquired 
funds (excluding money market funds) during the prior fiscal year, 
should we base the 10% calculation on the amount of acquired fund 
investments as of the end of the fiscal year, at the time of acquiring 
a security issued by an acquired fund, at the time the fund amends its 
prospectus, or on some other basis? What are the advantages and 
disadvantages of these different approaches? Is it appropriate to 
exclude money market funds from the 10% threshold? If not, why not? 
Should we reduce or increase the 10% threshold? For example, should the 
threshold be 5%, 25%, or 50% of total assets? Alternatively, instead of 
using a

[[Page 70796]]

threshold based on the percent of assets invested in acquired funds, 
should we use a different approach? Please explain.
    241. Are there any gaming concerns associated with the proposed 
approach to AFFE disclosure that may potentially harm investors? For 
example, are there concerns that funds would hold large investments in 
acquired funds, but engineer their investments so that they are below 
the proposed 10% threshold at the time of calculation? If so, how would 
this harm investors, and how could we modify the proposed approach to 
mitigate gaming concerns?
    242. Should we, as proposed, instruct new funds to base the 10% 
threshold on assumptions of the percent of acquired funds in which the 
new fund expects to invest? If not, what would be a more appropriate 
approach for new funds, and why?
    243. Should the proposed footnote to the fee table and fee summary 
provide different or additional information than the amount of the 
fund's AFFE and a statement that the fund's total ongoing annual fees 
in the table and fee summary would be higher if these fees and expenses 
were included? If so, what information should the footnote provide? 
Should we require funds to provide quantitative or qualitative 
information about other performance costs, including securities lending 
costs and transaction costs of the fund buying and selling portfolio 
investments, in the same or similar footnotes (for example, taking an 
approach that is the same as or similar to the approach we are 
proposing for the shareholder report expense presentation)? Why or why 
not?
    244. Should we amend the scope of acquired fund investments that 
AFFE reflects? Instead of requiring a fund to include fees and expenses 
from any investment in an investment company or a company that would be 
an investment company but for section 3(c)(1) or (c)(7) of the 
Investment Company Act, should we broaden or narrow the scope? For 
example, we understand that currently funds do not treat investments in 
the following vehicles that may rely on the exclusion in section 
3(c)(7) as acquired fund investments: Structured finance vehicles, 
collateralized debt obligations, or other entities not traditionally 
considered pooled investment vehicles. Should some or all of these 
investment types be treated as acquired fund investments for purposes 
of AFFE disclosure requirements? Are there other categories of 
investments that AFFE should or should not include?
    245. Instead of permitting funds that invest 10% or less of their 
total assets in acquired funds to omit the AFFE amount in the fee table 
and replace it with a footnote, should we permit or require all funds 
to exclude 10% of their total assets in acquired funds from the AFFE 
calculation in order to treat all funds consistently?
    246. As another alternative, should we permit a fund to disclose 
AFFE in a footnote to the fee table, instead of in the fee table 
itself, if the amount of the fund's AFFE is below a certain threshold? 
If so, what threshold should we use for determining when a fund's AFFE 
is sufficiently small, relative to its other expenses, such that the 
fund does not need to include AFFE in the fee table? For example, 
should we permit a fund to disclose AFFE in a footnote to the fee table 
if the amount of its AFFE was less than a specific percentage of its 
annual ongoing fees (excluding AFFE) or average net assets? If so, what 
specific threshold should we use, and why? Would this approach improve 
the utility of the disclosure for investors? How would this approach 
affect the consistency of the fee table disclosure, relative to the 
proposed approach? For example, would it result in AFFE amounts moving 
in and out of the fund's ongoing annual fee figure at a greater or 
lesser frequency than the proposal?
    247. Commenters have expressed particular concern about AFFE 
disclosure's impact on BDC investments.\627\ Would our proposed 
amendments address these concerns? Why or why not? If not, how could we 
address these concerns? Should we, as some commenters suggested, allow 
funds to exclude fees and expenses from BDC investments in AFFE 
disclosure? If so, why should BDC fees and expenses be excluded when 
other types of acquired funds that may have similar strategies, nature 
of expenses, and portfolio holdings are included?
---------------------------------------------------------------------------

    \627\ See supra footnote 611.
---------------------------------------------------------------------------

    248. Should we amend AFFE disclosure requirements in Forms N-2, N-
3, N-4, and N-6 for other types of investment companies? If so, should 
we modify these requirements in the same manner as the proposed 
amendments to Form N-1A, or are there changes we should make to 
recognize differences between registrant types?
    249. As proposed, should we remove the current instruction allowing 
funds to disclose AFFE under the ``other expenses'' line item of the 
fee table if the fund's AFFE does not exceed 0.01 percent of average 
net assets? If not, under what circumstances would this instruction be 
useful?
    250. Would the proposed amendments to AFFE disclosure result in any 
unintended consequences for investors, funds, or other market 
participants? Please explain.
    251. As proposed, should we modify the AFFE calculation for funds 
that have been in operation for less than a year to use the number of 
days since the date the fund made its first investment instead of the 
number of days in the fund's fiscal year? Is there a different approach 
we should use to improve the accuracy of the AFFE calculation for these 
funds? Should we similarly amend the AFFE instructions in Forms N-2 and 
N-3?
    252. As proposed, should we permit funds that disclose AFFE in 
their fee tables to include a footnote distinguishing the fund's 
ongoing annual fees from its shareholder report expense presentation? 
Consistent with the proposal, should funds continue to be able to refer 
to differences between the prospectus fee table and financial 
highlights in this optional footnote as well? If not, why not?
h. Portfolio Turnover
    In addition, we propose to include portfolio turnover disclosure in 
both the fee summary and the full fee table and to modify the narrative 
that accompanies the portfolio turnover rate to enhance clarity and 
provide for more concise disclosure.\628\ We believe that this 
disclosure helps investors understand the effect of portfolio turnover, 
and the resulting transaction costs, on fund expenses and performance. 
However, we believe the current disclosure is too lengthy, and that 
this length does not contribute to (and may detract from) investor 
understanding. Therefore, we propose to reduce the length of the 
prescribed disclosure without changing its meaning. We believe this 
change will make the portfolio turnover disclosure more inviting and 
usable by investors. We are including this disclosure in both the fee 
summary and the fee table because we continue to believe this 
information is necessary to understand the full context of fund fees 
and should therefore accompany any prospectus fee presentation. Below 
is a chart showing the current disclosure, along with its replacement.
---------------------------------------------------------------------------

    \628\ See proposed Items 3 and 8A of Form N-1A.

[[Page 70797]]



------------------------------------------------------------------------
  Current disclosure and Form N-1A    Proposed disclosure and Form N-1A
              location                             location
------------------------------------------------------------------------
Portfolio Turnover.................  Portfolio Turnover.
The Fund pays transaction costs,     Portfolio turnover measures how
 such as commissions, when it buys    often a fund buys and sells its
 and sells securities (or ``turns     investments. A higher portfolio
 over'' its portfolio). A higher      turnover rate may indicate higher
 portfolio turnover rate may          transaction costs and may result
 indicate higher transaction costs    in higher taxes. The Fund's annual
 and may result in higher taxes       portfolio turnover rate is __%.
 when Fund shares are held in a      (Items 3 and 8A).
 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)...........................
------------------------------------------------------------------------

    We seek comment on the proposed approach to portfolio turnover 
disclosure, and specifically on the following issues:
    253. Are the proposed changes to the portfolio turnover disclosure 
helpful? If not, what improvements, if any, would commenters recommend?
i. Structured Data Requirements
    Finally, we are proposing minor amendments to the Form N-1A General 
Instructions regarding the requirements for funds to submit interactive 
data files (formatted XBRL) containing their risk/return summary 
information, which includes objectives, fees, principal strategies, 
principal risks, and performance disclosures.\629\ Because, as 
discussed above, we are proposing to move the current full fee table 
from Item 3 of Form N-1A to new Item 8A of Form N-1A, we are proposing 
a conforming change requiring funds to tag the data elements in Item 8A 
instead of in Item 3 (as they currently do). We continue to believe 
that market participants should have access to the full fee table in 
structured data format. We are not proposing to require that funds tag 
the proposed fee summary in addition to the full fee table because the 
fee summary is derived from the full fee table, so requiring funds to 
tag both presentations would be redundant.
---------------------------------------------------------------------------

    \629\ See General Instruction C.3.g(i), (iv) to Form N-1A 
(requiring funds to submit an Interactive Data File for any 
registration statement or post-effective amendment thereto on Form 
N-1A that includes or amends information provided in response to 
Items 2, 3, or 4); see also General Instruction C.3.g to proposed 
Form N-1A.
---------------------------------------------------------------------------

    We seek comment on the proposed amendments to the Form N-1A General 
Instructions regarding funds' structured data requirements, and 
specifically on the following issues:
    254. Are the proposed amendments to the Form N-1A General 
Instructions regarding the use of structured data appropriate? Given 
that the full fee table in the fund's statutory prospectus would 
continue to be tagged, and the information included in the summary fee 
table would be the same as that in the statutory fee table, would it 
also be necessary to require a fund to tag the summary fee table? If 
so, why?
    255. Funds must submit their prospectus fee tables in a structured 
format, but other fee information generally is not in a structured 
format. Is there any other fee-related information in fund disclosure, 
including in financial statements, that funds should submit in a 
structured format (such as in Form N-CEN)? If so, what are these items 
and what are the benefits of structured disclosure for these items?
2. Improved Prospectus Risk Disclosures
    We are proposing 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.\630\ Funds' prospectus 
disclosure requirements are designed to help promote informed 
investment decisions by providing investors with information that is 
easy to use and readily accessible. The revisions and additions we are 
proposing are designed to further improve fund prospectus risk 
disclosure by making this disclosure clearer and more specifically 
tailored to a fund.
---------------------------------------------------------------------------

    \630\ See Item 4(b)(1)(i) of Form N-1A; proposed Item 4(b)(1)(i) 
of Form N-1A; proposed Item 9(c) of Form N-1A.
---------------------------------------------------------------------------

    Items 4 and 9 of Form N-1A address disclosure of the principal 
risks of investing in the fund. Both of these items are designed to 
provide user-friendly, clear and succinct disclosures. Item 4 requires 
that the fund summarize the principal risks in the summary section of 
the statutory prospectus (or the summary prospectus, to the extent the 
fund is relying on rule 498).\631\ The information that a fund 
currently provides in response to Item 4 must be based on the 
information that the fund provides in response to Item 9(c) of Form N-
1A, which requires that the registrant disclose the principal risks of 
the fund. Item 9 was designed to allow for fuller information about 
fund risks, but still requires that a fund only disclose principal 
risks.
---------------------------------------------------------------------------

    \631\ For purposes of the discussion in this section, the term 
``summary prospectus'' refers both to the summary section of the 
statutory prospectus, as well as a summary prospectus prepared by a 
fund in reliance on rule 498. See supra footnote 6.
---------------------------------------------------------------------------

    We believe that some funds are providing risk information in their 
prospectuses and summary prospectuses that is often long, but does not 
achieve the policy goals of these current disclosure requirements.\632\ 
This length may not contribute to (and may sometimes detract from) 
investors' understanding of the principal risks of an investment in a 
particular fund. Because of its length, this disclosure also may not be 
user-friendly, particularly to retail investors. Commission staff has 
recently published its observations regarding some of the issues that 
the staff has observed with respect to funds' risk disclosures.\633\ 
The staff document would be withdrawn if the Commission's proposal is 
adopted. The amendments that we are proposing are designed to respond 
to the issues that we have observed in some funds' prospectus risk 
disclosure and to promulgate additional requirements that we believe 
would be beneficial to funds and investors.
---------------------------------------------------------------------------

    \632\ For example, researchers have found that investment 
company risk disclosure in the summary prospectus has nearly doubled 
in length since 2010. These researchers state that the principal 
risk section accounted for 31% of the disclosure in 2010 and 
steadily climbed to 48% in 2018 (with more than double the average 
word count from 2010). Anne M. Tucker and Yusan Xia, Investing in 
the Dark: Investing Company Disclosure Qualities, Content and 
Compliance, 27-28 (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3436952.
    \633\ See ADI 2019-08, supra footnote 67. This document 
encourages funds to order their risks by importance and better 
tailor their principal risk disclosure.
---------------------------------------------------------------------------

    We are proposing to add to the General Instructions to Form N-1A a 
provision that would preclude a fund from disclosing non-principal 
risks in the prospectus.\634\ While Items 4 and 9 of Form N-1A 
currently specify that funds describe ``principal risks,'' there is not 
a requirement that risk disclosure appearing in the statutory 
prospectus be

[[Page 70798]]

limited to the fund's principal risks.\635\ We believe that including 
this disclosure in the prospectus may overwhelm other important 
information. The proposed provision is designed to streamline risk 
disclosure in the prospectus, focus on essential information, and 
clarify current form requirements that emphasize the disclosure of 
``principal'' risks. Funds would remain free to disclose non-principal 
risks in the SAI.
---------------------------------------------------------------------------

    \634\ See General Instruction C.3.(a) to proposed Form N-1A.
    \635\ See ADI 2019-08, supra footnote 67. The Form N-1A General 
Instructions currently prohibit the disclosure of non-principal 
risks in the summary prospectus (or summary section of the statutory 
prospectus), but no instructions currently prohibit this disclosure 
from appearing in other parts of the statutory prospectus. See 
General Instruction C.3.(b) to Form N-1A (``A Fund may include, 
except in response to Items 2 through 8, information in the 
prospectus or the SAI that is not otherwise required.'').
---------------------------------------------------------------------------

    We are proposing several new requirements for principal risk 
disclosure that appears in the summary prospectus. First, we are 
proposing to insert the term ``briefly'' before the current requirement 
that the fund summarize the principal risks.\636\ This proposed change 
is designed to address the concern that, for some funds, principal risk 
disclosure in the summary prospectus is overly lengthy. We have 
observed significant variations in funds' approaches to principal risk 
disclosures in the summary. For example, some funds describe just a few 
principal risks in less than 200 words, while other funds in the same 
category list 20 or more principal risks using more than 2,500 words. 
Some of the longest disclosures the staff has seen in the summary 
section exceed 7,000 words. Indeed, the staff has observed that some 
funds simply repeat risk information that appears later in the 
statutory prospectus instead of summarizing it.\637\ The proposed 
change is designed to emphasize that principal risk disclosure that 
appears in the summary prospectus should be concise and succinct, with 
more detailed risk information to appear later in the statutory 
prospectus.
---------------------------------------------------------------------------

    \636\ See Item 4(b)(1)(i) of proposed Form N-1A. In both the 
current item and the proposed item, the summary of principal risks 
is based on information that the fund provides in response to Item 
(9).
    \637\ See Fund Investor Experience RFC, supra footnote 8, at 
Section II.D.2.
---------------------------------------------------------------------------

    We are proposing an additional new instruction to the summary 
prospectus principal risk disclosure requirement stating that funds 
should describe principal risks in order of importance, with the most 
significant risks appearing first.\638\ We believe that this 
presentation would highlight for investors the risks that they should 
consider most carefully. We have observed that it is currently common 
for funds to describe their principal risks in alphabetical order.\639\ 
However, we believe that this approach could obscure the importance of 
key risks, especially when a fund discloses many principal risks. For 
example, a real estate fund that describes principal risks 
alphabetically may describe a number of less-relevant risks before 
describing the key risks of real estate investments. In some extreme 
cases, this presentation format could result in a fund's key risks 
being obscured to such an extent that it could render the disclosure 
potentially misleading. We understand that there are different ways of 
determining the relative significance of principal risks. The proposed 
new instruction therefore specifies that a fund may use any reasonable 
means of determining the significance of risks. For example, a fund 
could take an approach to ordering its principal risks in a way that 
considers the likelihood and possible severity of any loss resulting 
from each risk. This proposed new instruction would include an explicit 
statement that a fund should not describe principal risks in 
alphabetical order.
---------------------------------------------------------------------------

    \638\ See Instruction 2 to Item 4(b)(1) of proposed Form N-1A.
    \639\ See ADI 2019-08, supra footnote 67.
---------------------------------------------------------------------------

    Finally, we are proposing an additional instruction to the summary 
prospectus principal risk disclosure requirement that instructs a fund 
to, where appropriate, tailor its risk disclosures to how the fund 
operates rather than rely on generic, standard risk disclosures.\640\ 
We have observed that some prospectuses for funds within a fund group 
commonly include generic, standardized risk disclosures for every fund 
in the group. Such standardized disclosure may be appropriate under 
certain circumstances. For example, ``market risk,'' could be a 
principal risk for all funds in a complex. However, there are other 
circumstances in which generic, across-the-board risk disclosures for 
all funds in a fund complex may not be appropriate. For example, we do 
not believe it would be appropriate for a fund to include credit risk 
disclosure that discusses the heightened risks associated with below-
investment-grade or distressed securities when the fund does not hold, 
or expect to hold, these types of investments.
---------------------------------------------------------------------------

    \640\ See Instruction 3 to Item 4(b)(1) of proposed Form N-1A.
---------------------------------------------------------------------------

    We are also proposing amendments that would affect funds' principal 
risk disclosures in the statutory prospectus, as well as the summary 
prospectus. Specifically, we are proposing to add three new 
instructions relating to Form N-1A Item 9(c), which requires a fund to 
disclose the principal risks of investing in the fund in its statutory 
prospectus.\641\ Because Item 4 of Form N-1A requires a fund to 
summarize the principal risks of investing in the fund, based on the 
information the fund provides in response to Item 9(c), the proposed 
new instructions to Item 9(c) would also affect the disclosure that a 
fund provides in the summary prospectus in response to Item 4.
---------------------------------------------------------------------------

    \641\ See Instructions 1 through 3 to Item 9(c) of proposed Form 
N-1A.
---------------------------------------------------------------------------

    Proposed Instruction 1 states that in determining whether a risk is 
a principal risk, a fund should consider both whether the risk would 
place more than 10% of the fund's assets at risk (``10% standard'') and 
whether it is reasonably likely that a risk will meet this 10% standard 
in the future. Today, funds may be using varying standards to determine 
whether a risk is a principal risk. This makes it difficult for an 
investor to compare risks among funds. This proposed instruction is 
designed to clarify the meaning of the term ``principal risk'' by 
providing quantitative guidance as to what a fund should consider when 
it determines whether a risk is a principal risk. For example, a fund 
that invests 10% or more of its assets in a particular sector, such as 
financial services or consumer staples, could determine that it should 
disclose a ``principal risk'' relating to its investments in that 
sector. A fund also could determine that it should disclose a 
``principal risk'' in some circumstances when the fund uses less than 
10% of its assets to make investments, when those investments may 
subject the fund to risk of loss of more than 10% of its assets, for 
example, a fund that engages in short sales or derivatives trading.
    The ``reasonably likely'' language is designed to reflect that a 
risk may not be a principal risk when first disclosed but may become a 
principal risk over time, due to changing conditions or the fund 
changing its strategies.\642\ For example, interest rate risk for a 
fixed income fund could increase depending on government action that 
affects interest rates. As another example, a fund investing in U.S. 
equities may change its strategy to include foreign investments and 
thus may introduce foreign investment risk. Therefore, if the fund 
considers it reasonably likely that a risk will become a principal risk 
in the future, it should consider whether to

[[Page 70799]]

include it in the prospectus to help ensure that when it becomes a 
principal risk, investors will be informed. On the other hand, the 
proposed ``reasonably likely'' language reflects our view that risks 
that are not likely to become principal risks should be excluded from a 
fund's principal risk disclosure, consistent with the purpose of 
streamlining the prospectus.
---------------------------------------------------------------------------

    \642\ The ``reasonably likely'' standard is a standard already 
used to describe principal risks in Items 4(b)(1)(i) and 9(c) of 
Form N-1A.
---------------------------------------------------------------------------

    Proposed Instruction 2 is addressed to a fund investing in other 
funds (an ``acquiring fund'' and an ``acquired fund,'' respectively), 
commonly known as a ``fund of funds.'' \643\ We have observed that many 
acquiring funds disclose all of the principal risks of each of their 
acquired funds as part of their principal risk disclosure. In some 
cases, acquiring funds list over 70 principal risks. The proposed 
instruction states that, in the case of acquiring funds, risks should 
be included only if they are principal risks of the acquiring fund, and 
that a principal risk of an acquired fund should not be included unless 
it is a principal risk of the acquiring fund. In the case of an 
acquiring fund, disclosing the risks of acquired funds could obscure 
information relating to principal risks of the acquiring fund. We 
believe that the key consideration for an investor relates to the 
principal risks of the fund in which the investor is actually buying 
shares, i.e., the acquiring fund, and the proposed instruction is 
therefore designed to help an investor focus on principal risks that 
are most applicable to his or her investment. A principal risk of an 
acquired fund might be a principal risk of the acquiring fund when, for 
example, the acquiring fund invests a substantial portion of its assets 
in an acquired fund (or the risk is shared by multiple acquired 
funds).\644\
---------------------------------------------------------------------------

    \643\ While the Commission recently proposed rules relating to 
fund of funds arrangements, this proposal did not address risk 
disclosure by funds investing in other funds. See Fund of Funds 
Proposing Release, supra footnote 608.
    \644\ For example, if a particular risk of the acquired funds in 
the aggregate places more than 10% of the acquiring fund's assets at 
risk, that risk is a principal risk of the acquiring fund. See also 
Instruction 1 to Item 9(c) of proposed Form N-1A.
---------------------------------------------------------------------------

    Proposed Instruction 3 is addressed to funds whose strategy 
provides the freedom to invest in different types of assets at the 
manager's discretion. This could occur if, for example, the manager has 
discretion to change the fund's strategy. These funds are commonly 
known as ``go anywhere'' funds. This instruction would provide that, if 
the fund's strategy permits the manager discretion to invest in 
different types of assets, such fund must disclose that an investor may 
not know--and has no way to know--how the fund will invest in the 
future and the associated risks. This proposed instruction would make 
that principal risk explicit in the fund's disclosure.
    We seek comment on the proposed amendments to prospectus disclosure 
requirements regarding funds' principal risks, and specifically on the 
following issues:
    256. Is the proposed amendment in the General Instructions to Form 
N-1A to preclude disclosure of non-principal risks in the statutory 
prospectus appropriate? Would the proposed amendment further the goal 
of streamlining risk disclosure in the prospectus and focusing on 
essential information? Should the proposed amendment to the General 
Instructions instead use another standard in precluding the disclosure 
of certain less-central risks in the fund's prospectus, such as 
prohibiting the disclosure of ``non-material'' risks? If so, what 
should this alternative standard be and how should we define it?
    257. Is the proposed amendment to Form N-1A Item 4(b)(1)(i), which 
specifies that a fund should ``briefly'' summarize principal risks, 
appropriate? Would this proposed amendment help emphasize the 
Commission's goal of making the principal risk disclosure in the 
summary prospectus concise and succinct?
    258. Is the proposed new instruction to Item 4(b)(1)(i), providing 
that a fund in a complex should describe principal risks in order of 
importance, appropriate? Is it helpful to expressly provide in the 
proposed instruction that a fund may use any reasonable means to 
determine the significance of the risk? Should the proposed instruction 
be more prescriptive as to how a fund should determine the significance 
of risk, and if so, what method for determining risks' significance 
should the instruction specify (for example, should the proposed 
instruction specify ways in which a fund could--or must--quantify 
likelihood and severity of risk, and if so what methods for 
quantification should the instruction specify)? Should additional 
guidance be provided? Is it appropriate to expressly state in the 
proposed instruction that a fund should not list its principal risks in 
alphabetical order? Are there circumstances where an alphabetical order 
presentation may be appropriate and if so which ones?
    259. Should the number of principal risks that funds disclose in 
the summary prospectus be subject to any limits? Should we require a 
minimum number of risks to be disclosed? For example, would five be 
sufficient? Should we impose a maximum number of risks that may be 
disclosed in the summary? For example, would more than twenty-five be 
too many?
    260. Is the proposed new instruction to Item 4(b)(1)(i), providing 
that a fund should tailor its risk disclosure to how each particular 
fund in the complex operates, appropriate? Does this proposed 
instruction provide adequate guidance as to tailoring risk disclosure? 
Should additional guidance be provided?
    261. With regard to Form N-1A Item 9(c), is the proposed new 
instruction on the factors a fund should consider in determining 
whether a risk is a principal risk useful and appropriate? Would it 
give investors adequate information regarding the risks they should 
consider in determining whether to purchase shares of the fund? Is the 
proposed standard for considering whether a risk is a principal risk--
that the risk is one that would place more than 10% of the fund's 
assets at risk (or it is reasonably likely that it would place more 
than 10% of the fund's assets at risk in the future)--appropriate? 
Should the proposed 10% be more or less? For example, should the 
standard be 5% or 20% of the fund's assets at risk? If so, why? Should 
there be a numerical standard associated with the instruction for 
determining whether a risk is a principal risk, and if so, what 
quantitative or other criteria should inform this standard? Is the 
applicability of the 10% standard to the fund's assets appropriate? 
Would a 10% standard help achieve the goal of providing user-friendly, 
clear and succinct disclosures? If not, why not? Is the ``assets at 
risk'' standard clear and appropriate? If not, why not? Would the 
proposed instruction providing that a fund should consider whether it 
is ``reasonably likely'' that a risk will become a principal risk in 
the future give adequate notice of future risks? Is this provision 
sufficiently clear? Is the term ``reasonably likely'' clear? Should we 
provide guidance or a definition regarding this term? Are there other 
means of determining principal risks that would be more effective? 
Should there be guidance regarding consideration of non-investment 
related risks, such as cybersecurity risk and new fund risk, as 
principal risks?
    262. Is the proposed instruction that addresses risk disclosure in 
fund-of-funds arrangements appropriate? Would this proposed instruction 
be effective in promoting the policy goal of helping investors focus on 
the principal risks of the fund in which the investor is purchasing 
shares?

[[Page 70800]]

    263. Is the proposed instruction addressing the principal risks of 
``go-anywhere'' funds appropriate? Would this instruction effectively 
convey the uncertainty of the fund's investments and the associated 
principal risks? If not, what amendments would improve the instruction?
    264. Are there other changes we can make to risk disclosure to make 
this information more investor-friendly, clear and succinct?
    265. The Commission recently adopted amendments to rule 8b-16(b) 
under the Investment Company Act, which would require registered 
closed-end funds that rely on this rule to include--among other 
things--new disclosure about their principal risks in their annual 
reports.\645\ Should we extend any of the proposed amendments to open-
end funds' prospectus risk disclosure to closed-end fund prospectus 
disclosures or the new annual report risk disclosures required for 
certain closed-end funds? If so, how should we amend the risk 
disclosure requirements for these closed-end funds?
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    \645\ See Closed-End Fund Offering Reform Adopting Release, 
supra footnote 128, at Section II.I.5; see also supra footnote 132 
and accompanying text.
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3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)
    We are proposing to rescind rule 30e-1(d), which permits a fund to 
transmit a copy of its prospectus or SAI in place of its shareholder 
report, if it includes all of the information that would otherwise be 
required to be contained in the shareholder report.\646\ Shareholder 
report and prospectus disclosures have historically served different 
purposes, with each catering to the different informational needs of 
prospective fund investors and current shareholders.\647\ We understand 
that funds very rarely rely on rule 30e-1(d) to transmit a prospectus 
or SAI in place of a shareholder report. Additionally, we believe that 
allowing funds to consolidate their prospectus, SAI and shareholder 
report disclosures into a single document would result in shareholders 
receiving long, complex, and overlapping fund disclosures which could 
cause shareholder confusion and fatigue. This result would not be 
consistent with the goals of this rulemaking proposal.
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    \646\ See rule 30e-1(d). When the Commission initially adopted 
rule 30e-1(d), it allowed a fund to send a copy of its prospectus or 
SAI, or both, instead of a shareholder report, so long as such 
prospectus or SAI included certain financial information and 
information about director's compensation. See Standardized 
Financial Statement Requirements in Management Investment Company 
Registration Statements and Reports to Shareholders, Investment 
Company Act Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 
1980)]. However, when the Commission expanded the required 
shareholder report disclosures, it simultaneously amended rule 30e-
1(d) to limit a fund's ability to use a prospectus or SAI in place 
of a shareholder report by requiring that a fund include in such a 
prospectus or SAI all the information that would otherwise be 
required in the shareholder report. See Role of Independent 
Directors of Investment Companies, Investment Company Act Release 
No. 24082 (Oct. 14, 1999) [64 FR 59826 (Nov. 3, 1999)].
    \647\ See supra Section II.A.2 (discussing the differences 
between shareholder report and prospectus disclosures and noting 
that the shareholder report provides information to a fund's current 
shareholders about the fund's operations and performance during the 
past fiscal period, while the prospectus acts as the principal 
selling document for investors to inform investment decisions and 
facilitate fund comparisons).
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    We seek comment on our proposal to rescind rule 30e-1(d):
    266. Do funds currently rely on rule 30e-1(d)? If so, which funds, 
and why?
    267. Would investors benefit from receiving in the fund's 
prospectus or SAI the disclosure that would otherwise have to appear in 
the shareholder report? Would this cause investor confusion and/or 
overwhelm investors? If so, is there any way to preserve the ability of 
funds to rely on rule 30e-1(d) while mitigating these potential 
negative effects?

L. Investment Company Advertising Rule Amendments

    As part of our proposed improvements to fund fee and expense 
information for investors, we are proposing to amend the Commission's 
investment company advertising rules (for purposes of this release, 
Securities Act rules 482, 156, and 433 and Investment Company Act rule 
34b-1) to promote transparent and balanced presentations of fees and 
expenses in investment company advertisements.\648\ As investment 
companies increasingly compete and market themselves on the basis of 
costs, we are concerned that investment company advertisements may 
mislead investors by creating an inaccurate impression of the costs 
associated with an investment.\649\ The proposed advertising rule 
amendments would generally apply to all investment companies, including 
mutual funds, ETFs, registered closed-end funds, and BDCs.\650\ Under 
the proposed amendments, investment company fee and expense 
presentations in advertisements would have to include timely and 
prominent information about a fund's maximum sales load (or any other 
nonrecurring fee) and gross total annual expenses, based on the methods 
of computation that the company's Investment Company Act or Securities 
Act registration statement form prescribes for a prospectus.\651\ We 
also are proposing to amend rule 156 to provide factors an investment 
company should consider to determine whether representations in its 
advertisements about the fees and expenses associated with an 
investment in the fund could be misleading.\652\
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    \648\ For purposes of this release, we generally refer to the 
types of investment company communications covered by rules 482, 
156, 433, and 34b-1 as ``advertisements,'' unless otherwise noted. 
Although the Commission recently proposed rule amendments relating 
to investment adviser advertisements, that proposal did not address 
investment company advertising rules. See Investment Adviser 
Advertisements; Compensation for Solicitations, Investment Advisers 
Act Release No. 5407 (Nov. 4, 2019) [84 FR 67518 (Dec. 10, 2019)].
    \649\ See supra Section I.C.
    \650\ As a result, for purposes of this Section II.I, the term 
``fund'' is not limited to mutual funds and ETFs registered on Form 
N-1A. Instead, we use this term more broadly in this Section to 
refer to any investment company that is subject to the Commission's 
investment company advertising rules, including registered closed-
end funds and BDCs.
    \651\ See proposed rule 482(i) and (j); proposed rule 34b-1(c); 
proposed rule 433(c).
    \652\ See proposed rule 156(b)(4).
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    Investment company advertisements, including advertisements 
regarding registered investment companies and BDCs, typically are 
prospectuses for purposes of the Securities Act.\653\ These 
advertisements are typically subject to rule 482, which provides a 
framework in which investment company advertisements are deemed to be 
``omitting prospectuses'' that may include information the substance of 
which is not included in a fund's statutory or summary prospectus.\654\ 
Rule 482 establishes certain content, legend, and filing requirements 
for investment company advertisements. Many of the rule's content 
requirements focus on advertisements that include performance data of 
certain types of funds, including mutual funds, ETFs, certain separate 
accounts, and money market funds.\655\ For example, the rule

[[Page 70801]]

provides a standardized formula for these funds to calculate 
performance data included in their advertisements.\656\ Instead of 
relying on rule 482, registered closed-end funds and BDCs may use free 
writing prospectuses in accordance with rule 433 and certain other 
Commission rules for advertising purposes.\657\ Because both rule 482 
advertisements and free writing prospectuses are treated as 
prospectuses under section 10(b) of the Securities Act, they are 
subject to liability under section 12(a)(2) of the Securities Act--
which imposes liability for materially false or misleading statements 
in a prospectus or oral communications--as well as the antifraud 
provisions of the Federal securities laws.\658\
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    \653\ See section 2(a)(10) of the Securities Act (defining the 
term ``prospectus'' to mean any prospectus, notice, circular, 
advertisement, letter, or communication, written or by radio or 
television, which offers any security for sale or confirms the sale 
of any security, subject to certain exceptions, including an 
exception for a communication that generally was accompanied or 
preceded by a statutory prospectus).
    \654\ See section 10(b) of the Securities Act; rule 482(a) under 
the Securities Act (stating that the rule applies to an 
advertisement or other sales material with respect to securities of 
a registered investment company or BDC that is selling or proposing 
to sell its securities pursuant to a registration statement that has 
been filed under the Securities Act, unless the advertisement is 
excepted from the definition of prospectus by section 2(a)(10) of 
the Securities Act or rule 498(d), or is a summary prospectus under 
rule 498).
    \655\ See rule 482(b)(3), (d), (e), and (g).
    \656\ See rule 482(d) and (e).
    \657\ See Closed-End Fund Offering Reform Adopting Release, 
supra footnote 128, at Section II.F.1; 17 CFR 230.164 [rule 164 
under the Securities Act] and rule 433 under the Securities Act [17 
CFR 230.164 and 17 CFR 230.433].
    \658\ See, e.g., section 12(a)(2) of the Securities Act [77l]; 
section 17(a) of the Securities Act [15 U.S.C. 77q]; section 10(b) 
of the Exchange Act [15 U.S.C. 78j]; section 34(b) of the Investment 
Company Act [15 U.S.C. 80a-33]; section 206 of the Investment 
Advisers Act of 1940 [15 U.S.C. 80b-6].
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    Rule 34b-1 applies to supplemental sales literature (i.e., sales 
literature that is preceded or accompanied by a prospectus) by any 
registered open-end company, registered unit investment trust, or 
registered face-amount certificate company.\659\ Rule 34b-1 includes 
many of the same requirements as rule 482, including the same 
performance-related requirements.\660\ The Commission adopted rule 34b-
1 to ensure that performance claims in supplemental sales literature 
would not be misleading and to promote comparability and uniformity 
among supplemental sales literature and rule 482 advertisements.\661\ 
Supplemental sales literature is subject to the general antifraud 
provisions of the Federal securities laws.
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    \659\ See rule 34b-1 under the Investment Company Act; section 
24(b) of the Investment Company Act.
    \660\ See rule 34b-1(b)(1)-(2) under the Investment Company Act.
    \661\ See Advertising by Investment Companies, Investment 
Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868 (Feb. 10, 
1988)], at Section III; Advertising by Investment Companies; 
Proposed Rules and Amendments to Rules, Forms, and Guidelines, 
Investment Company Act Release No. 15315 (Sept. 17, 1986) [51 FR 
34384 (Sept. 26, 1986)], at nn.77 and 78 and accompanying text.
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    Rule 156 states that whether or not a particular description, 
representation, illustration, or other statement involving a material 
fact is misleading depends on evaluation of the context in which it is 
made. The rule discusses several pertinent factors that should be 
weighed in considering whether a particular statement involving a 
material fact is or might be misleading in investment company sales 
literature, including rule 482 advertisements and supplemental sales 
literature.\662\ Rule 156 applies to sales literature used by any 
person to offer to sell or induce the sale of securities of any 
investment company, including registered investment companies and 
BDCs.\663\
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    \662\ See Mutual Fund Sales Literature Interpretive Rule, 
Investment Company Act Release No. 10915 (Oct. 26, 1979) [44 FR 
64070 (Nov. 6, 1979)] (``Rule 156 Adopting Release'').
    \663\ For purposes of rule 156, investment company sales 
literature includes any communication (whether in writing, by radio, 
or by television) used by any person to offer to sell or induce the 
sale of securities of any investment company. See rule 156(c) [17 
CFR 230.156(c)]. Communications between issuers, underwriters and 
dealers are included in this definition of sales literature if such 
communications, or the information contained therein, can be 
reasonably expected to be communicated to prospective investors in 
the offer or sale of securities or are designed to be employed in 
either written or oral form in the offer or sale of securities.
---------------------------------------------------------------------------

    Currently, the investment company advertising rules largely focus 
on performance-related information.\664\ Among other things, the 
performance-related provisions of these rules are designed to: (1) 
Address concerns that investors would be unable to compare fund 
performance when funds use different calculation methods in their 
advertisements; \665\ and (2) highlight areas that, based on the 
Commission's experience with investment company advertisements, have 
been particularly susceptible to misleading statements.\666\ The 
investment company advertising rules do not presently require 
information about an investment company's fees and expenses or limit 
how fee and expense information is presented, with one exception. Under 
the current rules, if an advertisement provides performance data of an 
open-end management investment company or a separate account registered 
as a unit investment trust offering variable annuity contracts, it also 
must include the maximum amount of the fund's sales load (i.e., 
purchase charge or exit charge) or any other nonrecurring fee that it 
charges.\667\
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    \664\ Rule 433 does not include performance-related requirements 
for registered closed-end fund or BDC free writing prospectuses. 
Currently, most rule 482 content requirements, including the 
performance-related requirements, do not apply to registered closed-
end funds and BDCs.
    \665\ See Rule 156 Adopting Release, supra footnote 662, at 
Section I.2.
    \666\ See Rule 156 Adopting Release, supra footnote 662; 
Investment Company Sales Literature Interpretive Rule, Investment 
Company Act Release No. 10621 (Mar. 8, 1979) [44 FR 16935 (Mar. 20, 
1979)], at paragraph accompanying n.5.
    \667\ See rule 482(b)(3)(ii); rule 34b-1(b)(1)(i).
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    Separately, FINRA rule 2210 requires fee and expense information in 
certain non-money market fund open-end management investment company 
advertisements that provide performance information.\668\ This 
includes: (1) The fund's maximum sales charge (i.e., purchase charge or 
exit charge); and (2) the total annual fund operating expense ratio, 
gross of any fee waivers or expense reimbursements (i.e., ongoing 
annual fees). Under FINRA's rule, a fund's standardized performance 
information, sales charge, and total annual fund operating expense 
ratio (gross of any fee waiver or expense reimbursement) must be set 
forth prominently.
---------------------------------------------------------------------------

    \668\ FINRA rule 2210(d)(5). This provision only applies to 
retail communications and correspondence that present non-money 
market fund open-end management investment company data as permitted 
by rule 482 and rule 34b-1.
---------------------------------------------------------------------------

    To promote more consistent and transparent presentations of 
investment costs in investment company advertisements, we are proposing 
to amend rules 482, 433, and 34b-1 to require that investment company 
advertisements providing fee or expense figures for the company include 
certain standardized fee and expense figures.\669\ The proposed 
amendments would apply to advertisements of any registered investment 
company or BDC. We are not proposing to limit the scope of the proposed 
amendments to a subset of investment companies because we believe 
investors in any registered investment company or BDC would benefit 
from advertisements that provide consistent, standardized fee and 
expense information that is generally aligned with prospectus fee and 
expense information.
---------------------------------------------------------------------------

    \669\ See proposed rule 482(i)(1).
---------------------------------------------------------------------------

    With respect to rule 482, we are proposing to amend the rule to 
require that investment company advertisements providing fee and 
expense figures include: (1) The maximum amount of any sales load, or 
any other nonrecurring fee; and (2) the total annual expenses without 
any fee waiver or expense reimbursement arrangement (collectively, the 
``required fee and expense figures'').\670\ Because we believe that 
these are important figures for assessing the fees and expenses of a 
fund investment, the proposal would require any advertisement 
presenting fee and expense figures to include these items. This 
proposed requirement would only apply if an investment company 
advertisement includes fee or expense figures, and therefore an 
advertisement

[[Page 70802]]

would not need to include the required fee and expense figures if it 
only included general, narrative information about fee and expense 
considerations and did not include any numerical fee or expense 
amounts.\671\
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    \670\ In an expense reimbursement arrangement, the adviser 
reimburses the fund for expenses incurred. In a fee waiver 
arrangement, the adviser agrees to waive a portion of its fee in 
order to limit fund expenses.
    \671\ This might be the case if, for example, the advertisement 
only refers to the fund's fees and expenses in the context of the 
disclosure required by rule 482(b)(1), which requires a statement 
advising an investor to consider the investment objectives, risks, 
and charges and expenses of the fund carefully before investing.
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    The proposed required fee and expense figures would be based on the 
methods of computation that the fund's Investment Company Act or 
Securities Act registration statement form prescribes for a prospectus. 
This proposed requirement is designed to promote consistent fee and 
expense computations across investment company advertisements, 
particularly within the same fund category, and to facilitate investor 
comparisons. We are proposing to require consistency with prospectus 
requirements because, like a fund's summary or statutory prospectus, 
advertisements are often designed for prospective investors and may 
influence an investment decision. Further, similar to associated 
prospectus requirements, if an advertisement covers only a subset of a 
fund's share classes, the advertisement could provide the required fee 
and expense information for those classes only.\672\
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    \672\ See, e.g., Instruction 1(d)(ii) to Item 3 of current Form 
N-1A; Instruction 1(e) to proposed Item 3 of Form N-1A; Instruction 
1(d)(ii) to proposed Item 8A of Form N-1A.
---------------------------------------------------------------------------

    While investment company advertisements could include other figures 
regarding a fund's fees and expenses, the advertisement would have to 
present the required fee and expense figures at least as prominently as 
any other included fee and expense figures. For example, under the 
proposed amendments, an advertisement could include a fund's fees and 
expenses net of certain amounts, such as a fee waiver or expense 
reimbursement arrangement, as we understand some fund advertisements do 
today. However, an advertisement could not present the net figure more 
prominently than the required fee and expense figures. In addition to 
meeting the proposed content and presentation requirements, 
advertisements that include a fund's total annual expenses net of fee 
waiver or expense reimbursement arrangement amounts would also need to 
include the expected termination date of the arrangement.\673\ We 
believe this proposed requirement would help investors better 
understand how a fee waiver or expense reimbursement arrangement may 
affect their investment costs by providing information about how long 
the arrangement would likely be in place (including that it may be 
terminated at any time).\674\
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    \673\ See proposed rule 482(i)(2).
    \674\ This also is similar to information that funds generally 
must include in their prospectuses when including total annual 
expenses net of a fee waiver or expense reimbursement arrangement. 
See Instruction 3(e) to Item 3 of Form N-1A; Instruction 4(b) to 
proposed Item 3 of Form N-1A; Instruction 4(e) to proposed Item 8A 
of Form N-1A; Instruction 15(f) to Item 4 of Form N-3; Instruction 
17 to Item 4 of Form N-4.
---------------------------------------------------------------------------

    The proposed amendments would also include timeliness requirements 
for fee and expense information in investment company 
advertisements.\675\ The proposed timeliness requirement would apply to 
fee and expense information and, thus, it would apply to fee and 
expense figures as well as relevant narrative information. Under the 
proposal, fee and expense information would need to be as of the date 
of the fund's most recent prospectus or, if the fund no longer has an 
effective registration statement under the Securities Act, as of its 
most recent annual report.\676\ A fund would, however, be able to 
provide more current information, if available. The proposed timeliness 
requirement is designed to prevent investment company advertisements 
from including stale, outdated information about a fund's fees and 
expenses. For instance, a registered open-end fund that maintains an 
effective Securities Act registration statement on Form N-1A would need 
to provide its maximum sales load (or other nonrecurring fee) and gross 
total annual expenses, as of the date of the fund's most recent 
prospectus.\677\ As another example, a registered closed-end fund that 
includes fee and expense figures in a rule 482 advertisement and that 
does not maintain an effective Securities Act registration statement 
would need to provide its gross total annual expenses, as of the date 
of the fund's most recent annual report.\678\
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    \675\ See proposed rule 482(j).
    \676\ In the case of a new fund that does not yet have an 
effective registration statement, fee and expense information would 
need to be as of the date of the fund's most recent prospectus filed 
with the Commission.
    \677\ The registered open-end fund's maximum sales load (or 
other nonrecurring fee) and gross total annual expenses would be 
computed using the method in proposed Item 8A of Form N-1A. Proposed 
Item 3 of Form N-1A also requires these figures in a fund's 
prospectus, but proposed Item 8A contains more complete 
computational instructions for these figures.
    \678\ Under these circumstances, the registered closed-end fund 
would not have a maximum sales load to report in its advertisement 
because it does not have an effective Securities Act registration 
statement and cannot presently sell the fund's securities. The 
registered closed-end fund's gross total annual expenses would be 
computed using the method in Item 3 of Form N-2.
---------------------------------------------------------------------------

    We also are proposing to amend rules 34b-1 and 433 so that those 
rules incorporate rule 482's proposed content, presentation, and 
timeliness requirements for fees and expenses. This would help ensure 
that the same fee and expense-related requirements are applied 
consistently across all registered investment company and BDC 
advertisements and sales literature. The proposed amendments to rule 
34b-1 would provide that any sales literature of a registered 
investment company or BDC would have omitted to state a fact necessary 
in order to make the statements therein not materially misleading 
unless the sales literature meets rule 482's proposed content, 
presentation, and timeliness requirements for investment company fees 
and expenses.\679\ That is, sales literature that would not otherwise 
be subject to rule 482 would have to meet rule 482's fee and expense 
requirements. The proposed amendments to rule 34b-1 would, for example, 
apply to sales literature that is excluded from the definition of 
``prospectus'' in section 2(a)(10) of the Securities Act and thus is 
not subject to rule 482.\680\ Additionally, we propose to

[[Page 70803]]

amend rule 433, which establishes conditions for the use of post-filing 
free writing prospectuses, to require a registered closed-end fund or 
BDC free writing prospectus to comply with the proposed content, 
presentation, and timeliness requirements of proposed rule 482, as 
applicable, if the free writing prospectus includes fee and expense 
information.\681\ As a result, regardless of whether a registered 
closed-end fund or BDC advertisement uses rule 482 or rule 433, the 
advertisement would be subject to the same requirements regarding fee 
and expense information. While the proposed amendments to rules 482, 
34b-1, and 433 are similar to requirements that currently apply to a 
subset of fund advertisements under FINRA rule 2210 (i.e., certain non-
money market fund open-end management investment company advertisements 
that provide performance information), our proposed amendments would 
apply more broadly to all investment company advertisements and 
supplemental sales literature.
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    \679\ See proposed rule 34b-1(c). The proposed amendments would 
apply to any registered investment company or BDC advertisement, 
pamphlet, circular, form letter, or other sales literature addressed 
to or intended for distribution to prospective investors in 
connection with a public offering (collectively, ``sales 
literature''). The current provisions of rule 34b-1, which largely 
relate to performance information, would continue to apply only to 
sales literature that is required to be filed with the Commission by 
section 24(b) of the Investment Company Act.
    \680\ Like the current scope of rules 34b-1 and 482, the 
proposed fee and expense requirements in these rules and in rule 433 
would not apply to any quarterly, semi-annual, or annual shareholder 
report under section 30 of the Investment Company Act. We also 
propose to provide similar treatment to other reports pursuant to 
section 13 of section 15(d) of the Exchange Act (e.g., Form 10-K, 
10-Q, and 8-K reports filed by BDCs). See proposed rule 34b-1(c)(2).
    Consistent with the current provision in rule 34b-1, the 
amendments are designed to provide that shareholder reports and 
similar periodic reports that might otherwise constitute sales 
literature or advertisements under the rules are not covered by the 
proposed amendments to rules 482, 34b-1, and 433 because those 
reports serve to inform shareholders of recent developments relating 
to their investment. See 1988 Advertising Rules Release, supra 
footnote 88, at n.40 and accompanying text (explaining that the 
current provision is necessary because of the breadth of the 
definition of ``sales literature''). We believe the proposed 
expansion of this provision to cover fee and expense information in 
fund advertisements is warranted because, among other things: (1) 
Investors are likely to understand that the fee and expense 
information in an annual or other periodic report is only as current 
as the report; and (2) the proposed content requirements for funds' 
annual and semi-annual reports are designed to independently 
recognize the types of fee and expense information a fund 
shareholder may need.
    \681\ See proposed rule 433(c)(3).
---------------------------------------------------------------------------

    In addition, we are proposing to amend rule 156 to address 
statements and representations about a fund's fees and expenses that 
could be materially misleading. Specifically, we would provide that, 
when considering whether a particular statement involving a material 
fact is or might be misleading, weight should be given to 
representations about the fees or expenses associated with an 
investment in the fund that could be misleading because of statements 
or omissions involving a material fact. As funds are increasingly 
marketed on the basis of costs, we are concerned that investment 
companies and intermediaries may in some cases understate or obscure 
the costs associated with a fund investment. The new proposed factor in 
rule 156 would provide that representations about the fees or expenses 
associated with an investment in the fund could be misleading because 
of statements or omissions involving a material fact, including 
situations where portrayals of such fees and expenses omit 
explanations, qualifications, limitations, or other statements 
necessary or appropriate to make the portrayals not misleading.\682\ 
Consistent with the current framework in rule 156, whether a particular 
description, representation, illustration, or other statement involving 
a fund's fees and expenses is materially misleading depends on 
evaluation of the context in which it is made.\683\ In addition, like 
current rule 156, the proposed amendments would apply to all investment 
company sales literature.\684\ We are not proposing to limit the scope 
of these amendments to a subset of investment companies because our 
concerns regarding materially misleading statements about fees and 
expenses are not limited to certain types of investment companies.
---------------------------------------------------------------------------

    \682\ See proposed rule 156(b)(4).
    \683\ See rule 156(b).
    \684\ See rule 156(c) (defining ``sales literature'' for 
purposes of the rule).
---------------------------------------------------------------------------

    The proposed amendments to rule 156 are designed to address 
concerns that investment company advertisements may present a fund's 
fees and expenses in a way that materially misleads an investor to 
believe that the costs associated with a fund investment are lower than 
the actual investment costs. For example, we understand that it has 
become increasingly common for funds to market themselves, or attempt 
to market themselves, as ``zero expense'' or ``no expense'' funds based 
solely on information in their prospectus fee tables and without also 
disclosing that investors or the fund may incur other costs. However, 
in some cases a fund's prospectus fee table shows no transaction fees 
and no ongoing charges only because its adviser, the adviser's 
affiliates, or others are collecting fees elsewhere from these 
investors.\685\ For instance, an investor in a so-called ``zero 
expense'' fund may encounter other investment costs that can 
effectively reduce the value of his or her investment in a fund. For 
example, an investor may incur intermediary costs, such as wrap fees 
that an investor pays to the sponsor of a wrap fee program (which may 
be the fund's adviser or its affiliates) for investment advice, 
brokerage services, administrative expenses, or other fees and 
expenses. As another example, if a fund engages in securities lending, 
it generally pays certain fees or compensation to a securities lending 
agent (which may be affiliated with the fund's adviser), including 
through revenue sharing arrangements. Additionally, a fund may appear 
to be a ``zero expense'' fund because its adviser is waiving fees or 
reimbursing expenses for a period of time, but the fund will incur fees 
and expenses once that arrangement expires. In these and other cases 
where an investor may encounter other investment costs, we are 
concerned that, absent appropriate explanations or limitations, 
investors in these cases may believe incorrectly that there are no 
expenses associated with investing in the fund.
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    \685\ In addition to considering whether statements in fund 
sales literature about fees and expenses associated with a fund 
investment are materially misleading, a fund should also consider 
whether the fee table in its prospectus may be materially misleading 
unless the fund includes additional material information as may be 
necessary to make the information and statements expressly required 
to be in the registration statement, in light of the circumstances 
under which they are made, not misleading. See rule 8b-20 under the 
Investment Company Act [17 CFR 270.8b-20].
---------------------------------------------------------------------------

    Similar issues can arise with respect to investment company 
advertisements that advertise low investment costs, based solely on a 
fund's prospectus fee table, and that do not reflect or recognize other 
categories of costs that may, for instance, be supplementing or 
replacing a more traditional management fee (e.g., intermediary costs, 
securities lending costs). As another example, an advertisement might 
be materially misleading if it presents one component of a fund's total 
operating expenses, such as the fund's management fee, without stating 
that there are other costs associated with a fund investment or 
providing the total operating expense figure.
    Under certain circumstances, statements in advertisements about a 
fund's fees and expenses that would be materially misleading on their 
own may not be misleading if the advertisement includes appropriate 
explanations, qualifications, limitations, or other statements. To use 
this approach effectively to avoid materially misleading statements, we 
believe it would be appropriate for funds to avoid using lengthy and 
technical disclaimers in small font sizes.
    These proposed content-related restrictions in rules 482, 433, and 
34b-1 and the proposed amendments to rule 156 are designed to work 
together to promote balanced and transparent presentations of fee and 
expense information in investment company sales literature. We request 
comment on the proposed amendments to the Commission's investment 
company advertising rules, including the following:
    268. Should the advertising rule amendments apply to all investment 
companies, as proposed? If not, what types of investment companies 
should the amendments cover? Are there fee and expense-related issues 
that are specific to certain types of investment company advertisements 
that we should take into account?
    269. Should we amend rule 482 to require that an advertisement 
providing fee or expense figures for an investment company also include 
the maximum sales load (or any other nonrecurring

[[Page 70804]]

fee) and the total annual expenses without any fee waiver or expense 
reimbursement arrangement, as proposed? If not, why not? Should we 
require investment company advertisements to include other fee and 
expense information, such as the fund's management fee? If so, what 
information should we require, and why? Should we, for example, require 
the same fee and expense information as the fund's prospectus fee table 
(or, in the case of mutual funds and ETFs, the proposed fee summary)?
    270. As proposed, should we require that investment company 
advertisements present the required fee and expense figures using the 
methods of computation that the fund's Investment Company Act or 
Securities Act registration statement form prescribes for a prospectus? 
Should we allow some or all funds to use different computational 
methods? As another example, should registered closed-end funds that do 
not maintain an effective registration statement be able to show 
expense figures from their shareholder reports (e.g., financial 
highlights expense ratios) rather than computing total annual expenses 
in the manner required for a prospectus fee table? Why or why not? Are 
the shareholder report figures, which represent backward-looking 
information for the last fiscal year and do not include AFFE, 
appropriate for advertising materials absent other information? Instead 
should the required expense figure reflect estimated expenses for the 
current fiscal year and AFFE (as required in prospectus fee tables)? If 
we permit different computational methods among investment company 
advertisements, are there other ways we could promote more consistent 
fee and expense presentations and facilitate investor comparisons?
    271. Beyond the required fee and expense figures, should we require 
an investment company advertisement to present any other fees or 
expenses the advertisement may include using the same computational 
method identified in a Commission form or rule, such as the relevant 
Investment Company Act or Securities Act registration statement form 
(e.g., for a prospectus or shareholder report), where available? If so, 
should this apply to particular fee or expense figures, or should it 
apply to all fee and expense figures that have identified computations 
in Commission forms or rules? Do funds already use standardized 
computational methods in advertisements that include fee information 
(e.g., for administrative ease or due to antifraud concerns)?
    272. Should we require an investment company advertisement to 
present the required fee and expense figures at least as prominently as 
any other fee and expense figures, as proposed? If not, why not? Are 
there circumstances in which it would be appropriate for an 
advertisement to present a different fee or expense figure more 
prominently than the required fee and expense figures? Please explain.
    273. Beyond the proposed prominence requirements, should we impose 
other presentation standards for fee and expense information in fund 
advertisements? For example, should we require advertisements to 
present fee and expense information in a format that aligns with the 
fee table (or fee summary) presentation the fund's registration form 
requires for prospectuses?
    274. Should we require investment company advertisements to use 
specified terms to describe the required fee and expense figures? For 
example, should we require advertisements to use the same terms as 
those prescribed for prospectus fee tables in the fund's registration 
form? Alternatively, should we require all fund advertisements to use 
consistent, plain English terminology (such as ``ongoing annual 
fees'')?
    275. As proposed, should we allow investment company advertisements 
to include other fee and expense figures, beyond the required fee and 
expense figures? If not, why not? Alternatively, should we require 
advertisements that include fee and expense figures to include only 
figures that appear in the fee table of the fund's prospectus (or, 
additionally, in the fund's shareholder reports)? If so, how should we 
address the fact that these presentations do not reflect all potential 
investment costs, including intermediary costs, transaction costs, and 
securities lending costs? Should we, for instance, require that a 
legend or footnote accompany the presentation to explain that it may 
not reflect all costs associated with an investment?
    276. As proposed, should we require an investment company 
advertisement to include the expected termination date of a fee waiver 
or expense reimbursement arrangement if the advertisement provides a 
fund's total annual expenses net of fee waiver or expense reimbursement 
arrangements? Is there other information we should require about a fee 
waiver or expense reimbursement arrangement, such as who can terminate 
the arrangement? Should we permit an advertisement to reflect any fee 
waiver or expense reimbursement arrangement, or should the arrangement 
have to meet certain conditions to appear in an advertisement? For 
example, should we allow such arrangements to appear in investment 
company advertisements only if they can appear in a fund's prospectus 
fee table (e.g., in the case of a registered open-end fund registered 
on Form N-1A, if the fee waiver or expense reimbursement arrangement 
would be in place for at least 1 year from the effective date of the 
fund's registration statement)? As another alternative, because 
prospectus-related requirements currently vary among different types of 
funds, should we require an arrangement to be in place for the same 
period of time for any fund that wishes to disclose its total annual 
expenses net of a fee waiver or expense reimbursement in an 
advertisement? If so, what period of time (e.g., 1 year), and how 
should we measure it (e.g., from the date the advertisement is first 
submitted for publication, published, or used; from the effective date 
of the fund's registration statement; or from the date of the fund's 
most recent annual report)? What are the advantages and disadvantages 
of any such approach? Are there other conditions that should determine 
when a fund may include fee waiver or expense reimbursement amounts in 
investment company advertisements and if so, what should these be?
    277. Should we, as proposed, include timeliness requirements in 
rule 482 for fee and expense information in an investment company 
advertisement? Should fee and expense information be as of the fund's 
most recent prospectus or, if the fund no longer has an effective 
Securities Act registration statement, as of its most recent annual 
report, as proposed? If not, what baselines should we use to measure 
the timeliness of fee and expense information? Should the baseline 
differ among different types of funds, or is there a single baseline 
that would work for all funds? Should we allow advertisements to 
include fees and expenses that are more current than the fund's most 
recent prospectus (or as of the fund's most recent annual report), as 
proposed? Alternatively, should we require a fund with a current 
prospectus to always present the same fees and expenses in its 
advertisements as those shown in its current prospectus? Should the 
proposed timeliness requirement apply to any fee and expense 
information, as proposed, or should it apply more narrowly to 
particular subsets of fee and expense information (e.g., fee and 
expense figures)?
    278. Should rule 34b-1 include the same fee and expense-related 
requirements as rule 482, as proposed?

[[Page 70805]]

If not, why should different fee-related requirements apply to rule 482 
advertisements and rule 34b-1 sales literature? What fee and expense-
related requirements should rule 34b-1 include?
    279. As proposed, given the breadth of the definition of ``sales 
literature'' in proposed rule 34b-1, should we amend rule 34b-1 to 
provide that the proposed fee and expense-related requirements for 
investment company advertisements in rules 34b-1, 482, and 433 do not 
apply to shareholder reports under section 30 of the Investment Company 
Act or to other reports pursuant to section 13 or 15(d) of the Exchange 
Act? \686\ If not, why not? Are there circumstances in which the 
proposed fee and expense-related content or timeliness requirements 
should apply to these reports?
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    \686\ See supra footnote 680.
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    280. As proposed, should we amend rule 433 to require registered 
closed-end fund or BDC free writing prospectuses that include fee and 
expense information to comply with applicable fee and expense-related 
requirements in rule 482? If not, why should we treat free writing 
prospectuses differently from rule 482 advertisements? Are there other 
amendments we should make to the free writing prospectus rules to more 
effectively implement the proposed requirements? For example, should we 
amend Securities Act rule 164 to provide that an immaterial or 
unintentional failure to comply with the proposed fee and expense 
requirements would not result in a violation of section 5(b)(1) of the 
Securities Act or the loss of the ability to rely on the free writing 
prospectus rules, similar to the provision that currently applies to 
the legend condition in rule 433? \687\ If so, why should we treat the 
substantive requirements regarding fee and expense information in the 
same manner as the required legend? Are the proposed amendments to rule 
34b-1--which apply to any registered investment company or BDC 
advertisement, pamphlet, circular, form letter, or other sales 
literature addressed to or intended for distribution to prospective 
investors--sufficiently broad such that the proposed amendments to rule 
433 would not be necessary?
---------------------------------------------------------------------------

    \687\ See rule 164(c) under the Securities Act [17 CFR 
230.164(c)].
---------------------------------------------------------------------------

    281. Should we amend Securities Act rule 163 to apply fee and 
expense-related requirements to free writing prospectuses that a 
registered closed-end fund or BDC that is a well-known seasoned issuer 
may use before filing a Securities Act registration statement? If so, 
what requirements should apply to these pre-filing communications? 
Should we require such a fund to compute the required fee and expense 
figures in the manner required for a prospectus fee table before the 
fund has filed a registration statement? What are the advantages and 
disadvantages of such an approach?
    282. Should the content requirements of rule 482, rule 34b-1, and 
rule 433 apply differently based on the audience for the advertisement 
(e.g., retail versus institutional investors)? \688\ For example, after 
filing a registration statement, do new funds or existing funds that 
are planning to conduct a new offering of securities need flexibility 
to rely on rule 482, rule 34b-1, or rule 433 to communicate with 
certain parties, such as intermediaries or institutional investors, 
about potential fee or expense amounts to determine the appropriate fee 
structure for a new fund or security? If so, why would a fund need to 
rely on rule 482, rule 34b-1, or rule 433 for these purposes instead of 
the Commission's new rule allowing test-the-water communications with 
certain institutional investors? \689\ If the content requirement 
should differ based on the audience, how should they differ, and what 
is the basis for these differences? How should we define the different 
categories of investors?
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    \688\ See, e.g., Investment Adviser Advertisements; Compensation 
for Solicitations, Investment Advisers Act Release No. 5407 (Nov. 4, 
2019) [84 FR 67518 (Dec. 10, 2019)], at Section II.A.5; FINRA rule 
2210.
    \689\ Securities Act rule 163B allows funds to engage in test-
the-waters communications with qualified institutional buyers and 
institutional accredited investors to determine whether such 
investors might have an interest in a contemplated registered 
securities offering. These communications may occur either before or 
after a fund has filed a Securities Act registration statement. See 
17 CFR 230.163B; Solicitations of Interest Prior to a Registered 
Public Offering, Securities Act Release No. 10699 (Sep. 25, 2019) 
[84 FR 53011 (Oct. 4, 2019)].
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    283. Should the amendments to rule 482, rule 34b-1, and rule 433 
apply equally to new and existing funds? If not, why not? For example, 
do any of the proposed amendments present particular challenges for a 
new fund that has filed a registration statement but that does not have 
an effective registration statement? If so, what are those challenges, 
and how could we address them?
    284. Should we amend rule 156 to address statements and 
representations about a fund's fees and expenses that could be 
materially misleading, as proposed? If not, why not? Are the proposed 
amendments overly broad or overly narrow? What impact would the 
proposed amendments have on current investment company marketing 
practices? Should the proposed amendments be requirements rather than a 
factor for consideration?
    285. Is the proposed factor in rule 156 appropriately tailored to 
address potential materially misleading statements or representations 
regarding a fund's fees and expenses? \690\ If not, how could we modify 
the proposed factor to address potential materially misleading 
statements or representations without negatively affecting a fund's 
ability to provide the types of fee and expense information that 
investors want in fund advertisements?
---------------------------------------------------------------------------

    \690\ See proposed rule 156(b)(4).
---------------------------------------------------------------------------

    286. Should we provide additional factors an investment company 
should consider to avoid potentially materially misleading statements 
regarding a fund's fees and expenses? If so, what factors and why? For 
instance, are there circumstances in which a fund might include 
statements in its advertisements that suggest or imply present or 
future levels of fees and expenses that would not be justified under 
the circumstances and that might be materially misleading to investors? 
Could this potentially occur, for example, if a fund that has 
performance fees or fulcrum fees advertises its current fees and 
expenses in a manner that suggests or implies that the fund's fees and 
expenses would remain the same in the future, even though the fund's 
fee and expenses could be significantly higher if the fund's future 
performance triggers the performance fee or fulcrum fee? What are the 
advantages or disadvantages of including a new factor in rule 156 
related to statements that suggest or imply present or future levels of 
fees and expenses that would not be justified under the circumstances? 
Would the proposed amendments to rule 156 already appropriately address 
this concern?
    287. Should we provide additional guidance on the types of 
explanations, qualifications, limitations, or other statements that 
funds that have zero-expenses (or close to zero expenses) based solely 
on information in their prospectus fee tables could include in their 
advertisements to address concerns about materially misleading 
statements or provide standardized statements for advertisements or 
prospectuses? For example, should such a statement provide that the 
fund, its adviser, or its affiliates may receive compensation from the 
fund that is not disclosed? Should the statement instead provide that 
there are other costs that will reduce the value of an investment

[[Page 70806]]

in the fund? Are there other statements that would explain the issue 
more clearly to investors or that would be more accurate for different 
types of funds? Would standardized language be appropriate for 
different types of funds with zero expenses (or close to zero expenses) 
based solely on information in their prospectus fee tables, or should 
funds have discretion to tailor the language to address a particular 
fund's facts and circumstances? Would guidance of the type that this 
request for comment describes be appropriate for other scenarios 
related to the presentation of fees and expenses in fund 
advertisements, and if so, what other types of scenarios should the 
guidance address?
    288. Would the proposed amendments to the investment company 
advertising rules create unintended incentives or results, such as an 
incentive for funds to no longer include fee and expense information in 
fund advertisements? If so, how could we reduce the impact of those 
unintended incentives or results while still promoting more balanced 
and transparent presentations of fund fees and expenses in 
advertisements?

M. Technical and Conforming Amendments

    We are proposing technical and conforming amendments to various 
rules and forms. As discussed above, our proposal would revise rule 
30e-3 to exclude investment companies registered on Form N-1A from the 
scope of the rule. As a conforming amendment, we propose to revise Form 
N-1A and rule 498 under the Securities Act to remove legends required 
by rule 30e-3.\691\ Likewise, as another conforming amendment, we 
propose to withdraw previously adopted amendments to Form N-1A and rule 
498 that are scheduled to become effective on January 1, 2021 and that 
would reference requirements of rule 30e-3.\692\ As technical 
amendments, we also propose to update certain terminology in Form N-1A 
to reflect modern usage and presentation and to remove references to 
collect phone calls.
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    \691\ See Item 1(a)(5) and Item 27(d)(7) of Form N-1A; rule 
498(b)(1)(vii).
    \692\ See Rule 30e-3 Adopting Release, supra footnote 14, at 
amendatory instructions 5, 6, and 16.
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    As discussed above, we are also proposing new rule 498B to address 
shareholders' continued receipt of annual prospectus updates in the 
years following their initial investment in a fund. As a conforming 
amendment, we propose to amend 17 CFR 200.800 to display control 
numbers assigned to information collection requirements for rule 498B 
by the Office of Management and Budget pursuant to the Paperwork 
Reduction Act. As discussed further below, an agency may not conduct or 
sponsor, and a person is not required to respond to a collection of 
information unless it displays a currently valid OMB control 
number.\693\
---------------------------------------------------------------------------

    \693\ See infra Section IV.
---------------------------------------------------------------------------

    Our proposal would also simplify the fee table currently included 
in Form N-1A and move the full fee table to a different location in 
Form N-1A.\694\ To ensure that forms cross-referencing the current fee 
table in Form N-1A continue to reference that same table, we propose to 
update cross-references in Schedule 14A and Form N-14.\695\
---------------------------------------------------------------------------

    \694\ Compare proposed Item 3 (Risk/Return Summary: Fee Summary) 
with proposed Item 8A (Fee Table).
    \695\ See proposed Schedule 14A [14a-101 under the Securities 
Act] and Form N-14 [17 CFR 239.23].
---------------------------------------------------------------------------

    Finally, as technical amendments, we also propose to update the 
current SAI requirement to provide the age and length of service for a 
fund's officers and directors to allow funds to instead disclose for 
each officer and director the birth year and the year their service 
began.\696\ We also are proposing a similar instruction for the length 
of service for portfolio managers that must be disclosed in the 
prospectus to permit a fund to disclose the year the portfolio 
manager's service began.\697\ We believe that permitting a fund to use 
a static date rather than updating this information annually will 
reduce a burden on funds that can arise in updating a previously 
disclosed age, for example, while providing investors equivalent 
information. We also have observed that some funds already disclose 
each officer and director's year of birth and the date the services of 
the officers, directors and portfolio managers began.
---------------------------------------------------------------------------

    \696\ See proposed Item 17(a)(1) of Form N-1A.
    \697\ See proposed Item 5(b) of Form N-1A.
---------------------------------------------------------------------------

    We request comment generally on these technical and conforming 
amendments, and specifically on the following issues:
    269. Are these technical and conforming amendments appropriate in 
light of the other changes contemplated by our proposal?
    270. Are there any additional technical or conforming amendments 
that should be made in order to fully implement the proposed changes in 
this rulemaking? For example, should we update cross-references in 
Forms N-4 and N-6 to the current fee table in Form N-1A (which would be 
revised under our proposal to become a summary table), even though 
those cross-references are with regard to the line-item ``Total Annual 
Fund Operating Expenses'' which would not be changed under our proposal 
and thus would be identical in both the summary fee table and the full 
fee table? If so, why?
    271. Are there any proposed technical or conforming amendments that 
we should not make, or should modify? For example, should forms cross-
referencing the current fee table in Form N-1A continue to reference 
that same fee table, even though that fee table would be revised under 
our proposal to become a summary fee table? If so, why?

N. Compliance Date

    We propose to provide a transition period after the effective date 
of the amendments to give funds sufficient time to adjust their 
prospectus and shareholder report disclosure practices and to provide 
sufficient time to comply with the new fee and expense requirements for 
investment company advertisements, as described below. We are proposing 
generally a compliance date of 18 months after the amendments' 
effective date. Based on our experience, we believe the proposed 
compliance dates would provide an appropriate amount of time for funds 
to comply with the proposed rules.\698\
---------------------------------------------------------------------------

    \698\ For example, the proposed compliance dates are generally 
consistent with the compliance dates the Commission has provided for 
similar disclosure-based amendments. See Variable Contract Summary 
Prospectus Adopting Release, supra footnote 27, at section II.G.
---------------------------------------------------------------------------

     Shareholder reports and related requirements. All 
shareholder reports for funds registered on Form N-1A would have to 
comply with Item 27A of Form N-1A if they are transmitted to 
shareholders 18 months or more after the effective date. These funds 
also would have to comply with the amendments to rule 30e-1 and Form N-
CSR no later than 18 months after the effective date by, among other 
things, meeting the website availability requirements for the new Form 
N-CSR items.
     Rule 30e-3 and related amendments. We propose that the 
amendments to the scope of rule 30e-3, and conforming amendments to 
Form N-1A and rule 498 to remove legends required by rule 30e-3, would 
be effective 18 months after final rules are adopted to provide time 
for funds relying on rule 30e-3 to transition to the proposed 
disclosure framework.
     Rule 498B. Funds could rely on rule 498B to satisfy 
prospectus delivery requirements for existing shareholders beginning on 
the effective date of the rule, provided the fund is also in compliance 
with the amendments to

[[Page 70807]]

Item 27A of Form N-1A, rule 30e-1, and Form N-CSR.
     Amended prospectus disclosure. We propose that funds would 
have 18 months after the effective date to comply with the amendments 
to prospectus disclosure in Form N-1A, including the fee summary and 
revised principal risk disclosure.
     Amended advertising rules. We propose to provide 18 months 
after the effective date for investment company advertisements to 
comply with the amendments to rules 482, 433, and 34b-1. We do not 
propose to provide an additional compliance period for the amendments 
to rule 156 after the amended rule is effective.
    We request comment on the proposed compliance and effective dates, 
including the following:
    272. Are the proposed compliance dates appropriate? If not, why 
not? Is a longer or shorter period necessary to allow registrants to 
comply with one or more of these particular amendments? If so, which 
proposed amendments, and what would be an appropriate compliance date?
    273. Is the proposed effective date for the rule 30e-3 amendments 
appropriate? Should the effective date of the rule 30e-3 amendments 
align with the proposed compliance date for the other shareholder 
report-related amendments, as proposed? If not, why not?
    274. Should we allow funds to begin to rely on proposed rule 498B 
as soon as the rule is effective, provided they comply with the 
amendments to Item 27A of Form N-1A, rule 30e-1, and Form N-CSR? If 
not, why not?

III. Economic Analysis

O. Introduction

    We are mindful of the costs imposed by, and the benefits obtained 
from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the 
Securities Act, and section 2(c) of the Investment Company Act state 
that when the Commission is engaging in rulemaking under such titles 
and is required to consider or determine whether the action is 
necessary or appropriate in (or, with respect to the Investment Company 
Act, consistent with) the public interest, the Commission shall 
consider whether the action will promote efficiency, competition, and 
capital formation, in addition to the protection of investors. Further, 
section 23(a)(2) of the Exchange Act requires the Commission to 
consider, among other matters, the impact such rules would have on 
competition and states that the Commission shall not adopt any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The following 
analysis considers, in detail, the potential economic effects that may 
result from the proposed rule and amendments, including the benefits 
and costs to investors and other market participants as well as the 
broader implications of the proposal for efficiency, competition, and 
capital formation.
    The proposed rule would affect the provision of information by 
funds to investors, including existing fund shareholders and new or 
prospective fund investors.\699\ For example, under the proposal funds 
would provide existing shareholders with more concise and visually 
engaging shareholder reports that highlight key information, including 
fund expenses, performance, and holdings.\700\ The proposed rule would 
also affect how funds transmit shareholder reports. Under the proposal, 
funds would not be permitted to deliver paper notices regarding the 
online availability of shareholder reports in reliance on rule 30e-3. 
Instead, funds would deliver the more concise shareholder report in 
full.\701\ Through a layered disclosure framework, additional 
information that may be of interest to market professionals and some 
shareholders, such as fund financial statements, would be available 
online and delivered in paper or electronic format upon request, free 
of charge.\702\ Further, instead of delivering annual prospectus 
updates to existing shareholders, funds would have the option to notify 
shareholders promptly of certain material changes to the fund, provided 
the prospectus is available online and delivered upon request, free of 
charge.\703\
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    \699\ The term ``fund' in this proposal includes all Form N-1A 
filers, except where otherwise indicated.
    \700\ See supra Sections II.B and II.C.
    \701\ See supra Section II.G.
    \702\ See supra Section II.D.
    \703\ See supra Section II.F.
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    In addition to amendments that would primarily affect existing fund 
shareholders, the proposed rule would amend prospectus disclosure 
regarding fees and expenses and principal risk, which we expect to 
primarily affect new or prospective investors in a fund.\704\ Finally, 
to improve fee and expense information that is available to investors 
more generally, we propose to amend the investment company advertising 
rules to require that investors receive more transparent and consistent 
fee and expense information.\705\
---------------------------------------------------------------------------

    \704\ See supra Section II.H.
    \705\ See supra Section II.I.
---------------------------------------------------------------------------

    We expect the proposed rule to benefit investors by permitting them 
to make more efficient use of their time and attention, and by 
facilitating informed investment decisions and choice among financial 
products. We expect some funds to experience lower costs of delivering 
materials under the proposal, which may be passed on to investors as a 
further benefit of the proposal, while other funds may experience 
increased delivery costs that would be a cost of the proposal to the 
shareholders of those funds.

P. Economic Baseline and Affected Parties

1. Descriptive Industry Statistics
    The proposed rule would affect funds and investors who receive fund 
disclosure under the current rules.\706\ Approximately 101.6 million 
individuals own shares of registered investment companies, representing 
57.2 million (or 44.8%) of U.S. households. An estimated 99.5 million 
individuals own shares of mutual funds in particular, representing 56.0 
million (or 43.9%) of U.S. households.\707\ The assets of all 
registered investment companies exceeded $21 trillion at year-end 2018, 
having grown from about $5.8 trillion at the end of 1998.\708\ Based on 
staff analysis of Form N-CEN filings, we estimate that, as of March 
2020, the number of funds that could be affected by the proposed 
amendments to disclosure and delivery requirements for prospectuses and 
shareholder reports is 12,410, including 10,310 mutual funds and 2,100 
ETFs that register on Form N-

[[Page 70808]]

1A.\709\ As of March 2020, the 10,310 mutual funds (i.e., series of 
trusts registered on Form N-1A) had average total net assets of $25 
trillion and 33,785 authorized share classes.\710\ The 2,100 ETFs 
(i.e., series, or classes of series, of trusts registered on Form N-1A) 
had average total net assets of $3.2 trillion as of March 2020.
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    \706\ The vast majority (89%) of mutual fund shares are 
estimated to be held through retail accounts. See 2019 ICI Fact 
Book, available at https://www.ici.org/pdf/2019_factbook.pdf. Based 
on staff analysis of Form 13F data, the mean institutional holding 
is estimated to be approximately 48% for exchange-traded funds. We 
calculated ``institutional holding'' as the sum of shares held by 
institutions (as reported on Form 13F filings) divided by shares 
outstanding (as reported in CRSP). Year-end 2018 Form 13F filings 
were used to estimate institutional ownership. We note that there 
are long-standing questions around the reliability of data obtained 
from Form 13F filings. See Covered Investment Fund Research Reports, 
Investment Company Act Release No. 33311 (Nov. 30, 2018) [83 FR 
64180, 64199 (Dec. 13, 2018)], at n.223; see also Reporting 
Threshold for Institutional Investment Managers, Exchange Act 
Release No. 89290 (July 10, 2020) [85 FR 46016] (July 31, 2020), at 
n.63 (proposing certain technical amendments to Form 13F that the 
Commission believes may reduce filer mistakes and data 
inaccuracies).
    \707\ See 2019 ICI Fact Book, supra footnote 706. Among mutual 
fund-owning households, 63% held funds outside employer-sponsored 
retirement accounts, with 20% owning funds only outside such plans.
    \708\ See id.
    \709\ These estimates are based on staff analysis of Form N-CEN 
filings received through March 2020 and Bloomberg data.
    \710\ The estimate of the number of authorized share classes is 
based on responses to Form N-CEN, Item C.2.a., and includes non-ETF 
share classes of multi-class ETFs.
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    Funds may invest in other funds under section 12(d)(1) of the Act 
and the rules thereunder.\711\ We estimate that approximately 30% of 
funds invest in such acquired funds.\712\ Most acquiring funds invest 
10% or less of their total assets in acquired funds (excluding money 
market funds).\713\ For funds with more than 10% of their total assets 
in acquired funds, the majority invest more than 20% of their total 
assets in the acquired funds. We estimate that approximately 32% of 
funds that invest in acquired funds invest more than 10% of their total 
assets in acquired funds, and that approximately 28% invest more than 
20% of their total assets in acquired funds. Thus, a large share (88%) 
of the funds with more than 10% invested have more than 20% of their 
total assets invested in acquired funds.\714\
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    \711\ 15 U.S.C. 80a-12(d)(1); see also 17 CFR 270.12d1-1 through 
270.12d1-3.
    \712\ See Fund of Funds Proposing Release, supra footnote 608, 
at paragraph accompanying n.242.
    \713\ This analysis excludes money market fund holdings from 
acquired fund investments because the proposed amendments to 
prospectus AFFE disclosure exclude money market fund holdings from 
the calculation of a fund's investments in acquired funds. Thus, for 
purposes of this discussion, an ``acquired fund'' does not include a 
money market fund. See also supra footnote 619. The estimates of 
acquired fund holdings are based on staff's analysis of Form N-PORT 
filings received through early June 2020.
    \714\ 0.28 = 0.32 x 0.88. We further estimate that approximately 
4% of acquiring funds invest between 10% and 20% of their total 
assets in acquired funds (0.04 = 0.32-0.28).
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    The scope of the proposed advertising rule amendments is broader 
than that of the other elements of the proposal. The advertising rule 
amendments would apply to other registered investment companies and to 
BDCs, in addition to mutual funds and ETFs. As of March 2020, there 
were 1,388 other registered investment companies, including 665 
registered closed-end funds, 14 funds that could file registration 
statements or amendments to registration statements on Form N-3, and 
709 UITs.\715\ As of March 2020, there were 87 BDCs with $139 billion 
in total assets.\716\
---------------------------------------------------------------------------

    \715\ We estimate that all registered investment companies would 
be affected by the advertising rule amendments. Based on staff 
analysis of Form N-CEN filings received through March 2020, this 
includes all mutual funds and ETFs; 665 closed-end funds registered 
on Form N-2, with average total net assets of $335 billion; 14 
variable annuity separate accounts registered as management 
investment companies on Form N-3, with total assets of $234 billion; 
and 709 UITs, with total assets of $2.0 trillion (including 5 ETFs 
that are registered as UITs with total assets of $338 billion).
    \716\ To estimate the number of BDCs, we use data from Form 10-K 
and Form 10-Q filings from the first quarter of 2020. Our estimates 
exclude BDCs that may be delinquent, wholly owned subsidiaries of 
other BDCs, and BDCs in master-feeder structures.
---------------------------------------------------------------------------

    The proposal would also affect financial intermediaries and other 
third parties that are involved in the distribution and use of the 
prospectus and shareholder reports, such as broker-dealers and third-
party information providers. We understand that most fund investors are 
not direct shareholders of record, but instead engage an investment 
professional and hold their fund investments as beneficial owners 
through accounts with intermediaries such as broker-dealers.\717\ As a 
result, intermediaries commonly distribute fund materials to beneficial 
owners, including shareholder reports and annual prospectus updates. In 
the case of broker-dealers, self-regulatory organization (``SRO'') 
rules provide that broker-dealer member firms are required to 
distribute annual reports, as well as ``interim reports,'' to 
beneficial owners on behalf of issuers, so long as an issuer (i.e., the 
fund) provides satisfactory assurance that the broker-dealer will be 
reimbursed for expenses (as defined in SRO rules) incurred by the 
broker-dealer for distributing the materials.\718\ Based on information 
reported on Form BD, we estimate that 2,016 broker-dealers sell 
registered investment companies' shares and may deliver prospectuses or 
shareholder reports that would be affected by the proposal.
---------------------------------------------------------------------------

    \717\ By one estimate, approximately 75% of accounts are held 
through brokers and other intermediaries, excluding positions held 
in employer-sponsored plans. See Rule 30e-3 Adopting Release, supra 
footnote 14, at n.275.
    \718\ See NYSE rule 465(2); NYSE rules 451(a)(1) and (2); FINRA 
rule 2251(e)(1)(C); FINRA rule 2251.01.
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2. Fund Prospectuses
    The prospectus is the main selling document of the fund and is 
designed to provide forward-looking information and certain historical 
information to new shareholders and prospective shareholders with no 
existing investment in the fund. Funds deliver a prospectus to new 
shareholders in connection with the initial purchase, and prospectuses 
are designed to inform investment decisions and help investors compare 
funds. Funds typically update their prospectuses annually within 120 
days of fiscal year-end.\719\ Funds also may supplement or ``sticker'' 
their prospectuses to update the disclosure at other times during the 
year when material or other changes occur.\720\
---------------------------------------------------------------------------

    \719\ See supra footnote 20 and accompanying text.
    \720\ See supra footnote 13 and accompanying text.
---------------------------------------------------------------------------

    Funds (or intermediaries) are generally required to deliver a fund 
prospectus to an investor in connection with a purchase of fund shares. 
Rule 498 enables funds to deliver the summary prospectus rather than 
the statutory prospectus if they meet certain conditions.\721\ We 
estimate that 93 percent of funds deliver a summary prospectus in 
reliance on rule 498, and the remaining seven percent of funds deliver 
the statutory prospectus. According to one academic study, the average 
summary prospectus is 6.77 pages.\722\ Based on a review of fund 
websites, the staff has found similar page lengths in summary 
prospectuses. In a sample from 2020, for example, the staff found that 
summary prospectus page lengths varied around an average of 8 pages at 
the mean and median, and that summary prospectuses were shorter than 
statutory prospectuses, which varied in length around a mean of 128 
pages and median of 75 pages. We estimate that currently the average 
summary prospectus length is 8 pages and the average statutory 
prospectus length is 128 pages.
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    \721\ Rule 498 has been in place since 2009. Funds delivered the 
statutory prospectus to all investors before that time.
    \722\ See Anne M. Tucker & Yusen Xia, Investing in the Dark: 
Investment Company Disclosure Qualities, Content & Compliance (SSRN, 
Sept. 1, 2019) (``Tucker and Xia''), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3436952 (estimating 
that, in 2018, the summary prospectus was 6.77 pages, based on 
estimated page number lengths from mean and median counts by year).
---------------------------------------------------------------------------

    In addition to sending prospectuses to new investors, funds 
typically send an annual prospectus update to ongoing shareholders each 
year, and may deliver prospectus stickers to shareholders to update the 
disclosure at other times.\723\ The form (i.e., summary prospectus or 
statutory prospectus) and length of the annual prospectus update a fund 
delivers to ongoing shareholders is the same as that of the prospectus 
it delivers to new investors. The annual prospectus update provides 
continuing shareholders with access to information about material fund 
changes, such as in the fund's fees or principal investment 
strategy.\724\ The disclosure format of the

[[Page 70809]]

prospectus, however, does not highlight or explain the material 
changes. We estimate that funds, on average, deliver one annual 
prospectus update each year and one prospectus sticker every other year 
to disclose material changes to the fund.\725\ Funds also are required 
to file their prospectuses on EDGAR. In addition, funds often provide 
their prospectuses on their websites. The extent to which funds 
currently publish prospectuses to their public websites is influenced 
by Commission rules. If a fund delivers a summary prospectus under rule 
498 (which an estimated 93 percent of funds do), then its summary and 
statutory prospectuses and its SAI must be available on the website 
identified at the beginning of the summary prospectus.\726\ As for the 
SAI, in addition to its typical availability online, funds must file it 
on EDGAR. Funds generally do not deliver SAIs to investors (although a 
fund must deliver it to an investor on request).
---------------------------------------------------------------------------

    \723\ See supra footnote 11 and accompanying text.
    \724\ Funds are required to update the prospectus at or before 
the time their financials are 16 months old under section 10(a)(3) 
of the Securities Act. In addition, Investment Company Act rule 8b-
16(a) requires funds to amend their Investment Company Act 
registration statements within 120 days after the close of each 
fiscal year.
    \725\ This estimate is based on the average number of summary 
prospectuses funds filed in 2018 and 2019, excluding multiple 
summary prospectuses filed on the same day and adjusted to recognize 
that funds may not deliver prospectus stickers to notify 
shareholders of certain changes. See, e.g., ICI Comment Letter II; 
Fidelity Comment Letter. This estimate is an average, and funds may 
deliver more or fewer prospectus-related disclosures to shareholders 
in a given year.
    \726\ See supra footnote 12.
---------------------------------------------------------------------------

    Among other things, prospectuses include information about a fund's 
investment objective, principal investment strategy, fees and expenses, 
principal risks, performance, investment adviser, and portfolio 
managers. Funds must provide certain of this information--including 
investment objectives, fees and expenses, principal investment 
strategies, principal risks, and performance--in a structured data 
format.\727\ With respect to principal risk disclosure in particular, 
the length of this disclosure has been growing over time, and funds 
sometimes order their risks alphabetically instead of by importance. 
One academic study found that fund risk disclosure in the summary 
prospectus had nearly doubled in length between 2010 and 2018.\728\ 
Based on staff analysis, the median number of principal risks listed in 
fund prospectuses grew from 11 in 2016 to 13 in 2018, and almost half 
of the principal risk disclosures generally were in alphabetical 
order.\729\
---------------------------------------------------------------------------

    \727\ See General Instruction C.3(g) of current Form N-1A.
    \728\ See Tucker and Xia, supra footnote 722, at 27 and 28.
    \729\ These figures are based on staff analysis of a sample of 
485BPOS, 485APOS, and 497 filings on EDGAR in XBRL format. Analysis 
of whether funds tend to list principal risks in alphabetical order 
is based on normalized inversion counts. We recognize that the 
length and the ordering of risks varies across funds. The average 
number of principal risks for funds in this sample is 12.7 in 2016 
and 13.9 in 2018.
---------------------------------------------------------------------------

    Funds disclose their fees and expenses in the prospectus fee table. 
Some fees and expenses are directly attributed to the fund's 
operations, while others are indirect. For example, some fees and 
expenses are attributable to the fund only through its investments in 
other funds). These indirect fund expenses generally appear in a 
separate AFFE line item in the fee table.\730\ Currently, regardless of 
the size of a fund's investments in the acquired funds, AFFE is a 
component of the line items that, summed together, produce the fund's 
bottom-line annual fund operating expenses in its fee table. 
Differences in the operating expense disclosures of different funds may 
thus reflect differences in their operations or differences in the 
operations of their acquired funds.
---------------------------------------------------------------------------

    \730\ See supra Section II.H.1.g.
---------------------------------------------------------------------------

3. Fund Shareholder Reports
    Funds provide information about their past operations and 
activities to investors through periodic shareholder reports. Funds 
send shareholder reports to ongoing shareholders twice-annually. Thus, 
shareholders receive both a semi-annual and an annual report from the 
fund. Shareholder reports provide backward-looking information about a 
fund's performance (in the case of an annual report), expenses, 
holdings, and other matters (e.g., statements about the fund's 
liquidity management program, the basis for approval of an investment 
advisory contract, and the availability of additional information about 
the fund). These reports also include financial statements, which 
include audited financials in the annual report. Shareholder reports 
can be quite long. The average length of a shareholder report exceeds 
100 pages. Based on staff analysis of shareholder reports available on 
fund websites, we estimate that the average annual report length is 134 
pages and the average semi-annual report length is 116 pages, or 86% of 
the average length of a fund's annual report.\731\ The length and 
complexity of these materials can make them difficult for some 
shareholders to use and understand.
---------------------------------------------------------------------------

    \731\ According to one estimate, the annual report was 114 pages 
long on average in 2016. See Comment Letter of Investment Company 
Institute (Mar. 14, 2016) on File No. S7-08-15, at n.49, available 
at https://www.sec.gov/comments/s7-08-15/s70815-581.pdf.
---------------------------------------------------------------------------

    Funds must deliver the shareholder reports to shareholders. Funds 
also must file the shareholder reports on EDGAR on Form N-CSR. In 
addition, funds often provide their shareholder reports on their 
websites. The extent to which funds currently publish shareholder 
reports on public websites is influenced by Commission rules. All funds 
that rely on rule 498 to deliver summary prospectuses are required to 
make their shareholder reports available online at the website address 
identified at the beginning of the summary prospectus; as a result, we 
estimate that at least 93% of funds currently provide their shareholder 
reports on websites.\732\ Form N-CSR filings include information other 
than shareholder reports. This information is filed on EDGAR but is not 
required to be delivered or otherwise available online.
---------------------------------------------------------------------------

    \732\ In addition, a fund relying on rule 30e-3 would be 
required to make its shareholder reports publicly accessible on a 
website. In the case of rule 30e-3, the shareholder report must be 
available at the website address specified in the notice the fund 
would send to shareholders under the rule. Funds that rely on rule 
30e-3 would also be required to make their complete portfolio 
holdings for each quarter available online. To the extent that any 
funds not currently relying on rule 498 to deliver summary 
prospectuses start to rely on rule 30e-3 beginning as early as 
January 1, 2021, the number of funds providing their shareholder 
reports on websites would be greater than 93%.
    \733\ See supra footnote 21.
---------------------------------------------------------------------------

4. Delivery of Fund Prospectuses and Shareholder Reports
    Under Commission rules and guidance, delivery of fund prospectuses 
and shareholder reports occurs by paper or email, depending on the 
investor's expressed preference. The Commission has provided guidance 
permitting electronic delivery of required disclosure materials under 
certain circumstances.\733\ Under this guidance, funds can transmit 
shareholder reports, prospectuses, or other materials electronically in 
lieu of paper delivery if they satisfy certain conditions relating to 
investor notice, access, and evidence of delivery. Funds (or 
intermediaries) relying on this guidance typically obtain an investor's 
informed consent to electronic delivery to satisfy the ``evidence of 
delivery'' condition. Fund investors that have elected electronic 
delivery typically receive an email that contains a link to where the 
materials are available online. The proportion of shareholders who 
elect to receive fund disclosure by email varies among funds. By one 
estimate, the average enrollment rate for electronic delivery is 19.35% 
for direct-held positions (i.e., shares purchased directly through an 
account

[[Page 70810]]

with the fund) and 55% for beneficial positions (i.e., shares purchased 
through an account with an intermediary).\734\
---------------------------------------------------------------------------

    \734\ See Putnam Comment Letter.
---------------------------------------------------------------------------

    With respect to shareholder reports, there is also an alternative 
means of delivery. On June 5, 2018, the Commission adopted rule 30e-3 
to provide an optional method for satisfying obligations to transmit 
shareholder reports by making them accessible online. Starting in 2021, 
under rule 30e-3, fund shareholders who would otherwise receive 
shareholder reports in paper may instead receive a short paper notice 
that a semi-annual or annual report is available online. Rule 30e-3 
does not modify the delivery method for shareholders who request to 
receive reports in paper or elect to receive reports 
electronically.\735\ Funds that intend to rely on rule 30e-3 before 
2022 must provide notice to shareholders in their prospectuses and 
shareholder reports. Under rule 30e-3, what shareholders see when they 
access the report does not vary in substance or length according to 
whether they view the report online or request a paper copy of the 
report.\736\ Yet delivery of the report tends to be less costly for 
funds that choose to rely on rule 30e-3 than funds that do not choose 
to rely on rule 30e-3 because printing and mailing costs are lower for 
a short paper notice as opposed to a full-length report.\737\
---------------------------------------------------------------------------

    \735\ Rule 30e-3 requires the fund to deliver shareholder 
reports in paper to those shareholders who expressly opt in to paper 
delivery. For funds that rely on rule 30e-3, other shareholders who 
have not consented to electronic delivery would receive a link to 
the shareholder report in a paper notice from the fund.
    \736\ See supra Section III.B.3.
    \737\ Shareholders of funds that rely on rule 30e-3 may request 
paper copies of the full report, which may reduce the cost savings 
associated with rule 30e-3 if many shareholders make these requests. 
We previously estimated that registered investment companies relying 
on rule 30e-3 would incur approximately $70.6 million per year to 
print and mail notices and approximately $5.7 million per year to 
print and mail shareholder reports upon request. See Rule 30e-3 
Adopting Release, supra footnote 14, at nn.414 and 415 and 
accompanying text.
---------------------------------------------------------------------------

    We estimate that 86 percent of funds registered on Form N-1A plan 
to rely on rule 30e-3 before 2022.\738\ We understand that the number 
could increase or decrease over time, depending on fund and investor 
experience with the new practice. The Commission previously estimated 
aggregated costs of $11 million during the transition period for funds 
to add statements to their shareholder reports and prospectuses 
notifying shareholders of the fund's intent to rely on rule 30e-3. This 
includes costs of approximately $7.1 million in the first year and 
approximately $4.3 million in the second year.\739\ In addition, funds 
may have incurred costs in anticipation of relying on rule 30e-3 that 
include costs of tracking how many investors request continued delivery 
by paper mail under rule 30e-3. This is because rule 30e-3 allows 
shareholders to elect--at any time--to receive all future reports in 
paper, or request particular reports in paper on an ad hoc basis.
---------------------------------------------------------------------------

    \738\ Our estimate reflects the percent of open-end funds 
registered on Form N-1A that included a statement notifying 
investors of their intent to rely on rule 30e-3 in annual or semi-
annual reports filed on Form N-CSR in 2019. The estimate excludes 
any funds that may plan to rely on rule 30e-3 after the rule's 
extended transition period ends on January 1, 2022 and, thus, are 
not required to provide this notice to investors. In a June 2019 
survey, ICI found that 97 percent of member funds responding to the 
survey planned to rely on rule 30e-3. See ICI Comment Letter II.
    \739\ See Rule 30e-3 Adopting Release, supra footnote 14, at 
nn.419 and 420 and accompanying text (estimating costs of $7,144,872 
associated with amendments to rule 498 and Form N-1A in the first 
year and costs of $4,286,980 associated with amendments to rule 498 
and Form N-1A in the second year).
---------------------------------------------------------------------------

    In adopting rule 30e-3, the Commission understood that it would 
reduce the allocation of resources to printing and mailing of reports, 
depending on how many funds choose to rely on the rule. At that time, 
the Commission estimated that annual printing and mailing costs 
(inclusive of processing fees) for shareholder reports were 
approximately $20,707.33 per fund absent rule 30e-3.\740\ Based on the 
current number of funds, the aggregate costs would be approximately 
$257.0 million.\741\ At the time of adoption, the Commission estimated 
that 90 percent of funds would choose to rely on rule 30e-3. Based on 
the current number of funds, this would result in reduced printing and 
mailing costs for funds of approximately $231.3 million.\742\ Under our 
current estimate of the proportion of funds relying on rule 30e-3, 
which is 86%, the annual savings in printing and mailing costs for 
funds will decline from approximately $231.3 million to $221.0 
million.\743\ The estimated aggregate printing and mailing costs for 
funds' shareholder reports in 2021 depends on whether and how fully 
funds achieve the projected savings for rule 30e-1 by that year. We 
expect the aggregate printing and mailing costs (inclusive of 
processing fees) to range between $36.0 million and $257.0 million in 
2021, without the proposal, depending on how fully funds have realized 
the projected savings from reliance on rule 30e-3.\744\ For example, we 
would expect the costs to be closer to the lower end of the range if 
most or all of the 86% of funds are able to rely on the rule to 
transmit annual and semi-annual reports in 2021, while we would expect 
the costs to be closer to the higher end of the range if many of these 
funds are still subject to rule 30e-3's transition period for some or 
all of 2021.\745\
---------------------------------------------------------------------------

    \740\ See id. at n.353.
    \741\ $20,707.33 x 12,410 funds = $256,977,965 = $257.0 million.
    \742\ See Rule 30e-3 Adopting Release, supra footnote 14, at 
n.372 and accompanying text (using an approach to estimate gross 
aggregate annual savings of printing and mailing costs as the 
aggregate annual printing and mailing costs multiplied by the 
percentage of funds expected to rely on rule 30e-3). $256,977,965 x 
90% = $231.3 million.
    \743\ $256,977,965 x 86% = $221,001,050.
    \744\ $256,977,965-$221,001,050 = $35,976,915.
    \745\ See rule 30e-3(i) (generally requiring funds to include 
required statements about rule 30e-3 in their prospectuses and 
shareholder reports for a period of two years prior to relying on 
the rule).
---------------------------------------------------------------------------

    A summary of the delivery scenarios that would occur without the 
proposal, along with typical delivery outcomes, appears in table 7 
below. As indicated, the baseline delivery outcomes vary across funds 
and shareholders, according to their expressed preferences and 
circumstances:
BILLING CODE 8011-01-P

[[Page 70811]]

[GRAPHIC] [TIFF OMITTED] TP05NO20.003

BILLING CODE 8011-01-C

[[Page 70812]]

5. Investor Use of Fund Disclosure
    Based on responses to the Fund Investor Experience RFC and results 
of prior investor testing and surveys,\746\ the Commission understands 
that investors find that the information currently provided to them is 
overly long and difficult to understand. Investors have expressed 
concern about the length of the materials.\747\ Many investors have 
also suggested that fund disclosure is too complex or technical.\748\ 
For example, one survey reported that 67% of surveyed investors found 
shareholder reports difficult to understand, and another found the 
number to be higher, 72%.\749\ Some investor surveys suggest that many 
investors review little, if any, of funds' shareholder reports.\750\
---------------------------------------------------------------------------

    \746\ See supra Section I.B.
    \747\ See, e.g., Rojas Comment Letter (``I receive too much 
information. It is too long and too complex.); Franco Comment 
Letter; Nevin Comment Letter; Woods Comment Letter; David Comment 
Letter (stating that fund disclosures are too overwhelming to be 
useful).
    \748\ See supra footnotes 32 through 36 and accompanying text.
    \749\ See Broadridge Comment Letter I (stating that 72% of 
surveyed investors that review mutual fund or ETF disclosures do not 
find them easy to understand); ICI Investor Testing (stating that 
67% of surveyed mutual fund investors who recalled receiving fund 
shareholder reports indicated that the reports are difficult to 
understand).
    \750\ See supra footnote 40 and accompanying text.
---------------------------------------------------------------------------

    In addition, some investors have expressed concern about the fee 
information that funds disclose.\751\ Many investors responding to the 
Fund Investor Experience RFC expressed the view that funds do not 
clearly disclose their fees and expenses. This may indicate that they 
do not make effective use of the fee information that is provided under 
the current requirements. Several of these investors expressed support 
for simplifying fee presentations by, for example, reducing the number 
of line items in the prospectus fee table or providing only one 
``bottom-line'' number showing the fees associated with an investment 
in the fund. Some commenters suggested that funds should disclose fees 
in terms of dollars rather than percentages to make the disclosure more 
understandable to investors.\752\ Some commenters have suggested that 
disclosing AFFE in the fee table may confuse investors because the fee 
table does not reflect similar indirect expenses of the fund and 
combining the fund's operating expenses with indirect AFFE does not 
align with the fund's financial statements.\753\
---------------------------------------------------------------------------

    \751\ See supra Section I.B.2.
    \752\ See supra footnote 63 and accompanying text.
    \753\ See, e.g., Chapman and Cutler Fund of Funds Comment 
Letter; Invesco Fund of Funds Comment Letter.
---------------------------------------------------------------------------

    Investors also indicate that prospectus risk disclosures are 
difficult to understand,\754\ and this may mean that such disclosures 
currently are difficult to incorporate into investment decisions. For 
example, many investors responding to the Fund Investor Experience RFC 
suggested that disclosure about a fund's risks is too long. Some 
investors suggested that funds should order risks by importance or 
otherwise better focus their risk disclosures.
---------------------------------------------------------------------------

    \754\ See supra Section I.B.2.
---------------------------------------------------------------------------

6. Fund Advertisements
    The Commission rules on investment company advertising apply to all 
registered investment companies and BDCs. These rules largely focus on 
how certain types of funds present their performance in advertisements. 
This focus reflects the Commission's acknowledgement that investors use 
information about performance to choose among funds and concern that, 
absent requirements to standardize how funds present performance in 
advertisements, investors may be susceptible to basing their investment 
decisions on information that is inaccurate or creates an inaccurate 
impression of the fund's performance.\755\
---------------------------------------------------------------------------

    \755\ See Rule 156 Adopting Release, supra footnote 662; 
Investment Company Sales Literature Interpretive Rule, Investment 
Company Act Release No. 10621 (Mar. 8, 1979) [44 FR 16935 (Mar. 20, 
1979)], at paragraph accompanying n.5.
---------------------------------------------------------------------------

    In recent years, many funds have reduced their fees they impose on 
investors. The staff has observed that some funds have highlighted low 
fees in their advertising materials as a salient factor for investors 
to consider when choosing among funds. For example, we understand that 
some funds are advertised as ``zero expense'' or ``no expense'' funds 
based on the information included in their prospectus fee tables, 
potentially leading investors to believe these funds impose no costs 
even though the adviser or an affiliate may be collecting fees (e.g., 
securities lending costs) from the investor's fund investment. As a 
result, investors may be more likely today to consider a fund's fees 
when making their investment choices than they were when the Commission 
last updated the investment company advertising rules.\756\ Also as a 
result, funds may face increased incentives to understate or obscure 
fees in their advertising materials.
---------------------------------------------------------------------------

    \756\ See, e.g.,Michael Goldstein, Issues Facing the U.S. Money 
Management Industry: Presentation to SEC Asset Management Advisory 
Committee, at 27-28, available at https://www.sec.gov/files/Empirical-Research-Issues-Facing-US-MM.pdf; Ben Phillips, >Remarks 
and Discussion: U.S. Securities and Exchange Commission, Asset 
Management Advisory Committee, at 2, 8, and 15 (Jan. 14, 2020), 
available athttps://www.sec.gov/files/BenPhillips-CaseyQuirk-Deloitte.pdf.
---------------------------------------------------------------------------

    Advertising can reduce information asymmetries with implications 
for investor search costs and effects on investor choices and 
investment outcomes. Lower search costs can lead to more efficient 
matches between investor preferences and choices. Advertising can also 
make investors worse off, however.\757\ It depends on the abilities of 
investors to make effective use of the information that the advertising 
conveys. On the one hand, a fund advertisement can convey information 
that reduces information asymmetry between the fund and the investor. 
The effects can be lower search costs for the investor and a lesser 
chance of a mismatch between the investor's preferences and the fund 
that is ultimately chosen. However, investors may respond to 
advertising in ways that are not consistent with their own interests. 
The effectiveness of the advertising in lowering search costs and 
improving match efficiency depends on the investor's ability to 
understand the information. For example, a positive relation between 
funds' marketing efforts and investor flows (cash investment from 
investors) is well-documented among mutual funds.\758\ In that context, 
the adviser to the fund bears marketing expenses as part of its total 
operating cost, and fund shareholders are found to bear some of that 
cost in the form of fund expenses--unless shareholders react by 
switching to a similar fund that has lower expenses. One study observed 
that funds charge higher fees to cover the marketing cost as they 
engage in an ``arms race'' for similar pools of

[[Page 70813]]

investors.\759\ Some of this cost is passed on to investors according 
to their abilities to distinguish among funds. The authors suggest that 
as fees increase, investors with a high search cost would be more 
likely to be made worse off by the increase in fees and related 
marketing expenditures than those with low search costs. This is 
because the investors with the high search costs would be more likely 
to match with asset managers of poor ability, and because the higher 
fees would reduce returns.
---------------------------------------------------------------------------

    \757\ See, e.g., Nikolai Roussanov, Hongxun Ruan, & Yanhao Wei, 
Marketing Mutual Funds, Nat'l Bureau of Econ. Research, Working 
Paper No. 25056 (2018) (developing and estimating a structural model 
of the effects of mutual fund marketing with costly investor 
search).
    \758\ See, e.g., Prem Jain & Joanna Wu, Truth in Mutual Fund 
Advertising: Evidence on Future Performance and Fund Flows, 2 J. FIN 
937 (2000) (finding that advertising in funds increases flows 
(comparing advertised funds with non-advertised funds closest in 
returns and with the same investment objective)); Gallaher, Kaniel & 
Starks (2006) and Kaniel & Parham (2016) (finding a significant and 
positive impact of advertising expenditures and the resulting media 
prominence of the funds on fund inflows). Steven Gallaher, Ron 
Kaniel & Laura T. Starks, Madison Avenue Meets Wall Street: Mutual 
Fund Families, Competition and Advertising (SSRN, Jan. 2006) 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=879775; Ron Kaniel & Robert Parham, WSJ 
Category Kings--The Impact of Media Attention on Consumer and Mutual 
Fund Investment Decisions, 123 J. Fin. Econ. 1 (2016).
    \759\ See Roussanov, Ruan, & Wei, supra footnote 757.
---------------------------------------------------------------------------

    Under current rules, fund advertising may influence investor choice 
in ways that depend on the ability of the investor to make effective 
use of the information in the advertisement. When the investor is able 
to make effective use of the information, advertising can reduce the 
investor's search cost and thereby improve the efficiency of the match 
between the investor's choices and preferences.

Q. Costs and Benefits

    Where possible, we have attempted to quantify the costs, benefits, 
and effects on efficiency, competition, and capital formation expected 
to result from the proposed rule. We are providing both a qualitative 
assessment and quantified estimates of the potential economic effects 
of the proposed amendments where feasible. As explained in more detail 
below, because we do not have, and in certain cases do not believe we 
can reasonably obtain reliable quantitative evidence to use as a basis 
for our analysis, we are unable to quantify certain economic effects. 
For example, because the proposed rule would provide fund investors 
with more tailored, concise disclosure than they currently receive, it 
is possible that readership of fund disclosure may increase. We do not 
have reliable quantitative estimates of the extent to which the use of 
more concise disclosure would enhance readership compared to the 
baseline scenario in which funds continue to deliver the materials that 
investors now receive. Similarly, the format and content of the 
proposed annual and semi-annual reports could reduce the amount of time 
and effort shareholders require to monitor their fund investments and 
make portfolio decisions (that is, whether to buy additional shares, 
continue to hold, or sell a fund investment). We also do not have 
reliable quantitative estimates of the extent to which the delivery of 
these more concise, tailored reports would reduce the amount of time 
and effort investors require to make portfolio decisions, or the value 
of that time and effort to investors. Nor do we have such estimates for 
the baseline conditions without the proposed rule. In those 
circumstances in which we do not have the requisite quantitative 
evidence, we have qualitatively analyzed the economic impact of the 
proposed rule and the baseline environment. Our inability to quantify 
these costs, benefits, or other effects does not imply these effects 
are less significant from an economic perspective. We request that 
commenters provide any information, including relevant data or 
supporting quantitative evidence, that may help inform our analysis and 
understanding of the economic consequences of the proposed rule and 
amendments.
1. Broad Economic Considerations
    In addition to the comments we received in response to the Fund 
Investor Experience RFC, discussed in Section I.B, academic studies 
have documented potential benefits of providing more concise and 
tailored disclosure. While some of these studies apply only to certain 
elements of our proposal, others apply broadly to the framing of our 
analysis of the economic impacts of the proposed rule. In particular, 
some of this research has identified characteristics that may increase 
the effectiveness of a disclosure document to consumers, as discussed 
below.\760\
---------------------------------------------------------------------------

    \760\ See George Loewenstein, Cass R. Sunstein, & Russell 
Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ. 
391 (2014) (``Lowenstein Paper''). The paper provides a 
comprehensive survey of the literature relevant to disclosure 
regulation.
---------------------------------------------------------------------------

    Research suggests that, because individuals can exhibit limited 
ability to absorb and understand the implications of the disclosed 
information, for example due to limited attention or low level of 
financial sophistication,\761\ more targeted and simpler disclosures 
may be more effective in communicating information to investors than 
more complex disclosures. Academic studies suggest that costs, such as 
from increased investor confusion or reduced understanding of the key 
elements of the disclosure, are likely to increase as disclosure 
documents become longer, more complex, or more reliant on narrative 
text.\762\ Consistent with such findings, other empirical evidence 
suggests that disclosure simplification may benefit consumers of 
disclosed information.\763\ In general, academic research appears to 
support the notion that shorter and more focused disclosures could be 
more effective at increasing investors understanding than longer, more 
complex disclosures. For example, a concise shareholder report or a 
prospectus fee summary could more effectively communicate information 
to investors than current shareholder reports or prospectus fee tables.
---------------------------------------------------------------------------

    \761\ See, e.g., David Hirshleifer & Siew Hong Teoh, Limited 
attention, information disclosure, and financial reporting, 36 J. 
Acct. & Econ. 337 (2003) (``Hirshleifer & Teoh Study'') and L.E. 
Willis, Decision making and the limits of disclosure: The problem of 
predatory lending: Price, 65 Md. L. Rev. 707 (2006).
    \762\ See, e.g., Samuel B. Bonsall & Brian P. Miller, The Impact 
of Narrative Disclosure Readability on Bond Ratings and the Cost of 
Debt, 22 Rev. Acct. Stud. 608 (2017) and Alistair Lawrence, 
Individual Investors and Financial Disclosure, 56 J. Acct. & Econ. 
130 (2013).
    \763\ See, e.g., Sumit Agarwal, et al., Regulating Consumer 
Financial Products: Evidence from Credit Cards, Nat'l Bureau of 
Econ. Research, Working Paper No. 19484 (Jun. 2014), available at 
https://www.nber.org/papers/w19484 (finding that a series of 
requirements in the Credit Card Accountability Responsibility and 
Disclosure Act (CARD Act), including several provisions designed to 
promote simplified disclosure, has produced substantial decreases in 
both over-limit fees and late fees, thus saving U.S. credit card 
users $12.6 billion annually).
---------------------------------------------------------------------------

    Another characteristic of effective disclosures documented in 
academic research is disclosure salience. Salience detection is a key 
feature of human cognition allowing individuals to focus their limited 
time and attention on a subset of the available information and causing 
them to over-weight this information in their decision-making 
processes.\764\ Within the context of disclosures, information 
disclosed more saliently, such as information presented in bold text, 
or at the top of a page, would be more effective in attracting 
attention than less saliently disclosed information, such as 
information presented in a footnote. Limited attention also increases 
the importance of an individual's focusing on salient disclosure 
signals. Some research finds that more visible disclosure signals are 
associated with stronger stakeholder response to these signals.\765\ 
Moreover, research suggests that increasing signal salience is 
particularly helpful to consumers with lower education levels and 
financial literacy.\766\ There is also empirical evidence that 
visualization improves individual perception of

[[Page 70814]]

information.\767\ For example, one experimental study shows that 
tabular reports lead to better decision making and graphical reports 
lead to faster decision making (when people are subject to time 
constraints).\768\ Overall these findings suggest that problems such as 
limited attention may be alleviated if key information in shareholder 
reports is emphasized, is reported closer to the beginning of the 
document, and is visualized in some manner (e.g., tables, graphs, 
bullet lists). However, it is also important to note that given a 
choice, registrants may opt to emphasize elements of the disclosure 
that are most beneficial to themselves rather than investors, while 
deemphasizing elements of the disclosure that are least beneficial to 
them. The proposed instructions for shareholder reports include 
requirements that are designed to mitigate this risk. For example, the 
proposed instructions require disclosure items to appear in a 
prescribed order, which mitigates funds' ability to provide disclosure 
opportunistically.\769\
---------------------------------------------------------------------------

    \764\ See Daniel Kahneman, Thinking, Fast and Slow (2013); Susan 
Fiske & Shelley E. Taylor, Social Cognition: From Brains to Culture 
(3rd ed. 2017).
    \765\ See Hirshleifer and Teoh Study, supra footnote 761.
    \766\ See, e.g., Victor Stango & Jonathan Zinman, Limited and 
Varying Consumer Attention: Evidence from Shocks to the Salience of 
Bank Overdraft Fees, 27 Rev. Fin. Stud. 990 (2014).
    \767\ See John Hattie, Visible Learning. A Synthesis of Over 800 
Meta-Analyses Relating to Achievement (2008).
    \768\ See Izak Benbasat & Albert Dexter, An Investigation of the 
Effectiveness of Color and Graphical Information Presentation Under 
Varying Time Constraints, 10-1 MIS Q. 59 (1986).
    \769\ Funds are already required to provide certain disclosure 
in a required order in the summary section of the statutory 
prospectus, or in the summary prospectus. See General Instruction 
C.3 of Form N-1A.
---------------------------------------------------------------------------

    There is also a trade-off between allowing more disclosure 
flexibility and ensuring disclosure comparability (e.g., through 
standardization). Greater disclosure flexibility potentially allows the 
disclosure to reflect more relevant information, as disclosure 
providers can tailor the information to firms' own specific 
circumstances. Although disclosure flexibility allows for disclosure of 
more decision-relevant information, it also allows registrants to 
emphasize information that is most beneficial to themselves rather than 
investors, while deemphasizing information that is least beneficial to 
the registrants. Economic incentives to present one's operations and 
performance in better light may drive funds to deemphasize information 
that may be relevant to retail investors. Moreover, although 
standardization makes it harder to tailor disclosed information to a 
firm's specific circumstances, it also comes with some benefits. For 
example, people are generally able to make more coherent and rational 
decisions when they have comparative information that allows them to 
assess relevant trade-offs.\770\ The proposed rule is intended to 
strike a balance between the relative benefits and costs of disclosure 
standardization versus disclosure flexibility; for example, by 
requiring a prescribed order of disclosure topics and providing 
standardized instructions for each of those disclosures but allowing 
some flexibility for certain disclosure presentations (e.g., fund 
statistics, graphical representation of holdings) to account for 
different fund types.
---------------------------------------------------------------------------

    \770\ See, e.g., JR Kling, et al., Comparison Friction: 
Experimental Evidence from Medicare Drug Plans, 127 Q. J. Econ. 199 
(2012) (finding that in a randomized field experiment, in which some 
senior citizens choosing between Medicare drug plans that were 
randomly selected to receive a letter with personalized, 
standardized, comparative cost information (``the intervention 
group'') while another group (``the comparison group'') received a 
general letter referring them to the Medicare website; plan 
switching was 28% in the intervention group, but only 17% in the 
comparison group, and the intervention caused an average decline in 
predicted consumer cost of about $100 a year among letter 
recipients); CK Hsee, et al., Preference Reversals Between Joint and 
Separate Evaluations of Options: A Review and Theoretical Analysis, 
125 Psychol. Bull. 576 (1999).
---------------------------------------------------------------------------

    In addition, studies have found that the structure or format of 
disclosure may improve (or decrease) investor understanding of the 
disclosures being made. Every disclosure document not only presents new 
information to retail investors but also provides a particular 
structure or format for this information that affects investors' 
evaluation of the disclosure.\771\ This ``framing effect'' could lead 
investors to draw different conclusions depending on how information is 
presented. For example, if the liquidity risk management program 
information is presented first in a shareholder report, it could affect 
the way investors perceive all subsequent disclosures in the 
shareholder report and, possibly, discount more heavily the information 
provided by funds that disclose issues regarding liquidity risk 
management over the period. If, instead, liquidity risk management 
information were provided near the end of the shareholder report, the 
effect of the information could be moderated because it would no longer 
frame the other information provided to investors. Because of such 
framing effects, it is important that the structure of a disclosure 
document supports the intended purpose of the disclosure.
---------------------------------------------------------------------------

    \771\ See Amos Tversky & Daniel Kahneman, The Framing of 
Decisions and the Psychology of Choice, 211 Sci. 453 (1981).
---------------------------------------------------------------------------

2. Modified Disclosure Framework for Existing Fund Shareholders
a. Summary of Economic Effects
    The proposal would provide fund shareholders with more concise 
disclosure that highlights information that is key to retail 
shareholders for the purpose of monitoring fund investments and 
informing portfolio decisions, while providing layered access to other 
information that shareholders now receive that may be of interest to 
market professionals and some fund shareholders. To promote disclosure 
that highlights key information for shareholders further, the proposal 
would permit funds to notify shareholders promptly if certain material 
changes occur to the fund (provided the summary prospectus, statutory 
prospectus, and additional information is available online and 
delivered upon request), instead of delivering annual prospectus 
updates and prospectus stickers each year. Funds (and intermediaries) 
would have the option to continue sending the annual prospectus update 
under the rule.
    The following sections discuss the potential costs and benefits of 
the proposed modifications to the disclosure framework. In summary, we 
expect the proposed rules to benefit retail shareholders by providing 
information that is easier to use and that highlights key information 
for purposes of monitoring fund investments and making informed 
portfolio decisions. As a result, the proposed amendments could result 
in shareholders making more informed investment decisions by reducing 
obstacles that the Commission believes have limited readership of fund 
shareholder reports--namely, that the reports are too lengthy and not 
sufficiently tailored for retail shareholders. The proposed rules are 
also likely to reduce expenses associated with delivering disclosures 
for some funds, and to the extent that funds pass these savings on to 
shareholders, fund shareholders would benefit from these cost savings. 
We discuss two principal types of costs associated with the proposed 
approach. First, we expect fund and fund shareholders to incur 
transition costs of adapting to the new disclosure framework. Second, 
we anticipate some shareholders may sustain costs beyond the transition 
period arising from the possibility of mismatch between the preferences 
of the shareholders and the design of the rule proposal.
b. Benefits to Investors
    It is difficult to quantify the effects of the proposed modified 
disclosure framework on investors. The delivery of more concise 
disclosures by funds through the proposed layered framework may reduce 
the investor effort required to monitor existing fund

[[Page 70815]]

investments or to make subsequent portfolio decisions. Key information 
provided in a concise, user-friendly presentation could allow investors 
to understand information about a fund's operations and activities or 
compare information across products more easily or efficiently, and as 
a result, may lead investors to make decisions that better align with 
their investment goals.\772\
---------------------------------------------------------------------------

    \772\ Research suggests that individuals are generally able to 
make more efficient decisions when they have comparative information 
that allows them to assess relevant trade-offs. See, e.g., supra 
footnote 770.
---------------------------------------------------------------------------

    For example, the proposed rule requires funds to distill certain 
key information--such as expenses, performance, and holdings--and use 
graphs, tables, and other more visually engaging presentations in their 
shareholder reports.\773\ As another example, because the proposal 
would require fund registrants to prepare separate shareholder reports 
for each series, a shareholder would be able to more quickly identify 
information about the fund in which she or he invests, instead of 
having to find his or her fund in a long report that covers multiple 
funds. Further, by providing additional flexibility for funds to use 
technology to provide interactive or user-friendly features in 
electronic versions of their shareholder reports, the proposal may 
provide shareholders with access to information that is more tailored 
to their individual needs and circumstances (e.g., performance or 
expense information based on their individual investment amounts), 
which may facilitate better monitoring of fund investments or more 
informed investment decisions.
---------------------------------------------------------------------------

    \773\ See supra footnotes 767 and 768 and accompanying text 
(discussing studies suggesting that visualization improves an 
individual's perception of information).
---------------------------------------------------------------------------

    There is evidence to suggest that consumers benefit from 
disclosures that highlight key information.\774\ One study finds that 
the use of summary prospectuses helps investors spend less time and 
effort to make investment decisions without reduction in the quality of 
those decisions.\775\ This research is consistent with the 2012 
Financial Literacy Study, which showed that at least certain investors 
favor a layered approach to disclosure with the use, wherever possible, 
of tailored disclosures containing key information about an investment 
product or service.\776\ We understand that investors may prefer a 
layered approach simply to save time in reaching similar investment 
decisions, or to make better decisions, or both.
---------------------------------------------------------------------------

    \774\ See, e.g., supra footnote 763; see also Robert Clark, 
Jennifer Maki & Melinda S. Morrill., Can simple informational nudges 
increase employee participation in a 401(k) plan?, Nat'l Bureau of 
Econ. Research, Working Paper 19591 (2013). The authors find that a 
flyer with simplified information about an employer's 401(k) plan, 
and about the value of contributions compounding over a career, had 
a significant effect on participation rates.
    \775\ Beshears Paper, supra footnote 81. We note, however, that 
while the authors find evidence that investors spend less time 
making their investment decision when they are able to use summary 
prospectuses, there is no evidence that the quality of their 
investment decisions is improved. In particular, ``On the positive 
side, the Summary Prospectus reduces the amount of time spent on the 
investment decision without adversely affecting portfolio quality. 
On the negative side, the Summary Prospectus does not change, let 
alone improve, portfolio choices. Hence, simpler disclosure does not 
appear to be a useful channel for making mutual fund investors more 
sophisticated . . .'' Id. at 13.
    \776\ See 2012 Financial Literacy Study, supra footnote 26.
---------------------------------------------------------------------------

    Further, investors allocate their attention selectively,\777\ and 
the sheer volume of disclosure that investors receive about funds may 
discourage investors from reading the materials that are currently 
delivered to them. For example, in connection with the development of 
the summary prospectus, the observations of a 2008 telephone survey 
conducted on behalf of the Commission with respect to mutual fund 
statutory prospectuses are consistent with the view that the volume of 
disclosure may discourage investors from reading disclosures.\778\ That 
survey observed that many mutual fund investors did not read statutory 
prospectuses because they are long, complicated, and hard to 
understand. Investor surveys submitted by commenters on the Fund 
Investor Experience RFC similarly suggest that shareholders may be more 
likely to read more concise shareholder reports.\779\ To the extent 
that the proposed rule would increase readership of fund shareholder 
reports, they could improve the efficiency of portfolio allocations 
made on the basis of disclosed information for those shareholders who 
otherwise would not have read the disclosures that the funds deliver 
currently.
---------------------------------------------------------------------------

    \777\ See, e.g., Loewenstein Paper, supra footnote 760; 
Hirshleifer and Teoh Study, supra footnote 761.
    \778\ Prior to the Commission's 2009 adoption of mutual fund 
summary prospectus rules, the Commission engaged a consultant to 
conduct focus group interviews and a telephone survey concerning 
investors' views and opinions about various disclosure documents 
filed by companies, including mutual funds. During this process, 
investors participating in focus groups were asked questions about a 
hypothetical Summary Prospectus. Investors participating in the 
telephone survey were asked questions relating to several disclosure 
documents, including mutual fund prospectuses. See Abt SRBI, Inc., 
Final Report: Focus Groups on a Summary Mutual Fund Prospectus (May 
2008), available at https://www.sec.gov/comments/s7-28-07/s72807-142.pdf; see also supra footnote 10 and accompanying text.
    \779\ See, e.g., Broadridge Comment Letter I (discussing the 
results of a quantitative survey related to fund disclosure in which 
approximately 39% of investors said they would be more likely to 
look at or review a summary format of a fund's annual and semi-
annual reports); ICI Comment Letter I (discussing an investor survey 
of a summary shareholder report prototype, in which more than 90% of 
participants indicated that they would be more likely to read the 
summary prototype than a full-length shareholder report); Broadridge 
Comment Letter II.
---------------------------------------------------------------------------

    In addition, other information that shareholders currently receive 
under the baseline, including financial statements, financial 
highlights, and annual prospectus updates, would be available online 
and delivered upon request to those shareholders who are interested in 
more-detailed information. As a result, shareholders who use this 
information to monitor their fund investments or inform portfolio 
decisions could continue to access and use this information.
    Further, by allowing funds to deliver prompt notices of material 
funds changes to existing shareholders instead of annual prospectus 
updates, the proposed rule would help shareholders focus on information 
that is designed to meet their needs, rather than the needs of new or 
prospective investors. This aspect of the proposal would also reduce 
the amount of duplicative disclosure that fund shareholders currently 
receive. This is because annual prospectus updates include some of the 
same types of information as shareholder reports, including expense and 
performance information. Reducing duplicative disclosure could help 
shareholders more easily focus on salient information and could reduce 
the potential for shareholder confusion when a shareholder receives 
multiple disclosure materials close in time to one another and that 
include similar information, but with different presentations of that 
information.
    By tailoring the information that funds deliver to shareholders to 
meet the needs of retail shareholders, the proposed rule could 
facilitate better or more efficient monitoring of fund investments and 
overall investment decision-making. The magnitude of this effect will 
depend on the extent to which investors review the disclosures 
directly, as a basis for their choices.
    In addition, by excluding funds from rule 30e-3, fund shareholders 
may receive key information to monitor their fund investments or inform 
their investment decisions more directly as compared to the baseline. 
To the extent that direct delivery of a concise shareholder report that 
highlights key information for retail shareholders--

[[Page 70816]]

including annual report disclosure that better identifies material 
changes to the fund than current annual prospectus update disclosure--
may increase how informed shareholders are about funds, this could 
potentially increase shareholders' ability to allocate capital 
efficiently across funds and other investments.\780\
---------------------------------------------------------------------------

    \780\ See supra Section I.B.1 (discussing investor preferences 
for concise, layered disclosure).
---------------------------------------------------------------------------

    The proposed changes are intended to make the disclosures easier to 
use by highlighting key information for shareholders in a concise, 
visually appealing format. As described above, shareholders responding 
to the Fund Investor Experience RFC indicated that shareholder reports 
are currently too lengthy and technical, and expressed a preference for 
receiving summary disclosures, including visual tools such as tables 
and charts.\781\ Given this, we expect that the proposed rule could 
reduce obstacles limiting shareholder readership of fund shareholder 
reports.
---------------------------------------------------------------------------

    \781\ Id.
---------------------------------------------------------------------------

    We note that the magnitude of the effect would depend on how many 
shareholders rely on the reports that are the subject of the proposal 
to monitor their funds. It would also depend on the extent to which 
those who use the reports would monitor differently in response to the 
tailored disclosures and, for other shareholders, how many would choose 
to rely on the reports under the rule that would not otherwise do so. 
We are requesting comment on this appraisal, and also comments on what 
sources might be available for consideration by the Commission of 
quantitative estimates of the likely future difference in shareholder 
use of the disclosure under the proposal relative to what would occur 
in the future under the current framework.
c. Costs to Investors
    Fund shareholders could experience certain transition costs under 
the proposal, and some shareholders may experience other ongoing costs. 
Transition costs would include the costs of the inconvenience to some 
shareholders of adapting to the new materials and to the changes in the 
presentation of information. While the more concise shareholder reports 
required by the proposal would likely reduce investor comprehension 
costs, investors would nevertheless bear a one-time cost of the 
inconvenience of adjusting to the changes in the disclosures they 
receive. These costs are likely to be relatively lower for less 
experienced shareholders and relatively greater for the more seasoned 
shareholders who are accustomed to existing fund practices.
    Shareholders in funds that rely on rule 30e-3 to deliver paper 
notices to notify shareholders that a shareholder report is available 
online, or shareholders in funds that were planning to rely on rule 
30e-3 and that included statements in their shareholder reports and 
prospectuses notifying shareholders of the upcoming change to 
shareholder report delivery, may experience greater transition costs. 
For example, those shareholders who were receiving rule 30e-3 notices 
or who expected to begin receiving rule 30e-3 paper notices in the 
future may experience some confusion when a fund begins to deliver 
concise shareholder reports. However, shareholders receiving the annual 
and semi-annual reports that this proposal contemplates would be 
receiving tailored information more directly than they would through 
the rule 30e-3 notice. We believe the benefit of making this tailored 
information more accessible to shareholders would justify any potential 
short-term confusion that may result from the transition. In addition, 
a fund that relied on rule 30e-3 would be able to communicate to 
investors about these shareholder report changes.
    Beyond transition costs, the proposal would also impose costs on 
shareholders who prefer to receive the baseline disclosure as opposed 
to the more concise and tailored disclosure they would receive under 
the proposal. These shareholders may experience costs associated with 
locating additional information online or requesting delivery of 
materials they would no longer automatically receive. Some shareholders 
may rely on information that is currently included in the annual and 
semi-annual report but would, under the proposed amendments, be located 
in other documents, such as Form N-CSR or the SAI. Those shareholders 
would incur the cost of reviewing multiple disclosure documents to 
locate the information that was previously located in a single 
document. The significance of this cost would likely depend on several 
factors, including the delivery method and relative importance of each 
piece of information to the individual shareholder. For those 
shareholders who prefer to receive disclosures in paper, the proposal 
provides an option for the shareholder to request the mailing of a 
paper copy of the new Form N-CSR items, such as financial statements, 
that would no longer appear in shareholder reports.
    In addition, for funds that rely on proposed rule 498B, 
shareholders who prefer paper delivery of the annual prospectus update 
would face the choice of adjusting to using the online version of the 
prospectus or making ad hoc requests for paper delivery. For those 
shareholders, the effect of either of these choices would be a cost of 
disutility or inconvenience from the loss of the automatic access to 
their preferred option that they have under the current framework but 
would not have under the proposal.
    To illustrate, we note that, for some shareholders, the cost of 
making requests for additional information would be small and 
therefore, the cost of losing their preferred option as the default 
under the proposal would be small. This is because those shareholders 
would likely react to the proposal by making the effort to request 
continued mailing of more-detailed semi-annual information or 
prospectuses. For those shareholders, the cost of the proposal would 
include the cost of the inconvenience from having to make the request. 
Shareholders who find it relatively burdensome to make a request for 
continued mailing, however, would be migrated over to the new delivery 
framework and face disutility from migrating to the new tailored 
disclosures. By providing a mechanism for shareholders to continue to 
receive the more-detailed information, the proposal would limit the 
extent to which shareholders who prefer the current disclosures would 
end up facing disutility from receiving the proposed disclosures 
instead. Thus, the overall cost of inconvenience or disutility to those 
shareholders who prefer the delivery framework under the current rules 
to the proposed framework would depend on how easy it is for 
shareholders to request continued mailings of more-detailed semi-annual 
information or prospectuses by funds after the rule goes into effect. 
We do not have access to reliable estimates of the opportunity cost to 
investors associated with this effect of the proposed rule; we are 
therefore requesting comment on this, as well as the effects on the use 
of investor time and attention, as further described at the end of this 
section.
    In addition to transition costs and information search or request 
costs, fund shareholders would bear the costs of the proposed modified 
disclosure framework through the increased expenses that funds would 
incur to implement the proposal. We discuss those expenses in the 
section on ``other costs,'' below.

[[Page 70817]]

d. Other Benefits
    The proposal would reduce some of the costs to funds of delivering 
information to shareholders. As the owners of the fund assets, 
shareholders could benefit from this cost reduction in proportion to 
their holdings of those assets. The magnitude of this cost savings 
would be more significant to the extent that a fund would deliver 
shareholder reports or prospectus updates to investors by paper mail in 
the absence of the proposed rule. The amount of the cost savings would 
vary across funds, depending on the expressed preferences of the fund 
and its shareholders for paper versus electronic delivery under 
Commission guidance on electronic delivery (and, with respect to 
shareholder reports, rule 30e-3 notices) and on fund practices between 
delivery of the summary prospectus under rule 498 versus the statutory 
prospectus. The scenarios where delivery costs may decline 
significantly under the proposal, relative to the baseline scenario, 
are indicated in table 8 and discussed below.
Delivery Cost Savings for Shareholder Reports
    The proposal would reduce the cost of delivering a shareholder 
report by a larger per-fund amount for funds that do not rely on rule 
30e-3 (deliver the full report) than for funds that rely on rule 30e-3 
(deliver a notice) at the time any final rule goes into effect. Thus, 
we consider separately the delivery-cost savings from the proposed rule 
for funds under each of these two baseline delivery scenarios. For 
funds that do not rely on rule 30e-3, the proposal would reduce 
delivery costs by replacing the cost of sending current annual and 
semi-annual reports with the smaller cost of sending concise reports to 
those shareholders who do not request e-delivery. This is because the 
cost of printing and mailing (including processing fees) would be lower 
for the concise reports. We estimate that funds could deliver annual 
and semi-annual reports as trifold mailings (3-4 pages) under the 
proposal instead of annual reports that are approximately 134 pages on 
average and semi-annual reports that are approximately 116 pages on 
average. One commenter on the Fund Investor Experience RFC estimated 
that delivering a concise shareholder report instead of current 
shareholder reports would reduce the per unit cost of delivery from 
$0.50 to $0.33 annually, which is a decline of $0.17 per unit or 34 
percent.\782\ The commenter's per unit delivery cost estimates assume 
that 3 out of 10 fund shareholders receive a shareholder report by 
mail.\783\ We understand that these costs may or may not be 
representative of the costs for all funds. For example, the commenter's 
estimates are based on costs for delivering shareholder reports to 
shareholders who hold their shares in beneficial accounts and may not 
reflect any differences in costs for direct-held accounts.\784\ 
Nevertheless, we believe that the estimate of 34 percent is a 
reasonable estimate of the likely decline in the per unit cost of 
delivering the concise report for funds that do not rely on rule 30e-3 
under the proposal.\785\ Thus, for these funds, we estimate that the 
proposed rule would reduce their current shareholder report delivery 
costs by 34 percent on average, resulting in an average annual cost 
savings of approximately $7,040 per fund that does not rely on rule 
30e-3.\786\ For funds that rely on rule 30e-3, the proposal would 
reduce delivery costs because it would be less costly to deliver the 
concise report than the rule 30e-3 notice. That is, while the cost of 
printing the concise report may be greater than the cost of printing 
the notice (see table 8), the overall cost of delivery that includes 
the costs of printing, mailing, and processing fees would likely be 
lower for the concise report.\787\ One commenter estimated that 
delivering a concise shareholder report instead of a rule 30e-3 notice 
would reduce the delivery cost from $0.36 to $0.33 annually, which is a 
decrease of $0.03 per unit or approximately 8 percent.\788\ This is 
assuming that 3 out of 10 fund shareholders receive a shareholder 
report by mail and is based on the commenter's experience processing 
shares held in beneficial accounts.\789\ We understand that this 
estimate may or may not be representative of the average costs for all 
funds. For example, the average enrollment rate for electronic delivery 
may be lower for direct-held accounts, which would result in higher per 
unit costs than the commenter provided.\790\ As another example, to the 
extent a fund would share a single, consolidated rule 30e-3 notice with 
other funds to notify a shareholder of the website address(es) for each 
fund's report, and the fund has many shareholders who are invested in 
those other funds, the fund may not experience the same extent of cost 
savings under the proposal.\791\ Nevertheless, we believe that the 
estimate of approximately 8 percent is a reasonable estimate of the 
likely decline in the per-unit cost of delivering the concise report 
rather than rule 30e-3 notices.\792\ Specifically, for funds that rely 
on rule 30e-3, we estimate that the proposed rule would reduce their 
current shareholder report delivery costs by approximately 8 percent, 
on average, and that the average annual cost savings would be 
approximately $1,243 per fund that relies on rule 30e-3.\793\
---------------------------------------------------------------------------

    \782\ See Broadridge Comment Letter II.
    \783\ See id. We understand that the commenter's cost estimates 
are not limited to shareholder reports that are delivered by mail 
and, instead, the cost per unit averages the costs of different 
delivery mechanisms (including paper and electronic delivery). See, 
e.g., Comment Letter of Broadridge Financial Solutions, Inc. (Oct. 
31, 2018) on File No. S7-13-18, available at https://www.sec.gov/comments/s7-13-18/s71318-4593946-176328.pdf (estimating that the 
average cost of paper, printing, and postage of a mailed shareholder 
report is $0.94).
    \784\ For instance, we understand that the average enrollment 
rate for electronic delivery may be lower for direct-held accounts, 
which would result in higher per unit costs for delivering current 
shareholder reports than the commenter provided. See supra footnote 
734 and accompanying text. In addition, the cost of delivering the 
current and proposed shareholder reports vary by individual funds 
based on a number of factors. For example, we understand that 
printing and mailing costs vary depending on the length of the 
fund's shareholder reports and the number of reports it delivers by 
mail.
    \785\ $0.17 estimated reduction in shareholder report delivery 
costs associated with summary shareholder reports/$0.50 estimated 
costs of delivering current shareholder reports = 34 percent.
    \786\ See supra footnote 740 and accompanying text (noting that 
the Commission estimated annual printing and mailing costs 
(inclusive of processing fees) of $20,707.33 absent rule 30e-3). 
$20,707.33 x 34 percent = $7,040.49.
    \787\ See, e.g., ICI Comment Letter I (stating that processing 
fees on average would be $0.20 for rule 30e-3 notices and $0.15 for 
concise shareholder reports); Broadridge Comment Letter II.
    \788\ See Broadridge Comment Letter II.
    \789\ See id.
    \790\ See supra footnote 734 and accompanying text.
    \791\ See Rule 30e-3 Adopting Release, supra footnote 14, at 
paragraph accompanying n.211 (discussing consolidated rule 30e-3 
notices).
    \792\ $0.03 average reduction in delivery costs for summary 
shareholder reports/$0.36 average cost of delivering rule 30e-3 
notices = 8.33 percent.
    \793\ Based on one commenter's estimate, delivering the concise 
report instead of the rule 30e-3 notice would reduce the per-unit 
delivery cost from $0.36 to $0.33, or $0.03 per unit. See Broadridge 
Comment Letter II. This is $0.03/$0.17 or approximately 17.65 
percent of estimated per-unit reduction in the shareholder report 
delivery costs for funds that do not rely on rule 30e-3. We thus 
estimate that the savings from delivering the concise report instead 
of the notice is 17.65 percent of the estimated $7,040.49 cost 
savings from delivering the concise report instead of the full 
report, or 17.65 percent x $7,040.49 = $1,242.65.
---------------------------------------------------------------------------

    The total shareholder report delivery cost savings from the 
proposal would be a weighted combination of the savings in delivery 
costs for funds that rely on rule 30e-3 and the savings for funds that 
do not rely on rule 30e-3. For example, if 86 percent of funds deliver

[[Page 70818]]

rule 30e-3 notices before the proposal is in effect, the delivery cost 
savings from the proposal would be an estimated $13.26 million from 
those funds.\794\ In addition, if 14 percent of funds do not rely on 
rule 30e-3 before any final rules are in effect, the delivery cost 
savings would be $12.23 million from those funds.\795\ Thus, the 
aggregate delivery costs savings for shareholder reports from the rule 
would be $25.49 million.\796\
---------------------------------------------------------------------------

    \794\ 12,410 funds x 86 percent x $1,242.64 estimated savings in 
delivery costs per fund that delivers a rule 30e-3 notice = $13.26 
million.
    \795\ 12,410 funds x 14 percent x $7,040.49 estimated savings 
per fund that delivers the full report (and does not rely on rule 
30e-3) = $12.23 million.
    \796\ The weighted average savings in delivery cost per fund is 
(86 percent x $1,242.64) + (14 percent x $7,040.49) = $1,068.67 + 
$985.67 = $2,054.34. Multiplying this across all 12,410 funds yields 
an estimated delivery cost savings from the proposal of 12,410 funds 
x $2,054.34 per fund = $25.49 million. That is, the aggregate cost 
savings is $13.26 million + $12.23 million = $25.49 million.
---------------------------------------------------------------------------

    We understand that the estimated cost savings for shareholder 
reports would depend on factors in addition to those discussed above. 
These include the fraction of funds that would deliver notices under 
rule 30e-3 before any final rules are in effect and the extent to which 
those funds actually experience a delivery cost savings under the 
proposal. For example, if the cost of delivering a concise shareholder 
report were about the same as the cost of delivering a notice under 
rule 30e-3, then our estimated cost savings would decline from $25.49 
million to $12.23 million. As another example, if fewer than 86 percent 
of funds began to deliver notices under rule 30e-3 before any final 
rules are in effect, then our estimated aggregate cost savings would be 
greater than $25.49 million. This is because a larger number of funds 
would experience higher delivery cost savings in that instance.
Delivery Cost Savings for Prospectuses
    Funds that rely on rule 498B would experience cost savings from 
delivering prompt notices of certain material changes to existing 
shareholders instead of the annual prospectus updates and interim 
prospectus stickers that they delivery currently. The proposal would 
allow funds to consolidate some of their current disclosures so that 
they would generally deliver fewer disclosure materials to 
shareholders.
    We estimate that, on average, funds make 1.5 material changes per 
year that they currently disclose in annual prospectus updates and 
interim prospectus stickers and that the proposal would require them to 
disclose in their annual reports or through prompt notices under rule 
498B.\797\ Of these material changes, we estimate that an average of 1 
material change is made in the annual prospectus update. Under the 
proposal, a fund would disclose this material change in its annual 
report and generally would not need to send a separate notice under 
proposed rule 498B. We estimate that the remaining average of 0.5 
material changes per year would be disclosed separately in rule 498B 
notices.
---------------------------------------------------------------------------

    \797\ See supra footnote 725.
---------------------------------------------------------------------------

    As a result, we estimate that proposed rule 498B would reduce fund 
delivery costs by reducing the number of separate prospectus-related 
deliveries to existing shareholders from an average of 1.5 deliveries 
to an average of 0.5 deliveries per year. The total cost savings would 
depend on factors that include: (1) Whether a fund currently delivers 
annual prospectus updates to all shareholders or tracks which 
shareholders purchase additional shares during the year; (2) how many 
shareholders have elected electronic delivery and how many shareholders 
receive prospectus materials in paper; (3) how many material changes a 
fund makes each year; and (4) whether a fund delivers prospectus 
stickers separately or consolidates this delivery with delivery of 
other materials, such as semi-annual reports. We are unable to estimate 
the aggregate cost savings across all funds. However, we are able to 
estimate that the current costs of printing and mailing summary 
prospectus annual updates is approximately $0.55 per summary prospectus 
and that the proposal would eliminate at least part of this cost.\798\ 
That is, under proposed rule 498B, funds would no longer incur the 
costs of delivering annual prospectus updates by mail. Additionally, 
funds would no longer incur processing fees for delivering annual 
prospectus updates electronically such as by email currently.\799\
---------------------------------------------------------------------------

    \798\ See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27, at n.1077 and accompanying text (estimating that 
9-page updating summary prospectus for variable insurance contracts 
would cost $0.55 to print and mail); see also supra paragraph 
accompanying footnote 721 (estimating that funds' summary 
prospectuses are, on average, 8 pages long).
    \799\ For example, a fund may pay a type of processing fee 
(referred to as a preference management fee and, formerly, as an 
incentive fee) of up to 10 cents per distribution per account where 
a shareholder holds shares in a fund through an account with an 
intermediary and the shareholder has elected to receive fund 
disclosures electronically. See NYSE rule 451.90(4); Supplementary 
Material .01(a)(5) to FINRA rule 2251. See also Comment Letter of 
Investment Company Institute (Oct. 31, 2018) on File No. S7-13-18, 
at 14, available at https://www.sec.gov/comments/s7-13-18/s71318-4594882-176335.pdf.
---------------------------------------------------------------------------

    We understand funds that currently deliver statutory prospectuses 
to existing shareholders would likely experience greater delivery cost 
savings if they were to rely on proposed rule 498B because of higher 
printing and mailing costs for statutory prospectuses than for shorter 
summary prospectuses. However, we assume that only funds that deliver 
summary prospectuses would rely on proposed rule 498B. We believe that 
funds that deliver summary prospectuses are more familiar with using 
layered disclosure concepts to satisfy prospectus delivery obligations 
and would incur fewer transition costs to comply with proposed rule 
498B, as discussed in Section III.C.2.e.
Benefits of Proposed Form N-CSR Requirements
    Beyond delivery-related cost savings from the proposal, there are 
benefits associated with the proposed requirement that funds continue 
to file on Form N-CSR certain information, such as financial statements 
and financial highlights, that would no longer appear in shareholder 
reports, relative to the alternative of not continuing to require such 
filings. The continued availability of this information, including on a 
historical basis on EDGAR, would allow financial professionals and 
other market participants to continue to analyze this information over 
time. This historical information also may facilitate the Commission's 
performance of fund monitoring responsibilities that benefit investors. 
Finally, a fund's principal executive and financial officer(s) would 
continue to be required to certify the financial and other information 
included on Form N-CSR and would be subject to liability for material 
misstatements or omissions on Form N-CSR, so there would be no change 
in this contribution to the maintained accuracy and completeness of 
this information for investors, market professionals, and others who 
use this information.
e. Other Costs
    Some of the proposed changes in delivery would cause fund 
shareholders to face greater fund expenses than without the proposal. 
The likelihood and extent of these increases would depend on the fund's 
baseline delivery scenario, as follows. For funds that rely on rule 
30e-3, the costs of printing and mailing shareholder reports would be

[[Page 70819]]

higher under the proposal.\800\ We generally believe these additional 
printing and mailing costs would be small. For example, we anticipate 
that funds may be able to deliver the proposed shareholder reports as a 
trifold mailing, which would only incrementally increase the printing 
and mailing costs of a rule 30e-3 notice. One commenter estimated that 
a concise shareholder report would be approximately $0.01 more 
expensive to print than a rule 30e-3 notice.\801\ We estimate that this 
cost increase would be less than the estimated decline in the cost of 
processing fees, as discussed in Section III.C.2.d, above. Moreover, to 
the extent a fund shareholder invests in multiple of a registrant's 
funds and these funds would use a single shareholder report absent the 
proposal, the amendments may increase printing and mailing costs a 
negligible amount in some instances if certain disclosures across the 
funds otherwise are the same. In addition, some funds that choose to 
rely on proposed rule 498B may send more notices of material changes to 
certain prospectus items in some years than the number of annual 
prospectus updates and stickers they would deliver to shareholders 
without the proposal. Since funds would have the option to rely on 
proposed rule 498B, however, we expect that funds would likely rely on 
498B where it would reduce their average annual costs. That is, we 
understand that cost is a consideration for funds and that the cost 
differences may be sufficient in this instance to influence their 
choice.
---------------------------------------------------------------------------

    \800\ As discussed below, funds that rely on rule 30e-3 or plan 
to rely on rule 30e-3 would also incur transition costs under the 
proposal.
    \801\ See Broadridge Comment Letter II.

  Table 8--Potential Effects on Delivery of Shareholder Reports and Prospectus Updates Under the Proposal Vary
          According the Baseline Preferences and Requests of the Affected Funds and Fund Shareholders *
----------------------------------------------------------------------------------------------------------------
          Table 8.1--Semi-annual report. (Effect of proposal to modify the semi-annual report delivery)
-----------------------------------------------------------------------------------------------------------------
                                                             Shareholder
                                   Shareholder requests     requests paper       Shareholder makes no delivery
    Fund relies on rule 30e-3?      electronic delivery  delivery under rule               election
                                                                30e-3
----------------------------------------------------------------------------------------------------------------
Yes..............................  Email (with link to   Paper mail (3-4      Paper mail (3-4 page) trifold
                                    3-4 page trifold      page) trifold        tailored report replaces paper (1
                                    tailored report)      tailored report      page) of notice with link to 116
                                    replaces email        replaces paper       page semi-annual report (Printing
                                    (with link to 116     mail of 116 page     and mailing cost increase and
                                    page report).         semi-annual report   processing fee decrease).
                                                          (Printing and
                                                          mailing cost
                                                          decrease).
No...............................  Email (with link to   N/A................  Paper mail (3-4 page) trifold
                                    3-4 page report)                           replaces paper mail (116 page)
                                    replaces email                             report (Printing and mailing cost
                                    (with link to 116                          decrease).
                                    page report).
----------------------------------------------------------------------------------------------------------------


 
               Table 8.2--Annual report. (Effect of proposal to modify the annual report delivery)
-----------------------------------------------------------------------------------------------------------------
                                                             Shareholder
                                   Shareholder requests     requests paper       Shareholder makes no delivery
    Fund relies on rule 30e-3?      electronic delivery  delivery under 30e-               election
                                                                  3
----------------------------------------------------------------------------------------------------------------
Yes..............................  Email (with link to   Paper mail (3-4      Paper mail (3-4 page) trifold
                                    3-4 page report)      page) trifold        replaces paper (1 page) notice
                                    replaces email        replaces paper       with link to 134 page report
                                    (with link to 134     mail (134 page)      (Printing and mailing cost
                                    page report).         report (Printing     increase and processing fee
                                                          and mailing cost     decrease).
                                                          decrease).
No...............................  Email (with link to   N/A................  Paper mail (3-4 page) trifold
                                    3-4 page report)                           replaces paper mail (134 page)
                                    replaces email                             report (Printing and mailing cost
                                    (with link to 134                          decrease).
                                    page report).
----------------------------------------------------------------------------------------------------------------


 
   Table 8.3--Annual prospectus update. (Effect of proposal to permit funds to replace the delivery of annual
    prospectus updates and prospectus stickers with notices of certain material changes (proposed rule 498B),
                                    assuming that they exercise this option)
-----------------------------------------------------------------------------------------------------------------
                                                      Shareholder requests electronic delivery?
 Fund uses summary prospectus (rule ----------------------------------------------------------------------------
               498)?                                  Yes                                    No
----------------------------------------------------------------------------------------------------------------
Yes................................  Eliminate email (with link to 8 page   Eliminate paper mail (8 page)
                                      summary prospectus update, annual)     summary prospectus update, annual
                                      (Processing fee decrease).             (Printing and mailing cost
                                                                             decrease).
No.................................  No change expected but, if a fund      No change expected but, if a fund
                                      relies on rule 498B under these        relies on rule 498B under these
                                      circumstances, it would eliminate      circumstances, it would eliminate
                                      email with link to statutory           paper mail (128 page) statutory
                                      prospectus update (annual), which      prospectus update, (annual), which
                                      would decrease processing fees for     would decrease printing and mailing
                                      the fund.                              costs for the fund.
----------------------------------------------------------------------------------------------------------------


 
    Table 8.4--Other prospectus updates. (Effect of proposal to permit funds to replace the delivery of other
    prospectus updates or prospectus stickers, with notices of certain material changes (proposed rule 498B),
                                    assuming that they exercise this option)
-----------------------------------------------------------------------------------------------------------------
                                                      Shareholder requests electronic delivery?
    Is fund change  material, as    ----------------------------------------------------------------------------
      described in rule 498B?                         Yes                                    No
----------------------------------------------------------------------------------------------------------------
Yes................................  Email with notice of a material        Paper mail of notice of a material
                                      change delivered within 3 business     change delivered within 3 business
                                      days replaces potentially less         days replaces potentially less
                                      timely email of prospectus update or   timely paper mail of prospectus
                                      sticker in some instances.             update or sticker in some
                                                                             instances.

[[Page 70820]]

 
No.................................  May eliminate email of prospectus      May eliminate paper mail of
                                      update or sticker in some instances.   prospectus update or sticker in
                                                                             some instances.
----------------------------------------------------------------------------------------------------------------
Notes: The costs and benefits of the proposed modification to shareholder report and prospectus delivery under
  the proposed rules would vary across the baseline delivery scenarios--i.e., the scenario that would be in
  place at the time of the proposed rule implementation if the current rules were to remain in place--that are
  shown in the table. Some of the cost and benefits would be transitional and others would be sustained, and
  each would depend on factors beyond what appears in the table, as discussed in Sections III.C.2.c and
  III.C.2.e, below. In addition, under the proposal, shareholders may request delivery of paper or electronic
  copies of the documents that funds would be required to make available online.

    As a further delivery-related cost, funds would incur costs under 
the proposed requirements in rule 30e-1 and rule 498B to deliver 
certain materials to shareholders upon request. The extent of these 
costs would depend on how many shareholders prefer the current delivery 
framework in which they receive additional shareholder report 
information or annual prospectus updates, how many of these 
shareholders would prefer to request these materials directly (e.g., in 
paper) instead of accessing them online, and whether the shareholders 
request paper or electronic copies of these materials. We estimate that 
funds would incur average annual printing and mailing costs of $500 per 
fund to deliver materials upon request under the proposed amendments to 
rule 30e-1.\802\ For funds that choose to rely on proposed rule 498B, 
we estimate average annual printing and mailing costs of $500 per fund 
to deliver prospectuses and related materials upon request under that 
rule.\803\
---------------------------------------------------------------------------

    \802\ See infra Section IV.C. Because we do not have specific 
data regarding the cost of printing and mailing the materials that 
must be provided on request, for purposes of our analysis we 
estimate $500 per year for each fund to collectively print and mail 
such materials upon request. Investors could also request to receive 
these materials electronically. We estimate that there will be 
negligible external costs associated with emailing electronic copies 
of these documents.
    \803\ See infra Section IV.D; see also supra footnote 802.
---------------------------------------------------------------------------

    In addition to delivery-related costs, fund would experience other 
costs under the proposal, including both transition costs and ongoing 
costs. These other costs would result from proposed changes to the 
scope and contents of shareholder reports, new Form N-CSR items, new 
website availability requirements, amendments to the scope of rule 30e-
3, and preparation of notices of material changes under proposed rule 
498B. The compliance costs associated with proposed rule 498B would 
only affect funds that choose to rely on that rule, and the compliance 
costs associated with the amendments to rule 30e-3 would only affect 
funds that rely on that rule or were planning to rely on that rule. The 
other categories of compliance costs would affect all funds. These 
different categories of costs could be reflected in fund expenditures 
that funds could pass on to shareholders, likely in proportion to their 
participation in the fund. The expenditures could be to procure the 
services of third parties for the purpose of implementing the changes 
to fund disclosure and delivery practices under the proposal, as we 
understand some funds utilize outside providers for these compliance 
responsibilities.
    Funds would experience transition costs to modify their current 
shareholder report disclosures. Specifically, funds would incur costs 
to modify their shareholder reports to comply with the proposed scope 
and content requirements. We estimate that the initial costs to funds 
of modifying their annual shareholder report disclosure would be 
$150,111,360 in aggregate costs and $41,697,600 annually 
thereafter.\804\ We estimate that the initial costs to funds of 
modifying their semi-annual shareholder report disclosure would be 
$75,055,680 in aggregate costs and $20,848,800 annually 
thereafter.\805\ Initial costs would include costs associated with 
designing the concise shareholder reports, amending the scope of 
shareholder reports to cover a single fund series, implementing any 
operational changes needed to prepare and deliver separate shareholder 
reports for different fund series, revising existing disclosure 
practices for shareholder report items that the proposal would amend 
(e.g., management's discussion of fund performance, including the 
proposed clarification of the term ``appropriate broad-based securities 
market index,'' as well as the expense presentation), and developing 
disclosures for the proposed new shareholder report items (i.e., fund 
statistics and material fund changes). The ongoing costs would largely 
be attributed to the costs of preparing new shareholder report 
disclosure items under the proposal, since funds already incur the 
costs of preparing the other shareholder report disclosures today. To 
the extent that the proposed clarification of the term ``appropriate 
broad-based securities market index'' causes funds to select a new 
index for this disclosure purpose, this could result in additional 
costs to funds in the form of index-licensing fees. Funds also would 
incur costs of complying with the new Form N-CSR disclosure items. As 
funds already prepare the disclosure that the proposed N-CSR items 
would cover for purposes of current shareholder reports and disclose 
that information on Form N-CSR as part of their shareholder reports, we 
do not believe the costs of the new N-CSR disclosure would be 
significant. However, we recognize that funds may face some costs of 
rearranging their disclosures within Form N-CSR. We estimate that the 
costs of the proposed new Form N-CSR items would initially

[[Page 70821]]

be $75,055,680 and $20,848,800 annually thereafter.\806\
---------------------------------------------------------------------------

    \804\ The estimated initial cost for the proposed annual reports 
is based on the following calculations: 36 hours x $336 (blended 
wage rate for compliance attorney and senior programmer) = $12,096 
per fund. 12,410 funds x $12,096 = $150,111,360. The estimated 
annual cost for the proposed annual reports is based on the 
following calculations: 10 hours x $336 (blended wage rate for 
compliance attorney and senior programmer) = $3,360 per fund. 12,410 
funds x $3,360 = $41,697,600. See infra Section IV.C.
    \805\ The estimated initial cost of the proposed semi-annual 
reports is based on the following calculation: 18 hours x $336 
(blended wage rate for compliance attorney and senior programmer) = 
$6,048 per fund. 12,410 funds x $6,048 = $75,055,680. The estimated 
annual cost for the proposed semi-annual reports is based on the 
following calculations: 5 hours x $336 (blended wage rate for 
compliance attorney and senior programmer) = $1,680 per fund. 12,410 
funds x $1,680 = $20,848,800. See infra Section IV.C.
    \806\ The initial costs of the proposed Form N-CSR requirements 
are based on the following calculations: 18 hours x $336 (blended 
wage rate for compliance attorney and senior programmer) = $6,048 
per fund. 12,410 funds x $6,048 = $75,055,680. The annual cost of 
the proposed new Form N-CSR requirements are based on the following 
calculations: 5 hours x $336 (blended wage rate for compliance 
attorney and senior programmer) = $1,680 per fund. 12,410 funds x 
$1,680 = $20,848,800. See infra Section IV.D. These PRA burden 
estimates do not account for the fact that funds are currently 
required to prepare the same general disclosure for purposes of 
their shareholder reports. Thus, these PRA-related estimates may 
over-estimate the costs of the proposed Form N-CSR disclosure items, 
particularly the transition costs.
---------------------------------------------------------------------------

    In addition, funds would be required to provide additional 
information online under the proposed amendments to rule 30e-1 and 
under proposed rule 498B. With respect to rule 30e-1, this would 
include online availability of the disclosure that the proposal would 
remove from shareholder reports, including financial statements and 
financial highlights, as well as quarterly portfolio holdings. In 
addition, funds that rely on proposed rule 498B would be required to 
provide certain information online, including summary and statutory 
prospectuses, SAIs, and shareholder reports. While the vast majority of 
funds already provide fund information on websites, they may not 
currently provide the same information that the proposed rule would 
require.\807\
---------------------------------------------------------------------------

    \807\ See supra Section III.B.2 and III.B.3.
---------------------------------------------------------------------------

    For instance, under the proposed amendments to rule 30e-1, funds 
would likely incur costs associated with providing online access to the 
new Form N-CSR disclosure items (i.e., the information that the 
proposal would remove from shareholder reports). Funds that do not rely 
on rule 30e-3 would also incur costs to provide their quarterly 
portfolio holdings online. We estimate that the initial costs of 
complying with the website availability requirements in rule 30e-1 
would be $35,591,880, with ongoing annual costs of $11,863,960.\808\
---------------------------------------------------------------------------

    \808\ See infra Section IV.C. The estimated initial cost of 
complying with rule 30e-1's website availability requirements is 
based on the following calculations: 12 hours x $239 (wage rate for 
webmaster) = $2,868 per fund. 12,410 funds x $2,868 = $35,591,880. 
The estimated ongoing annual cost is based on the following 
calculations: 4 hours x $239 (wage rate for webmaster) = $956 per 
fund. 12,410 funds x $956 = $11,863,960.
---------------------------------------------------------------------------

    With respect to the online information that proposed rule 498B 
would require, we estimate that funds generally would not incur 
additional transition or ongoing costs associated with these 
requirements. This is because we anticipate that only funds that rely 
on rule 498 to deliver summary prospectuses--and that are already 
required under that rule to provide the same information on websites--
would rely on proposed rule 498B.\809\ Only these funds are likely to 
choose to rely on proposed rule 498B because, unlike other funds, they 
already deliver summary prospectuses under rule 498 and so have 
experience using layered disclosure. In addition, they are already 
subject to similar website availability requirements under rule 498. 
Therefore, they would be more likely than other funds to experience 
overall cost savings under rule 498B.
---------------------------------------------------------------------------

    \809\ Absent the proposed requirement in rule 498B to provide 
summary prospectuses online, we recognize some funds that currently 
use summary prospectuses may have less incentive to do so under rule 
498B. This is because rule 498B would have the effect of reducing a 
fund's delivery costs for the annual prospectus update, regardless 
of whether it uses a summary prospectus or statutory prospectus. 
Proposed rule 498B would require funds to provide summary 
prospectuses and other materials online because we believe investors 
benefit from concise summary prospectus disclosure, along with 
access to more detailed information, to help inform their investment 
decisions and compare fund investments.
---------------------------------------------------------------------------

    However, if a fund that does not deliver summary prospectuses under 
rule 498 chose to rely on proposed rule 498B, the fund would be 
required to begin providing the relevant information on a website and 
to continue to update the website materials as needed. We estimate that 
the compliance costs of proposed rule 498B for funds that do not 
currently rely on rule 498 to deliver summary prospectuses initially 
would be $12,948 per fund to begin to comply with the relevant 
requirements in proposed rule 498B and would reduce to annual costs of 
$4,316 per fund thereafter.\810\
---------------------------------------------------------------------------

    \810\ See infra Section IV.D. The estimate of initial costs is 
based on the following calculation: (30 hours to begin to prepare 
summary prospectuses x $336 (blended wage rate for compliance 
attorney and senior programmer)) + (12 hours to begin to comply with 
website availability requirements x $239 (wage rate for webmaster)) 
= $12,948. The estimate of annual costs is based on the following 
calculation: (10 hours to prepare summary prospectuses x $336 
(blended wage rate for compliance attorney and senior programmer)) + 
(4 hours to comply with website availability requirements x $239 
(wage rate for webmaster)) = $4,316.
---------------------------------------------------------------------------

    In addition to website availability requirements, funds that choose 
to rely on proposed rule 498B could incur costs to prepare prompt 
notices of material changes that the rule would require. The proposed 
rule does not specify the form of this notice. Therefore, a fund could 
satisfy this requirement, for example, by sending existing shareholders 
the prospectus supplement filed with the Commission, an amended 
prospectus which reflects the material change, or another form of 
notice that discusses the change. The costs of preparing a notice under 
proposed rule 498B would depend on the approach a particular fund uses. 
For example, we expect that preparation costs would be fairly minimal 
if a fund delivers a prospectus supplement or amended prospectus, which 
the fund would have already prepared for other purposes. However, funds 
that choose to prepare separate notices under the proposed rule would 
likely experience higher preparation costs. We estimate that the 
average annual costs of preparing notices of material changes under 
proposed rule 498B would be $1,344 per fund, after an initial 
compliance cost of $4,032 per fund.\811\ If 90 percent of funds rely on 
proposed rule 498B, this would result in aggregate ongoing annual costs 
of $15,011,136 and initial costs of $45,033,408.\812\
---------------------------------------------------------------------------

    \811\ See infra Section IV.D. The estimated annual cost of 
preparing notices under proposed rule 498B is based on the following 
calculation: 4 hour x $336 (blended wage rate for compliance 
attorney and senior programmer) = $1,344. The estimated initial cost 
of this proposed requirement is based on the following calculation: 
12 hours x $336 (blended wage rate for compliance attorney and 
senior programmer) = $4,032.
    \812\ The estimated aggregate annual costs of preparing notices 
under proposed rule 498B is based on the following calculations: 
(12,410 funds x 90 percent) x $1,344 = $15,011,136. The estimated 
aggregate initial costs of preparing notices under proposed rule 
498B is based on the following calculation: (12,410 funds x 90 
percent) x $4,032 = $45,033,408.
---------------------------------------------------------------------------

    Further, to the extent that affected funds have changed their 
operations in anticipation of relying on rule 30e-3, those funds would 
bear the costs associated with the proposed amendment's prohibition on 
open-end funds relying on rule 30e-3. These costs could include, among 
others, changes to internal systems and adjustments to agreements with 
third-party vendors contracted to provide relevant services. In 
addition, if the proposed amendments to rule 30e-3 are implemented by 
certain funds before January 1, 2022, funds that were planning to rely 
on rule 30e-3 would experience transition costs associated with 
removing statements in their shareholder reports and prospectuses 
indicating that the fund would be transitioning to the rule 30e-3 
framework for transmitting shareholder reports. Moreover, funds that 
choose to take additional steps to inform their shareholders about the 
modified approach to delivering shareholder reports under the proposal 
would likely incur additional transition costs. We lack data to 
quantify these costs because we do not have information about how many 
funds would provide discretionary notices or other

[[Page 70822]]

information to their shareholders to explain the proposed changes to 
shareholder report delivery.
3. Prospectus Disclosure Amendments
a. Summary of Economic Effects
    The proposal would simplify the initial prospectus disclosure to 
investors in a layered approach where other information would continue 
to be available online and delivered upon request, free of charge. The 
proposal requires a new fee summary that includes bottom-line numbers 
from the current prospectus fee table, and would appear in the summary 
section of the prospectus (as well as in a summary prospectus if a fund 
uses that form of prospectus).\813\ The fee summary would also express 
the bottom-line numbers in dollar terms, in addition to the current 
presentation of an amount in terms of fund net assets, and describe fee 
and expense items in plain English.\814\ In addition, funds would 
simplify their disclosures of principal risk, ranking them by 
importance and highlighting those that are truly principal to the 
particular fund.
---------------------------------------------------------------------------

    \813\ For example, instead of listing different expense types 
that comprise a fund's total annual operating expenses and then 
providing the bottom-line total annual operating expenses, the fee 
summary would only provide the bottom-line total.
    \814\ For example, a fund would describe a charge an investor 
incurs when purchasing a fund's shares as a ``purchase charge'' 
instead of as a ``maximum sales charge (load) imposed on 
purchases.''
---------------------------------------------------------------------------

    The following sections discuss the potential costs and benefits of 
these proposed modifications to prospectus disclosures. In summary, the 
benefits of the proposal would accrue through better use of the 
prospectus disclosure materials by investors. The tailored disclosures 
would enable investors to make more efficient use of their scarce time 
and attention and, potentially, more informed investment decisions. The 
costs of the proposal would accrue to fund shareholders through a 
short-term, transition-related increase in fund expenses required to 
prepare the new disclosures, and to fund investors in adapting to the 
new style of prospectus disclosure.
b. Benefits to Investors
    The direct effect of the proposed amendments to fund prospectuses 
would be to simplify the presentation of fee- and risk-related 
information that funds deliver to investors. This would improve 
investors' understanding of key information, and this improved 
understanding could result in more efficient investment decisions.\815\ 
Also the proposed amendments may improve investor understanding with 
respect to funds that invest 10% or less of total fund assets in 
acquired funds by reducing emphasis on AFFE as a discrete category of 
performance expenses where the fund does not invest significantly in 
acquired funds and by improving consistency between the fund's 
prospectus fee table disclosures and financial statement disclosures 
under these circumstances, while also retaining investors' access to 
information about the potential layering of fees through a fund's 
investments in acquired funds.\816\
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    \815\ Existing research notes that individuals exhibit limited 
ability to absorb and process information. See Richard E. Nisbett & 
Lee Ross, Human Inference: Strategies and Shortcomings of Social 
Judgment (1980) (``Nisbett & Ross''); Hirshleifer and Teoh Study, 
supra footnote 761.
    \816\ Some commenters have suggested that the disclosure of AFFE 
in the fee table provides investors with the necessary information 
to understand the potential layering of fees in a fund of funds 
arrangements. See Kauff Laton Fund of Funds Comment Letter; Rand 
Fund of Funds Comment Letter.
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    The proposal would enable investors to locate and use key 
information more easily, requiring less time and attention to process 
key available information than under current rules. For example, rather 
than listing different expense types that comprise a fund's total 
annual operating expenses and then presenting the total annual figure, 
the fee summary would only provide the total. This would make it easier 
for retail investors to locate the total amount in the prospectus 
quickly. Similarly, the proposal would shorten the principal risk 
disclosure to focus on risks that are truly principal to the particular 
fund; this would make information about those risks easier to locate 
and use. We believe that making information easier to locate and use 
can make the information easier to understand.
    In addition, the proposed amendments would result in disclosure 
that is easier for investors to understand. By providing clearer 
descriptions of certain fee and expense concepts, the proposal would 
reduce the chance of retail investors misinterpreting this key 
information. For example, a fund would describe a charge an investor 
incurs when purchasing a fund's shares as a ``purchase charge'' instead 
of as a ``maximum sales charge (load) imposed on purchases.'' Further, 
by providing fee and expense information in dollar terms, the effect of 
the fees and expenses may be more understandable to investors.\817\ In 
addition, providing principal risks in order of importance would help 
investors more readily identify and understand a fund's principal risks 
relative to the baseline, where funds may order risks alphabetically or 
in other ways that do not show a risk's relative importance.
---------------------------------------------------------------------------

    \817\ See supra footnotes 63 and 573.
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    Providing more user-friendly and concise information in the 
prospectus can lower the cost to the investor of gathering key 
information needed to make choices among funds. The proposal may thus 
enable investors more easily to evaluate and monitor fund investments 
and make choices among competing funds than under the current 
requirements. Some investors may read disclosures that they would not 
otherwise have read. Others may consider the information they receive 
more carefully. In each instance, the consequence may be choices among 
investment alternatives that reflect a better alignment between the 
circumstances of the investor and the available products. The ultimate 
impact on investment outcomes depends on the extent to which investors 
find the amended disclosure easier to access and use and the extent to 
which they rely on the amended disclosure to inform their investment 
decisions and actions. As discussed above, there is evidence to suggest 
that consumers benefit from disclosure that highlights key 
information.\818\
---------------------------------------------------------------------------

    \818\ See supra footnotes 774 to 778 and accompanying text.
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    The proposal to allow funds with limited investments in acquired 
funds to move the disclosure of AFFE into a footnote, and eliminate it 
from the bottom-line total expense disclosure in the prospectus fee 
table and fee summary, may benefit some investors by making it easier 
for them to compare and choose among funds to meet their investment 
objectives. That is, the proposal may enhance the salience of 
disclosures in the prospectus fee table and fee summary that reflect 
the fund's main investment strategy relative to the disclosure of its 
AFFE. As the information on the AFFE amount would be retained in a 
footnote, investors' access to AFFE information would not change under 
the proposal. In addition, investors would continue to see a bottom-
line number that reflects AFFE where the fund substantially invests in 
other funds such that the fund is, in essence, managed significantly at 
the acquired fund level. Maintaining this requirement for these funds 
is designed to prevent investors from being confused by expense ratios 
that do not fully reflect the cost of the fund's investments.

[[Page 70823]]

c. Costs to Investors
    We understand that some investors may prefer the current level of 
detail about a fund's fees or principal risks, and therefore, the 
advantages associated with tailored disclosure, as described in this 
section, may not apply to those investors. For example, if the fund 
uses a summary prospectus, and an investor would prefer to see the 
breakdown of fees and expenses among various line items (or wants 
longer narrative discussions about principal risks), the proposal would 
require the investor to take the additional step of finding the 
statutory prospectus online or requesting a copy of it. The rule would 
make it more difficult for the investor who prefers the more detailed 
information to obtain and use that information than under the current 
rule baseline. We recognize that, under these circumstances, the 
proposal would impose some costs of inconvenience to these investors in 
the form of requiring more time and attention to find the statutory 
prospectus online or to request a copy of the statutory prospectus.
    For investors who prefer the current disclosure format and are 
aware that a fund has moved the AFFE disclosure into a footnote, there 
may be some inconvenience even without any change in access to 
information. For example, the investor would need to take an extra step 
of obtaining the AFFE amount from the footnote and combining it with 
the expense information from the fee table to recover the same total 
expense information that is disclosed currently. However, investors 
would have access to the information necessary to recover this 
information under the proposal.\819\
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    \819\ For example, this could be done by simple addition (e.g., 
expense ratio of 0.50 + AFFE expense of 0.03 = total expenses of 
0.53). The inputs to this addition would be readily available under 
the proposal to all investors, including in XBRL format.
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    We also recognize that some investors may not recognize that 
certain funds' AFFE disclosures have moved into a footnote of the fee 
table under the proposal. If an investor does not realize that the 
expense disclosure in these funds' prospectus fee tables (i.e., funds 
that have 10% or less of their total assets invested in acquired funds) 
no longer includes these indirect fund expenses, such an investor could 
under-estimate the expenses of these funds. Such underestimation could 
lead to a distortion of some investors' choices relative to their 
preferences and investment objectives. Relatedly, an investor may be 
less able to compare funds under the proposal to the extent that any 
funds continue to include AFFE amounts in their bottom line ongoing 
annual expenses even though they are eligible to disclose their AFFE in 
a footnote. Because reliance on the AFFE amendment would be optional, 
investors may receive expense disclosures from the same types of funds 
(i.e., those that have 10% or less of their total assets invested in 
acquired funds) that treat AFFE differently. This could make it more 
difficult for investors to compare these expenses between funds.
    The costs from any potential underestimation of AFFE would depend 
on how many funds rely on the AFFE amendment. This number would depend, 
in turn, on fund incentives and on whether funds believe that any 
benefit from relying on the AFFE amendment would outweigh any costs 
incurred in moving AFFE disclosure into a footnote. Funds that believe 
that relying on the amendment would be beneficial by, for example, 
providing a more consistent fee and expense presentation for investors, 
may have a greater incentive to rely on the amendment than other funds. 
In addition, some funds that are slightly above the 10% threshold may 
have an incentive to reduce their investments in acquired funds to the 
extent that they believe there would be sufficient benefit from 
providing AFFE disclosure in a footnote. We believe that few funds 
would do so. As discussed above, we estimate that approximately 88% of 
the funds with more than 10% of their total assets invested in acquired 
funds invest more than 20% of their total assets in acquired funds. 
Based on this estimate, we would expect that any incentive to reduce 
investments in acquired funds that is driven by the proposed AFFE 
amendment would be limited to the other 12% of funds, which is 4% of 
acquiring funds.\820\
---------------------------------------------------------------------------

    \820\ See supra footnote 714 and accompanying text.
---------------------------------------------------------------------------

    In addition, fund investors could bear the costs of the prospectus 
amendments through the increased expenses that funds would incur to 
implement the proposal. We discuss those expenses in the section on 
``other costs,'' below.
d. Other Costs
    The proposed amendments would impose costs on funds (which they may 
pass on to their shareholders) to amend their disclosure practices. For 
example, the proposal would require funds to review their principal 
risk disclosure and assess whether the risks they are currently 
disclosing are principal to the fund under the proposed amendments. 
Among other things, this may require fund groups to modify their 
current practices for principal risk disclosure, including where they 
use many of the same risk disclosures across various funds in the fund 
group. Funds also would need to determine an appropriate method for 
ordering a fund's principal risks by importance and implement this 
approach. We estimate that the proposed amendments to principal risk 
disclosure would result in initial aggregate costs of $75,055,680 and 
$16,679,040 annually thereafter.\821\ In addition, funds would need to 
modify their disclosure templates to revise the terms they currently 
use in prospectus fee tables and to add fee summaries to their 
disclosure, although the content of the fee summary would largely 
consist of information that funds already disclose in their prospectus 
fee tables. We estimate that the costs of the proposed amendments to 
prospectus fee and expense disclosure would be $37,527,840 initially 
and $8,339,520 annually thereafter.\822\
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    \821\ See infra Section IV.B. The estimated initial cost of the 
proposed amendments to principal risk disclosure is based on the 
following calculations: 18 hours x $336 (blended wage rate for 
compliance attorney and senior programmer) = $6,048 per fund. 12,410 
funds x $6,048 = $75,055,680. The estimated ongoing annual cost of 
these proposed amendments is based on the following calculations: 4 
hours x $336 (blended wage rate for compliance attorney and senior 
programmer) = $1,344 per fund. 12,410 funds x $1,344 = $16,679,040.
    \822\ See infra Section IV.B. The estimated initial cost of the 
proposed amendments to prospectus fee and expense disclosure is 
based on the following calculations: 9 hours x $336 (blended wage 
rate for compliance attorney and senior programmer) = $3,024 per 
fund. 12,410 funds x $3,024 = $37,527,840. The estimated ongoing 
annual cost of these proposed amendments is based on the following 
calculations: 2 hours x $336 (blended wage rate for compliance 
attorney and senior programmer) = $672 per fund. 12,410 funds x $672 
= $8,339,520.
---------------------------------------------------------------------------

    Some of these costs would be incurred by funds that make limited 
investments in other funds as a result of our proposal to allow such 
funds to disclose AFFE in a footnote to the fee table and fee summary. 
While only funds that invest 10% or less of their total assets in 
acquired funds would be allowed to rely on this proposal, we believe 
that these costs would also be incurred by funds with investments 
slightly above 10% in other funds because such funds would likely spend 
time considering whether they would qualify for the proposal. 
Therefore, for purposes of our analysis, we assume that the bulk of the 
costs associated with this proposal would be incurred by funds that 
invest less than 20% of their total assets in other funds.\823\ These

[[Page 70824]]

funds would incur costs of (1) establishing and implementing procedures 
they may choose to adopt to monitor the percent of the fund's acquired 
fund investments relative to total assets; (2) calculating their 
investments in acquired funds to determine whether they would be 
permitted to modify their disclosure pursuant to the proposal; and (3) 
updating their prospectus fee table to modify their AFFE disclosure if 
they choose to present AFFE in accordance with the proposal, and they 
are eligible to do so. We estimate that approximately 30%, or 3,723 
open-end funds, have investments in other funds. Of those, we estimate 
that approximately 70%, or 2,606 open-end funds, invest less than 20% 
of their total assets in other funds (excluding money market 
funds).\824\ Therefore, we estimate that the transition costs 
associated with this proposed amendment would be $4,378,080.\825\
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    \823\ We believe that funds that invest more than 20% of their 
total assets in other funds would not choose to exert this effort 
because it is unlikely that they would anticipate being able to rely 
on the proposal.
    \824\ For funds that may be eligible for the proposed amendments 
to AFFE disclosure, we believe that approximately 50% of the burden 
hours they would incur to comply with all of the proposed fee 
disclosure amendments would be allocated to complying with these 
amendments.
    \825\ 5 hours x $336 (blended wage rate for compliance attorney 
and senior programmer) = $1,680 per fund. 2,606 funds x $1,680 = 
$4,378,080.
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    We understand that changes in the prospectus also could affect data 
aggregators that rely on the information in the prospectus fee table as 
a basis for the services they provide to investors and other parties. 
We have considered that changes in the prospectus can make it easier or 
more difficult for them to provide this service. In this instance, the 
proposal is unlikely to have an effect on data aggregators because the 
full fee table would still be structured.\826\ We believe that the 
information available to data aggregators about the current line items 
would not change under the proposal accordingly.
---------------------------------------------------------------------------

    \826\ See supra Section II.H.1.i (discussing structured data 
requirements for fund fee and expense disclosures and proposed 
amendments to continue to require that funds provide the full fee 
table in a structured data format).
---------------------------------------------------------------------------

4. Advertising Rule Amendments
a. Summary of Economic Effects
    The proposed advertising rule amendments would enhance the 
transparency of the fees and expenses that are associated with 
investing in a particular investment company. To obtain this 
improvement in transparency, the proposal would require specific 
changes to how mutual funds, ETFs, other registered investment 
companies, and BDCs present information about fund fees and expenses in 
fund advertisements. That is, the proposed amendments would require 
that the fee and expense presentations prominently include timely 
information about a fund's maximum sales load (or any other 
nonrecurring fee) and gross total annual expenses, computed in a manner 
that is consistent with relevant prospectus requirements. Further, if 
an advertisement included an investment company's total annual expenses 
net of a fee waiver or expense reimbursement amount in addition to the 
required gross annual expense figure, the advertisement would need to 
disclose the expected termination date of that arrangement. We also 
propose to provide specific factors an investment company should 
consider as part of its determination of whether representations in its 
advertisements about the fees and expenses associated with an 
investment in the fund could be materially misleading.
    Below we discuss the likely effects of the proposed amendments to 
the advertising rules. We expect that the proposed amendments would 
lower investor search costs and reduce the risk of a mismatch between 
investor preferences and investor choice while also imposing certain 
costs on investors and third parties who participate in the production 
and delivery of fund advertising to investors. Additionally, we discuss 
how the effects of the proposed amendments to the advertising rules may 
vary across investors and funds according to the conditions of their 
participation in the market for financial products.
b. Benefits to Investors
    The effect of the proposal would be to reduce the likelihood that 
investors misinterpret investment company advertisements. For example, 
the recent experience of the Commission is that funds sometimes market 
themselves as ``zero expense'' or ``no expense'' funds based solely on 
information in their prospectus fee tables. In some cases a fund's 
prospectus fee table may show no transaction costs and no ongoing 
charges only because the fund adviser, the adviser's affiliates, or 
others are collecting fees elsewhere from these investors. In such 
cases, an investor in a so-called ``zero expense'' fund may encounter 
other investment costs, including intermediary costs (e.g., through 
wrap account fees), securities lending costs (e.g., through revenue 
sharing with a securities lending agent), or future costs associated 
with the fund once an underlying fee waiver or expense reimbursement 
arrangement expires. These additional costs and expenses can reduce the 
value of a shareholder's investment in a fund. As a result, absent 
appropriate explanations or limitations, referring to such a fund as a 
``zero expense'' fund can materially mislead investors and cause them 
to believe incorrectly that there are no expenses associated with 
investing in the fund.
    More generally, the proposed rules would require more consistent 
fee and expense presentations across investment company advertisements, 
and thus facilitate investor comparisons of important fee and expense 
figures. By reducing the chance of misleading information being 
presented to investors--e.g., so that useful information faces less 
competition for investor attention with other information--the proposal 
may increase the salience of relevant fee and expense figures to 
investors and reduce the chance of a mismatch between the investor's 
preferences and their choice of investment product among the various 
alternatives, thereby increasing the efficiency of investors' 
investment decisions. The extent to which increasing the salience of 
fee and expense information in advertisements benefits an investor 
considering an investment in a fund depends on the importance of this 
information contained in fund advertising materials relative to the 
other information that is available to the investor for the purpose of 
monitoring fund investments and choosing between the fund and other 
financial products.
    To the extent that the advertising rule amendments reduce fund 
incentives to understate or obscure their fees, they may enable 
investors more easily to distinguish funds according to their actual 
fees. In this instance, the indirect effect would be that funds with 
lower (higher) fees would attract more (less) investor dollars and, in 
anticipation, the higher-fee funds would have a greater incentive to 
lower their fees than without the rule amendments. Thus, some funds may 
put even more effort into lowering their fees and expenses than they 
would do in the absence of the proposal, and otherwise find ways to 
differentiate themselves to attract and retain investment business.
c. Costs to Investors
    Investment companies and third parties involved in preparing or 
disseminating investment company advertisements may incur costs to 
comply with the proposed advertising rule amendments. Investors could 
bear the costs of these amendments through increased expenses that 
funds would

[[Page 70825]]

incur to implement the proposal. We discuss those expenses below.\827\
---------------------------------------------------------------------------

    \827\ See infra Section III.C.4.d.
---------------------------------------------------------------------------

    In addition, if the cost of compliance with these proposed 
amendments were significant, some advertisers might cease advertising 
rather than incur the extra costs of compliance, which could affect 
investors. Investors who rely on advertisements to make investment 
decisions or compare funds might have less complete information for 
these purposes. However, we believe this is unlikely because, as 
discussed below, we do not anticipate that the compliance costs would 
be significant in general or significant enough relative to the benefit 
that most funds would expect from continuing to advertise.\828\
---------------------------------------------------------------------------

    \828\ See infra Section III.C.4.d.
---------------------------------------------------------------------------

d. Other Costs
    The cost of our proposal to amend the advertising rules would 
include the direct cost of modifying advertising materials to bring 
them into compliance with the proposed advertising rule amendments. 
This may require internal review and approval of advertisements beyond 
what occurs under the current rule, particularly where an advertisement 
is not already required to present certain fee and expense figures 
under existing FINRA rules. For example, while many investment company 
advertisements are subject to timeliness requirements related to 
performance, they currently are not subject to similar timeliness 
requirements for fee and expense information. We expect some of these 
costs to be borne in the first year after the rule adoption. That is, 
they would be transition costs and not sustained beyond the first year. 
We estimate that the transition costs associated with the proposed 
advertising rule amendments would be $201,353,040.\829\ These costs 
would be borne by funds (including their shareholders), intermediaries, 
and other third parties who prepare investment company advertisements.
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    \829\ See infra Sections IV.F through IV.H. We estimate there 
are 39,951 investment company advertisements (or supplemental sales 
literature) each year that would be subject to the proposed 
amendments to rules 482, 34b-1, and 433. This includes 35,514 
advertisements subject to rule 482, 337 supplemental sales 
literature subject to rule 34b-1, and 4,100 advertisements by 
registered closed-end funds or BDCs used in reliance on rule 433 
instead of rule 482. For each of these rules, we estimate an initial 
burden of 15 hours for relevant advertisements. The estimated 
transition costs of the proposed advertising rule amendments is 
based on the following calculation: 15 hours x $336 (blended wage 
rate for compliance attorney and senior programmer) x 39,951 
advertisements = $201,353,040.
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    The overall costs of the proposed advertising rule amendments would 
be greater for some types of fund advertisements than others. For 
example, the proposed rule would require the fee and expense figures to 
be calculated in the manner the registrant's Investment Company Act or 
Securities Act registration form prescribes for a prospectus. This 
proposed requirement could make it more burdensome to prepare 
advertisements for some types of registrants, such as closed-end funds 
that do not maintain updated prospectuses and, thus, may not currently 
calculate current fees and expenses in the manner the proposed 
amendments would require. As a result, it would be more costly to 
prepare these advertisements (if they include fee and expense 
information) because of the need to develop new procedures for annually 
calculating these registrants' fees and expenses in accordance with 
prospectus fee table requirements. In addition, the cost of compliance 
would be greater for funds, intermediaries, or others that react to the 
proposed advertising rule amendments by initiating or enhancing a 
compliance program after previously having no such program or only a 
very limited program in place. It would be smaller for those who 
periodically obtain compliance advice and continually update their 
advertising materials in response to changing market conditions or 
changing investor demand. Overall, we estimate that the ongoing annual 
costs of the proposed advertising rule amendments would be 
$67,117,680.\830\
---------------------------------------------------------------------------

    \830\ See infra Sections IV.F through IV.H; see also supra 
footnote 829. The estimated annual costs of the proposed advertising 
rule amendments is based on the following calculation: 5 hour x $336 
(blended wage rate for compliance attorney and senior programmer) x 
39,951 advertisements = $67,117,680.
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R. Effects on Efficiency, Competition, and Capital Formation

    This section describes the effects we expect the proposed rule to 
have on efficiency, competition, and capital formation. Key to this 
analysis are the concepts of efficiency in the use of investor time and 
attention and in the use of fund resources from the real economy to 
meet disclosure delivery obligations. We regard changes and amendments 
that reduce these costs as increasing economic efficiency, with changes 
and amendments that increase these costs having the opposite effect. 
Also key is the concept of ``information asymmetry''--in this case, the 
lack of information that investors may have about funds and other 
investment products--and the difficulties that some investors may face 
in using the information that is available to them in reducing that 
information asymmetry.
    Efficiency. The proposed rules and amendments would enable 
investors to use their time and attention more efficiently. To 
investors, the costs of investing in a fund are more than just the 
dollar cost, and include the value of an individual's time and 
attention that is spent gaining an understanding of the fund and its 
fees, expenses, risks, and other characteristics, both before and after 
the initial fund investment. Further, for those investors who do not 
gain a full understanding of the fund and its risks, there could be a 
cost stemming from a potential mismatch between the investor's goals 
and the fund risk profile and fee structure. Depending on the size of 
an individual's position in a fund, certain of these additional costs 
could be considerable in comparison to the monetary costs associated 
with the investment and could discourage investors from gathering 
information about different investment alternatives and evaluating 
existing investments even in circumstances where reviewing prospectuses 
and available shareholder reports could be beneficial.
    The overall efficiency gains from the effect the proposal and 
amendments have on how investors allocate their time and attention 
would depend on the extent to which individual investors find it easy 
to transition from the current framework to the new framework and find 
disclosure and other materials under the new framework genuinely easier 
to use. Some individuals may prefer the current framework. Their time 
and attention may be used less efficiently under the proposed rules, 
which would require them to go to the trouble of requesting their 
preferred materials rather than receiving them automatically as would 
occur in the current framework, and these investors would indeed not 
find the new framework preferable to current practice. However, despite 
these potential limitations, we expect the efficiency gain and cost 
reduction from changes in the use of investor time and attention 
resulting from the proposed rule to be positive, because the proposed 
disclosure framework is specifically designed to make the disclosures 
easier for retail investors to use while continuing to provide access 
to more detailed information for the market professionals and other 
investors who wish to access them, as discussed in Section 
III.C.2.b.\831\
---------------------------------------------------------------------------

    \831\ These provisions would thus not have efficiency effects 
for financial professionals and other investors who currently rely 
on more detailed information online that will continue to be 
accessible.

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[[Page 70826]]

    While not the primary source of efficiency gain, changes in the 
delivery of disclosures to shareholders under the proposed rules would 
cause a decline in the real-resource costs of delivering disclosures to 
investors. This could be an efficiency gain from the proposal. 
Specifically, by effectively consolidating two deliveries--the annual 
report and the annual prospectus update--into a single delivery of a 
concise annual report, the proposal would promote efficiency by 
reducing the cost of printing and delivering disclosures to retail 
shareholders. Here, efficiency gains would depend on the preferences of 
individual shareholders, who would have the option of requesting that 
the two disclosures instead continue to be sent separately. They also 
would depend on the preferences of funds. We discuss these efficiency 
gains from reduced delivery costs as benefits of the proposal in 
Section III.C.2.d.\832\
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    \832\ For example, as discussed above, greater investor 
understanding of a fund, including its fees and risks, could lead to 
a better match between investor goals and investor choice among 
alternative funds and other investment opportunities. In other 
words, investment efficiency could increase.
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    In addition, efficiency gains may arise from the proposed 
improvements to prospectus disclosure about fund fees. For example, 
investors may find it easier to compare the fees and expenses of funds 
under the proposal. The proposal may therefore contribute to the 
efficient use of those investors' time and attention, and lead to more 
efficient matches between investor preferences and the available 
investments. To the extent the proposed amendments would affect funds' 
investment behavior, it could result in funds investing in acquired 
funds where the adviser believes this would contribute to the fund's 
investment objective and would be in the interest of shareholders. This 
could result in the fund allocating its investments more efficiently 
because it would reduce a potential impediment to investments in 
acquired funds, even while it may result in other funds reducing their 
investments in acquired funds for the purpose of moving or staying 
below the proposed eligibility threshold. We discuss the efficiency 
gains from changes in the prospectus fee table as benefits of the 
proposal in Section III.C.3.b.
    In addition, the proposal may affect economic efficiency through 
changes in disclosure content. The proposed amendments to the content 
of shareholder report disclosure and the presentation of advertising 
materials would increase the consistency of the presentation of their 
contents across funds (and, in the advertising rule change, across a 
wider range of investment opportunities) and thereby promote their 
comparability. This may make it easier for investors to make 
comparisons across funds, and between funds and other investment 
products. As a result, investors may face lower information asymmetry 
and lower search costs in choosing among funds, and among investment 
opportunities more generally. In addition, investors and other market 
participants may be more easily able to monitor their fund and other 
investments. Finally, investors may be more likely to react to actual 
differences in fund fees, expenses, principal risks, and other fund 
characteristics than under the current framework to the extent that 
those differences are more easily identified. Thus, the proposed rules 
and amendments that reduce information asymmetry and search costs may 
reduce barriers that funds and intermediaries face in supplying 
investment opportunities to investors, and that investors may face in 
comparing and evaluating the suitability of the investments initially 
and, as fund shareholders, over the period of the investment.\833\ The 
proposed advertising amendments would have similar effects, by 
deterring potentially misleading statements by funds.
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    \833\ As noted above, there may be investors who would prefer 
the disclosure framework that is now in place and who would under 
the proposed framework need to take extra steps to continue to use 
the disclosures that they use in making investment decisions 
currently. To the extent this occurs, the proposal could lead to 
additional costs and reduced efficiency for such investors in their 
evaluation of fund investments.
---------------------------------------------------------------------------

    These increases in efficiency and related cost reductions could 
manifest as a higher likelihood that investors make use of the 
disclosures that funds provide through their prospectus and shareholder 
reports, and thus lead to investment decisions that are informationally 
efficient. First, it may increase the likelihood that investors choose 
a mix and level of fund investments that are consistent with their 
overall financial preferences and objectives--a level that may be 
higher or lower than would occur presently. The proposal may help 
promote investment in funds by investors who would benefit from them. 
Second, an increase in the informational efficiency of investor 
decisions could make it more likely that those investors who choose to 
invest in funds make choices that are consistent with their preferences 
and needs and reject those that are not. Third, making it easier for 
investors to use the information that is disclosed under the rule 
provisions that require concise, tailored prospectus and shareholder 
report disclosures could facilitate more efficient investor allocation 
of assets across funds. These effects on efficiency would be limited, 
however, to the extent that investors rely on third parties for advice 
in selecting among financial products, where that third party uses more 
information than the proposed shareholder reports and amended 
prospectus disclosure.\834\
---------------------------------------------------------------------------

    \834\ For example, one investor survey found that 24% of 
surveyed mutual fund investors agreed with the statement, ``I rely 
on a financial adviser or broker to look at these sorts of [fund] 
documents.'' See ICI Investor Survey, supra footnote 36, at 20. 
Within subsets of the surveyed investors, 57% of mutual fund 
investors aged 65 and older, and 58% of mutual fund investors with 
household incomes less than $50,000, agreed with this statement. See 
id. at nn.19 and 20. A third party adviser, for example, may prefer 
to access all information that is available about a fund online 
rather than rely solely on the prospectus and shareholder report 
information that is the subject of the proposal. Such an adviser 
would not change its information or advice under the proposal. Funds 
would not anticipate such a change, and there would be a lesser 
effect on competition among funds accordingly.
---------------------------------------------------------------------------

    Competition. The proposed rules and amendments that affect 
information asymmetry between investors and funds may, by reducing 
investor search costs, affect competition. For example, the proposed 
rules and amendments make changes to shareholder reports, prospectus 
disclosures, and fund advertisements that would enable investors to 
compare fees and expenses and other information more easily across 
funds, and between funds and other financial products, could affect 
competition among funds by making it easier for lower-fee funds to 
distinguish themselves from other funds. This could lead investors to 
shift their assets from higher-fee funds to lower-fee funds. It also 
could lead funds, in anticipation of this, to lower their fees or 
otherwise take steps to draw investor flows away from competing funds 
or avoid outflows to competing funds under the modified disclosure 
framework. It could lead funds to exit that are not as easily able to 
compete on the basis of fees and expenses as a result of the modified 
disclosure framework, and other funds to enter and compete for investor 
assets more efficiently than would currently occur. The effect on 
competition among funds may be limited, however, to the extent that 
investors rely on third parties who are not affected by the rule for 
advice in selecting among financial products.\835\
---------------------------------------------------------------------------

    \835\ See also supra footnote 834.

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[[Page 70827]]

    As discussed above, the proposed clarification of the term 
``appropriate broad-based securities market index'' in the management's 
discussion of fund performance section of the shareholder report could 
result in additional costs to funds in the form of index-licensing 
fees. The amount of these costs would depend, among other things, on 
market competition among index providers. If the proposed clarification 
were to result in a sufficient reduction in the number of index 
providers producing indexes that are ``appropriate broad-based 
securities market indexes'' or increased demand by funds to license 
indexes from a sufficiently small number of competing suppliers, index-
licensing fees could increase.
    The proposed amendments to prospectus disclosure requirements could 
have similar competitive effects as enhanced fee and expense 
disclosures. If these proposed amendments have the intended effect of 
making the disclosure of principal risks more usable for investors and 
cause each fund to highlight those risks that are truly principal to 
the particular fund, they may also induce funds to compete more 
intensively on the basis of risk exposures. For example, some funds may 
choose to hedge certain risks, such as foreign currency risks, or 
otherwise manage risks, in an effort to offer investors a narrower set 
of risk exposures.
    Finally, we noted earlier in Section III.C.4.c that certain funds 
may respond to the proposed amendments to the advertising rule by 
limiting their advertising. Reduced advertising could affect the way in 
which funds compete for investor assets, causing funds to focus 
competition more narrowly on dimensions that are disclosed in 
prospectuses, such as fees, expenses, and principal risks. At the same 
time, if investors respond to fewer fund advertisements by making fewer 
comparisons between funds or searching less intensively for funds that 
match their preferences, the proposed amendments to the advertising 
rule could blunt competition between funds.
    Capital Formation. The proposed rules and amendments could lead to 
an increase in capital formation. First, to the extent they increase 
the efficiency of exchange in markets for funds and other financial 
products, the proposed rules and amendments could lead to changes in 
fund investment in these products. Greater investment in ETFs, mutual 
funds, and other products, for example, could lead to increased demand 
for their underlying securities. The increased demand for those 
securities could, in turn, facilitate capital formation. Diminished 
investment could have the opposite effect, although we do not have any 
reason to believe that the proposal would decrease capital formation. 
In addition, changes in the prospectus fee disclosure could affect the 
willingness of index providers to include funds in their indexes or of 
funds to invest in other funds, as some commenters have indicated.\836\ 
If the proposed amendments increase fund investments in certain other 
funds, they could in turn result in additional capital formation for 
the particular types of companies in which the acquired funds 
invest.\837\ For example, to the extent the proposal would result in 
funds investing more in BDCs, the proposal could enable BDCs to make 
additional investments in small- and mid-sized companies.\838\
---------------------------------------------------------------------------

    \836\ See supra footnote 611 (discussing comments on the effects 
of AFFE disclosure on BDC investments).
    \837\ As an example, to the extent BDCs were excluded from 
indexes as a result of concerns about the effect of BDC investments 
on funds' fee tables as a result of AFFE disclosure, as commenters 
have suggested, the proposal may result in BDCs being included in 
indexes again. This may occur particularly where BDCs and other 
funds would represent less than 10% of an index, which would permit 
funds tracking the index to rely on the proposed AFFE amendments. 
See id.
    \838\ Of the funds that invest in acquired funds, we estimate 
that approximately 11% currently invest in BDCs. This is based on 
staff's analysis of Form N-PORT filings received through early June 
2020.
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    We further note that, to the extent that increased or decreased 
investment in these financial products reflects substitution from other 
investment vehicles, the effect on capital formation would be 
attenuated because this would reduce the net change in the overall 
amount of investment in the capital markets.
    The proposed rules that would lower the cost of delivering 
disclosures to fund shareholders could have a positive effect on fund 
performance and attract new investors or additional capital from 
existing investors. If so, the rule could promote capital formation 
benefits. We are unable to estimate precisely the magnitude of capital 
formation effects that may result from our projected cost savings under 
the rule because the magnitude of such effects may be affected by the 
extent of pass-through cost savings and by other factors that affect 
the flow of investor capital into mutual funds and ETFs, including 
other components of fund returns, overall market returns, and returns 
on investments other than funds. To the extent that any proposed rule 
or amendment would increase the delivery cost, we would anticipate the 
opposite effect.
    The proposed rule changes and amendments are designed to make 
shareholder reports and prospectus disclosures easier for shareholders 
to use and to help investors better understand fees and expenses 
through fund prospectuses or advertisements. To the extent that it 
becomes easier for investors to use fund disclosure or to understand 
investment fees and expenses, the effect may improve retail investors' 
understanding about, and confidence in, the market for funds and other 
investment products, which may increase participation in this market by 
investors that previously avoided it. Such additional entry by new 
investors could increase the level of total capital across markets and 
increase the demand for new investment products and securities, which 
could lower the cost of capital for operating companies, precipitate 
capital formation in aggregate across the economy, and facilitate 
economic growth. These effects on capital formation would be limited, 
however, to the extent that investors rely on third parties who are not 
affected by the rule for advice in selecting among financial products. 
\839\ Overall, we do not have reason to believe that the proposed rules 
or amendments would have significant effects on capital formation.
---------------------------------------------------------------------------

    \839\ See also supra footnote 834.
---------------------------------------------------------------------------

S. Reasonable Alternatives

1. More or Less Frequent Disclosure
    The proposal would maintain a fund's obligation to deliver an 
annual and a semi-annual report to shareholders. Alternatively, we 
could consider increasing or reducing the frequency of reports that 
funds would be required to deliver to shareholders.
    As one alternative, the Commission could propose to increase the 
required frequency of delivery of reports to shareholders beyond what 
occurs under the current disclosure framework. For example, the 
Commission could require funds to deliver shareholder reports on a 
quarterly basis, rather than on a semi-annual basis as would continue 
to be the case under the proposal. To the extent shareholders review 
these additional reports, receiving the reports more frequently could 
keep shareholders better informed about their fund investments and 
could enhance shareholders' familiarity and comfort with reviewing 
shareholder report disclosures, since they would encounter such 
disclosures more frequently. As a result, investors may make more 
informed investment decisions. However, increasing the frequency of

[[Page 70828]]

reports would require greater allocation of fund resources to preparing 
and delivering shareholder reports, which would increase fund (and 
shareholder) costs. In addition, receiving more frequent shareholder 
reports would place greater demands on shareholder time and attention 
compared to the proposal, which could decrease the likelihood that 
shareholders review the reports and rely on them to inform their 
investment decisions.\840\
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    \840\ Existing research notes that individuals exhibit limited 
ability to absorb and process information. See supra Section 
III.C.1; Nisbett & Ross, supra footnote 815; Hirshleifer and Teoh 
Study, supra footnote 761.
---------------------------------------------------------------------------

    The Commission could also propose alternatives to transmitting the 
semi-annual report, such as permitting the requirement to transmit 
semi-annual reports to be satisfied by a fund filing certain 
information on Form N-CSR or by making information available on a 
website (either semi-annually or more frequently). Relative to the 
proposal, funds would benefit from cost savings associated with no 
longer being required to deliver the semi-annual report. Funds also 
could experience lower costs associated with preparing disclosures, 
particularly if the information they were required to provide on 
websites largely replicated information that many funds already provide 
online in monthly or quarterly fact sheets.\841\ Shareholders could 
benefit from these cost savings to the extent funds pass them through. 
However, shareholders who prefer to receive information more frequently 
than annually, as they currently do, would incur costs associated with 
the reduced frequency of delivery, such as costs of locating 
information online instead of in the delivered semi-annual report. In 
addition, to the extent this was an optional framework (e.g., funds 
could either provide certain information online or deliver semi-annual 
reports), the alternative framework may lead to shareholders in some 
funds receiving less direct information than those in other funds.
---------------------------------------------------------------------------

    \841\ See generally supra text following footnote 23.
---------------------------------------------------------------------------

2. More or Less Information in Shareholder Reports
    The proposal would make the disclosures that funds send to 
shareholders more concise, without materially changing the overall 
amount or scope of information that funds provide to their shareholders 
(either in shareholder reports or separately online). Instead, the 
Commission could propose to require more (or less) information in fund 
shareholder reports and less (or more) information online or upon 
request only, relative to the proposed amendments. We could further 
propose to reduce the overall amount of disclosure funds are required 
to prepare and provide, e.g., by no longer requiring funds to provide 
disclosure regarding the basis for the board's approval of investment 
advisory contracts.
    The benefits of requiring more information to be included in 
shareholder reports (with less information online or upon request only) 
are that fewer investors may need to take any additional steps needed 
to access the information online, which would reduce burdens on those 
investors. However, this alternative also has certain costs. For 
example, requiring more information in shareholder reports may reduce 
the likelihood that shareholders review the reports because they may be 
more likely to feel overwhelmed by the length of the reports. 
Shareholder reports that include more information than the proposed 
content may also make it harder for shareholders to find key 
information within the report. Moreover, increasing the length of 
shareholder reports by requiring additional content could also increase 
delivery costs for funds (which could also be passed on to 
shareholders), particularly with respect to printing and mailing costs.
    As another alternative, we could further limit the content of 
shareholder reports. This alternative could result in shareholder 
reports that are easier for shareholders to review and could reduce 
costs associated with the preparation and delivery of shareholder 
reports. However, this alternative may reduce the utility of 
shareholder reports for many if not most shareholders if the reports do 
not include the key information those shareholders tend to use to 
monitor their fund investments or make portfolio decisions. If, as part 
of this alternative, we required funds to provide the information 
removed from shareholder reports to shareholders upon request or 
online, those shareholders would face the burden of requesting the 
information or locating it online. If we instead removed certain 
disclosure requirements entirely, the costs to funds of preparing 
disclosure would decline. This approach would, however, reduce access 
to information for all market participants, which may result in less 
informed monitoring or investment decisions by shareholders or by the 
market professionals they rely on for investment advice.
3. Retaining Rule 30e-3 Flexibility for Open-End Funds Registered on 
Form N-1A
    The Commission is proposing to exclude funds registered on Form N-
1A from current rule 30e-3. Under the proposal, affected funds would be 
required to deliver concise shareholder reports directly to 
shareholders in order to meet their delivery obligations. Funds would 
not have the flexibility to instead deliver a paper notice with 
information about the online location of the shareholder report, as is 
the case under current rule 30e-3.
    As an alternative, the Commission could continue to permit these 
funds to rely on rule 30e-3 to satisfy their shareholder report 
delivery obligations. This alternative would provide optionality to 
funds to determine their preferred method for delivering shareholder 
reports where shareholders have not expressed a clear preference for 
electronic delivery or paper delivery of the report and could reduce 
costs for some funds compared to the proposal, such as for those funds 
that have already begun to prepare to rely on rule 30e-3. It also could 
reduce the potential for shareholder confusion where funds have 
notified shareholders of their intent to rely on rule 30e-3 and of the 
associated upcoming changes to shareholder report delivery. However, 
given that we do not expect the proposed shareholder reports to be much 
longer than a paper notice under rule 30e-3, we do not believe that 
excluding relevant funds from rule 30e-3 as proposed would 
significantly increase the costs of delivering shareholder reports 
relative to the baseline.\842\ For instance, the proposed amendments 
may reduce processing fees associated with delivering shareholder 
reports through intermediaries and should not significantly increase 
printing and mailing costs. Moreover, we believe that delivering a 
concise shareholder report to shareholders directly may help them more 
efficiently monitor their fund investments. This is because 
shareholders who would otherwise receive paper notices under rule 30e-3 
could avoid the additional step of finding the report online.
---------------------------------------------------------------------------

    \842\ See supra footnote 134 and accompanying text (discussing 
our belief that the proposed shareholder reports could be trifold 
self-mailers).
---------------------------------------------------------------------------

    In addition, we recognize that if a fund could rely on both rule 
30e-3 and proposed rule 498B, shareholders may no longer directly 
receive substantive disclosure about a fund investment, beyond notices 
of material changes under proposed rule 498B. This could

[[Page 70829]]

result in shareholders being less informed, compared to the proposal. 
If, instead, funds were provided the option to rely on either rule 30e-
3 or proposed rule 498B, a shareholder in a fund that chooses to rely 
on rule 30e-3 instead of proposed rule 498B would receive direct 
disclosure that may be less well-suited to his or her needs than a 
shareholder of a fund that relies on proposed rule 498B (or on neither 
rule), given that prospectus disclosure is designed more for the needs 
of new or prospective investors than for the needs of existing 
shareholders.
4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds
    The proposed advertising rule amendments would apply to all 
registered investment companies and BDCs. The scope of entities 
affected by these amendments would therefore be broader than under the 
proposed rule and other proposed amendments, which apply only to open-
end funds, such as mutual funds, and to ETFs. As an alternative, we 
could also limit the scope of the proposed amendments to the 
advertising rules to apply only to open-end funds.
    Under this alternative, the advertising rule amendments would apply 
to a narrower class of entities than is proposed. The effect would be 
to reduce both the cost and benefits of the proposed advertising 
amendments that are discussed in Section III.C.4, as these costs and 
benefits would accrue only to shareholders and issuers of the narrowed 
class of entities, and would no longer accrue to shareholders and 
issuers of any entities that would be excluded under the alternative. 
In addition, the alternative could lead to a disparity in the quality 
of the information that is available to market participants about funds 
that would be covered by the advertising rule amendments under the 
alternative and the entities that would be outside its scope. This 
could lead to reduced comparability and distortions in investor choice 
across registered investment companies and BDCs, relative to the 
approach the Commission is proposing, which would apply the standards 
across all of these entities evenly.
5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a 
Different Manner
    The proposed prospectus fee summary disclosure would require funds 
to provide certain fee and expense information both as a percent of a 
fund investment and in dollar figures based on a $10,000 investment, 
while the presentation of those numbers in the full fee table would 
remain only in percentage figures. Alternatively, we could require 
funds to express fees and expenses in the fee summary as a percent of a 
fund investment only, similar to the current fee table presentation. 
This alternative would streamline the fee summary and could make it 
more visually appealing by reducing the amount of detail. It also could 
marginally reduce costs of preparing disclosures for funds. However, as 
discussed above, a fee summary that excludes dollar-based figures may 
be more difficult for some investors to understand.\843\
---------------------------------------------------------------------------

    \843\ See supra footnotes 63 and 573.
---------------------------------------------------------------------------

    The proposed amendments are designed to promote more concise 
principal risk disclosure in the summary section of the statutory 
prospectus (or in summary prospectuses for funds that use summary 
prospectuses), but the proposal does not limit the number of principal 
risks a fund may disclose. As an alternative, we could limit the number 
of principal risks a fund may disclose (e.g., only 25 principal risks). 
This would streamline principal risk disclosure in a way that may make 
it easier for investors to digest and understand the most central risks 
of a fund investment. At the same time, this approach could potentially 
result in a fund understating its principal risks in some instances, 
which could mislead investors about the risks associated with an 
investment in the fund.
    The proposed rule would provide that a principal risk is one that 
would place more than 10% of the fund's assets at risk (or it is 
reasonably likely that it would place more than 10% of the fund's 
assets at risk in the future). Alternatively, we could establish 
different numerical thresholds in the proposed instruction. For 
example, we could provide a lower percentage threshold of 5% or a 
higher percentage threshold of 15% for determining whether a risk is 
principal. Compared to the proposed approach, a higher percentage 
threshold would result in funds disclosing fewer principal risks and 
reduce the costs to funds of providing these disclosures, while a lower 
percentage threshold would result in funds disclosing more principal 
risks and increase the costs to funds of providing these disclosures. 
Fewer principal risks being disclosed could lead to disclosure that is 
overall more concise and that may require less time and resources for 
investors to understand, while more principal risks being disclosed 
could lead to disclosure that is overall less concise and that may 
require more time and resources for investors to understand. At the 
same time, decreasing the number of principal risks a fund discloses 
may increase the potential for an investor to be misled about the risks 
of investing in a particular fund, while increasing the number of 
principal risks a fund discloses may decrease the potential for an 
investor to be misled.
    As another alternative, we could provide a qualitative standard or 
a ``materiality'' standard for funds to determine whether a risk is 
principal instead of a numerical-based standard. These alternatives may 
allow funds to tailor and adapt their principal risk disclosure better 
to different facts and circumstances, which could lead to more accurate 
identification of a fund's principal risks and may better account for 
non-investment related risks, such as cybersecurity risks and new fund 
risks. However, these alternatives may be less effective than the 
proposed approach in promoting more concise and focused principal risk 
disclosure. These alternatives also could lead to greater variation in 
principal risk disclosure across funds than the proposed approach, 
which may make it more difficult for investors to compare funds 
effectively when making investment decisions. In addition, it may be 
more costly for funds to evaluate whether a principal risk is material 
compared to evaluating whether the principal risk meets the proposed 
quantitative standard.
6. Amending Shareholder Report Requirements for Variable Insurance 
Contracts or Registered Closed-End Funds
    The proposed shareholder report amendments apply only to funds 
registered on Form N-1A. The proposed amendments to shareholder reports 
do not apply to other registered management investment companies that 
transmit annual and semi-annual reports under rule 30e-1.\844\ 
Alternatively, we could extend the shareholder report disclosure 
amendments to other registered management investment companies, 
including closed-end funds that register on Form N-2 and variable 
annuity separate accounts that register on Form N-3. Like shareholders 
in open-end

[[Page 70830]]

funds registered on Form N-1A, shareholders in these other funds could 
benefit from more concise shareholder reports. However, the Commission 
has recently amended the disclosures that shareholders in these funds 
receive. For example, the recently adopted changes to closed-end fund 
disclosures include multiple changes to these funds' shareholder report 
disclosure.\845\ Similarly, while the recently adopted changes to the 
variable insurance contract disclosure framework are focused more on 
prospectus disclosure and not shareholder report disclosure, we 
anticipate that these amendments would significantly change investors' 
experience with variable contract disclosure.\846\ Because we lack 
information about shareholders' experiences with these new disclosure 
requirements, we would like to assess the impact of these changes prior 
to proposing additional disclosure changes for variable contracts or 
closed-end funds.
---------------------------------------------------------------------------

    \844\ Although all registered management investment companies 
are subject to rule 30e-1, the information a registered management 
investment company must include in its shareholder report is 
specified in the relevant Investment Company Act registration 
statement form (i.e., Forms N-1A, N-2, or Form N-3).
    \845\ See supra footnote 129.
    \846\ See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27.
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7. Requiring Funds to Comply With Proposed Rule 498B
    Proposed rule 498B allows funds the option to deliver a notice of 
material changes to shareholders in lieu of delivering annual 
prospectus updates and prospectus stickers. Instead of providing funds 
with the option to rely on proposed rule 498B, we could require all 
affected funds to comply with the proposed rule.\847\
---------------------------------------------------------------------------

    \847\ Under the proposed rule 498B, investors would continue to 
receive a prospectus in connection with their initial fund 
investment, as they do today. Thereafter, a shareholder would no 
longer receive annual prospectus updates, in light of the fact that 
the shareholder would be receiving tailored shareholder reports 
(which would include, in the annual report, a summary of material 
changes that occurred over the prior year), and timely notifications 
to shareholders pursuant to proposed rule 498B regarding material 
fund changes as they occur.
---------------------------------------------------------------------------

    This alternative would have the benefit of creating a more 
consistent disclosure framework across funds and would result in fund 
shareholders generally receiving the same types of information from all 
funds. Under the proposal, prospectus delivery practices of funds would 
vary across funds depending on whether they choose to rely on rule 
498B. We believe that the funds that choose not to rely on the rule 
would generally continue to deliver the annual prospectus update, while 
the funds that rely on rule 498B would not deliver the annual 
prospectus update and would instead provide to fund shareholders timely 
notification of material changes. Under this alternative, all fund 
shareholders would receive prompt notices of material changes to a fund 
and would not receive separate annual prospectus updates directly. This 
may benefit the shareholders of funds that otherwise would decline to 
rely on rule 498B, to the extent that delivery of the more concise 
materials may allow them to make better-informed investment decisions.
    However, this alternative may impose burdens on funds that would 
not otherwise choose to rely on the proposed rule. For example, funds 
that do not currently use summary prospectuses, including some smaller 
funds, may determine that the benefits of proposed rule 498B do not 
justify its costs since the rule would require funds to provide summary 
and statutory prospectuses and other information online. As a result, 
the alternative approach may impose greater costs on those funds, 
including some smaller funds, than on other funds. In addition, under 
the proposed amendments, all fund shareholders would receive 
information in the annual report about material fund changes. This 
uniform annual report disclosure would promote more consistent 
information for fund shareholders and thus facilitate better-informed 
investment decisions. In addition, we believe this proposed requirement 
would not lead to increased costs because of the optional nature of 
rule 498B for two reasons. First, funds currently tend to disclose more 
material changes in the annual prospectus update, and disclosure of 
these changes would generally appear in the proposed annual report for 
all funds. Second, for material changes that funds disclose through 
prospectus stickers, we expect that funds that do not rely on proposed 
rule 498B would continue to deliver prospectus stickers to notify 
shareholders of material changes.
8. Requiring Form N-CSR To Be Tagged in Inline XBRL Format
    The proposal would not change the format requirement for Form N-
CSR, which is not required to be filed in a structured machine-readable 
format.\848\ Alternatively, we could require management investment 
companies (including open-end funds, registered closed-end funds, and 
some variable annuity separate accounts) to tag some or all of Form N-
CSR in the structured machine-readable Inline XBRL format.\849\ This 
requirement could include numerical detail tagging of the financial 
statements that would be included in Form N-CSR, as is currently 
required for operating company financial statements.\850\ The 
requirement could also include text block tagging for narrative 
disclosures (such as the discussion of prior-year performance that is 
proposed to be included in the annual report for open-end funds and 
would thus be filed as part of Form N-CSR), as is currently required 
for principal risk disclosures in open-end fund prospectuses.\851\
---------------------------------------------------------------------------

    \848\ The Instructions to Form N-CSR do not prescribe a format 
requirement for submission of the Form. As an EDGAR Form without a 
separate prescribed format, Form N-CSR is typically submitted in 
HTML (.htm) format. See Vol. 2, Sec. 5.1 of the EDGAR Filer Manual 
(Ver. 53, Jan. 2020).
    \849\ Such a requirement would be implemented by revising 17 CFR 
part 232 [Regulation S-T] and adding an Instruction to Form N-CSR 
which cites to Regulation S-T. In conjunction with the EDGAR Filer 
Manual, Regulation S-T governs the electronic submission of 
documents filed with the Commission. Modifying a structured format 
requirement for a Commission filing or series of filings can 
generally be accomplished through changes to Regulation S-T, and 
would not require dispersed changes to the various rules and forms 
that would be impacted by the format modification.
    \850\ Under the proposal, open-end funds would be required to 
file financial statements on Form N-CSR under proposed Item 7(a) of 
that Form. See supra Section II.D.1(a). Closed-end funds and 
variable annuity separate accounts that are management investment 
companies would still be required to include financial statements in 
their shareholder reports, which are filed on Form N-CSR under Item 
1 of that Form.
    \851\ Under the proposal, open-end funds would include a 
discussion of prior year performance pursuant to Item 27A(d) of Form 
N-1A. See supra Section II.B.2(c). In addition, registered closed-
end funds will be required to include a similar discussion in their 
shareholder reports as of August 1, 2021. See Closed-End Fund 
Offering Reform Adopting Release, supra footnote 128, at Sections 
II.I.2 and II.J.
---------------------------------------------------------------------------

    Compared to the baseline (under which Form N-CSR is not required to 
be submitted in a structured machine-readable format), an Inline XBRL 
tagging requirement for Form N-CSR could benefit investors by enabling 
efficient retrieval, aggregation, and analysis of the information in 
Form N-CSR and by facilitating comparisons of that information across 
investment companies and time periods. There are studies suggesting 
that XBRL requirements increase the information content of prices, 
reduce the informational advantages held by insiders over public 
investors, heighten the relevance, understandability, and comparability 
of financial information for non-professional investors, and enhance 
the reports and recommendations published by financial analysts, 
thereby indirectly benefitting retail investors for whom such analysts 
represent a significant source of investment information.\852\
---------------------------------------------------------------------------

    \852\ See, e.g., Yuyun Huang, Yuan George Shan, & Joey Wenling 
Yang, Effects of Information Processing Costs on Price 
Informativeness: Evidence from XBRL Mandate (SSRN, 2019) available 
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3324198 ; Yu 
Cong, Jia Hao, & Lin Zou, The Impact of XBRL Reporting on Market 
Efficiency, 28 J. INFO. SYS. 181 (2014); Huang, Yuyun, Jerry T. 
Parwada, Yuan George Shan, and Joey (Wenling) Yang, Insider 
Profitability and Public Information: Evidence from the XBRL Mandate 
(SSRN, 2019) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455105; Jacqueline Birt, Kala Muthusamy, & 
Poonam Bir (2017), XBRL and the Qualitative Characteristics of 
Useful Financial Information, 30 ACCT. RES. J 107 (2017); Chunhui 
Liu, Tawei Wang, & Lee J. Yao, XBRL's Impact on Analyst Forecast 
Behavior: An Empirical Study, 33 J. ACCT. & PUB. POL'Y 69 (2014); 
Andrew J. Felo, Joung W. Kim, & Jee-Hae Lim, Can XBRL Detailed 
Tagging of Footnotes Improve Financial Analysts' Information 
Environment?, 28 INT'L J. ACCT. INFO. SYS. 45 (2018); Karam Kim, 
Doojin Ryu, & Heejin Yang, Investor Sentiment, Stock Returns, and 
Analyst Recommendation Changes, 48(2) INV. ANALYSTS J. 89 (2019); 
Alastair Lawrence, James Ryans, & Estelle Sun, Investor Demand for 
Sell-Side Research, 92 ACCT. REV. (2017). However, note that the 
studies listed here which assessed the impact of XBRL were based on 
operating company financial statement data, not mutual fund risk/
return summary data.

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[[Page 70831]]

    Requiring Inline XBRL tagging of Form N-CSR would impose additional 
filing preparation costs on management investment companies compared to 
the baseline. Currently, management investment companies are not 
required to tag their Form N-CSR filings in the Inline XBRL format. As 
such, this alternative would impose on management investment companies 
the incremental costs of tagging Form N-CSR disclosures, whether 
implemented using internal staff or external service providers. Such 
costs would be partially mitigated by the fact that management 
investment companies will be subject to Inline XBRL tagging 
requirements in other filings, independent of this proposal.\853\ 
Consequently, the alternative of tagging Form N-CSR would not impose on 
management investment companies the Inline XBRL implementation costs 
that are often associated with being subject to an Inline XBRL 
requirement for the first time (such as the cost of training in-house 
staff to prepare filings in Inline XBRL, and the cost to license Inline 
XBRL filing preparation software from vendors).
---------------------------------------------------------------------------

    \853\ In 2009, the Commission adopted rules requiring mutual 
fund risk/return summaries to be submitted in an XBRL format 
entirely within an exhibit to a filing. See Interactive Data to 
Improve Financial Reporting, Release No. 33-9002 (Jan. 30, 2009) [74 
FR 6776 (Feb. 10, 2009)] as corrected by Release No. 33-9002A (Apr. 
1, 2009) [74 FR 15666 (Apr. 7, 2009)]. In 2018, the Commission 
refined the requirement to provide information in an XBRL format by 
requiring that, for fiscal periods ending on or after September 17, 
2020 (for fund groups with at least $1 billion in assets under 
management) and September 17, 2021 (for all other fund groups), 
mutual fund filers submit this information using the Inline XBRL 
format, which embeds the tagged information in the document itself, 
rather than in an exhibit. See Inline XBRL Filing of Tagged Data, 
Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
     In 2020, the Commission adopted rules requiring certain closed-
end fund prospectus disclosures to be tagged in Inline XBRL format 
for filings submitted on or after August 1, 2022 (for short-form 
eligible closed-end funds) and February 1, 2023 (for all other 
closed-end funds). See Closed-End Fund Offering Reform Adopting 
Release, supra footnote 128, at Sections II.I.1 and II.J. Also in 
2020, the Commission adopted rules requiring certain variable 
insurance account prospectus disclosures to be tagged in Inline XBRL 
format for filings submitted on or after January 1, 2023. See 
Variable Contract Summary Prospectus Adopting Release, supra 
footnote 27.
---------------------------------------------------------------------------

    However, as noted above, the primary objective of the proposed 
disclosure framework is to promote shareholder reports that assist 
existing shareholders in monitoring their fund investments, leaving 
information that is more useful for new and prospective investors to 
compare funds and make investment decisions to be retained in the fund 
prospectus.\854\ Because facilitating fund comparisons is one of the 
chief benefits of the Inline XBRL format, Inline XBRL requirements are 
likely more beneficial to investors in the context of prospectus 
disclosures rather than disclosures in periodic reports such as Form N-
CSR. As such, the Commission has determined not to propose an Inline 
XBRL tagging requirement for Form N-CSR.
---------------------------------------------------------------------------

    \854\ See supra Section II.A.2.
---------------------------------------------------------------------------

9. Modifying the AFFE Amendment
    The proposal would allow some funds to disclose AFFE, the fees and 
expenses associated with acquired fund investments, in a footnote to 
the fee table and fee summary instead of reflecting the AFFE in the 
bottom line annual expenses in the fee table (as funds do today). Funds 
with investments in acquired funds that are limited to 10 percent or 
less of their total assets would be eligible to disclose AFFE in a 
footnote. Moving the AFFE information to a footnote to the fee table 
would enable the eligible funds to provide disclosures that investors 
may find easier to use in comparing the fees and expenses of funds with 
comparable investment strategies.
    As alternatives, we could consider allowing more funds to move the 
AFFE disclosure into a footnote to the fee table by increasing the 
proposed eligibility threshold above 10%, such as to 50% or some other 
level, or by allowing all funds to move the AFFE disclosure into a 
footnote to the fee table, which may improve the salience of the 
expenses of the acquiring fund to investors. On the other hand, some 
funds may follow an investment strategy that leads them to incur 
significant expenses at a lower fund level, even where the fund does 
not have a majority of its assets invested in acquired funds. For those 
funds, moving the AFFE expenses into a footnote to the fee table may 
provide for expense disclosures that are less closely related to the 
expenses associated with the top-level fund's investment strategy. For 
example, some funds (such as certain target date funds) follow an 
investment strategy in which the acquiring fund has very low, or no, 
management fees. For those funds, a fee table that does not include the 
AFFE amount may confuse investors as to the expenses associated with 
investment in the fund.\855\ Therefore, we are proposing to limit 
eligibility for the proposed AFFE amendment to the more limited share 
of funds with 10% or less invested in acquired funds.
---------------------------------------------------------------------------

    \855\ See supra footnote 816 (discussing some commenters' views 
on the importance of AFFE disclosure).
---------------------------------------------------------------------------

    As another alternative, we could consider requiring all eligible 
funds to rely on the proposed AFFE amendments. This could make it 
easier for investors to compare similar funds because funds with 
acquired fund investments below the 10% threshold would all disclose 
AFFE in a footnote. It also could reduce investor uncertainty about how 
a fund is disclosing AFFE information. On the other hand, allowing 
funds to opt into reliance on the amendment would enable funds that 
have relatively low, or negative, net benefit from migrating to the 
footnote-based approach to opt out. Moreover, a mandatory approach 
could require funds that maintain acquired fund investments close to 
the 10% threshold to move AFFE disclosure back-and-forth between the 
fee table and an associated footnote over time, which could contribute 
to investor confusion.\856\ Therefore, we are proposing to allow 
voluntary reliance on the proposed AFFE amendments.
---------------------------------------------------------------------------

    \856\ See supra paragraph accompanying footnote 621.
---------------------------------------------------------------------------

T. Request for Comment

    We seek comment on the economic analysis, including whether the 
analysis has: (1) Identified all benefits and costs, including all 
effects on efficiency, competition, and capital formation; (2) given 
due consideration to each benefit and cost, including each effect on 
efficiency, competition, and capital formation; and (3) identified and 
considered reasonable alternatives to the proposed rules. We request 
and encourage any interested person to submit comments regarding the 
proposed rules, our analysis of the potential effects of the proposed 
rules, and other matters that may have an effect on the proposed rules. 
We request that commenters identify sources of data

[[Page 70832]]

and information as well as provide data and information to assist us in 
analyzing the economic consequences of the proposed rules and proposed 
amendments. We also are interested in comments on the qualitative 
benefits and costs we have identified and any benefits and costs we may 
have overlooked. In addition to our general request for comments on the 
economic analysis associated with the proposed rules and proposed 
amendments, we request specific comment on the following aspects of the 
proposal:
    275. What effect would the proposal have on funds' delivery costs? 
Is our assessment correct that funds could use a trifold self-mailer, 
or a similar approach, to deliver a proposed shareholder report by 
mail? Why or why not? What alternatives to a trifold self-mailer might 
funds consider for delivering the proposed shareholder reports in paper 
to relevant shareholders? How would the planned mailing device affect 
the estimated benefits and costs of the proposal? Please provide 
quantitative information, if available.
    276. We request comment on the costs to funds of the proposed 
requirement to prepare separate shareholder reports for each fund 
series. How would this requirement affect the cost to funds of 
preparing shareholder reports? Please answer this question separately 
for the transition cost and the ongoing costs of complying with this 
proposed requirement. Also please provide information on the additional 
costs to funds and other parties of delivering separate reports for 
separate fund series to shareholders, beyond any costs of report 
preparation.
    277. We request comment on the costs of the Commission's proposed 
clarification of the term ``appropriate broad-based securities market 
index'' for funds that are required to present their performance in 
relation to an ``appropriate broad-based securities market index'' in 
the management's discussion of fund performance section of the 
shareholder report. Would this proposed clarification result in 
increased index-licensing fees? To what extent would competition among 
index providers limit or otherwise affect these fees?
    278. What fraction of shareholders currently request electronic 
delivery of fund disclosure? \857\ Would the proposal cause an increase 
or decrease in this fraction relative to what would occur without the 
proposal? If so, explain and indicate the likely change. Provide 
supporting quantitative evidence, if available.
---------------------------------------------------------------------------

    \857\ We understand that the Commission estimated that fifteen 
percent of investors in variable contracts have requested electronic 
delivery. See Variable Contract Summary Prospectus Adopting Release, 
supra footnote 27, at n.1030 and accompanying text. There are 
sufficient differences between the market for investment in variable 
contracts and the market for investment in ETFs and mutual funds, 
that we believe the variable contract estimate is not a suitable 
indicator for the analysis of the present rule proposal.
---------------------------------------------------------------------------

    279. The proposal would affect financial intermediaries and other 
third parties that are involved in the distribution and use of the 
prospectus and shareholder reports, such as broker-dealers and third-
party information providers. For each type of intermediary or third 
party, we are requesting comment on how many would be affected by the 
rule, the characteristics of those affected, and the consequences for 
retail investors. Please provide quantitative information, if 
available.
    280. The effect of changes in disclosure under the proposal would 
be limited to the extent that retail investors rely on third parties 
for information and advice in selecting among financial products, where 
those third parties use more information than the proposed shareholder 
reports and amended prospectus disclosure. We are requesting comment on 
how many, or what fraction, of retail investors rely on advice from 
such third parties in choosing among funds or in monitoring fund 
investments. We are also requesting comment on whether the presence of 
third parties whose advice is unaffected by the proposal would reduce 
the impact of the proposal. Please explain and provide empirical facts 
to support your response.
    281. How frequently do funds currently deliver prospectus stickers 
to shareholders on average? Do funds typically deliver prospectus 
stickers separately, or together with other materials (e.g., semi-
annual reports)? What effects would proposed rule 498B, including the 
requirement to deliver prompt notices of certain material changes, have 
on funds' delivery costs?
    282. Are our estimates of the compliance costs associated with the 
proposed amendments reasonable?
    283. Is our assessment of the relative costs and benefits of the 
proposal to exclude open-end funds registered on Form N-1A from the 
scope of rule 30e-3 correct? Please provide qualitative or other 
information about the expected costs of delivering rule 30e-3 notices 
or complying with that rule more generally in light of funds' 
additional experience with the rule after its adoption. How do these 
costs compare to the expected costs of preparing and delivering the 
proposed shareholder reports?
    284. We seek information that would help us quantify or otherwise 
qualitatively assess the benefits of the proposed rule, particularly 
the benefits for retail investors. Please provide any data, studies, or 
other evidence that would allow us to quantify some or all of the 
benefits.
    285. The proposal is designed to conserve the time and attention of 
retail investors, and other market participants, in using the 
disclosures that funds provide through prospectuses and shareholder 
reports. We do not, however, have reliable estimates of the value to 
investors of being able to use their time more efficiently under the 
proposal or being able to make more informed investment decisions. We 
are requesting comment on the effects of the proposal on the use of 
investor time and attention, the ability of investors to make informed 
investment decisions, and on the proposal's likely effects on welfare 
of retail investors. Please provide explanations to support your 
comments. Please also provide examples, where appropriate, and 
supporting evidence from analysis of quantitative data, where 
available.
    286. The proposal is designed to increase the use of disclosures by 
retail investors. We seek comment on whether the benefit in terms of 
investor comprehension of the disclosures is likely to vary according 
to the disclosure format and, in particular, according to whether 
delivery occurs in the form of digital media. What is the empirical 
evidence? Please explain and provide documentation of any quantitative 
evidence that includes an explanation of the data sources and analysis 
methods.
    287. We seek comment on whether, and to what extent, funds that 
have the option would choose to rely on the AFFE amendments that we are 
proposing. For example, for purposes of the economic analysis, we have 
assumed that all funds that are eligible for the AFFE amendment would 
choose to move their AFFE disclosure to a footnote of the fee table, if 
allowed to do so. It is possible that not all such funds would rely on 
the amendment, however.\858\ Are there conditions under which a fund 
that could move AFFE out of the fee table would choose not to do so? 
Please explain. Also please provide data or examples to support your 
answer.
---------------------------------------------------------------------------

    \858\ See supra paragraph accompanying footnote 621 (recognizing 
that funds that tend to hold acquired fund investments near the 10% 
threshold may prefer to consistently disclose AFFE in the fee table 
to avoid moving the disclosure back-and-forth between a footnote and 
the table).

---------------------------------------------------------------------------

[[Page 70833]]

    288. The effects on investors of fund reliance on the proposed AFFE 
amendments would depend on how many funds rely on the AFFE amendment, 
and under what conditions. For example, we estimate that only funds 
with investments in acquired funds of less than 20% of total assets 
would likely spend time considering whether they would qualify for the 
AFFE amendment. We are requesting comment on the effects of the 
proposed amendment on funds and investors.
    289. The effects on investors of the proposed change in the AFFE 
disclosure would depend on whether, and under what conditions, 
investors currently rely on the fund AFFE disclosure information. We 
are requesting comment on how investors and other market participants 
use the AFFE information that is disclosed currently. What is the 
evidence that investors and others rely on AFFE disclosures in making 
choices among funds? What is the evidence that the proposed changes 
would cause any difference in the way this information is used or the 
ease of its use by investors or other market participants? Please 
explain and provide supporting cites (or other background 
documentation).
    290. We are requesting comments on whether there are any 
disparities between the likely effects of the advertising rule 
amendments on different financial products or investments that could 
lead to differences in the effects of the proposed advertising rule 
amendments across products. We specifically seek comments on 
differences in the effects of the proposed advertising rule amendments 
between ETFs or mutual funds, on the one hand, and other types of 
registered investment companies, on the other.
    291. We are not proposing to require Form N-CSR to be submitted in 
a structured machine-readable format. Should we require funds to submit 
some or all of Form N-CSR in a structured machine-readable format such 
as the Inline XBRL format? What would be the benefits and costs of such 
a requirement? Would any resulting benefits accrue to all types of 
investors (e.g., retail investors and institutional investors)? Are 
there any particular disclosures which investors would benefit most 
from having access to in structured machine-readable format? Should a 
structured machine-readable format other than Inline XBRL, such as a 
custom XML format, be required for Form N-CSR?
    292. Form N-CSR currently requires funds to disclose their name and 
Investment Company Act file number on the Form N-CSR cover page. Unlike 
the Investment Company Act file number, which is a Commission-specific 
identifier, the Legal Entity Identifier (``LEI'') is used by numerous 
domestic and international regulatory regimes and could facilitate 
collection of information about a fund beyond the information disclosed 
in Commission filings.\859\ Should we require a fund that has an LEI to 
disclose its LEI on the Form N-CSR cover page? What would be the costs 
and benefits of such an approach for investors and for funds? If the 
approach would provide informational benefits for investors, would 
retail investors realize such benefits? By making additional 
information available outside of the shareholder reports, would the 
added LEI requirement contribute to the layered disclosure framework 
discussed above?
---------------------------------------------------------------------------

    \859\ The LEI is also used by private market participants for 
risk management and operational efficiency purposes. See the LEI 
ROC's list of LEI uses at https://www.leiroc.org/lei/uses.htm.
---------------------------------------------------------------------------

    293. Form N-CSR currently requires funds that disclose divested 
securities under Item 6.b of the Form to include the Committee on 
Uniform Securities Identification Procedures (``CUSIP'') number for 
each divested security listed. Should we consider omitting Form N-CSR's 
requirement to provide a CUSIP number for each divested security? Why 
or why not? Should we permit funds to provide, in lieu of a CUSIP 
number, other identifiers such as a Financial Instrument Global 
Identifier (FIGI) for each security? Why or why not? Would permitting 
voluntary use of an alternate identifier have a beneficial effect for 
investors, funds, or users of the data?

IV. Paperwork Reduction Act Analysis

U. Introduction

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\860\ We are submitting the proposed 
collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\861\ The titles for 
the existing collections of information are: (1) ``Form N-1A, 
Registration Statement under the Securities Act and under the 
Investment Company Act for Open-End Management Investment Companies'' 
(OMB Control No. 3235-0307); \862\ (2) ``Rule 30e-1 under the 
Investment Company Act, Reports to Stockholders of Management 
Companies'' (OMB Control No. 3235-0025) (3) ``Form N-CSR, Certified 
Shareholder Report under the Exchange Act and under the Investment 
Company Act for Registered Management Investment Companies''(OMB 
Control No. 3235-0570); (4) ``Rule 30e-3 under the Investment Company 
Act, internet Availability of Reports to Shareholders'' (OMB Control 
No. 3235-0758); (5) ``Rule 31a-2, Records to be Preserved by Registered 
Investment Companies, Certain Majority-Owned Subsidiaries thereof, and 
other Persons Having Transactions with Registered Investment 
Companies'' (OMB Control No. 3235-0179); (6) ``Rule 498 under the 
Securities Act of 1933, Summary Prospectuses for Open-End Management 
Investment Companies'' (OMB Control No. 3235-0648); (7) ``Rule 34b-1 
under the Investment Company Act, Sales Literature Deemed to be 
Misleading'' (OMB Control No. 3235-0346); (8) ``Rule 433 under the 
Securities Act of 1933'' (OMB Control No. 3235-0617); and (9) ``Rule 
482 under the Securities Act of 1933 Advertising by an Investment 
Company as Satisfying Requirements of Section 10'' (OMB Control No. 
3235-0565). We are also submitting a new collection of information for 
proposed rule 498B under the Securities Act to allow funds to rely on a 
new layered disclosure framework for prospectus delivery to existing 
shareholders, subject to certain conditions. The title for this new 
collection of information would be ``Delivery of Prospectuses to 
Existing Shareholders of Open-End Management Investment Companies.''
---------------------------------------------------------------------------

    \860\ 44 U.S.C. 3501 through 3521.
    \861\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \862\ In addition to the amendments discussed below, we also are 
proposing amendments to Schedule 14A and Form N-14 to update certain 
cross references to the fee table in Form N-1A.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number.
    We discuss below the collection of information burdens associated 
with proposed amendments to Form N-1A, rule 30e-1 under the Investment 
Company Act, and Form N-CSR. We also discuss proposed rule 498B and 
proposed amendments to rule 482 under the Securities Act, rule 34b-1 
under the Investment Company Act, rule 433 under the Securities Act, 
and rule 30e-3 under the Investment Company Act. The Commission also 
intends to use two Feedback Fliers to obtain information from investors 
and funds about the

[[Page 70834]]

proposed rule.\863\ The Feedback Fliers are included in this proposal 
as Appendix B and Appendix C hereto.
---------------------------------------------------------------------------

    \863\ The Commission has determined that this usage is in the 
public interest and will protect investors, and therefore is not 
subject to the requirements of the Paperwork Reduction Act of 1995. 
See section 19(e) and (f) of the Securities Act. Additionally, for 
the purpose of developing and considering any potential rules 
relating to this rulemaking, the agency may gather from and 
communicate with investors or other members from the public. See 
section 19(e)(1) and (f) of the Securities Act.
---------------------------------------------------------------------------

V. Form N-1A

    In our most recent Paperwork Reduction Act submission for Form N-
1A, we estimated for Form N-1A a total hour burden of 1,662,190 hours, 
and the total annual external cost burden is $131,338,208.\864\ 
Compliance with the disclosure requirements of Form N-1A is mandatory, 
and the responses to the disclosure requirements will not be kept 
confidential.
---------------------------------------------------------------------------

    \864\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2020.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-1A.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP05NO20.010


[[Page 70835]]



W. Proposed New Shareholder Report Requirements Under Rule 30e-1

    We have previously estimated that it takes a total of 1,028,658 
hours, and involves a total external cost burden of $147,750,391, to 
comply with the collection of information associated with rule 30e-
1.\865\ Compliance with the disclosure requirements of rule 30e-1 is 
mandatory. Responses to the disclosure requirements are not kept 
confidential.
---------------------------------------------------------------------------

    \865\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2019.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to rule 30e-1.
[GRAPHIC] [TIFF OMITTED] TP05NO20.011

BILLING CODE 8011-01-C

X. Form N-CSR

    In our most recent Paperwork Reduction Act submission for Form N-
CSR, we estimated the annual compliance burden to comply with the 
collection of information requirement of

[[Page 70836]]

Form N-CSR is 179,443 burden hours with an internal cost burden of 
$57,723,571, and an external cost burden estimate of $3,129,984.\866\ 
Compliance with the disclosure requirements of Form N-CSR is mandatory, 
and the responses to the disclosure requirements will not be kept 
confidential.
---------------------------------------------------------------------------

    \866\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-CSR.
[GRAPHIC] [TIFF OMITTED] TP05NO20.012

Y. Proposed Rule 498B

    Proposed rule 498B would address shareholders' continued receipt of 
annual prospectus updates in the years following their initial 
investment in a fund and uses layered disclosure concepts to tailor 
funds' required disclosures to the informational needs of different 
types of investors.\867\ Under the proposed rule, investors would 
continue to receive a prospectus in connection with their initial fund 
investment, as they do today. Thereafter, a shareholder would no longer 
receive annual prospectus updates, in light of the fact that the 
shareholder would be receiving tailored shareholder reports (which 
would include, in the annual report, a summary of material changes that 
occurred over the prior year), and timely notifications to shareholders 
pursuant to proposed rule 498B regarding material fund changes as they 
occur. Reliance on the rule is voluntary; however, compliance with the 
rule's conditions is mandatory for funds relying on the rule. Responses 
to the information collections would not be kept confidential.
---------------------------------------------------------------------------

    \867\ See supra section II.F.
---------------------------------------------------------------------------

    Because a fund's reliance on proposed rule 498B would be voluntary, 
the percentage of funds that would choose to rely on the rule is 
uncertain. We generally anticipate that the proposed rule would provide 
costs savings to funds, and so we assume that the vast majority of 
funds would rely on rule 498B to satisfy their prospectus delivery 
obligations.\868\ For purposes of this estimate, we assume that funds 
that currently rely on rule 498 generally would rely on proposed rule 
498B. We believe this assumption is appropriate because funds that rely 
on rule 498 are funds that have already chosen to rely on a rule that 
provides an alternative means of satisfying prospectus delivery 
obligations, and because certain of the conditions of proposed rule 
498B overlap with similar conditions to rely on rule 498.\869\ 
Therefore, we assume that these funds would experience some 
efficiencies in coming into compliance with proposed rule 498B. Based 
on

[[Page 70837]]

these assumptions, we estimate that 90% of mutual funds and ETFs would 
choose to rely on rule 498B.\870\
---------------------------------------------------------------------------

    \868\ See supra section III.C.2.d (discussing the anticipated 
cost savings associated with rule 498B).
    \869\ For example, the set of documents that funds relying on 
498B must post online would be identical to the set of documents 
that are publicly accessible online for funds currently relying on 
rule 498. Therefore, for funds currently relying on 498, there would 
be no added burden to comply with this requirement.
    \870\ We estimate that 93% of funds use summary prospectuses. 
See supra footnote 12. Funds that use summary prospectuses under 
rule 498 already meet several of the conditions of proposed rule 
498B, which we believe would lead most of these funds to rely on 
proposed rule 498B due to the lower compliance costs of relying on 
the new rule. As a result, and to simplify our calculations, we 
estimate that 90% of funds would rely on proposed rule 498B.
---------------------------------------------------------------------------

    The table below summarizes the proposed estimates for internal and 
external burdens associated with this new requirement under rule 498B:
[GRAPHIC] [TIFF OMITTED] TP05NO20.013

Z. Rule 482

    In our most recent Paperwork Reduction Act submission for rule 482, 
we estimated the annual burden to comply with rule 482's information 
collection requirements to be 278,161 hours, with a time cost of 
$76,702,895, and with no annual external cost burden.\871\ Compliance 
with the requirements of rule 482 is mandatory, and responses to the 
information

[[Page 70838]]

collections would not be kept confidential.
---------------------------------------------------------------------------

    \871\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2017.
---------------------------------------------------------------------------

    We estimate that 36,994 responses to rule 482 are filed 
annually.\872\ We estimate that approximately 96% of the rule 482 
responses provide fee and expense figures in qualifying advertisements 
and would, therefore, be required to comply with the proposed 
amendments regarding such information (for example, ensuring that the 
fee and expense figures are presented in accordance with the prominence 
and timeliness requirements in the proposed amendments to rule 482). 
Similarly, we estimate that 96% of the responses to rule 482 provide 
advertisements that include information regarding a fund's total annual 
expenses and would, therefore, have to comply with the proposed 
amendments regarding such information.
---------------------------------------------------------------------------

    \872\ In 2019, there were 41,003 responses to rule 482 filed 
with FINRA and 262 responses filed with the Commission in 2019. Of 
those, 4,271 were responses from closed-end funds and BDCs. We 
assume that, moving forward, closed-end funds and BDCs will choose 
to use free writing prospectuses under rule 433. Therefore, we 
excluded closed-end funds or BDCs from the total responses to rule 
482.
---------------------------------------------------------------------------

    The table below summarizes the proposed estimates for internal 
burdens associated with this new requirement under rule 482:
[GRAPHIC] [TIFF OMITTED] TP05NO20.014

AA. Rule 34b-1

    To apply the same fee and expense-related requirements consistently 
across all registered investment company and BDC advertisements and 
supplemental sales literature, we are proposing to amend rules 34b-1 in 
a manner that mirrors our proposed amendments to rule 482.\873\
---------------------------------------------------------------------------

    \873\ See supra Section II.I.
---------------------------------------------------------------------------

    We estimate that 351 responses to rule 34b-1 are filed 
annually.\874\ We estimate that approximately 96% of the rule 34b-1 
responses provide fee and expense figures in qualifying advertisements 
and would, therefore, be required to comply with the proposed 
amendments regarding such information. Similarly, we estimate that 96% 
of the responses to rule 34b-1 provide advertisements that include 
information regarding a fund's total annual expenses and would, 
therefore, have to comply with the proposed amendments regarding such 
information.
---------------------------------------------------------------------------

    \874\ The estimated number of responses filed with the 
Commission in 2019.

---------------------------------------------------------------------------

[[Page 70839]]

    In our most recent Paperwork Reduction Act submission for rule 34b-
1, we estimated the annual compliance burden to comply with the 
collection of information requirement in rule 34b-1 is 26,008 hours, 
with an internal cost burden of $7.3 million.\875\ There is no annual 
external cost burden attributed to rule 34b-1. Compliance with the 
requirements of rule 34b-1 is mandatory and the responses to the 
information collections would not be kept confidential. The table below 
summarizes the proposed estimates for internal burdens associated with 
this new requirement under rule 34b-1.
---------------------------------------------------------------------------

    \875\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2018.
[GRAPHIC] [TIFF OMITTED] TP05NO20.015

BB. Rule 433

    We are proposing to amend rule 433 to require a registered closed-
end fund or BDC free writing prospectus to comply with the proposed 
content, presentation, and timeliness requirements of proposed rule 
482, as applicable, if the free writing prospectus includes fee and 
expense information.\876\ As a result, regardless of whether a 
registered closed-end fund or BDC advertisement uses rule 482 or rule 
433, the advertisement would be subject to the same requirements 
regarding fee

[[Page 70840]]

and expense information.\877\ Compliance with the requirements of rule 
433 is mandatory and the responses to the information collections would 
not be kept confidential.
---------------------------------------------------------------------------

    \876\ See supra Section II.I.
    \877\ See supra footnote 872 (noting that, for purposes of the 
PRA for rule 482, we excluded responses from closed-end funds and 
BDC).
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for rule 433, 
we estimated the annual compliance burden to comply with the collection 
of information requirement rule 433 is 6,391 hours, at a time cost of 
$7,668,800, and an external cost burden estimate of $7,669,017.\878\ As 
part of that rulemaking, we also estimated that there will be 791 
closed-end funds and BDCs filing approximately 4,271 free writing 
prospectuses.
---------------------------------------------------------------------------

    \878\ This estimate is based on the last time the rule's 
information collection was submitted in 2020. See Securities 
Offering Reform for Closed-End Investment Companies, Investment 
Company Act Release No. 33836 (Apr. 8, 2020).
---------------------------------------------------------------------------

    We estimate that approximately 96% of the 4,271 responses provide 
fee and expense figures in free writing prospectuses and would, 
therefore, be required to comply with the proposed amendments regarding 
such information. Similarly, we estimate that 96% of these responses 
would include information regarding a fund's total annual expenses and 
would, therefore, have to comply with the proposed amendments regarding 
such information.
    The table below summarizes the proposed estimates for internal 
burdens associated with this new requirement under rule 433:
[GRAPHIC] [TIFF OMITTED] TP05NO20.016

CC. Rule 30e-3

    We are proposing to amend the scope of rule 30e-3 to exclude 
investment companies registered on Form N-1A.\879\ Because our proposed 
amendment would decrease the number of funds that would be able to rely 
on rule 30e-3, we are updating the PRA analysis for rule 30e-3 to 
account for any burden

[[Page 70841]]

decrease that would result from this decrease in respondents. We are 
not updating the rule 30e-3 PRA analysis in any other respect. Reliance 
on the rule is voluntary; however, compliance with the rule's 
conditions is mandatory for funds relying on the rule. Responses to the 
information collections would not be kept confidential.
---------------------------------------------------------------------------

    \879\ See supra section II.G.
---------------------------------------------------------------------------

    Under current PRA estimates for rule 30e-3, we estimated that 
complying with the information collection requirements of rule 30e-3 
would impose an average total annual hour burden of about 8,866 hours 
and an external cost burden estimate of $76,038 on funds that choose to 
rely on rule 30e-3.\880\ Of those costs, we estimated that 24,459.4 
hours, at a time cost of $8,674,306, and an external cost of 
$69,965,020, were attributed to the compliance costs of open-end funds 
registered on Form N-1A. The table below summarizes these revisions to 
the estimated annual responses, burden hours, and burden-hour costs 
based on the proposed amendment to the scope of rule 30e-3.
---------------------------------------------------------------------------

    \880\ This estimate is based on the last time the rule's 
information collection was submitted in connection with the adoption 
of rule 30e-3 in 2019.
[GRAPHIC] [TIFF OMITTED] TP05NO20.017

DD. Rule 498

    Rule 498 under the Securities Act permits funds to satisfy their 
prospectus delivery obligations under the Securities Act by sending or 
giving investors the fund's summary prospectus and providing the 
statutory prospectus on a website. Reliance on the rule is voluntary; 
however, compliance with the rule's conditions is mandatory for funds 
relying on the rule. Responses to the information collections would not 
be kept confidential.
    We are proposing to amend the scope of rule 30e-3 to exclude 
investment companies registered on Form N-1A. Because our proposed 
amendments would decrease the number of funds that would be able to 
rely on rule 30e-3, we are updating the PRA analysis for rule 498 to 
account for that change. We are not updating the rule 498 PRA analysis 
in any other respect.
    Under current PRA estimates for rule 498, we estimated that 
complying with the information collection requirements of rule 498 
would impose an average total annual hour burden of about 20,327 burden 
hours, at a time cost of $5.8 million, and an annual external cost 
burden of $167,458,800. Of those costs, we estimated that the amortized 
aggregate annual hour burden associated with the rule 30e-3 amendments 
to rule 498 was 4,529 hours, at a time cost of $1,286,236. We estimated 
that the external costs of rule 498 did not change as a result of the 
rule 30e-3 amendments. The table below summarizes our proposed 
revisions to the estimated burden hours, and burden-hour costs based on 
the proposed amendment to the scope of rule 30e-3.
[GRAPHIC] [TIFF OMITTED] TP05NO20.018

EE. Request for Comment

    We request comment on whether these estimates are reasonable. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through

[[Page 70842]]

the use of automated collection techniques or other forms of 
information technology.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed amendments should direct them to the OMB 
Desk Officer for the Securities and Exchange Commission, 
[email protected], and should send a copy to 
Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090, with reference to File No. 
S7-09-20. OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication of this 
release; therefore a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days after publication of this 
release. Requests for materials submitted to OMB by the Commission with 
regard to these collections of information should be in writing, refer 
to File No. S7-09-20, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736.

V. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with section 3 of the Regulatory Flexibility Act 
(``RFA'').\881\ It relates to: The proposed amendments to funds' annual 
and semi-annual report requirements, proposed new Form N-CSR 
requirements, and proposed new website posting requirements; the 
treatment of annual prospectus updates for existing fund shareholders 
under proposed rule 498B; the proposed amendments to fund prospectus 
disclosure requirements; the proposed investment company advertising 
rule amendments; and the proposed technical and conforming amendments.
---------------------------------------------------------------------------

    \881\ 5 U.S.C. 603.
---------------------------------------------------------------------------

FF. Reasons for and Objectives of the Proposed Actions

    The Commission is proposing a new rule, rule amendments, and form 
amendments that would create a simplified disclosure framework for 
mutual funds and exchange-traded funds to highlight key information for 
investors. Under the proposed amendments, fund investors would continue 
to receive fund prospectuses in connection with their initial 
investment in a fund, as they do today. On an ongoing basis thereafter, 
the investors would receive more concise and visually engaging annual 
and semi-annual reports designed to highlight information that we 
believe is particularly important for retail shareholders to assess and 
monitor their ongoing fund investments. The fund's shareholder reports 
would serve as the primary fund disclosures that existing shareholders 
receive each year, in addition to notices of certain material changes 
if they occur during the year. The proposal would promote a layered 
disclosure framework that would complement the shareholder reports by 
continuing to make available additional information that may be of 
interest to some investors, including the fund's financial statements. 
This information would be available online, reported on Form N-CSR, and 
delivered to an investor on request, free of charge. We also propose to 
provide funds the flexibility to make electronic versions of their 
shareholder reports more user-friendly and interactive. Under the 
proposal, mutual funds and exchange-traded funds would no longer be 
permitted to rely on rule 30e-3 to satisfy shareholder report 
transmittal requirements, in order to promote the provision of 
consistent disclosure that we believe is best tailored to investors' 
informational needs. While it is currently common for fund shareholders 
to receive an updated annual prospectus each year, the proposal's 
layered disclosure approach would instead rely on shareholder reports 
(which, in the case of the annual report, would include a summary of 
material changes that occurred over the prior year), as well as the 
online availability of the fund prospectus and timely notifications to 
shareholders regarding material fund changes as they occur, to keep 
investors informed about their ongoing fund investments. In addition, 
we are proposing amendments to certain mutual fund and ETF prospectus 
disclosure requirements, which are designed to improve the presentation 
of fund fees and expenses and principal risks to help investors better 
understand this important information. To improve fee- and expense-
related information more broadly, we further propose to 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 
BDCs.

GG. Legal Basis

    The Commission is proposing the rules and forms contained in this 
document under the authority set forth in the Securities Act, 
particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Exchange 
Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et 
seq.], the Investment Company Act, particularly, sections 8, 24, 30, 
and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

HH. Small Entities Subject to the Rule

    For purposes of Commission rulemaking in connection with the 
Regulatory Flexibility Act, an investment company is a small entity if, 
together with other investment companies in the same group of related 
investment companies, it has net assets of $50 million or less as of 
the end of its most recent fiscal year.\882\ Commission staff estimates 
that, as of June 2019, approximately 50 open-end funds (including 8 
ETFs), 33 closed-end funds, and 16 BDCs are small entities.
---------------------------------------------------------------------------

    \882\ 17 CFR 270.0-10(a). Recognizing the growth in assets under 
management in investment companies since rule 0-10(a) was adopted, 
the Commission plans to revisit the definition of a small entity in 
rule 0-10(a).
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II. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

1. Annual and Semi-Annual Reports
    We propose to tailor the disclosure requirements for funds' annual 
and semi-annual reports to help shareholders focus on key information 
that we believe is most useful for assessing and monitoring fund 
investments on an ongoing basis, including information about a fund's 
expenses, portfolio holdings, and performance. Among other things, 
shareholder reports would be revised to include new disclosures (such 
as material changes and fund statistics in annual reports), simplify 
certain disclosures (such as the MDFP in annual reports), and remove 
certain disclosures (such as financial statements currently found in 
semi-annual and annual reports).\883\ We also propose to improve the 
design of funds' shareholder reports by, for example, encouraging funds 
to use features that promote effective communications (e.g., tables, 
charts, bullet lists, question-and-answer formats) and permitting funds 
to use technology to enhance an investor's understanding of material in 
electronic versions of shareholder reports.
---------------------------------------------------------------------------

    \883\ See supra Sections II.B.2 and II.C.1.
---------------------------------------------------------------------------

    We estimate that approximately 50 funds are small entities that are 
required to prepare and transmit shareholder reports under the proposed 
rules.\884\ We expect the proposed amendments would result in some 
initial implementation costs but, going forward, would reduce the 
burdens associated with these

[[Page 70843]]

existing disclosure requirements related to shareholder reports. We 
estimate that preparing amended annual report disclosure would cost 
$12,096 for each fund, including small entities, in its first year of 
compliance, and $3,360 for each subsequent year.\885\ We further 
estimate that preparing amended semi-annual report disclosure would 
cost $6,048 for each fund, including small entities, in its first year 
of compliance, and $1,680 for each subsequent year.\886\
---------------------------------------------------------------------------

    \884\ See text following supra footnote 882.
    \885\ See supra footnote 804 and accompanying text.
    \886\ See supra footnote 805 and accompanying text.
---------------------------------------------------------------------------

2. New Form N-CSR and Website Availability Requirements
    We propose a layered disclosure framework that would complement the 
proposed shareholder report requirements by continuing to make 
available to investors additional, less retail-focused information, 
including the fund's financial statements. This additional information, 
which we believe would primarily benefit financial professionals and 
other investors who desire more in-depth information, would be 
available online, reported on Form N-CSR, and delivered to an investor 
on request, free of charge.\887\ This new Form N-CSR disclosure also 
would need to be available on the website specified on the cover page 
or at the beginning of the fund's annual report and delivered in paper 
or electronically upon request, free of charge.\888\
---------------------------------------------------------------------------

    \887\ See supra Sections II.B through II.C.
    \888\ See supra Section II.B.3.
---------------------------------------------------------------------------

    We estimate that approximately 50 funds are small entities that 
would be required to comply with the proposed new Form N-CSR and 
website posting requirements.\889\ We further estimate that complying 
with the new Form N-CSR and website posting requirements would cost 
$8,916 for each fund, including small entities, in its first year of 
compliance, and $2,636 for each subsequent year.\890\
---------------------------------------------------------------------------

    \889\ See text following footnote 882.
    \890\ See supra footnotes 806 and 808 and accompanying text.
---------------------------------------------------------------------------

3. Proposed Rule 498B, and Treatment of Annual Prospectus Updates Under 
Proposed Disclosure Framework
    Proposed rule 498B uses layered disclosure concepts to tailor 
funds' required disclosures to the informational needs of different 
types of investors. Under the proposed rule, investors would continue 
to receive a prospectus in connection with their initial fund 
investment, as they do today. Thereafter, a shareholder would no longer 
receive annual prospectus updates, in light of the fact that the 
shareholder would be receiving a tailored shareholder report (which in 
the case of the annual report would include a summary of material 
changes that occurred over the prior year), and timely notifications to 
shareholders regarding material fund changes as they occur, which would 
be required under rule 498B.\891\
---------------------------------------------------------------------------

    \891\ See supra Section II.D.
---------------------------------------------------------------------------

    We estimate that approximately 50 funds are small entities that are 
required to send or give prospectuses to satisfy prospectus delivery 
obligations under the Securities Act.\892\ A fund's reliance on 
proposed rule 498B would be voluntary, so the percentage of funds that 
would choose to rely on the rule is uncertain. Because we generally 
anticipate that the proposed rule would provide costs savings to funds, 
we assume that the vast majority of funds would rely on rule 498B to 
satisfy their prospectus delivery obligations.\893\ For purposes of 
this estimate, we assume that 90% of funds, including small funds, 
would rely on proposed rule 498B, which is roughly the same percentage 
of funds that currently rely on rule 498.\894\ We believe this 
assumption is appropriate because funds that rely on rule 498 are funds 
that have already chosen to rely on a rule that provides an alternative 
means of satisfying prospectus delivery obligations, and because 
certain of the conditions of proposed rule 498B overlap with similar 
conditions to rely on rule 498. Therefore, we assume that these funds 
would experience some efficiencies in coming into compliance with 
proposed rule 498B. Based on these assumptions, we estimate that 
approximately 45 small funds would choose to rely on proposed rule 
498B.\895\
---------------------------------------------------------------------------

    \892\ See text following footnote 883.
    \893\ See supra footnote 868 and accompanying text.
    \894\ See supra footnote 870 (estimating that 93% of funds 
currently rely on rule 498).
    \895\ See supra text following footnote 872. Our estimate of 45 
funds is based on the following calculation: 50 funds x 90% = 45 
funds.
---------------------------------------------------------------------------

    We estimate that preparing notices of material changes under 
proposed rule 498B would cost $4,032 for each fund, including small 
entities, in its first year, and $1,344 per year for each subsequent 
year.\896\ Further, if a fund does not currently rely on rule 498, we 
estimate additional compliance costs with the website availability 
requirements and the requirement to prepare a summary prospectus of 
$12,948 per fund in its first year and $4,316 per fund for each 
subsequent year.\897\
---------------------------------------------------------------------------

    \896\ See supra footnote 811 and accompanying text.
    \897\ See supra footnote 810 and accompanying text.
---------------------------------------------------------------------------

4. Amendments to Scope of Rule 30e-3
    Subject to conditions, rule 30e-3 generally permits investment 
companies to satisfy shareholder report transmission requirements by 
making these reports and other materials available online and providing 
a notice of the reports' online availability instead of directly 
mailing the report (or emailing an electronic version of the report) to 
shareholders. We are proposing to amend the scope of rule 30e-3 to 
exclude investment companies registered on Form N-1A, which would be 
sending tailored shareholder reports under the proposal. This proposed 
amendment to the scope of the rule is designed to help ensure that all 
investors in these funds experience the anticipated benefits of the 
proposed new disclosure framework.\898\
---------------------------------------------------------------------------

    \898\ See supra Section II.F.
---------------------------------------------------------------------------

5. Proposed Amendments To Fund Prospectus Disclosure Requirements
    We are proposing amendments to funds' prospectus disclosure that 
are designed to help investors more readily understand a fund's fees 
and risks, and that use layered disclosure principles that tailor 
disclosures of these topics to different types of investors' 
informational needs. Specifically, we are proposing amendments to Form 
N-1A that would create a more concise, easier-to-understand 
presentation of fund fees for the summary prospectus or summary section 
of the statutory prospectus, while maintaining the existing fee table 
in the statutory prospectus for investors that would like more 
detail.\899\ We are also proposing changes in some terminology that 
funds would use to describe fees in the prospectus.\900\ In addition, 
we are proposing Form N-1A amendments that are designed to make it 
easier for investors to identify and understand the principal risks of 
a fund investment by requiring funds to briefly disclose principal 
risks in general order of importance and providing funds with 
additional guidance for determining whether a risk is a principal 
risk.\901\
---------------------------------------------------------------------------

    \899\ See supra Section II.H.1.
    \900\ See supra Section II.H.1.f.
    \901\ See supra Section II.H.2.
---------------------------------------------------------------------------

    We are also proposing to rescind rule 30e-1(d), which permits a 
fund to transmit a copy of its prospectus or SAI in place of its 
shareholder report, if it includes all of the information that would 
otherwise be required to be

[[Page 70844]]

contained in the shareholder report.\902\ We understand that funds very 
rarely rely on rule 30e-1(d) to transmit a prospectus or SAI in place 
of a shareholder report. Additionally, we believe that allowing funds 
to consolidate their prospectus, SAI, and shareholder report 
disclosures into a single document would result in shareholders 
receiving long, complex, and overlapping fund disclosures that could 
cause shareholder confusion and fatigue.\903\
---------------------------------------------------------------------------

    \902\ See supra Section II.H.3.
    \903\ See supra text following footnote 647.
---------------------------------------------------------------------------

    We estimate that approximately 50 funds are small entities that 
prepare prospectuses pursuant to the requirements of Form N-1A.\904\ We 
estimate that compliance with the proposed Form N-1A amendments 
affecting funds' prospectus disclosure, in the aggregate, would entail 
initial costs of $9,072 for each fund, including small entities, and 
$2,016 per year for each subsequent year.\905\
---------------------------------------------------------------------------

    \904\ See supra text following footnote 862.
    \905\ See supra footnotes 821 and 822 and accompanying text.
---------------------------------------------------------------------------

6. Investment Company Advertising Rules
    We are also proposing to amend the Commission's investment company 
advertising rules (for purposes of this release, Securities Act rules 
482, 156, and 433 and Investment Company Act rule 34b-1) to promote 
transparent and balanced presentations of fees and expenses in 
investment company advertisements.\906\ As investment companies 
increasingly compete and market themselves on the basis of costs, we 
are concerned that investment company advertisements may mislead 
investors by creating an inaccurate impression of the costs associated 
with an investment.\907\ The proposed advertising rule amendments would 
generally apply to any investment company, including mutual funds, 
ETFs, registered closed-end funds, and BDCs.
---------------------------------------------------------------------------

    \906\ See supra Section II.I.
    \907\ See supra text accompanying footnote 649.
---------------------------------------------------------------------------

    Specifically, we are proposing to amend Securities Act rules 433 
and 482 and Investment Company Act rule 34b-1 to promote transparent 
and balanced presentations of fees and expenses in investment company 
advertisements. We also are proposing to amend Securities Act rule 156 
to provide factors an investment company should consider to determine 
whether representations about the fees and expenses associated with an 
investment in the fund could be materially misleading.\908\
---------------------------------------------------------------------------

    \908\ See supra footnote 652 and accompanying text.
---------------------------------------------------------------------------

    We estimate that 50 open-end funds (including 8 registered ETFs), 
33 closed-end funds, and 16 BDCs are small entities that would be 
affected by our proposed amendments to investment company advertising 
rules. As discussed above, we estimate that compliance with these 
proposed amendments would cost $5,040 for each advertisement, including 
small entities, in the first year, and $1,680 per year for each 
subsequent year.\909\
---------------------------------------------------------------------------

    \909\ See supra footnotes 829 and 830 and accompanying text.
---------------------------------------------------------------------------

JJ. Duplicative, Overlapping, or Conflicting Federal Rules

Filing, Posting, and Delivery-Upon-Request of Certain Information That 
Currently Appears in Funds' Shareholder Reports
    Funds currently prepare and transmit annual and semi-annual reports 
to investors and file those reports, along with other information, on 
Form N-CSR. Under our proposal, funds would transmit tailored annual 
and semi-annual reports to investors. Certain information currently 
contained in funds' shareholder reports would no longer be included in 
the reports that are transmitted to investors but would instead be 
included in funds' semi-annual filings on Form N-CSR.\910\ Funds would 
also make that same information available on the website specified on 
the cover page or at the beginning of the fund's shareholder reports 
and deliver that information in paper or electronically upon request, 
free of charge.\911\ We acknowledge that filing that information with 
the Commission, posting it online, and delivering it upon request could 
result in some investors receiving or being able to access the same 
information multiple times, which could be duplicative. However, each 
one of those different requirements would serve a unique purpose. We 
believe it is important for regulatory disclosures to be filed with the 
Commission for oversight and compliance purposes. The website posting 
requirement would provide investors with broad access to the additional 
information and conforms with evolving investor preferences regarding 
document delivery.\912\ Finally, the delivery-upon-request requirements 
would allow investors to choose the format in which regulatory 
disclosures are provided, which could be especially important for 
investors who might not have reliable access to the internet or who 
might prefer paper disclosures.
---------------------------------------------------------------------------

    \910\ See supra Section II.B.1.
    \911\ See supra Sections II.B.2 and 3.
    \912\ See supra Section I.B.3.
---------------------------------------------------------------------------

    We also considered whether the information regarding remuneration 
paid to funds' directors and officers, which we propose to remove from 
funds' shareholder reports and instead require funds to file on Form N-
CSR and make available online, would duplicate the detailed disclosures 
regarding compensation paid to each of the fund's directors, members of 
any advisory board, and certain officers and affiliates that are 
required to appear in a fund's SAI. We do not believe that the proposed 
new Form N-CSR and website availability requirement for remuneration-
related information inappropriately duplicates the current SAI 
requirement. The different disclosure requirements vary in terms of 
scope and presentation requirements, and thus serve different 
informational needs.\913\
---------------------------------------------------------------------------

    \913\ For example, the required SAI information is disaggregated 
for each director, whereas the information that would appear on Form 
N-CSR and on funds' websites would be aggregated. See supra Section 
II.D.1.e.
---------------------------------------------------------------------------

Prospectus Delivery Requirements
    Under proposed new rule 498B, funds would have the option of 
satisfying prospectus delivery requirements with respect to existing 
shareholders by making certain information, including summary and 
statutory prospectuses, publicly accessible on the fund's website; 
delivering this information in paper or electronically upon request, 
free of charge; and complying with certain other conditions.\914\ This 
proposed rule is modeled in part on rule 498 and contains certain 
similar provisions, including website posting and delivery-upon-request 
requirements with regard to largely the same documents.\915\ However, 
compliance obligations under rules 498B and 498 apply under different 
circumstances (satisfying prospectus delivery requirements with respect 
to existing shareholders, and satisfying prospectus delivery 
requirements by using a summary prospectus, respectively). Furthermore, 
proposed rule 498B is designed to avoid duplication and instead create 
efficiencies for funds that currently rely on rule 498, because we 
believe these funds would already be familiar with the website posting 
and delivery-upon-request conditions and

[[Page 70845]]

would have compliance processes in place related to these conditions.
---------------------------------------------------------------------------

    \914\ See supra Section II.F.
    \915\ See supra Sections II.F.3.a and II.F.4.
---------------------------------------------------------------------------

Shareholder Report Transmission Requirements
    We are proposing to revise rule 30e-3 to exclude investment 
companies registered on Form N-1A from the scope of the rule. Rule 30e-
3 currently allows a fund to satisfy its obligation to transmit the 
shareholder reports that rule 30e-1 and rule 30e-2 require if the fund 
complies with certain conditions. These conditions generally relate to: 
(1) Making the fund's shareholder report and certain other materials 
available on a website; (2) providing notice to investors of the 
website availability of the shareholder report; and (3) delivering 
paper copies of the materials that appear online, upon a shareholder's 
request.\916\ If we do not revise rule 30e-3 to exclude funds from the 
scope of the rule, a fund (or intermediary) could rely on both rule 
30e-3 and proposed rule 498B. In that case, existing shareholders would 
not receive the shareholder report pursuant to proposed rule 30e-3 and 
furthermore would not be sent or given prospectus updates pursuant to 
proposed rule 498B. This would contradict our goal of ensuring 
consistent disclosure requirements with respect to existing fund 
shareholders, and also could prevent these investors from experiencing 
the anticipated benefits of the new tailored disclosure framework. 
Thus, we are proposing to amend rule 30e-3 to avoid overlapping and 
conflicting Federal rules.
---------------------------------------------------------------------------

    \916\ See supra footnote 532.
---------------------------------------------------------------------------

    We are also proposing to rescind rule 30e-1(d), which permits a 
fund to transmit a copy of its prospectus or SAI in place of its 
shareholder report, if it includes all of the information that would 
otherwise be required to be contained in the shareholder report.\917\ 
We believe that allowing funds to consolidate their prospectus, SAI, 
and shareholder report disclosures into a single document would result 
in shareholders receiving long, complex, and overlapping fund 
disclosures which could cause shareholder confusion and fatigue and 
would conflict with the goals of this rulemaking.
---------------------------------------------------------------------------

    \917\ See infra Section II.H.3.
---------------------------------------------------------------------------

Fee Table
    Proposed amendments to Form N-1A are designed to create a more 
concise, easier-to-understand presentation of fund fees for the summary 
prospectus or summary section of the statutory prospectus, while 
maintaining the existing fee table in the statutory prospectus for 
investors that would like more detail.\918\ Although this layered 
disclosure approach would result in some duplicative information (i.e., 
certain transaction fees, ongoing annual fees, and an expense example 
would appear in both the summary prospectus as well as in the statutory 
prospectus), we believe that both the nature and structure of each of 
the proposed fee-related disclosures are sufficiently different to 
justify overlapping information requirements. The goal of the 
simplified fee summary is to streamline presentation of fees, which 
would allow investors to more easily and rapidly understand the total 
costs of investing in a fund. The current, full fee table presentation 
would be moved to the statutory prospectus, where it could be used by 
financial professionals or other investors who seek additional details 
about fund fees to supplement the fee summary.
---------------------------------------------------------------------------

    \918\ See infra Section II.H.1.
---------------------------------------------------------------------------

KK. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish its stated objective, while minimizing any 
significant economic impact on small entities. The Commission 
considered the following alternatives for small entities in relation 
our proposed amendments: (1) Establishing different reporting, 
recordkeeping, and other compliance requirements or frequency, to 
account for resources available to small entities; (2) exempting funds 
that are small entities from the proposed reporting, recordkeeping, and 
other compliance requirements, to account for resources available to 
small entities; (3) clarifying, consolidating, or simplifying the 
compliance requirements under the proposal for small entities; and (4) 
using performance rather than design standards.
    As discussed above, our proposal contemplates amendments to 
shareholder report content and disclosure requirements, proposed new 
rule 498B to address existing shareholders' receipt of annual 
prospectus updates, amendments to the scope of rule 30e-3 to exclude 
funds registered on Form N-1A, amendments to fund prospectus fee and 
risk disclosures, and rescission of rule 30e-1(d) (which currently 
permits a fund to transmit a copy of its prospectus or SAI in place of 
its shareholder report under certain conditions). Collectively, these 
amendments would tailor the disclosures that funds provide by using 
layered disclosure principles to create a new disclosure framework 
designed to meet the informational needs of different investors (i.e., 
initial investors versus existing shareholders, and retail investors 
versus those who desire more information). The proposed amendments are 
designed to focus on key information different investors need to make 
informed investment decisions and, for existing shareholders, to assess 
and monitor their fund investments. In addition, our proposal would 
amend investment company advertising rules to promote transparent and 
balanced presentations of fees and expenses in investment company 
advertisements.
    We do not believe it would be appropriate to establish different 
reporting, recordkeeping, and other compliance requirements or 
frequency, to account for resources available to small entities. Small 
entities currently follow the same requirements that large entities do 
when preparing, transmitting, and filing shareholder reports; preparing 
and sending or giving prospectuses to investors; and preparing 
investment company advertisements and supplemental sales literature. If 
the proposal included different requirements for small funds, it could 
raise investor protection concerns for investors in small funds to the 
extent that investors in small funds would not receive the same 
disclosures as investors in larger funds.
    For example, to the extent that small funds may have fewer 
resources to invest in investor education or marketing materials, 
investors in small funds may have fewer opportunities outside of 
regulatory disclosures to obtain key information needed to make 
informed investment decisions and assess and monitor their fund 
investments. For this reason, it is important that the regulatory 
disclosures that small funds provide to investors are consistent in 
terms of content and frequency with the disclosures that larger funds 
provide to investors, so that all investors have the tools they need to 
meet their informational needs. More generally, our proposed disclosure 
requirements are tailored to meet the informational needs of different 
groups of investors, and to implement a layered disclosure framework 
that would benefit all investors. Permitting different disclosure 
requirements for small funds would result in small fund investors not 
experiencing the anticipated benefits of the new tailored disclosure 
framework. Furthermore, uniform prospectus fee and risk disclosure 
requirements would allow all investors to compare funds reporting the 
same information on the same frequency, and help all investors to make 
informed investment decisions based upon those comparisons.

[[Page 70846]]

    Similarly, we do not believe it would be appropriate to exempt 
small funds from the proposed amendments. As discussed above, our 
contemplated disclosure framework would be disrupted if investors in 
smaller funds received different disclosures than investors in larger 
funds. We believe that investors in all funds should benefit from the 
Commission's proposed disclosure amendments, not just investors in 
large funds.
    We do not believe that clarifying, consolidating, or simplifying 
the compliance requirements under the proposal for small funds would 
permit us to achieve our stated objectives. Many of the amendments we 
are proposing are based on existing rules or disclosure 
frameworks.\919\ We anticipate that building on existing regulatory 
frameworks and concepts should help to ease certain compliance burdens 
for funds, including small funds. For example, the website availability 
and delivery-upon-request provisions in proposed rules 498B and 30e-1 
are modeled on parallel provisions in rule 498, which we estimate that 
more than 90% of all funds, including small funds, currently rely on to 
satisfy prospectus delivery obligations. We believe that this would 
create efficiencies for small funds relying on proposed rules 498B or 
30e-1, because these funds would likely be familiar with these 
conditions and would already have compliance processes in place 
pursuant to rule 498.
---------------------------------------------------------------------------

    \919\ For example, many of our proposed amendments to fund 
prospectuses, shareholder reports, and Form N-CSR largely reframe 
existing disclosure requirements to tailor disclosures to the 
informational needs of different investors, as opposed to requiring 
new disclosures for which funds would need to generate and develop 
reporting and compliance procedures for the first time.
---------------------------------------------------------------------------

    Finally, we do not believe it would be appropriate to use 
performance rather than design standards. As discussed above, we 
believe the regulatory disclosures that small funds provide to 
investors should be consistent with the disclosures provided to 
investors in larger entities. Our proposed disclosure requirements are 
tailored to meet the informational needs of different investors, and to 
implement a layered disclosure framework. We believe all fund investors 
should experience the anticipated benefits of the new tailored 
disclosure framework. Finally, we believe that prospectus fee and risk 
disclosure requirements should be uniform and standardized in order to 
allow investors to compare funds reporting the same information on the 
same frequency, and to help all investors to make informed initial 
investment decisions based upon those comparisons.

LL. General Request for Comment

    The Commission requests comments regarding this IRFA. We request 
comments on the number of small entities that may be affected by our 
proposed rules and guidelines, and whether the proposed rules and 
guidelines would have any effects not considered in this analysis. We 
request that commenters describe the nature of any effects on small 
entities subject to the rules, and provide empirical data to support 
the nature and extent of such effects. We also request comment on the 
proposed compliance burdens and the effect these burdens would have on 
smaller entities.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\920\ the Commission must advise OMB whether a 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results in or is likely 
to result in:
---------------------------------------------------------------------------

    \920\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on:
     The potential effect on the U.S. economy on an annual 
basis;
     Any potential increase in costs or prices for consumers or 
individual industries; and
     Any potential effect on competition, investment, or 
innovation.
    Commenters are requested to provide empirical data and other 
factual support for their views to the extent possible.

VII. Statutory Authority

    The Commission is proposing the rules and forms contained in this 
document under the authority set forth in the Securities Act, 
particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Exchange 
Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et 
seq.], the Investment Company Act, particularly, sections 8, 24, 30, 
and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Organization and functions 
(Government agencies).

17 CFR Parts 230 and 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rules and Form Amendments

    For reasons set forth in the preamble, title 17, chapter II of the 
Code of Federal Regulations is proposed to be amended as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart N--Commission Information Collection Requirements Under the 
Paperwork Reduction Act: OMB Control Numbers

0
1. The authority citation for subpart N of part 200 continues to read 
as follows:

    Authority:  44 U.S.C. 3506; 44 U.S.C. 3507.

0
2. Amend Sec.  200.800 in paragraph (b) by adding an entry in numerical 
order by section number for ``Rule 498B'' to read as follows:


Sec.  200.800   OMB control numbers assigned pursuant to the Paperwork 
Reduction Act.

* * * * *
    (b) * * *

[[Page 70847]]



------------------------------------------------------------------------
                                    17 CFR part or
     Information collection          section where        Current OMB
           requirement              identified and        control No.
                                       described
------------------------------------------------------------------------
 
                              * * * * * * *
Rule 498B.......................  230.498B..........  [OMB control
                                                       number TBD].
 
                              * * * * * * *
------------------------------------------------------------------------

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
3. The authority citation for part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
    Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48 
Stat. 78, 79, 81, and 85, as amended [15 U.S.C. 77f, 77h, 77j, 77s].
* * * * *
0
4. Amend Sec.  230.156 by adding paragraph (b)(4) to read as follows:


Sec.  230.156   Investment company sales literature.

* * * * *
    (b) * * *
    (4) Representations about the fees or expenses associated with an 
investment in the fund could be misleading because of statements or 
omissions made involving a material fact, including situations where 
portrayals of the fees and expenses associated with an investment in 
the fund omit explanations, qualifications, limitations, or other 
statements necessary or appropriate to make the portrayals not 
misleading.
* * * * *
0
5. Amend Sec.  230.433 by adding paragraph (c)(3) to read as follows:


Sec.  230.433   Conditions to permissible post-filing free writing 
prospectuses.

* * * * *
    (c) * * *
    (3) A free writing prospectus with respect to securities of a 
registered closed-end investment company or a business development 
company that includes fee or expense information must comply with 
paragraphs (i) and (j) of Sec.  230.482 (Rule 482), as applicable.
* * * * *
0
6. Amend Sec.  230.482 by revising paragraph (b)(3)(i) and adding 
paragraphs (i) and (j) to read as follows:


Sec.  230.482   Advertising by an investment company as satisfying 
requirements of section 10.

* * * * *
    (b) * * *
    (3) * * *
    (i) A legend disclosing that the performance data quoted represents 
past performance; that past performance is not a good predictor of 
future results; that the investment return and principal value of an 
investment will fluctuate so that an investor's shares, when redeemed, 
may be worth more or less than their original cost; and that current 
performance may be lower or higher than the performance data quoted. 
The legend should also identify a toll-free telephone number or a 
website where an investor may obtain performance data current to the 
most recent month-end unless the advertisement includes total return 
quotations current to the most recent month ended seven business days 
prior to the date of use. An advertisement for a money market fund that 
is a government money market fund, as defined in Sec.  270.2a-7(a)(16) 
of this chapter, or a retail money market fund, as defined in Sec.  
270.2a-7(a)(25) of this chapter may omit the disclosure about principal 
value fluctuation; and
* * * * *
    (i) Advertisements including fee or expense figures. An 
advertisement that provides fee or expense figures for an investment 
company must include the following:
    (1) The maximum amount of any sales load, or any other nonrecurring 
fee, and the total annual expenses without any fee waiver or expense 
reimbursement arrangement, based on the methods of computation 
prescribed by the company's registration statement form under the 1940 
Act or under the Act for a prospectus and presented at least as 
prominently as any other fee or expense figure included in the 
advertisement; and
    (2) The expected termination date of a fee waiver or expense 
reimbursement arrangement, if the advertisement provides total annual 
expenses net of fee waiver or expense reimbursement arrangement 
amounts.
    (j) Timeliness of fee and expense information. Fee and expense 
information contained in an advertisement must be as of the date of the 
investment company's most recent prospectus or, if the company no 
longer has an effective registration statement under the Act, as of the 
date of its most recent annual shareholder report, except that a 
company may provide more current information if available.


Sec.  230.498  [Amended]

0
7. Amend Sec.  230.498 by removing paragraph (b)(1)(vii).
0
8. Add Sec.  230.498B to read as follows:


Sec.  230.498B  Delivery of prospectuses to existing shareholders of 
open-end management investment companies.

    (a) Definitions. For purposes of this section:
    Account means any contractual or other business relationship 
between a person and a Fund to effect transactions in securities issued 
by the fund, including the purchase or sale of securities.
    Existing shareholder means a shareholder to whom a Summary 
Prospectus or Statutory Prospectus has been previously sent or given in 
order to satisfy any obligation under section 5(b)(2) of the Act [15 
U.S.C. 77e(b)(2)] to have a Statutory Prospectus precede or accompany 
the carrying or delivery of Fund shares and that has either 
continuously held Fund shares or, if the Fund is a money market fund as 
defined in Sec.  270.2a-7 of this chapter has continuously maintained 
or been a beneficial owner of a Fund Account, since that Summary 
Prospectus or Statutory Prospectus has been sent or given. This 
definition excludes investors that hold the fund through a separate 
account funding a variable annuity contract offered on Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter) or a variable life 
insurance contract offered on Form N-6 (Sec. Sec.  239.17c and 274.11d 
of this chapter).
    Fund means an open-end management investment company, or any Series 
of such a company, that has, or is included in, an effective 
registration statement on Form N-1A (Sec. Sec.  239.15A and 274.11A of 
this chapter) and that has a current prospectus that satisfies the 
requirements of section 10(a) of the Act [15 U.S.C. 77j(a)].
    Series means shares offered by a Fund that represent undivided 
interests in a portfolio of investments and that are preferred over all 
other series of shares for assets specifically allocated to that

[[Page 70848]]

series in accordance with Sec.  270.18f-2(a) of this chapter.
    Statement of Additional Information means the statement of 
additional information required by Part B of Form N-1A.
    Statutory Prospectus means a prospectus that satisfies the 
requirements of section 10(a) of the Act.
    Summary Prospectus means the summary prospectus described in Sec.  
230.498(b).
    (b) Transfer of the security. With respect to Existing 
Shareholders, any obligation under section 5(b)(2) of the Act [15 
U.S.C. 77e(b)(2)] to have a Statutory Prospectus precede or accompany 
the carrying or delivery of a Fund security in an offering registered 
on Form N-1A is satisfied if the conditions in paragraph (c) of this 
section are satisfied.
    (c) Conditions--(1) website availability of certain Fund documents. 
(i) The Fund's current Summary Prospectus, Statutory Prospectus, 
Statement of Additional Information, and most recent annual and semi-
annual reports to shareholders under Sec.  270.30e-1 of this chapter 
must be publicly accessible, free of charge, at the website address 
specified on the cover page or at the beginning of its annual and semi-
annual reports to shareholders.
    (ii) The materials that are accessible in accordance with paragraph 
(c)(2)(i) of this section must be presented on the website in a format, 
or formats, that:
    (A) Are human-readable and capable of being printed on paper in 
human-readable format;
    (B) Permit persons accessing the Statutory Prospectus or Statement 
of Additional Information to move directly back and forth between each 
section heading in a table of contents of such document and the section 
of the document referenced in that section heading; provided that, in 
the case of the Statutory Prospectus, the table of contents is either 
required by Sec.  230.481(c) or contains the same section headings as 
the table of contents required by Sec.  230.481(c); and
    (C) Permit persons accessing the Summary Prospectus to move 
directly back and forth between:
    (1) Each section of the Summary Prospectus and any section of the 
Statutory Prospectus and Statement of Additional Information that 
provides additional detail concerning that section of the Summary 
Prospectus; or
    (2) Links located at both the beginning and end of the Summary 
Prospectus, or that remain continuously visible to persons accessing 
the Summary Prospectus, and tables of contents of both the Statutory 
Prospectus and the Statement of Additional Information that meet the 
requirements of paragraph (c)(2)(ii)(B) of this section.
    (iii) Persons accessing the materials specified in paragraph 
(c)(1)(i) of this section must be able to permanently retain, free of 
charge, an electronic version of such materials in a format, or 
formats, that meet each of the requirements of paragraphs (c)(2)(ii)(A) 
and (B) of this section.
    (iv) The conditions in paragraphs (c)(2)(i) through (iii) of this 
section shall be deemed to be met, notwithstanding the fact that the 
materials specified in paragraph (c)(2)(i) of this section are not 
available for a time in the manner required by paragraphs (c)(2)(i) 
through (iii) of this section, provided that:
    (A) The Fund has reasonable procedures in place to ensure that the 
specified materials are available in the manner required by paragraphs 
(c)(2)(i) through (c)(2)(iii) of this section; and
    (B) The Fund takes prompt action to ensure that the specified 
documents become available in the manner required by paragraphs 
(c)(2)(i) through (c)(2)(iii) of this section, as soon as practicable 
following the earlier of the time at which it knows or reasonably 
should have known that the documents are not available in the manner 
required by paragraphs (c)(2)(i) through (iii) of this section.
    (2) Material changes to the Fund. If any material change has been 
made to the Fund with respect to any of the topics described in Item 
27A(g) of Form N-1A, and the Fund files a post-effective amendment to 
its prospectus pursuant to Sec.  230.485 or files a prospectus 
supplement with the Commission pursuant to Sec.  230.497 regarding any 
such material change, the Fund (or a financial intermediary through 
which shares of the Fund may be purchased or sold) must provide 
Existing Shareholders notice of that change. Such notice must be 
provided within three business days of either the effective date of the 
Fund's post-effective amendment filing or the filing date of the 
prospectus supplement filing, by first-class mail or other means 
designed to ensure equally prompt receipt, unless that change is 
disclosed in the Fund's most recent annual report to shareholders. Such 
notice will be considered to be provided to investors who share an 
address if the requirements of section Sec.  230.154 are met with 
regard to delivery of that notice.
    (d) Other requirements. If paragraph (b) of this section is relied 
on with respect to a Fund:
    (1) Delivery upon request of certain Fund documents. (i) The Fund 
(or a financial intermediary through which shares of the Fund may be 
purchased or sold) must send, at no cost to the requestor and by U.S. 
first class mail or other reasonably prompt means, a paper copy of any 
of the documents listed in paragraph (c)(2) of this section to any 
person requesting such a copy within three business days after 
receiving a request for a paper copy; and
    (ii) The Fund (or a financial intermediary through which shares of 
the Fund may be purchased or sold) must send, at no cost to the 
requestor, and by email, an electronic copy of any of the documents 
listed in paragraph (c)(2) of this section to any person requesting 
such a copy within three business days after receiving a request for an 
electronic copy. The requirement to send an electronic copy of a 
document by email may be satisfied by sending a direct link to the 
online document; provided that a current version of the document is 
directly accessible through the link from the time that the email is 
sent through the date that is six months after the date that the email 
is sent and the email explains both how long the link will remain 
useable and that, if the recipient desires to retain a copy of the 
document, he or she should access and save the document.
    (2) Convenient for reading and printing. (i) The materials that are 
accessible in accordance with paragraph (c)(1) of this section must be 
presented on the website in a format, or formats, that are convenient 
for both reading online and printing on paper; and
    (ii) Persons accessing the materials that are accessible in 
accordance with paragraph (c)(1) of this section must be able to 
permanently retain, free of charge, an electronic version of such 
materials in a format, or formats, that are convenient for both reading 
online and printing on paper.
    (3) Compliance with this paragraph (d) not a condition to reliance 
on paragraph (b) of this section. Compliance with this paragraph (d) is 
not a condition to the ability to rely on paragraph (b) of this section 
with respect to a Fund, and failure to comply with this paragraph (d) 
does not negate the ability to rely on paragraph (b).

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
9. The general authority citation for part 239 is revised to read as 
follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 
78ll,

[[Page 70849]]

78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, 80a-37, and sec. 71003 and sec. 84001, Pub. L. 114-
94, 129 Stat. 1321, unless otherwise noted.
* * * * *
0
10. Amend Form N-14 (referenced in Sec.  239.23) by removing in Item 
3(a) ``Item 3 of Form N-1A'' and adding in its place ``Item 8A of Form 
N-1A''.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
11. The general authority citation for part 240 continues to read as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, 
secs. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *


Sec.  240.14a-101   [Amended]

0
 12. Amend Sec.  240.14a-101 by removing the phrase ``Item 3 of Form N-
1A'' and adding in its place ``Item 8A of Form N-1A'' in paragraph 
(a)(3)(iv) and Instruction 4 of Item 22.

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
13. The authority for part 270 continues to read in part as follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
    Section 270.30e-1 is also issued under 15 U.S.C. 77f, 77g, 77h, 
77j, 77s, 78l, 78m, 78n, 78o(d), 78w(a), 80a-8, 80a-29, and 80a-37.
* * * * *
0
14. Amend Sec.  270.30e-1 by:
0
a. Removing paragraph (d);
0
b. Redesignating paragraphs (b) and (c) as paragraphs (c) and (d);
0
c. Adding a new paragraph (b); and
0
d. Revising newly redesignated paragraphs (c) and (d) and paragraphs 
(f)(2)(ii)(F) and (f)(4).
    The addition and revisions read as follows:


Sec.  270.30e-1  Reports to stockholders of management companies.

* * * * *
    (b)(1) To satisfy its obligations under section 30(e) of the 1940 
Act, an open-end management investment company registered on Form N-1A 
(Sec. Sec.  239.15A and 274.11A of this chapter) also must:
    (i) Make certain materials available on a website, as described 
under paragraph (b)(2) of this section; and
    (ii) Deliver certain materials upon request, as described under 
paragraph (b)(3) of this section.
    (2) The following website availability requirements are applicable 
to an open-end management investment company registered on Form N-1A 
(Sec. Sec.  239.15A and 274.11A of this chapter).
    (i) The company must make the disclosures required by Items 7 
through 11 of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this 
chapter) publicly accessible, free of charge, at the website address 
specified at the beginning of the report to stockholders under 
paragraph (a) of this section, no later than 70 days after the end of 
the fiscal half-year or fiscal year of the company until 70 days after 
the end of the next fiscal half-year or fiscal year of the company, 
respectively. The company may satisfy the requirement in this paragraph 
(b)(2)(i) by making its most recent report on Form N-CSR publicly 
accessible, free of charge, at the specified website address for the 
time period that this paragraph (b)(2)(i) specifies.
    (ii) Unless the company is a money market fund under Sec.  270.2a-
7, the company must make the company's complete portfolio holdings, if 
any, as of the close of the company's most recent first and third 
fiscal quarters, after the date on which the company's registration 
statement became effective, presented in accordance with the schedules 
set forth in Sec. Sec.  210.12-12 through 210.12-14 of this chapter 
(Regulation S-X), which need not be audited. The complete portfolio 
holdings required by this paragraph (b)(2)(ii) must be made publicly 
accessible, free of charge, at the website address specified at the 
beginning of the report to stockholders under paragraph (a) of this 
section, not later than 70 days after the close of the of the first and 
third fiscal quarters until 70 days after the end of the next first and 
third fiscal quarters of the company, respectively.
    (iii) The website address relied upon for compliance with this 
section may not be the address of the Commission's electronic filing 
system.
    (iv) The materials that are accessible in accordance with paragraph 
(b)(2)(i) or (ii) of this section must be presented on the website in a 
format, or formats, that are convenient for both reading online and 
printing on paper.
    (v) Persons accessing the materials specified in paragraph 
(b)(2)(i) or (ii) of this section must be able to permanently retain, 
free of charge, an electronic version of such materials in a format, or 
formats, that meet the requirements of paragraph (b)(2)(iv) of this 
section.
    (vi) The requirements set forth in paragraphs (b)(2)(i) through (v) 
of this section will be deemed to be met, notwithstanding the fact that 
the materials specified in paragraphs (b)(2)(i) and (ii) of this 
section are not available for a time in the manner required by 
paragraphs (b)(2)(i) through (v) of this section, provided that:
    (A) The company has reasonable procedures in place to ensure that 
the specified materials are available in the manner required by 
paragraphs (b)(2)(i) through (v) of this section; and
    (B) The company takes prompt action to ensure that the specified 
materials become available in the manner required by paragraphs 
(b)(2)(i) through (v) of this section, as soon as practicable following 
the earlier of the time at which it knows or reasonably should have 
known that the materials are not available in the manner required by 
paragraphs (b)(2)(i) through (v) of this section.
    (vii) The materials specified in paragraph (b)(2)(i) or (ii) of 
this section may be separately available for each series of a fund or 
grouped by the types of materials and/or by series, so long as the 
grouped information:
    (A) Is presented in a format designed to communicate the 
information effectively;
    (B) Clearly distinguishes the different types of materials and/or 
each series (as applicable); and
    (C) Provides a means of easily locating the relevant information 
(including, for example, a table of contents that includes hyperlinks 
to the specific materials and series).
    (3) The following requirements to deliver certain materials upon 
request are applicable to an open-end management investment company 
registered on Form N-1A (Sec. Sec.  239.15A and 274.11A of this 
chapter).
    (i) The company (or a financial intermediary through which shares 
of the company may be purchased or sold) must send, at no cost to the 
requestor and by U.S. first class mail or other reasonably prompt 
means, a paper copy of any of the materials specified in paragraph 
(b)(2)(i) or (ii) of this section, to any person requesting such a copy 
within three business days after receiving a request for a paper copy.
    (ii) The company (or a financial intermediary through which shares 
of the company may be purchased or sold) must send, at no cost to the 
requestor, and by email or other reasonably prompt means, an electronic 
copy of any of the materials specified in

[[Page 70850]]

paragraph (b)(2)(i) or (ii) of this section, to any person requesting 
such a copy within three business days after receiving a request for an 
electronic copy. The requirement to send an electronic copy of the 
requested materials may be satisfied by sending a direct link to the 
online location of the materials; provided that a current version of 
the materials is directly accessible through the link from the time 
that the email is sent through the date that is six months after the 
date that the email is sent and the email explains both how long the 
link will remain useable and that, if the recipient desires to retain a 
copy of the materials, he or she should access and save the materials.
    (c) For registered management companies other than open-end 
management investment companies registered on Form N-1A, if any matter 
was submitted during the period covered by the shareholder report to a 
vote of shareholders, through the solicitation of proxies or otherwise, 
furnish the following information:
    (1) The date of the meeting and whether it was an annual or special 
meeting.
    (2) If the meeting involved the election of directors, the name of 
each director elected at the meeting and the name of each other 
director whose term of office as a director continued after the 
meeting.
    (3) A brief description of each matter voted upon at the meeting 
and the number of votes cast for, against or withheld, as well as the 
number of abstentions and broker non-votes as to each such matter, 
including a separate tabulation with respect to each matter or nominee 
for office.
    Instruction 1 to paragraph (c). The solicitation of any 
authorization or consent (other than a proxy to vote at a shareholders' 
meeting) with respect to any matter shall be deemed a submission of 
such matter to a vote of shareholders within the meaning of this 
paragraph (c).
    (d) Each report shall be transmitted within 60 days after the close 
of the period for which such report is being made.
* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
    (F) Contain the following prominent statement, or similar clear and 
understandable statement, in bold-face type: ``Important Notice 
Regarding Delivery of Shareholder Materials''. This statement also must 
appear on the envelope in which the notice is delivered. Alternatively, 
if the notice is delivered separately from other communications to 
investors, this statement may appear either on the notice or on the 
envelope in which the notice is delivered;
* * * * *
    (4) For purposes of this section, address means a street address, a 
post office box number, an electronic mail address, a facsimile 
telephone number, or other similar destination to which paper or 
electronic materials are transmitted, unless otherwise provided in this 
section. If the company has reason to believe that the address is a 
street address of a multi-unit building, the address must include the 
unit number.
0
15. Amend Sec.  270.30e-3 by revising paragraph (h)(2) to read as 
follows:


Sec.  270.30e-3  Internet availability of reports to shareholders.

* * * * *
    (h) * * *
    (2) Fund means a registered management company registered on Form 
N-2 (Sec. Sec.  239.14 and 274.11a of this chapter) or Form N-3 
(Sec. Sec.  239.17a and 274.11b of this chapter) and any separate 
series of the management company.
* * * * *
0
16. Amend Sec.  270.31a-2 by:
0
a. Removing the word ``and'' at the end of paragraph (a)(5);
0
b. In paragraph (a)(6), removing the period and adding ``; and'' in its 
place; and
0
c. Adding paragraph (a)(7).
    The addition reads as follows:


Sec.  270.31a-2  Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

    (a) * * *
    (7) Preserve for a period not less than six years, the first two 
years in an easily accessible place, any shareholder report required by 
Sec.  270.30e-1 (including any version posted on a website or otherwise 
provided electronically) that is not filed with the Commission in the 
exact form in which it was used.
* * * * *
0
17. Amend Sec.  270.34b-1 by revising the introductory text and 
paragraph (b)(3) and adding paragraph (c) to read as follows:


Sec.  270.34b-1  Sales literature deemed to be misleading.

    Any advertisement, pamphlet, circular, form letter, or other sales 
literature addressed to or intended for distribution to prospective 
investors that is required to be filed with the Commission by section 
24(b) of the Act [15 U.S.C. 80a-24(b)] (for purposes of paragraph (a) 
and (b) of this section, ``sales literature'') will have omitted to 
state a fact necessary in order to make the statements made therein not 
materially misleading unless the sales literature includes the 
information specified in paragraphs (a) and (b) of this section. Any 
registered investment company or business development company 
advertisement, pamphlet, circular, form letter, or other sales 
literature addressed to or intended for distribution to prospective 
investors in connection with a public offering (for purposes of 
paragraph (c) of this section, ``sales literature'') will have omitted 
to state a fact necessary in order to make the statements therein not 
materially misleading unless the sales literature includes the 
information specified in paragraph (c) of this section.

    Note 1 to Sec.  270.34b-1 Introductory Text:  The fact that the 
sales literature includes the information specified in paragraphs 
(a) and (b) of this section does not relieve the investment company, 
underwriter, or dealer of any obligations with respect to the sales 
literature under the antifraud provisions of the Federal securities 
laws. For guidance about factors to be weighed in determining 
whether statements, representations, illustrations, and descriptions 
contained in investment company sales literature are misleading, see 
Sec.  230.156 of this chapter.

* * * * *
    (b) * * *
    (3) The requirements specified in paragraph (b)(1) of this section 
do not apply to any quarterly, semi-annual, or annual report to 
shareholders under Section 30 of the Act [15 U.S.C. 80a-29] containing 
performance data for a period commencing no earlier than the first day 
of the period covered by the report; nor do the requirements of 
paragraphs (d)(3)(ii), (d)(4)(ii), and (g) of Sec.  230.482 of this 
chapter apply to any such periodic report containing any other 
performance data.
    (c)(1) Except as provided in paragraph (c)(2) of this section:
    (i) In any sales literature that contains fee and expense figures 
for a registered investment company or business development company, 
include the disclosure required by paragraph (i) of Sec.  230.482 of 
this chapter.
    (ii) Any fee and expense information included in sales literature 
must meet the timeliness requirements of paragraph (j) of Sec.  230.482 
of this chapter.
    (2) The requirements specified in paragraph (c)(1) of this section 
do not apply to any quarterly, semi-annual, or annual report to 
shareholders under

[[Page 70851]]

Section 30 of the Act [15 U.S.C. 80a-29] or to other reports pursuant 
to section 13 or section 15(d) of the Securities Exchange Act of 1934 
(15 U.S.C. 79m or 78o(d)) containing fee and expense information; nor 
do the requirements of paragraphs (i) and (j) of Sec.  230.482 of this 
chapter or paragraph (c)(3) of Sec.  230.433 of this chapter apply to 
any such report containing fee and expense information.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
18. The authority for part 274 continues to read in part as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, 
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
19. Revise Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) to 
read as follows:

    Note:  The text of Form N-1A will not appear in the Code of 
Federal Regulations.

United States

Securities and Exchange Commission

Washington, DC 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __[ ]
Post-Effective Amendment No. __[ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. __[ ]
Registrant Exact Name as Specified in Charter
-----------------------------------------------------------------------
Address of Principal Executive Offices (Number, Street, City, State, 
Zip Code)
-----------------------------------------------------------------------
Registrant's Telephone Number, including Area Code
-----------------------------------------------------------------------
Name and Address (Number, Street, City, State, Zip Code) of Agent for 
Service
-----------------------------------------------------------------------
Approximate Date of Proposed Public Offering

It is proposed that this filing will become effective (check 
appropriate box)

[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)
[ ] 75 days after filing pursuant to paragraph (a)(2) on (date)
[ ] pursuant to paragraph (a)(2) of rule 485

If appropriate, check the following box:

[ ] This post-effective amendment designates a new effective date for a 
previously filed post-effective amendment.

    Omit from the facing sheet reference to the other Act if the 
Registration Statement or amendment is filed under only one of the 
Acts. Include the ``Approximate Date of Proposed Public Offering'' and 
``Title of Securities Being Registered'' only where securities are 
being registered under the Securities Act of 1933.
    Form N-1A is to be used by open-end management investment 
companies, except insurance company separate accounts and small 
business investment companies licensed under the United States Small 
Business Administration, to register under the Investment Company Act 
of 1940 and to offer their shares under the Securities Act of 1933. The 
Commission has designed Form N-1A to provide investors with information 
that will assist them in making a decision about investing in an 
investment company eligible to use the Form. The Commission also may 
use the information provided on Form N-1A in its regulatory, disclosure 
review, inspection, and policy making roles.
    A Registrant is required to disclose the information specified by 
Form N-1A, and the Commission will make this information public. A 
Registrant is not required to respond to the collection of information 
contained in Form N-1A unless the Form displays a currently valid 
Office of Management and Budget (OMB) control number. Please direct 
comments concerning the accuracy of the information collection burden 
estimate and any suggestions for reducing the burden to Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090. The OMB has reviewed this collection of information under 
the clearance requirements of 44 U.S.C. 3507.

Contents of Form N-1A

GENERAL INSTRUCTIONS
    A. Definitions
    B. Filing and Use of Form N-1A
    C. Preparation of the Registration Statement
    D. Incorporation by Reference
PART A: INFORMATION REQUIRED IN A PROSPECTUS
    Item 1. Front and Back Cover Pages
    Item 2. Risk/Return Summary: Investment Objectives/Goals
    Item 3. Risk/Return Summary: Fee Summary
    Item 4. Risk/Return Summary: Investments, Risks, and Performance
    Item 5. Management
    Item 6. Purchase and Sale of Fund Shares
    Item 7. Tax Information
    Item 8. Financial Intermediary Compensation
    Item 8A. Fee Table
    Item 9. Investment Objectives, Principal Investment Strategies, 
Related Risks, and Disclosure of Portfolio Holdings
    Item 10. Management, Organization, and Capital Structure
    Item 11. Shareholder Information
    Item 12. Distribution Arrangements
    Item 13. Financial Highlights Information
PART B: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
    Item 14. Cover Page and Table of Contents
    Item 15. Fund History
    Item 16. Description of the Fund and Its Investments and Risks
    Item 17. Management of the Fund
    Item 18. Control Persons and Principal Holders of Securities
    Item 19. Investment Advisory and Other Services
    Item 20. Portfolio Managers
    Item 21. Brokerage Allocation and Other Practices
    Item 22. Capital Stock and Other Securities
    Item 23. Purchase, Redemption, and Pricing of Shares
    Item 24. Taxation of the Fund
    Item 25. Underwriters
    Item 26. Calculation of Performance Data
    Item 27. Financial Statements
    Item 27A. Annual and Semi-Annual Shareholder Report
PART C: OTHER INFORMATION
    Item 28. Exhibits
    Item 29. Persons Controlled by or Under Common Control with the 
Fund
    Item 30. Indemnification
    Item 31. Business and Other Connections of Investment Adviser
    Item 32. Principal Underwriters
    Item 33. Location of Accounts and Records
    Item 34. Management Services
    Item 35. Undertakings
SIGNATURES

General Instructions

A. Definitions

    References to sections and rules in this Form N-1A are to the 
Investment Company Act of 1940 [15 U.S.C. 80a-1

[[Page 70852]]

et seq.] (the ``Investment Company Act''), unless otherwise indicated. 
Terms used in this Form N-1A have the same meaning as in the Investment 
Company Act or the related rules, unless otherwise indicated. As used 
in this Form N-1A, the terms set out below have the following meanings:
    ``Class'' means a class of shares issued by a Multiple Class Fund 
that represents interests in the same portfolio of securities under 
rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the Multiple 
Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C. 80a-18(f), 
18(g), and 18(i)].
    ``Exchange-Traded Fund'' means a Fund or Class, the shares of which 
are listed and traded on a national securities exchange, and that has 
formed and operates under an exemptive order granted by the Commission 
or in reliance on rule 6c-11 [17 CFR 270.6c-11] under the Investment 
Company Act.
    ``Fund'' means the Registrant or a separate Series of the 
Registrant. When an item of Form N-1A specifically applies to a 
Registrant or a Series, those terms will be used.
    ``Market Price'' has the same meaning as in rule 6c-11 [17 CFR 
270.6c-11] under the Investment Company Act.
    ``Master-Feeder Fund'' means a two-tiered arrangement in which one 
or more Funds (each a ``Feeder Fund'') holds shares of a single Fund 
(the ``Master Fund'') in accordance with section 12(d)(1)(E) [15 U.S.C. 
80a-12(d)(1)(E)].
    ``Money Market Fund'' means a registered open-end management 
investment company, or series thereof, that is regulated as a money 
market fund pursuant to rule 2a-7 [17 CFR 270.2a-7] under the 
Investment Company Act of 1940.
    ``Multiple Class Fund'' means a Fund that has more than one Class.
    ``Registrant'' means an open-end management investment company 
registered under the Investment Company Act.
    ``SAI'' means the Statement of Additional Information required by 
Part B of this Form.
    ``Securities Act'' means the Securities Act of 1933 [15 U.S.C. 77a 
et seq.].
    ``Securities Exchange Act'' means the Securities Exchange Act of 
1934 [15 U.S.C. 78a et seq.].
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) [17 CFR 
270.18f-2(a)].

B. Filing and Use of Form N-1A

1. What is Form N-1A used for?
    Form N-1A is used by Funds, except insurance company separate 
accounts and small business investment companies licensed under the 
United States Small Business Administration, to file:
    (a) An initial registration statement under the Investment Company 
Act and amendments to the registration statement, including amendments 
required by rule 8b-16 [17 CFR 270.8b-16];
    (b) An initial registration statement under the Securities Act and 
amendments to the registration statement, including amendments required 
by section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)]; or
    (c) Any combination of the filings in paragraph (a) or (b).
2. What is included in the registration statement?
    (a) For registration statements or amendments filed under both the 
Investment Company Act and the Securities Act or only under the 
Securities Act, include the facing sheet of the Form, Parts A, B, and 
C, and the required signatures.
    (b) For registration statements or amendments filed only under the 
Investment Company Act, include the facing sheet of the Form, responses 
to all Items of Parts A (except Items 1, 2, 3, 4, 8A, and 13), B, and C 
(except Items 28(e) and (i)-(k)), and the required signatures.
3. What are the fees for Form N-1A?
    No registration fees are required with the filing of Form N-1A to 
register as an investment company under the Investment Company Act or 
to register securities under the Securities Act. See section 24(f) [15 
U.S.C. 80a-24(f)] and related rule 24f-2 [17 CFR 270.24f-2].
4. What rules apply to the filing of a registration statement on Form 
N-1A?
    (a) For registration statements and amendments filed under both the 
Investment Company Act and the Securities Act or only under the 
Securities Act, the general rules regarding the filing of registration 
statements in Regulation C under the Securities Act [17 CFR 230.400-
230.497] apply to the filing of Form N-1A. Specific requirements 
concerning Funds appear in rules 480-485 and 495-497 of Regulation C.
    (b) For registration statements and amendments filed only under the 
Investment Company Act, the general provisions in rules 8b-1--8b-32 [17 
CFR 270.8b-1--270.8b-32] apply to the filing of Form N-1A.
    (c) The plain English requirements of rule 421 under the Securities 
Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form 
N-1A. The information required by Items 2 through 8 must be provided in 
plain English under rule 421(d) under the Securities Act.
    (d) Regulation S-T [17 CFR 232.10-232.903] applies to all filings 
on the Commission's Electronic Data Gathering, Analysis, and Retrieval 
system (``EDGAR'').

C. Preparation of the Registration Statement

1. Administration of the Form N-1A Requirements
    (a) The requirements of Form N-1A are intended to promote effective 
communication between the Fund and prospective investors. A Fund's 
prospectus should clearly disclose the fundamental characteristics and 
investment risks of the Fund, using concise, straightforward, and easy 
to understand language. A Fund should use document design techniques 
that promote effective communication. The prospectus should emphasize 
the Fund's overall investment approach and strategy.
    (b) The prospectus disclosure requirements in Form N-1A are 
intended to elicit information for an average or typical investor who 
may not be sophisticated in legal or financial matters. The prospectus 
should help investors to evaluate the risks of an investment and to 
decide whether to invest in a Fund by providing a balanced disclosure 
of positive and negative factors. Disclosure in the prospectus should 
be designed to assist an investor in comparing and contrasting the Fund 
with other funds.
    (c) Responses to the Items in Form N-1A should be as simple and 
direct as reasonably possible and should include only as much 
information as is necessary to enable an average or typical investor to 
understand the particular characteristics of the Fund. The prospectus 
should avoid: Including lengthy legal and technical discussions; simply 
restating legal or regulatory requirements to which Funds generally are 
subject; and disproportionately emphasizing possible investments or 
activities of the Fund that are not a significant part of the Fund's 
investment operations. Brevity is especially important in describing 
the practices or aspects of the Fund's operations that do not differ 
materially from those of other investment companies. Avoid excessive

[[Page 70853]]

detail, technical or legal terminology, and complex language. Also 
avoid lengthy sentences and paragraphs that may make the prospectus 
difficult for many investors to understand and detract from its 
usefulness.
    (d) The requirements for prospectuses included in Form N-1A will be 
administered by the Commission in a way that will allow variances in 
disclosure or presentation if appropriate for the circumstances 
involved while remaining consistent with the objectives of Form N-1A.
2. Form N-1A Is Divided Into Three Parts
    (a) Part A. Part A includes the information required in a Fund's 
prospectus under section 10(a) of the Securities Act. The purpose of 
the prospectus is to provide essential information about the Fund in a 
way that will help investors to make informed decisions about whether 
to purchase the Fund's shares described in the prospectus. In 
responding to the Items in Part A, avoid cross-references to the SAI or 
shareholder reports. Cross-references within the prospectus are most 
useful when their use assists investors in understanding the 
information presented and does not add complexity to the prospectus.
    (b) Part B. Part B includes the information required in a Fund's 
SAI. The purpose of the SAI is to provide additional information about 
the Fund that the Commission has concluded is not necessary or 
appropriate in the public interest or for the protection of investors 
to be in the prospectus, but that some investors may find useful. Part 
B affords the Fund an opportunity to expand discussions of the matters 
described in the prospectus by including additional information that 
the Fund believes may be of interest to some investors. The Fund should 
not duplicate in the SAI information that is provided in the 
prospectus, unless necessary to make the SAI comprehensible as a 
document independent of the prospectus.
    (c) Part C. Part C includes other information required in a Fund's 
registration statement.
3. Additional Matters
    (a) Organization of Information. Organize the information in the 
prospectus and SAI to make it easy for investors to understand. 
Notwithstanding rule 421(a) under the Securities Act regarding the 
order of information required in a prospectus, disclose the information 
required by Items 2 through 8 in numerical order at the front of the 
prospectus. Do not precede these Items with any other Item except the 
Cover Page (Item 1) or a table of contents meeting the requirements of 
rule 481(c) under the Securities Act. Information that is included in 
response to Items 2 through 8 need not be repeated elsewhere in the 
prospectus, other than fee information required in both Item 3 and Item 
8A. Disclose the information required by Item 12 (Distribution 
Arrangements) in one place in the prospectus. Only principal risks 
should be disclosed in the prospectus, in accordance with Items 4 and 
9.
    (b) Other Information. A Fund may include, except in response to 
Items 2 through 8A, information in the prospectus or the SAI that is 
not otherwise required. For example, a Fund may include charts, graphs, 
or tables so long as the information is not incomplete, inaccurate, or 
misleading and does not, because of its nature, quantity, or manner of 
presentation, obscure or impede understanding of the information that 
is required to be included. Items 2 through 8A may not include 
disclosure other than that required or permitted by those Items.
    (c) Use of Form N-1A Registration Statement by More Than One 
Registrant, Series, or Class. A Form N-1A registration statement may be 
used by one or more Registrants, Series, or Classes.
    (i) When disclosure is provided for more than one Fund or Class, 
the disclosure should be presented in a format designed to communicate 
the information effectively. Except as required by paragraph (c)(ii) 
for Items 2 through 8, Funds may order or group the response to any 
Item in any manner that organizes the information into readable and 
comprehensible segments and is consistent with the intent of the 
prospectus to provide clear and concise information about the Funds or 
Classes. Funds are encouraged to use, as appropriate, tables, side-by-
side comparisons, captions, bullet points, or other organizational 
techniques when presenting disclosure for multiple Funds or Classes.
    (ii) Paragraph (a) requires Funds to disclose the information 
required by Items 2 through 8 in numerical order at the front of the 
prospectus and not to precede Items 2 through 8 with other information. 
Except as permitted by paragraph (c)(iii), a prospectus that contains 
information about more than one Fund must present all of the 
information required by Items 2 through 8 for each Fund sequentially 
and may not integrate the information for more than one Fund together. 
That is, a prospectus must present all of the information for a 
particular Fund that is required by Items 2 through 8 together, 
followed by all of the information for each additional Fund, and may 
not, for example, present all of the Item 2 (Risk/Return Summary: 
Investment Objectives/Goals) information for several Funds followed by 
all of the Item 3 (Risk/Return Summary: Fee Summary) information for 
several Funds. If a prospectus contains information about multiple 
Funds, clearly identify the name of the relevant Fund at the beginning 
of the information for the Fund that is required by Items 2 through 8. 
A Multiple Class Fund may present the information required by Items 2 
through 8 separately for each Class or may integrate the information 
for multiple Classes, although the order of the information must be as 
prescribed in Items 2 through 8. For example, the prospectus may 
present all of the Item 2 (Risk/Return Summary: Investment Objectives/
Goals) information for several Classes followed by all of the Item 3 
(Risk/Return Summary: Fee Summary) information for the Classes, or may 
present Items 2 and 3 for each of several Classes sequentially. Other 
presentations of multiple Class information also would be acceptable if 
they are consistent with the Form's intent to disclose the information 
required by Items 2 through 8 in a standard order at the beginning of 
the prospectus. For a Multiple Class Fund, clearly identify the 
relevant Classes at the beginning of the Items 2 through 8 information 
for those Classes.
    (iii) A prospectus that contains information about more than one 
Fund may integrate the information required by any of Items 6 through 8 
for all of the Funds together, provided that the information contained 
in any Item that is integrated is identical for all Funds covered in 
the prospectus. If the information required by any of Items 6 through 8 
is integrated pursuant to this paragraph, the integrated information 
should be presented immediately following the separate presentations of 
Item 2 through 8 information for individual Funds. In addition, include 
a statement containing the following information in each Fund's 
separate presentation of Item 2 through 8 information, in the location 
where the integrated information is omitted: ``For important 
information about [purchase and sale of fund shares], [tax 
information], and [financial intermediary compensation], please turn to 
[identify section heading and page number of prospectus].''
    (d) Modified Prospectuses for Certain Funds.

[[Page 70854]]

    (i) A Fund may modify or omit, if inapplicable, the information 
required by Items 6, 11(b)-(d) and 12(a)(2)-(5) for funds used as 
investment options for:
    (A) A defined contribution plan that meets the requirements for 
qualification under section 401(k) of the Internal Revenue Code [26 
U.S.C. 401(k)];
    (B) a tax-deferred arrangement under sections 403(b) or 457 of the 
Internal Revenue Code [26 U.S.C. 403(b) and 457]; and
    (C) a variable contract as defined in section 817(d) of the 
Internal Revenue Code [26 U.S.C. 817(d)], if covered in a separate 
account prospectus.
    (ii) A Fund that uses a modified prospectus under Instruction 
(d)(i) may:
    (A) Alter the legend required on the back cover page by Item 
1(b)(1) to state, as applicable, that the prospectus is intended for 
use in connection with a defined contribution plan, tax-deferred 
arrangement, or variable contract; and
    (B) modify other disclosure in the prospectus consistent with 
offering the Fund as a specific investment option for a defined 
contribution plan, tax-deferred arrangement, or variable contract.
    (iii) A Fund may omit the information required by Items 
4(b)(2)(iii)(B) and (C) and 4(b)(2)(iv) if the Fund's prospectus will 
be used exclusively to offer Fund shares as investment options for one 
or more of the following:
    (A) A defined contribution plan that meets the requirements for 
qualification under section 401(k) of the Internal Revenue Code [26 
U.S.C. 401(k)], a tax-deferred arrangement under section 403(b) or 457 
of the Internal Revenue Code [26 U.S.C. 403(b) or 457], a variable 
contract as defined in section 817(d) of the Internal Revenue Code [26 
U.S.C. 817(d)], or a similar plan or arrangement pursuant to which an 
investor is not taxed on his or her investment in the Fund until the 
investment is sold; or
    (B) persons that are not subject to the Federal income tax imposed 
under section 1 of the Internal Revenue Code [26 U.S.C. 1], or any 
successor to that section.
    (iv) A Fund that omits information under Instruction (d)(iii) may 
alter the legend required on the back cover page by Item 1(b)(1) to 
state, as applicable, that the prospectus is intended for use in 
connection with a defined contribution plan, tax-deferred arrangement, 
variable contract, or similar plan or arrangement, or persons described 
in Instruction (d)(iii)(B).
    (e) Dates. Rule 423 under the Securities Act [17 CFR 230.423] 
applies to the dates of the prospectus and the SAI. The SAI should be 
made available at the same time that the prospectus becomes available 
for purposes of rules 430 and 460 under the Securities Act [17 CFR 
230.430 and 230.460].
    (f) Sales Literature. A Fund may include sales literature in the 
prospectus so long as the amount of this information does not add 
substantial length to the prospectus and its placement does not obscure 
essential disclosure.
    (g) Interactive Data File.
    (i) An Interactive Data File (Sec.  232.11 of this chapter) is 
required to be submitted to the Commission in the manner provided by 
rule 405 of Regulation S-T (Sec.  232.405 of this chapter) for any 
registration statement or post-effective amendment thereto on Form N-1A 
that includes or amends information provided in response to Items 2, 4, 
or 8A.
    (A) Except as required by paragraph (g)(i)(B), the Interactive Data 
File must be submitted as an amendment to the registration statement to 
which the Interactive Data File relates. The amendment must be 
submitted on or before the date the registration statement or post-
effective amendment that contains the related information becomes 
effective.
    (B) In the case of a post-effective amendment to a registration 
statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), or (vii) 
of rule 485 under the Securities Act [17 CFR 230.485(b)], the 
Interactive Data File must be submitted either with the filing, or as 
an amendment to the registration statement to which the Interactive 
Data Filing relates that is submitted on or before the date the post-
effective amendment that contains the related information becomes 
effective.
    (ii) An Interactive Data File is required to be submitted to the 
Commission in the manner provided by rule 405 of Regulation S-T for any 
form of prospectus filed pursuant to paragraphs (c) or (e) of rule 497 
under the Securities Act [17 CFR 230.497(c) or (e)] that includes 
information provided in response to Items 2, 4, or 8A that varies from 
the registration statement. The Interactive Data File must be submitted 
with the filing made pursuant to rule 497.
    (iii) The Interactive Data File must be submitted in accordance 
with the specifications in the EDGAR Filer Manual, and in such a manner 
that will permit the information for each Series and, for any 
information that does not relate to all of the Classes in a filing, 
each Class of the Fund to be separately identified.

D. Incorporation by Reference

1. Specific Rules for Incorporation by Reference in Form N-1A 
Registration Statement
    (a) A Fund may not incorporate by reference into a prospectus 
information that Part A of this Form requires to be included in a 
prospectus, except as specifically permitted by Part A of the Form.
    (b) A Fund may incorporate by reference any or all of the SAI into 
the prospectus (but not to provide any information required by Part A 
to be included in the prospectus) without delivering the SAI with the 
prospectus.
    (c) A Fund may incorporate by reference into the SAI or its 
response to Part C, information that Parts B and C require to be 
included in the Fund's registration statement.
2. General Requirements
    All incorporation by reference must comply with the requirements of 
this Form and the following rules on incorporation by reference: Rule 
411 under the Securities Act [17 CFR 230.411] (general rules on 
incorporation by reference in a prospectus); rule 303 of Regulation S-T 
[17 CFR 232.303] (specific requirements for electronically filed 
documents); and rule 0-4 [17 CFR 270.0-4] (additional rules on 
incorporation by reference for Funds).

Part A--Information Required in a Prospectus

Item 1. Front and Back Cover Pages

    (a) Front Cover Page. Include the following information, in plain 
English under rule 421(d) under the Securities Act, on the outside 
front cover page of the prospectus:
    (1) The Fund's name and the Class or Classes, if any, to which the 
prospectus relates.
    (2) The exchange ticker symbol of the Fund's shares or, if the 
prospectus relates to one or more Classes of the Fund's shares, 
adjacent to each such Class, the exchange ticker symbol of such Class 
of the Fund's shares. If the Fund is an Exchange-Traded Fund, also 
identify the principal U.S. market or markets on which the Fund shares 
are traded.
    (3) The date of the prospectus.
    (4) The statement required by rule 481(b)(1) under the Securities 
Act.
    Instruction. A Fund may include on the front cover page a statement 
of its investment objectives, a brief (e.g., one sentence) description 
of its operations, or any additional information, subject to the 
requirement set out in General Instruction C.3(b).

[[Page 70855]]

    (b) Back Cover Page. Include the following information, in plain 
English under rule 421(d) under the Securities Act, on the outside back 
cover page of the prospectus:
    (1) A statement that the SAI includes additional information about 
the Fund, and a statement to the following effect:
    Additional information about the Fund's investments is available in 
the Fund's annual and semi-annual reports to shareholders and in Form 
N-CSR. In the Fund's annual report, you will find a discussion of the 
market conditions and investment strategies that significantly affected 
the Fund's performance during its last fiscal year. In Form N-CSR, you 
will find the Fund's annual and semi-annual financial statements.
    Explain that the SAI, the Fund's annual and semi-annual reports to 
shareholders, and Form N-CSR are available, without charge, upon 
request, and explain how shareholders in the Fund may make inquiries to 
the Fund. Provide a toll-free telephone number for investors to call: 
To request the SAI; to request the Fund's annual or semi-annual report; 
to request the Form N-CSR; to request other information about the Fund; 
and to make shareholder inquiries. Also, state the Fund makes available 
its SAI, annual and semi- annual report, and Form N-CSR, free of 
charge, on or through the Fund's website at a specified address. If the 
Fund does not make its SAI and shareholder reports available in this 
manner, disclose the reasons why it does not do so (including, where 
applicable, that the Fund does not have a website).
Instructions
    1. A Fund may indicate, if applicable, that the SAI, annual and 
semi-annual report, Form N-CSR, and other information are available by 
email request.
    2. A Fund may indicate, if applicable, that the SAI and other 
information are available from a financial intermediary (such as a 
broker-dealer or bank) through which shares of the Fund may be 
purchased or sold. When a Fund (or financial intermediary through which 
shares of the Fund may be purchased or sold) receives a request for the 
SAI, the annual report, the semi-annual report, or Form N-CSR, the Fund 
(or financial intermediary) must send the requested document within 3 
business days of receipt of the request, by first-class mail or other 
means designed to ensure equally prompt delivery.
    3. A Fund that has not yet been required to deliver an annual or 
semi-annual report to shareholders under rule 30e-1 [17 CFR 270.30e-1] 
or to file a Form N-CSR report may omit the statements required by this 
paragraph regarding the report.
    4. A Money Market Fund may omit the sentence indicating that a 
reader will find in the Fund's annual report a discussion of the market 
conditions and investment strategies that significantly affect the 
Fund's performance during its last fiscal year.
    (2) A statement whether and from where information is incorporated 
by reference into the prospectus as permitted by General Instruction D. 
Unless the information is delivered with the prospectus, explain that 
the Fund will provide the information without charge, upon request 
(referring to the telephone number provided in response to paragraph 
(b)(1)).
    Instruction. The Fund may combine the information about 
incorporation by reference with the statements required under paragraph 
(b)(1).
    (3) State that reports and other information about the Fund are 
available on the EDGAR Database on the Commission's website at https://www.sec.gov, and that copies of this information may be obtained, after 
paying a duplicating fee, by electronic request at the following email 
address: [email protected].
    (4) The Fund's Investment Company Act file number on the bottom of 
the back cover page in type size smaller than that generally used in 
the prospectus (e.g., 8-point modern type).

Item 2. Risk/Return Summary: Investment Objectives/Goals

    Disclose the Fund's investment objectives or goals. A Fund also may 
identify its type or category (e.g., that it is a Money Market Fund or 
a balanced fund).

Item 3. Risk/Return Summary: Fee Summary

    Include the following information, in plain English under rule 
421(d) under the Securities Act, after Item 2:
Your Investment Costs
    These are the amounts you could pay to buy, hold, and sell shares 
of the Fund. These costs reduce the value of your investment. You may 
pay other fees, such as brokerage commissions and other fees to 
financial intermediaries, which are not reflected in the table and 
example below.

 
 
 
Transaction Fees (fees paid each time you buy or sell):
    Purchase Charge (as a percentage of your   [Up to] __% (Or [up to]
     investment).                               $__, if you invest
                                                $10,000).
    Exit Charge (as a percentage of __)......  [Up to] __% (Or [up to]
                                                $__, if you invest
                                                $10,000).
    Maximum Purchase Charge Imposed on         [Up to] __% (Or [up to]
     Reinvested Dividends [and Other            $__, if you invest
     Distributions] (as a percentage of __).    $10,000).
    Early Exit Fee (as a percentage of amount  [Up to] __% (Or [up to]
     redeemed).                                 $__, if you invest
                                                $10,000).
    Exchange Fee.............................  [Up to] __% (Or [up to]
                                                $__, if you invest
                                                $10,000).
    Maximum Account Fee......................  [Up to] __% (Or [up to]
                                                $__, if you invest
                                                $10,000).
Ongoing Annual Fees (estimated expenses you pay each year as a
 percentage of the value of your investment)
    Ongoing Annual Fees......................  __% (Or $__, if you
                                                invest $10,000).
    Ongoing Annual Fees with Temporary         __% (Or $__, if you
     Discount *.                                invest $10,000).
 
* Discount expected to end on [date].

Example
    This example may help you understand the costs of investing in the 
Fund. The example assumes that: (1) You invest $10,000 in the Fund; (2) 
your investment has a 5% return each year; and (3) the Fund's operating 
expenses are based on the table above.

[[Page 70856]]



------------------------------------------------------------------------
                                              1 Year         10 Years
------------------------------------------------------------------------
Although your actual costs may be higher             $__             $__
 or lower, based on these assumptions,
 your costs would be:...................
If you sold your shares at the end of                $__             $__
 the relevant period, your costs would
 be:....................................
------------------------------------------------------------------------

    The example does not reflect purchase charges on reinvested 
dividends [and other distributions]. If these purchase charges were 
included, your costs would be higher.
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 __%.
Instructions
    1. General.
    (a) Round all dollar figures to the nearest dollar and all 
percentages to the nearest hundredth of one percent.
    (b) Include the narrative explanations in the order indicated. A 
Fund may modify the narrative explanations if the explanation contains 
comparable information to that shown.
    (c) Footnotes and other extraneous disclosure are not permitted, 
except that a footnote is permitted in a case where omitting it would 
cause the disclosure to be materially misleading, in that fees borne by 
the investor would be materially higher than fees presented in the fee 
summary.
    (d) If the Fund offers sales charge discounts, include ``up to'' 
before the maximum transaction fee amount in the table.
    (e) If the prospectus offers more than one Class of a Multiple 
Class Fund or more than one Feeder Fund that invests in the same Master 
Fund, provide a separate response for each Class or Feeder Fund.
    (f) If the Fund is an Exchange-Traded Fund, exclude any fees 
charged for the purchase and redemption of the Fund's creation units.
    2. Transaction Fees. Based on the information given in response to 
Item 8A, provide the maximum purchase charge, maximum exit charge, 
maximum purchase charge on reinvested dividends and other 
distributions, early exit fee, and exchange fee. Also disclose the 
dollar value of the maximum purchase charge, maximum exit charge, 
maximum purchase charge on reinvested dividends and other 
distributions, early exit fee, and exchange fee, based on a $10,000 
investment. Any transaction fees equaling $0 should not be included and 
the applicable line item should be omitted. However, a Multiple Class 
Fund that shows a charge and line item because one Class imposes a 
charge may show 0 as the charge for the other Classes.
    3. Maximum Account Fee. Based on the information given in response 
to Item 8A, provide the maximum account fee. Also disclose the dollar 
value of the maximum account fee based on a $10,000 investment. Any 
account fee equaling $0 should not be included and the maximum account 
fee line item should be omitted.
    4. Ongoing Annual Fees.
    (a) Based on the information given in response to Item 8A, provide 
the total Ongoing Annual Fees. If the Fund is a New Fund, include a 
parenthetical after the total Ongoing Annual Fees to state that the 
amount is estimated.
    (b) If there are expense reimbursement or fee waiver arrangements 
that will reduce any Fund operating expenses for no less than one year 
from the effective date of the Fund's registration statement, a Fund 
may also show the Fund's net expenses after subtracting the fee 
reimbursement or expense waiver from the total Ongoing Annual Fees 
under a caption titled ``Ongoing Annual Fees with Temporary Discount.'' 
The Fund should place this additional caption directly below the 
``Ongoing Annual Fees'' caption of the table. If the Fund provides this 
disclosure, provide in a footnote the expected termination date of the 
expense reimbursement or fee waiver arrangement.
    (c) Also disclose the dollar value of the total Ongoing Annual Fees 
and, as applicable, the dollar value of the total Ongoing Annual Fees 
with Temporary Discount based on a $10,000 investment.
    (d) If the Fund is including disclosure responsive to instruction 
4(f)(ii) of Item 8A, provide the footnote required by that instruction.
    5. Example.
    (a) Calculate the example in accordance with Instruction 5 to Item 
8A for 1- and 10-year periods. If the Fund is a New Fund, as described 
in Instruction 7 to Item 8A, provide information for 1- and 3-year 
periods in the Example and estimate any shareholder account fees 
collected.
    (b) Include the second 1- and 10-year periods and related narrative 
explanation only if an exit charge or other fee is charged upon 
redemption.
    6. Portfolio Turnover. Disclose the portfolio turnover rate 
provided in response to Item 13(a) for the most recent fiscal year (or 
for such shorter period as the Fund has been in operation). Disclose 
the period for which the information is provided if less than a full 
fiscal year. A Fund that is a Money Market Fund may omit the portfolio 
turnover information required by this Item.

Item 4. Risk/Return Summary: Investments, Risks, and Performance

    Include the following information, in plain English under rule 
421(d) under the Securities Act, in the order and subject matter 
indicated:
    (a) Principal Investment Strategies of the Fund.
    Based on the information given in response to Item 9(b), summarize 
how the Fund intends to achieve its investment objectives by 
identifying the Fund's principal investment strategies (including the 
type or types of securities in which the Fund invests or will invest 
principally) and any policy to concentrate in securities of issuers in 
a particular industry or group of industries.
    (b) Principal Risks of Investing in the Fund.
    (1) Narrative Risk Disclosure.
    (i) Based on the information given in response to Item 9(c), 
briefly summarize the principal risks of investing in the Fund, 
including the risks to which the Fund's portfolio as a whole is subject 
and the circumstances reasonably likely to affect adversely the Fund's 
net asset value, yield, and total return. Unless the Fund is a Money 
Market Fund, disclose that loss of money is a risk of investing in the 
Fund.
Instructions
    1. A Fund may, in responding to this Item, describe the types of 
investors for whom the Fund is intended or the types of investment 
goals that may be consistent with an investment in the Fund.
    2. A Fund should describe principal risks in order of importance, 
with the most significant risks appearing first. A Fund may use any 
reasonable means of determining the significance of risks. A Fund 
should not describe principal risks in alphabetical order.
    3. A Fund should, where appropriate, tailor risk disclosures to how 
the Fund

[[Page 70857]]

operates rather than rely on generic, standard risk disclosures.
    (ii) Statements Provided by Money Market Funds.
    (A) If the Fund is a Money Market Fund that is not a government 
Money Market Fund, as defined in Sec.  270.2a-7(a)(16) or a retail 
Money Market Fund, as defined in Sec.  270.2a-7(a)(25), include the 
following statement:
    You could lose money by investing in the Fund. Because the share 
price of the Fund will fluctuate, when you sell your shares they may be 
worth more or less than what you originally paid for them. The Fund may 
impose a fee upon sale of your shares or may temporarily suspend your 
ability to sell shares if the Fund's liquidity falls below required 
minimums because of market conditions or other factors. An investment 
in the Fund is not insured or guaranteed by the Federal Deposit 
Insurance Corporation or any other government agency. The Fund's 
sponsor has no legal obligation to provide financial support to the 
Fund, and you should not expect that the sponsor will provide financial 
support to the Fund at any time.
    (B) If the Fund is a Money Market Fund that is a government Money 
Market Fund, as defined in Sec.  270.2a-7(a)(16), or a retail Money 
Market Fund, as defined in Sec.  270.2a-7(a)(25), and that is subject 
to the requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii) of this 
chapter (or is not subject to the requirements of Sec. Sec.  270.2a-
7(c)(2)(i) and/or (ii) of this chapter pursuant to Sec.  270.2a-
7(c)(2)(iii) of this chapter, but has chosen to rely on the ability to 
impose liquidity fees and suspend redemptions consistent with the 
requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii)), include the 
following statement:
    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, it 
cannot guarantee it will do so. The Fund may impose a fee upon sale of 
your shares or may temporarily suspend your ability to sell shares if 
the Fund's liquidity falls below required minimums because of market 
conditions or other factors. An investment in the Fund is not insured 
or guaranteed by the Federal Deposit Insurance Corporation or any other 
government agency. The Fund's sponsor has no legal obligation to 
provide financial support to the Fund, and you should not expect that 
the sponsor will provide financial support to the Fund at any time.
    (C) If the Fund is a Money Market Fund that is a government Money 
Market Fund, as defined in Sec.  270.2a-7(a)(16), that is not subject 
to the requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii) of this 
chapter pursuant to Sec.  270.2a-7(c)(2)(iii) of this chapter, and that 
has not chosen to rely on the ability to impose liquidity fees and 
suspend redemptions consistent with the requirements of Sec. Sec.  
270.2a-7(c)(2)(i) and/or (ii), include the following statement:
    You could lose money by investing in the Fund. Although the Fund 
seeks to preserve the value of your investment at $1.00 per share, it 
cannot guarantee it will do so. An investment in the Fund is not 
insured or guaranteed by the Federal Deposit Insurance Corporation or 
any other government agency. The Fund's sponsor has no legal obligation 
to provide financial support to the Fund, and you should not expect 
that the sponsor will provide financial support to the Fund at any 
time.
    Instruction. If an affiliated person, promoter, or principal 
underwriter of the Fund, or an affiliated person of such a person, has 
contractually committed to provide financial support to the Fund, and 
the term of the agreement will extend for at least one year following 
the effective date of the Fund's registration statement, the statement 
specified in Item 4(b)(1)(ii)(A), Item 4(b)(1)(ii)(B), or Item 
4(b)(1)(ii)(C) may omit the last sentence (``The Fund's sponsor has no 
legal obligation to provide financial support to the Fund, and you 
should not expect that the sponsor will provide financial support to 
the Fund at any time.''). For purposes of this Instruction, the term 
``financial support'' includes any capital contribution, purchase of a 
security from the Fund in reliance on Sec.  270.17a-9, purchase of any 
defaulted or devalued security at par, execution of letter of credit or 
letter of indemnity, capital support agreement (whether or not the Fund 
ultimately received support), performance guarantee, or any other 
similar action reasonably intended to increase or stabilize the value 
or liquidity of the fund's portfolio; however, the term ``financial 
support'' excludes any routine waiver of fees or reimbursement of fund 
expenses, routine inter-fund lending, routine inter-fund purchases of 
fund shares, or any action that would qualify as financial support as 
defined above, that the board of directors has otherwise determined not 
to be reasonably intended to increase or stabilize the value or 
liquidity of the fund's portfolio.
    (iii) If the Fund is advised by or sold through an insured 
depository institution, state that:
    An investment in the Fund is not a deposit of the bank and is not 
insured or guaranteed by the Federal Deposit Insurance Corporation or 
any other government agency.
    Instruction. A Money Market Fund that is advised by or sold through 
an insured depository institution should combine the disclosure 
required by Items 4(b)(1)(ii) and (iii) in a single statement.
    (iv) If applicable, state that the Fund is non-diversified, 
describe the effect of non-diversification (e.g., disclose that, 
compared with other funds, the Fund may invest a greater percentage of 
its assets in a particular issuer), and summarize the risks of 
investing in a non-diversified fund.
    (2) Risk/Return Bar Chart and Table.
    (i) Include the bar chart and table required by paragraphs 
(b)(2)(ii) and (iii) of this section. Provide a brief explanation of 
how the information illustrates the variability of the Fund's returns 
(e.g., by stating that the information provides some indication of the 
risks of investing in the Fund by showing changes in the Fund's 
performance from year to year and by showing how the Fund's average 
annual returns for 1, 5, and 10 years compare with those of a broad 
measure of market performance). Provide a statement to the effect that 
the Fund's past performance (before and after taxes) is not a good 
predictor of the Fund's future performance. If applicable, include a 
statement explaining that updated performance information is available 
and providing a website address and/or toll-free telephone number where 
the updated information may be obtained.
    (ii) If the Fund has annual returns for at least one calendar year, 
provide a bar chart showing the Fund's annual total returns for each of 
the last 10 calendar years (or for the life of the Fund if less than 10 
years), but only for periods subsequent to the effective date of the 
Fund's registration statement. Present the corresponding numerical 
return adjacent to each bar. If the Fund's fiscal year is other than a 
calendar year, include the year-to-date return information as of the 
end of the most recent quarter in a footnote to the bar chart. 
Following the bar chart, disclose the Fund's highest and lowest return 
for a quarter during the 10 years or other period of the bar chart.
    (iii) If the Fund has annual returns for at least one calendar 
year, provide a table showing the Fund's (A) average annual total 
return; (B) average annual total return (after taxes on distributions); 
and (C) average annual total return (after taxes on distributions and 
redemption). A Money Market Fund should show only the returns described 
in clause (A) of the preceding sentence. All returns should be shown 
for 1-, 5-, and 10- calendar year periods ending on the date of the 
most recently completed

[[Page 70858]]

calendar year (or for the life of the Fund, if shorter), but only for 
periods subsequent to the effective date of the Fund's registration 
statement. The table also should show the returns of an appropriate 
broad-based securities market index as defined in Instruction 6 to Item 
27A(d)(2) for the same periods. A Fund that has been in existence for 
more than 10 years also may include returns for the life of the Fund. A 
Money Market Fund may provide the Fund's 7-day yield ending on the date 
of the most recent calendar year or disclose a toll-free telephone 
number that investors can use to obtain the Fund's current 7-day yield. 
For a Fund (other than a Money Market Fund or a Fund described in 
General Instruction C.3.(d)(iii)), provide the information in the 
following table with the specified captions:

                                          Average annual total returns
                                    [For the periods ended December 31, __ ]
----------------------------------------------------------------------------------------------------------------
                                                                                    5 years (or    10 years (or
                                                                      1 year       life of fund)   life of fund)
----------------------------------------------------------------------------------------------------------------
Return Before Taxes.............................................             __%             __%             __%
Return After Taxes on Distributions.............................             __%             __%             __%
Return After Taxes on Distributions and Sale of Fund Shares.....             __%             __%             __%
Index (reflects no deduction for [fees, expenses, or taxes] )...             __%             __%             __%
----------------------------------------------------------------------------------------------------------------

    (iv) Adjacent to the table required by paragraph 4(b)(2)(iii), 
provide a brief explanation that:
    (A) After-tax returns are calculated using the historical highest 
individual Federal marginal income tax rates and do not reflect the 
impact of state and local taxes;
    (B) Actual after-tax returns depend on an investor's tax situation 
and may differ from those shown, and after-tax returns shown are not 
relevant to investors who hold their Fund shares through tax-deferred 
arrangements, such as 401(k) plans or individual retirement accounts;
    (C) If the Fund is a Multiple Class Fund that offers more than one 
Class in the prospectus, after-tax returns are shown for only one Class 
and after-tax returns for other Classes will vary; and
    (D) If average annual total return (after taxes on distributions 
and redemption) is higher than average annual total return, the reason 
for this result may be explained.
Instructions
    1. Bar Chart.
    (a) Provide annual total returns beginning with the earliest 
calendar year. Calculate annual returns using the Instructions to Item 
13(a), except that the calculations should be based on calendar years. 
If a Fund's shares are sold subject to a sales charge (e.g., purchase 
charge or exit charge) or account fees, state that sales charges or 
account fees are not reflected in the bar chart and that, if these 
amounts were reflected, returns would be less than those shown.
    (b) For a Fund that provides annual total returns for only one 
calendar year or for a Fund that does not include the bar chart because 
it does not have annual returns for a full calendar year, modify, as 
appropriate, the narrative explanation required by paragraph (b)(2)(i) 
(e.g., by stating that the information gives some indication of the 
risks of an investment in the Fund by comparing the Fund's performance 
with a broad measure of market performance).
    2. Table.
    (a) Calculate a Money Market Fund's 7-day yield under Item 26(a); 
the Fund's average annual total return under Item 26(b)(1); and the 
Fund's average annual total return (after taxes on distributions) and 
average annual total return (after taxes on distributions and 
redemption) under Items 26(b)(2) and (3), respectively.
    (b) A Fund may include, in addition to the required broad-based 
securities market index, information for one or more other indexes as 
permitted by Instruction 7 to Item 27A(d)(2). If an additional index is 
included, disclose information about the additional index in the 
narrative explanation accompanying the bar chart and table (e.g., by 
stating that the information shows how the Fund's performance compares 
with the returns of an index of funds with similar investment 
objectives).
    (c) If the Fund selects an index that is different from the index 
used in a table for the immediately preceding period, explain the 
reason(s) for the selection of a different index and provide 
information for both the newly selected and the former index.
    (d) A Fund (other than a Money Market Fund) may include the Fund's 
yield calculated under Item 26(b)(2). Any Fund may include its tax-
equivalent yield calculated under Item 26. If a Fund's yield is 
included, provide a toll-free telephone number that investors can use 
to obtain current yield information.
    (e) Returns required by paragraphs 4(b)(2)(iii)(A), (B), and (C) 
for a Fund or Series must be adjacent to one another and appear in that 
order. The returns for a broad-based securities market index, as 
required by paragraph 4(b)(2)(iii), must precede or follow all of the 
returns for a Fund or Series rather than be interspersed with the 
returns of the Fund or Series.
    3. Multiple Class Funds.
    (a) When a Multiple Class Fund presents information for more than 
one Class together in response to Item 4(b)(2), provide annual total 
returns in the bar chart for only one of those Classes. The Fund can 
select which Class to include (e.g., the oldest Class, the Class with 
the greatest net assets) if the Fund:
    (i) Selects the Class with 10 or more years of annual returns if 
other Classes have fewer than 10 years of annual returns;
    (ii) Selects the Class with the longest period of annual returns 
when the Classes all have fewer than 10 years of returns; and
    (iii) If the Fund provides annual total returns in the bar chart 
for a Class that is different from the Class selected for the most 
immediately preceding period, explain in a footnote to the bar chart 
the reasons for the selection of a different Class.
    (b) When a Multiple Class Fund offers a new Class in a prospectus 
and separately presents information for the new Class in response to 
Item 4(b)(2), include the bar chart with annual total returns for any 
other existing Class for the first year that the Class is offered. 
Explain in a footnote that the returns are for a Class that is not 
presented that would have substantially similar annual returns because 
the shares are invested in the same portfolio of securities and the 
annual returns would differ only to

[[Page 70859]]

the extent that the Classes do not have the same expenses. Include 
return information for the other Class reflected in the bar chart in 
the performance table.
    (c) When a Multiple Class Fund presents information for more than 
one Class together in response to Item 4(b)(2):
    (i) Provide the returns required by paragraph 4(b)(2)(iii)(A) of 
this Item for each of the Classes;
    (ii) Provide the returns required by paragraphs 4(b)(2)(iii)(B) and 
(C) of this Item for only one of those Classes. The Fund may select the 
Class for which it provides the returns required by paragraphs 
4(b)(2)(iii)(B) and (C) of this Item, provided that the Fund:
    (A) Selects a Class that has been offered for use as an investment 
option for accounts other than those described in General Instruction 
C.3.(d)(iii)(A);
    (B) Selects a Class described in paragraph (c)(ii)(A) of this 
Instruction with 10 or more years of annual returns if other Classes 
described in paragraph (c)(ii)(A) of this Instruction have fewer than 
10 years of annual returns;
    (C) Selects the Class described in paragraph (c)(ii)(A) of this 
Instruction with the longest period of annual returns if the Classes 
described in paragraph (c)(ii)(A) of this Instruction all have fewer 
than 10 years of returns; and
    (D) If the Fund provides the returns required by paragraphs 
4(b)(2)(iii)(B) and (C) of this Item for a Class that is different from 
the Class selected for the most immediately preceding period, explain 
in a footnote to the table the reasons for the selection of a different 
Class;
    (iii) The returns required by paragraphs 4(b)(2)(iii)(A), (B), and 
(C) of this Item for the Class described in paragraph (c)(ii) of this 
Instruction should be adjacent and should not be interspersed with the 
returns of other Classes; and
    (iv) All returns shown should be identified by Class.
    (d) If a Multiple Class Fund offers a Class in the prospectus that 
converts into another Class after a stated period, compute average 
annual total returns in the table by using the returns of the other 
Class for the period after conversion.
    4. Change in Investment Adviser. If the Fund has not had the same 
investment adviser during the last 10 calendar years, the Fund may 
begin the bar chart and the performance information in the table on the 
date that the current adviser began to provide advisory services to the 
Fund subject to the conditions in Instruction 12 of Item 27A(d)(2).

Item 5. Management

    (a) Investment Adviser(s). Provide the name of each investment 
adviser of the Fund, including sub-advisers.
Instructions
    1. A Fund need not identify a sub-adviser whose sole responsibility 
for the Fund is limited to day-to-day management of the Fund's holdings 
of cash and cash equivalent instruments, unless the Fund is a Money 
Market Fund or other Fund with a principal investment strategy of 
regularly holding cash and cash equivalent instruments.
    2. A Fund having three or more sub-advisers, each of which manages 
a portion of the Fund's portfolio, need not identify each such sub-
adviser, except that the Fund must identify any sub-adviser that is (or 
is reasonably expected to be) responsible for the management of a 
significant portion of the Fund's net assets. For purposes of this 
paragraph, a significant portion of a Fund's net assets generally will 
be deemed to be 30% or more of the Fund's net assets.
    (b) Portfolio Manager(s). State the name, title, and length of 
service (or year service began) of the person or persons employed by or 
associated with the Fund or an investment adviser of the Fund who are 
primarily responsible for the day-to-day management of the Fund's 
portfolio (``Portfolio Manager'').
Instructions
    1. This requirement does not apply to a Money Market Fund.
    2. If a committee, team, or other group of persons associated with 
the Fund or an investment adviser of the Fund is jointly and primarily 
responsible for the day-to-day management of the Fund's portfolio, 
information in response to this Item is required for each member of 
such committee, team, or other group. If more than five persons are 
jointly and primarily responsible for the day-to-day management of the 
Fund's portfolio, the Fund need only provide information for the five 
persons with the most significant responsibility for the day-to-day 
management of the Fund's portfolio.

Item 6. Purchase and Sale of Fund Shares

    (a) Purchase of Fund Shares. Disclose the Fund's minimum initial or 
subsequent investment requirements.
    (b) Sale of Fund Shares. Also disclose that the Fund's shares are 
redeemable and briefly identify the procedures for redeeming shares 
(e.g., on any business day by written request, telephone, or wire 
transfer).
    (c) Exchange-Traded Funds. If the Fund is an Exchange-Traded Fund, 
the Fund may omit the information required by paragraphs (a) and (b) of 
this Item and must disclose:
    (1) That Individual Fund shares may only be bought and sold in the 
secondary market through a broker or dealer at market price;
    (2) That because ETF shares trade at market prices rather than net 
asset value, shares may trade at a price greater than net asset value 
(premium) or less than net asset value (discount);
    (3) That an investor may incur costs attributable to the difference 
between the highest price a buyer is willing to purchase shares of the 
Fund (bid) and the lowest price a seller is willing to accept for 
shares of the Fund (ask) when buying or selling shares in the secondary 
market (the ``bid-ask spread'');
    (4) If applicable, how to access recent information, including 
information on the Fund's net asset value, Market Price, premiums and 
discounts, and bid-ask spreads, on the Exchange-Traded Fund's website; 
and
    (5) The median bid-ask spread for the Fund's most recent year.
Instructions
    1. A Fund may omit the information required by paragraph (c)(5) of 
this Item if it satisfies the requirements of paragraph (c)(1)(v) of 
Rule 6c-11 [17 CFR 270.6c-11(c)(1)(v)] under the Investment Company 
Act.
    2. An Exchange-Traded Fund that had its initial listing on a 
national securities exchange at or before the beginning of the most 
recently completed fiscal year must include the median bid-ask spread 
for the Fund's most recent fiscal year. For an Exchange-Traded Fund 
that had an initial listing after the beginning of the most recently 
completed fiscal year, explain that the Exchange-Traded Fund did not 
have a sufficient trading history to report trading information and 
related costs. Information should be based on the most recently 
completed fiscal year end.
    3. Bid-Ask Spread (Median). Calculate the median bid-ask spread by 
dividing the difference between the national best bid and national best 
offer by the mid-point of the national best bid and national best offer 
as of the end of each ten-second interval throughout each trading day 
of the Exchange-Traded Fund's most recent fiscal year. Once the bid-ask 
spread for each ten-second interval throughout the fiscal year is 
determined, sort the spreads from lowest to highest. If there is an odd 
number of spread intervals, then the median is the middle number. If 
there

[[Page 70860]]

is an even number of spread intervals, then the median is the average 
between the two middle numbers. Express the spread as a percentage, 
rounded to the nearest hundredth percent.
    4. A Fund may combine the information required by Item 6(c)(4) into 
the information required by Item 1(b)(1) and Rule 498(b)(1)(v) [17 CFR 
230.498(b)(1)(v)] under the Securities Act.

Item 7. Tax Information

    State, as applicable, that the Fund intends to make distributions 
that may be taxed as ordinary income or capital gains or that the Fund 
intends to distribute tax-exempt income. For a Fund that holds itself 
out as investing in securities generating tax-exempt income, provide, 
as applicable, a general statement to the effect that a portion of the 
Fund's distributions may be subject to Federal income tax.

Item 8. Financial Intermediary Compensation

    Include the following statement. A Fund may modify the statement if 
the modified statement contains comparable information. A Fund may omit 
the statement if neither the Fund nor any of its related companies pay 
financial intermediaries for the sale of Fund shares or related 
services.
Payments to Broker-Dealers and Other Financial Intermediaries
    If you purchase the Fund through a broker-dealer or other financial 
intermediary (such as a bank), the Fund and its related companies may 
pay the intermediary for the sale of Fund shares and related services. 
These payments may create a conflict of interest by influencing the 
broker-dealer or other intermediary and your salesperson to recommend 
the Fund over another investment. Ask your salesperson or visit your 
financial intermediary's website for more information.

Item 8A. Fee Table

    Include the following information, in plain English under rule 
421(d) under the Securities Act:
Fees and Expenses of the Fund
    This table describes the fees and expenses that you could pay if 
you buy, hold, and sell shares of the Fund. These costs reduce the 
value of your investment. You may pay other fees, such as brokerage 
commissions and other fees to financial intermediaries, which are not 
reflected in the table and example below. You may qualify for sales 
charge discounts if you and your family invest, or agree to invest in 
the future, at least $[ ] in [name of fund family] funds. More 
information about these and other discounts is available from your 
financial professional and in [identify section heading and page 
number] of the Fund's prospectus and [identify section heading and page 
number] of the Fund's statement of additional information.

 
 
 
Transaction Fees (fees paid each time you buy or sell):
    Purchase Charge (as a percentage of your investment)             __%
    Exit Charge (as a percentage of __).................             __%
    Maximum Purchase Charge Imposed on Reinvested                    __%
     Dividends [and Other Distributions] (as a
     percentage of __)..................................
    Early Exit Fee (as a percentage of amount redeemed,              __%
     if applicable).....................................
    Exchange Fee........................................             __%
    Maximum Account Fee.................................             __%
Ongoing Annual Fees (estimated expenses you pay each year as a
 percentage of the value of your investment):
    Management Fees.....................................               %
    Selling Fees........................................               %
    Other Expenses......................................               %
                                                                       %
                                                                     __%
                                                                     __%
Total Ongoing Annual Fees...............................             __%
Temporary Discount......................................             __%
Total Ongoing Annual Fees with Temporary Discount.......             __%
 

Example
    This example may help you understand the cost of investing in the 
Fund. The example assumes that: (1) You invest $10,000 in the Fund; (2) 
your investment has a 5% return each year; and (3) the Fund's operating 
expenses are based on the table above.

----------------------------------------------------------------------------------------------------------------
                                                      1 Year          3 Years         5 Years        10 Years
----------------------------------------------------------------------------------------------------------------
Although your actual costs may be higher or                  $__             $__             $__             $__
 lower, based on these assumptions, your costs
 would be:......................................
If you sold your shares at the end of the                    $__             $__             $__             $__
 relevant period, your costs would be:..........
----------------------------------------------------------------------------------------------------------------

    The example does not reflect purchase charges on reinvested 
dividends [and other distributions]. If these purchase charges were 
included, your costs would be higher.
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 __%.
Instructions
    1. General.
    (a) Round all dollar figures to the nearest dollar and all 
percentages to the nearest hundredth of one percent.
    (b) Include the narrative explanations in the order indicated. A 
Fund may modify the narrative explanations if the explanation contains 
comparable information to that shown. The narrative explanation 
regarding sales charge discounts is only required by a Fund that offers 
such discounts and should specify the minimum level of investment 
required to qualify for a discount as disclosed in the table required 
by Item 12(a)(1).
    (c) Include the caption ``Maximum Account Fees'' only if the Fund 
charges these fees. A Fund may omit other captions if the Fund does not 
charge the

[[Page 70861]]

fees or expenses covered by the captions.
    (d) Multiple Class and Master-Feeder Funds.
    (i) If the Fund is a Feeder Fund, reflect the aggregate expenses of 
the Feeder Fund and the Master Fund in a single fee table using the 
captions provided. In a footnote to the fee table, state that the table 
and Example reflect the expenses of both the Feeder and Master Funds.
    (ii) If the prospectus offers more than one Class of a Multiple 
Class Fund or more than one Feeder Fund that invests in the same Master 
Fund, provide a separate response for each Class or Feeder Fund.
    (e) If the Fund is an Exchange-Traded Fund, exclude any fees 
charged for the purchase and redemption of the Fund's creation units.
    2. Transaction Fees.
    (a) ``Purchase Charge'' is the sales charge (load) imposed on 
purchases, expressed as a percentage of the offering price. Provide the 
maximum purchase charge.
    (b) ``Exit Charge'' includes the total deferred sales charge (load) 
payable upon redemption, in installments, or both, expressed as a 
percentage of the amount or amounts stated in response to Item 12(a). 
Provide the maximum exit charge. A Fund may include in a footnote to 
the table, if applicable, a tabular presentation showing the amount of 
exit charges over time or a narrative explanation of the exit charges 
(e.g., __% in the first year after purchase, declining to __% in the __ 
year and eliminated thereafter).
    (c) If more than one type of sales charge (load) is imposed (e.g., 
a purchase charge and an exit charge), the first caption in the table 
should read ``Maximum Combined Purchase and Exit Charge'' and show the 
maximum cumulative percentage. Show the percentage amounts and the 
terms of each sales charge (load) comprising that figure on separate 
lines below.
    (d) If a purchase charge is imposed on shares purchased with 
reinvested capital gains distributions or returns of capital, include 
the bracketed words in the ``Maximum Purchase Charge Imposed on 
Reinvested Dividends'' caption.
    (e) ``Early Exit Fee'' includes a fee charged for any redemption of 
the Fund's shares, but does not include an exit charge upon redemption, 
and, if the Fund is a Money Market Fund, does not include a liquidity 
fee imposed upon the sale of Fund shares in accordance with rule 2a-
7(c)(2).
    (f) ``Exchange Fee'' includes the maximum fee charged for any 
exchange or transfer of interest from the Fund to another fund. The 
Fund may include in a footnote to the table, if applicable, a tabular 
presentation of the range of exchange fees or a narrative explanation 
of the fees.
    3. Maximum Account Fees. Disclose account fees that may be charged 
to a typical investor in the Fund; fees that apply to only a limited 
number of shareholders based on their particular circumstances need not 
be disclosed. Include a caption describing the maximum account fee 
(e.g., ``Maximum Account Maintenance Fee'' or ``Maximum Cash Management 
Fee''). State the maximum annual account fee as either a fixed dollar 
amount or a percentage of assets. Include in a parenthetical to the 
caption the basis on which any percentage is calculated. If an account 
fee is charged only to accounts that do not meet a certain threshold 
(e.g., accounts under $5,000), the Fund may include the threshold in a 
parenthetical to the caption or footnote to the table. The Fund may 
include an explanation of any non-recurring account fee in a 
parenthetical to the caption or in a footnote to the table.
    4. Ongoing Annual Fees.
    (a) ``Management Fees'' include investment advisory fees (including 
any fees based on the Fund's performance), any other management fees 
payable to the investment adviser or its affiliates, and administrative 
fees payable to the investment adviser or its affiliates that are not 
included as ``Other Expenses.''
    (b) ``Selling Fees'' include all distribution or other expenses 
incurred during the most recent fiscal year under a plan adopted 
pursuant to rule 12b-1 [17 CFR 270.12b-1]. Under an appropriate caption 
or a subcaption of ``Other Expenses,'' disclose the amount of any 
distribution or similar expenses deducted from the Fund's assets other 
than pursuant to a rule 12b-1 plan.
    (c) ``Other Expenses''.
    (i) ``Other Expenses'' include all expenses not otherwise disclosed 
in the table that are deducted from the Fund's assets or charged to all 
shareholder accounts. The amount of expenses deducted from the Fund's 
assets are the amounts shown as expenses in the Fund's statement of 
operations (including increases resulting from complying with paragraph 
2(g) of rule 6-07 of Regulation S-X [17 CFR 210.6-07]).
    (ii) ``Other Expenses'' do not include extraordinary expenses. 
``Extraordinary expenses'' refers to expenses that are distinguished by 
their unusual nature and by the infrequency of occurrence. Unusual 
nature means the expense has a high degree of abnormality and is 
clearly unrelated to, or only incidentally related to, the ordinary and 
typical activities of the fund, taking into account the environment in 
which the fund operates. Infrequency of occurrence means the expense is 
not reasonably expected to recur in the foreseeable future, taking into 
consideration the environment in which the fund operates. The 
environment of a fund includes such factors as the characteristics of 
the industry or industries in which it operates, the geographical 
location of its operations, and the nature and extent of governmental 
regulation. If extraordinary expenses were incurred that materially 
affected the Fund's ``Other Expenses,'' disclose in a footnote to the 
table what ``Other Expenses'' would have been had the extraordinary 
expenses been included.
    (iii) The Fund may subdivide this caption into no more than three 
subcaptions that identify the largest expense or expenses comprising 
``Other Expenses,'' but must include a total of all ``Other Expenses.'' 
Alternatively, the Fund may include the components of ``Other 
Expenses'' in a parenthetical to the caption.
    (d) ``Ongoing Annual Fees''.
    (i) Base the percentages of ``Ongoing Annual Fees'' on amounts 
incurred during the Fund's most recent fiscal year, but include in 
expenses amounts that would have been incurred absent expense 
reimbursement or fee waiver arrangements. If the Fund has changed its 
fiscal year and, as a result, the most recent fiscal year is less than 
three months, use the fiscal year prior to the most recent fiscal year 
as the basis for determining ``Ongoing Annual Fees.''
    (ii) If there have been any changes in ``Ongoing Annual Fees'' that 
would materially affect the information disclosed in the table:
    (A) Restate the expense information using the current fees as if 
they had been in effect during the previous fiscal year; and
    (B) In a footnote to the table, disclose that the expense 
information in the table has been restated to reflect current fees.
    (iii) A change in ``Ongoing Annual Fees'' means either an increase 
or a decrease in expenses that occurred during the most recent fiscal 
year or that is expected to occur during the current fiscal year. A 
change in ``Ongoing Annual Fees'' does not include a decrease in 
operating expenses as a percentage of assets due to economies of scale 
or breakpoints in a fee arrangement resulting from an increase in the 
Fund's assets.

[[Page 70862]]

    (e) If there are expense reimbursement or fee waiver arrangements 
that will reduce any Fund operating expenses for no less than one year 
from the effective date of the Fund's registration statement, a Fund 
may add two captions to the table: One caption showing the amount of 
the expense reimbursement or fee waiver, and a second caption showing 
the Fund's net expenses after subtracting the fee reimbursement or 
expense waiver from the total fund operating expenses. The Fund should 
place these additional captions directly below the ``Total Ongoing 
Annual Fees'' caption of the table and should use appropriate 
descriptive captions, such as ``Temporary Discount'' and ``Total 
Ongoing Annual Fees with Temporary Discount,'' respectively. If the 
Fund provides this disclosure, also disclose the period for which the 
expense reimbursement or fee waiver arrangement is expected to 
continue, including the expected termination date, and briefly describe 
who can terminate the arrangement and under what circumstances.
    (f) Acquired Fund Fees and Expenses.
    (i) If the Fund (unless it is a Feeder Fund) invests in shares of 
one or more Acquired Funds, add a subcaption to the ``Ongoing Annual 
Fees'' portion of the table directly above the subcaption titled 
``Total Ongoing Annual Fees.'' Title the additional subcaption: 
``Acquired Fund Fees and Expenses.'' Disclose in the subcaption fees 
and expenses incurred indirectly by the Fund as a result of investment 
in shares of one or more Acquired Funds. For purposes of this item, an 
``Acquired Fund'' means any company in which the Fund invests or has 
invested during the relevant fiscal period that (A) is an investment 
company or (B) would be an investment company under section 3(a) of the 
Investment Company Act [15 U.S.C. 80a-3(a)] but for the exceptions to 
that definition provided for in sections 3(c)(1) and 3(c)(7) of the 
Investment Company Act [15 U.S.C. 80a-3(c)(1) and 80a-3(c)(7)]. If a 
Fund uses another term in response to other requirements of this Form 
to refer to Acquired Funds, it may include that term in parentheses 
following the subcaption title.
    (ii) A Fund may omit the Acquired Fund Fees and Expenses subcaption 
in the table if the ratio of the Acquiring Fund's investments in 
Acquired Funds (excluding Money Market Funds) to the Fund's total 
assets for the prior fiscal year, as calculated as described below, is 
10 percent or less and the Fund discloses in a footnote to the table: 
The amount of the Fund's Acquired Fund Fees and Expenses, and a 
statement that the Fund's [Total] Ongoing Annual Fees in the table 
would be higher if these fees and expenses were included. Calculate the 
ratio in the following manner.
    (A) For each of the 12 months that compose the prior fiscal year, 
divide the Fund's investments in Acquired Funds (excluding Money Market 
Funds) as of the end of the month by the Fund's total assets as of the 
end of the month. This will produce 12 data items (or fewer if the Fund 
has been in operation for less than a full fiscal year).
    (B) Calculate the average of the 12 (or fewer) data items. This 
figure is the ratio.
    (iii) Determine the ``Acquired Fund Fees and Expenses'' according 
to the following formula:
[GRAPHIC] [TIFF OMITTED] TP05NO20.004

Where:

AFFE = Acquired Fund fees and expenses;
F1, F2, F3, . . . = Total annual 
operating expense ratio for each Acquired Fund;
FY = Number of days in the relevant fiscal year (or the number of 
days since the date the Fund made its first investment, if less than 
a year);
AI1, AI2, AI3, . . . = Average 
invested balance in each Acquired Fund;
D1, D2, D3, . . . = Number of days 
invested in each Acquired Fund;
``Transaction Fees'' = The total amount of purchase charges, exit 
charges, redemption fees, or other transaction fees paid by the Fund 
in connection with acquiring or disposing of shares in any Acquired 
Funds during the most recent fiscal year; and
``Incentive Allocations'' = Any allocation of capital from the 
Acquiring Fund to the adviser of the Acquired Fund (or its affiliate 
based on a percentage of the Acquiring Fund's income, capital gains 
and/or appreciation in the Acquired Fund.

    (iv) Calculate the average net assets of the Fund for the most 
recent fiscal year, as provided in Item 13(a) (see Instruction 4 to 
Item 13(a)).
    (v) The total annual operating expense ratio used for purposes of 
this calculation (F1) is the annualized ratio of operating expenses to 
average net assets for the Acquired Fund's most recent fiscal period as 
disclosed in the Acquired Fund's most recent shareholder report. If the 
ratio of expenses to average net assets is not included in the most 
recent shareholder report, or the Acquired Fund is a newly formed fund 
that has not provided a shareholder report, then the ratio of expenses 
to average net assets of the Acquired Fund is the ratio of total annual 
operating expenses to average annual net assets of the Acquired Fund 
for its most recent fiscal period as disclosed in the most recent 
communication from the Acquired Fund to the Fund. For purposes of this 
Instruction: (i) Acquired Fund expenses include increases resulting 
from brokerage service and expense offset arrangements and reductions 
resulting from fee waivers or reimbursements by the Acquired Funds' 
investment advisers or sponsors; and (ii) Acquired Fund expenses do not 
include expenses (i.e., performance fees) that are incurred solely upon 
the realization and/or distribution of a gain. If an Acquired Fund has 
no operating history, include in the Acquired Funds' expenses any fees 
payable to the Acquired Fund's investment adviser or its affiliates 
stated in the Acquired Fund's registration statement, offering 
memorandum or other similar communication without giving effect to any 
performance.
    (vi) To determine the average invested balance (AI1) the 
numerator is the sum of the amount initially invested in an Acquired 
Fund during the most recent fiscal year (if the investment was held at 
the end of the previous fiscal year, use the amount invested as of the 
end of the previous fiscal year) and the amounts invested in the 
Acquired Fund no less frequently than monthly during the period the 
investment is held by the Fund (if the investment was held through the 
end of the fiscal year, use each month-end through and including the 
fiscal year end). Divide the numerator by the number of measurement 
points included in the calculation of the numerator (i.e., if an 
investment is made during the fiscal year and held for 3 succeeding 
months, the denominator would be 4).
    (vii) A New Fund should base the Acquired Fund fees and expenses 
and the percent invested in Acquired Funds on assumptions of the 
specific Acquired Funds in which the New Fund expects to invest. 
Disclose in a footnote to the table that Acquired Fund fees and

[[Page 70863]]

expenses are based on estimated amounts for the current fiscal year.
    (viii) If the Fund includes the Acquired Fund fees and expenses 
subcaption in the table, the Fund may clarify in a footnote to the fee 
table that the Total Ongoing Annual Fees under Item 8A do not correlate 
to the ratio of expenses to average net assets given in the fund's 
shareholder reports or in response to Item 13, which reflects the 
operating expenses of the Fund and does not include Acquired Fund fees 
and expenses.
    5. Example.
    (a) Assume that the percentage amounts listed under ``Ongoing 
Annual Fees'' remain the same in each year of the 1-, 3-, 5-, and 10-
year periods, except that an adjustment may be made to reflect any 
expense reimbursement or fee waiver arrangements that will reduce any 
Fund operating expenses for no less than one year from the effective 
date of the Fund's registration statement. An adjustment to reflect any 
expense reimbursement or fee waiver arrangement may be reflected only 
in the period(s) for which the expense reimbursement or fee waiver 
arrangement is expected to continue.
    (b) For any breakpoint in any fee, assume that the amount of the 
Fund's assets remains constant as of the level at the end of the most 
recently completed fiscal year.
    (c) Assume reinvestment of all dividends and distributions.
    (d) Reflect recurring and non-recurring fees charged to all 
investors other than any exchange fees or any purchase charges on 
shares purchased with reinvested dividends or other distributions. If 
purchase charges are imposed on reinvested dividends or other 
distributions, include the narrative explanation following the Example 
and include the bracketed words when purchase charges are charged on 
reinvested capital gains distributions or returns of capital. Reflect 
any shareholder account fees collected by more than one Fund by 
dividing the total amount of the fees collected during the most recent 
fiscal year for all Funds whose shareholders are subject to the fees by 
the total average net assets of the Funds. Add the resulting percentage 
to ``Ongoing Annual Fees'' and assume that it remains the same in each 
of the 1-, 3-, 5-, and 10-year periods. A Fund that charges account 
fees based on a minimum account requirement exceeding $10,000 may 
adjust its account fees based on the amount of the fee in relation to 
the Fund's minimum account requirement.
    (e) Include the second 1-, 3-, 5-, and 10-year periods and related 
narrative explanation only if an exit charge or other fee is charged 
upon redemption. Reflect any exit charge by assuming redemption of the 
entire account at the end of the year in which the exit charge is due. 
In the case of an exit charge that is based on the Fund's net asset 
value at the time of payment, assume that the net asset value at the 
end of each year includes the 5% annual return for that and each 
preceding year.
    6. Portfolio Turnover. Disclose the portfolio turnover rate 
provided in response to Item 13(a) for the most recent fiscal year (or 
for such shorter period as the Fund has been in operation). Disclose 
the period for which the information is provided if less than a full 
fiscal year. A Fund that is a Money Market Fund may omit the portfolio 
turnover information required by this Item.
    7. New Funds. For purposes of this Item, a ``New Fund'' is a Fund 
that does not include in Form N-1A financial statements reporting 
operating results or that includes financial statements for the Fund's 
initial fiscal year reporting operating results for a period of 6 
months or less. The following Instructions apply to New Funds.
    (a) Base the percentages expressed in ``Ongoing Annual Fees'' on 
payments that will be made, but include in expenses, amounts that will 
be incurred without reduction for expense reimbursement or fee waiver 
arrangements, estimating amounts of ``Other Expenses.'' Disclose in a 
footnote to the table that ``Other Expenses'' are based on estimated 
amounts for the current fiscal year.
    (b) Complete only the 1- and 3-year period portions of the Example 
and estimate any shareholder account fees collected.

Item 9. Investment Objectives, Principal Investment Strategies, Related 
Risks, and Disclosure of Portfolio Holdings

    (a) Investment Objectives. State the Fund's investment objectives 
and, if applicable, state that those objectives may be changed without 
shareholder approval.
    (b) Implementation of Investment Objectives. Describe how the Fund 
intends to achieve its investment objectives. In the discussion:
    (1) Describe the Fund's principal investment strategies, including 
the particular type or types of securities in which the Fund 
principally invests or will invest.
Instructions
    1. A strategy includes any policy, practice, or technique used by 
the Fund to achieve its investment objectives.
    2. Whether a particular strategy, including a strategy to invest in 
a particular type of security, is a principal investment strategy 
depends on the strategy's anticipated importance in achieving the 
Fund's investment objectives, and how the strategy affects the Fund's 
potential risks and returns. In determining what a principal investment 
strategy is, consider, among other things, the amount of the Fund's 
assets expected to be committed to the strategy, the amount of the 
Fund's assets expected to be placed at risk by the strategy, and the 
likelihood of the Fund's losing some or all of those assets from 
implementing the strategy.
    3. A negative strategy (e.g., a strategy not to invest in a 
particular type of security or not to borrow money) is not a principal 
investment strategy.
    4. Disclose any policy to concentrate in securities of issuers in a 
particular industry or group of industries (i.e., investing more than 
25% of a Fund's net assets in a particular industry or group of 
industries).
    5. Disclose any other policy specified in Item 16(c)(1) that is a 
principal investment strategy of the Fund.
    6. Disclose, if applicable, that the Fund may, from time to time, 
take temporary defensive positions that are inconsistent with the 
Fund's principal investment strategies in attempting to respond to 
adverse market, economic, political, or other conditions. Also disclose 
the effect of taking such a temporary defensive position (e.g., that 
the Fund may not achieve its investment objective).
    7. Disclose whether the Fund (if not a Money Market Fund) may 
engage in active and frequent trading of portfolio securities to 
achieve its principal investment strategies. If so, explain the tax 
consequences to shareholders of increased portfolio turnover, and how 
the tax consequences of, or trading costs associated with, a Fund's 
portfolio turnover may affect the Fund's performance.
    (2) Explain in general terms how the Fund's adviser decides which 
securities to buy and sell (e.g., for an equity fund, discuss, if 
applicable, whether the Fund emphasizes value or growth or blends the 
two approaches).
    (c) Risks. Disclose the principal risks of investing in the Fund, 
including the risks to which the Fund's particular portfolio as a whole 
is expected to be subject and the circumstances reasonably likely to 
affect adversely the

[[Page 70864]]

Fund's net asset value, yield, or total return.
Instructions
    1. In determining whether a risk is a principal risk, a Fund should 
consider whether the risk would place more than 10% of the Fund's 
assets at risk, or whether it is reasonably likely that the risk would 
place more than 10% of the Fund's assets at risk in the future.
    2. In the case of an Acquiring Fund, risks should only be included 
if they are principal risks of the Acquiring Fund. A principal risk of 
an Acquired Fund should not be included unless it is a principal risk 
of the Acquiring Fund.
    3. If a Fund's strategy provides the freedom to invest in different 
types of assets at the manager's discretion, disclose that an investor 
may not know--and has no way to know--how the fund will invest in the 
future and its associated risks.
    (d) Portfolio Holdings. State that a description of the Fund's 
policies and procedures with respect to the disclosure of the Fund's 
portfolio securities is available (i) in the Fund's SAI; and (ii) on 
the Fund's website, if applicable.

Item 10. Management, Organization, and Capital Structure

    (a) Management.
    (1) Investment Adviser.
    (i) Provide the name and address of each investment adviser of the 
Fund, including sub advisers. Describe the investment adviser's 
experience as an investment adviser and the advisory services that it 
provides to the Fund.
    (ii) Describe the compensation of each investment adviser of the 
Fund as follows:
    (A) If the Fund has operated for a full fiscal year, state the 
aggregate fee paid to the adviser for the most recent fiscal year as a 
percentage of average net assets. If the Fund has not operated for a 
full fiscal year, state what the adviser's fee is as a percentage of 
average net assets, including any breakpoints.
    (B) If the adviser's fee is not based on a percentage of average 
net assets (e.g., the adviser receives a performance-based fee), 
describe the basis of the adviser's compensation.
Instructions
    1. If the Fund changed advisers during the fiscal year, describe 
the compensation and the dates of service for each adviser.
    2. Explain any changes in the basis of computing the adviser's 
compensation during the fiscal year.
    3. If a Fund has more than one investment adviser, disclose the 
aggregate fee paid to all of the advisers, rather than the fees paid to 
each adviser, in response to this Item.
    (2) Portfolio Manager. For each Portfolio Manager identified in 
response to Item 5(b), state the Portfolio Manager's business 
experience during the past 5 years. Include a statement, adjacent to 
the foregoing disclosure, that the SAI provides additional information 
about the Portfolio Manager's(s') compensation, other accounts managed 
by the Portfolio Manager(s), and the Portfolio Manager's(s') ownership 
of securities in the Fund. If a Portfolio Manager is a member of a 
committee, team, or other group of persons associated with the Fund or 
an investment adviser of the Fund that is jointly and primarily 
responsible for the day-to-day management of the Fund's portfolio, 
provide a brief description of the person's role on the committee, 
team, or other group (e.g., lead member), including a description of 
any limitations on the person's role and the relationship between the 
person's role and the roles of other persons who have responsibility 
for the day-to-day management of the Fund's portfolio.
    (3) Legal Proceedings. Describe any material pending legal 
proceedings, other than ordinary routine litigation incidental to the 
business, to which the Fund or the Fund's investment adviser or 
principal underwriter is a party. Include the name of the court in 
which the proceedings are pending, the date instituted, the principal 
parties involved, a description of the factual basis alleged to 
underlie the proceeding, and the relief sought. Include similar 
information as to any legal proceedings instituted, or known to be 
contemplated, by a governmental authority.
    Instruction. For purposes of this requirement, legal proceedings 
are material only to the extent that they are likely to have a material 
adverse effect on the Fund or the ability of the investment adviser or 
principal underwriter to perform its contract with the Fund.
    (b) Capital Stock. Disclose any unique or unusual restrictions on 
the right freely to retain or dispose of the Fund's shares or material 
obligations or potential liabilities associated with holding the Fund's 
shares (not including investment risks) that may expose investors to 
significant risks.

Item 11. Shareholder Information

    (a) Pricing of Fund Shares. Describe the procedures for pricing the 
Fund's shares, including:
    (1) An explanation that the price of Fund shares is based on the 
Fund's net asset value and the method used to value Fund shares (market 
price, fair value, or amortized cost); except that if the Fund is an 
Exchange-Traded Fund, an explanation that the price of Fund shares is 
based on a market price.
    Instruction. A Fund (other than a Money Market Fund) must provide a 
brief explanation of the circumstances under which it will use fair 
value pricing and the effects of using fair value pricing. With respect 
to any portion of a Fund's assets that are invested in one or more 
open-end management investment companies that are registered under the 
Investment Company Act, the Fund may briefly explain that the Fund's 
net asset value is calculated based upon the net asset values of the 
registered open-end management investment companies in which the Fund 
invests, and that the prospectuses for these companies explain the 
circumstances under which those companies will use fair value pricing 
and the effects of using fair value pricing.
    (2) A statement as to when calculations of net asset value are made 
and that the price at which a purchase or redemption is effected is 
based on the next calculation of net asset value after the order is 
placed.
    (3) A statement identifying in a general manner any national 
holidays when shares will not be priced and specifying any additional 
local or regional holidays when the Fund shares will not be priced.
Instructions
    1. In responding to this Item, a Fund may use a list of specific 
days or any other means that effectively communicates the information 
(e.g., explaining that shares will not be priced on the days on which 
the New York Stock Exchange is closed for trading).
    2. If the Fund has portfolio securities that are primarily listed 
on foreign exchanges that trade on weekends or other days when the Fund 
does not price its shares, disclose that the net asset value of the 
Fund's shares may change on days when shareholders will not be able to 
purchase or redeem the Fund's shares.
    (b) Purchase of Fund Shares. Describe the procedures for purchasing 
the Fund's shares.
    (c) Redemption of Fund Shares. Describe the procedures for 
redeeming the Fund's shares, including:
    (1) Any restrictions on redemptions.
    (2) Any redemption charges, including how these charges will be 
collected and under what circumstances the charges will be waived.

[[Page 70865]]

    (3) Any procedure that a shareholder can use to sell the Fund's 
shares to the Fund or its underwriter through a broker-dealer, noting 
any charges that may be imposed for such service.
    Instruction. The specific fees paid through the broker-dealer for 
such service need not be disclosed.
    (4) The circumstances, if any, under which the Fund may redeem 
shares automatically without action by the shareholder in accounts 
below a certain number or value of shares.
    (5) The circumstances, if any, under which the Fund may delay 
honoring a request for redemption for a certain time after a 
shareholder's investment (e.g., whether a Fund does not process 
redemptions until clearance of the check for the initial investment).
    (6) Any restrictions on, or costs associated with, transferring 
shares held in street name accounts.
    (7) The number of days following receipt of shareholder redemption 
requests in which the fund typically expects to pay out redemption 
proceeds to redeeming shareholders. If the number of days differs by 
method of payment (e.g., check, wire, automated clearing house), then 
disclose the typical number of days or estimated range of days that the 
fund expects it will take to pay out redemptions proceeds for each 
method used.
    (8) The methods that the Fund typically expects to use to meet 
redemption requests, and whether those methods are used regularly, or 
only in stressed market conditions (e.g., sales of portfolio assets, 
holdings of cash or cash equivalents, lines of credit, interfund 
lending, and/or ability to redeem in kind).
    (d) Dividends and Distributions. Describe the Fund's policy with 
respect to dividends and distributions, including any options that 
shareholders may have as to the receipt of dividends and distributions.
    (e) Frequent Purchases and Redemptions of Fund Shares.
    (1) Describe the risks, if any, that frequent purchases and 
redemptions of Fund shares by Fund shareholders may present for other 
shareholders of the Fund.
    (2) State whether or not the Fund's board of directors has adopted 
policies and procedures with respect to frequent purchases and 
redemptions of Fund shares by Fund shareholders.
    (3) If the Fund's board of directors has not adopted any such 
policies and procedures, provide a statement of the specific basis for 
the view of the board that it is appropriate for the Fund not to have 
such policies and procedures.
    (4) If the Fund's board of directors has adopted any such policies 
and procedures, describe those policies and procedures, including:
    (i) Whether or not the Fund discourages frequent purchases and 
redemptions of Fund shares by Fund shareholders;
    (ii) Whether or not the Fund accommodates frequent purchases and 
redemptions of Fund shares by Fund shareholders; and
    (iii) Any policies and procedures of the Fund for deterring 
frequent purchases and redemptions of Fund shares by Fund shareholders, 
including any restrictions imposed by the Fund to prevent or minimize 
frequent purchases and redemptions. Describe each of these policies, 
procedures, and restrictions with specificity. Indicate whether each of 
these restrictions applies uniformly in all cases or whether the 
restriction will not be imposed under certain circumstances, including 
whether each of these restrictions applies to trades that occur through 
omnibus accounts at intermediaries, such as investment advisers, 
broker-dealers, transfer agents, third party administrators, and 
insurance companies. Describe with specificity the circumstances under 
which any restriction will not be imposed. Include a description of the 
following restrictions, if applicable:
    (A) Any restrictions on the volume or number of purchases, 
redemptions, or exchanges that a shareholder may make within a given 
time period;
    (B) Any exchange fee or redemption fee;
    (C) Any costs or administrative or other fees or charges that are 
imposed on shareholders deemed to be engaged in frequent purchases and 
redemptions of Fund shares, together with a description of the 
circumstances under which such costs, fees, or charges will be imposed;
    (D) Any minimum holding period that is imposed before an investor 
may make exchanges into another Fund;
    (E) Any restrictions imposed on exchange or purchase requests 
submitted by overnight delivery, electronically, or via facsimile or 
telephone; and
    (F) Any right of the Fund to reject, limit, delay, or impose other 
conditions on exchanges or purchases or to close or otherwise limit 
accounts based on a history of frequent purchases and redemptions of 
Fund shares, including the circumstances under which such right will be 
exercised.
    (5) If applicable, include a statement, adjacent to the disclosure 
required by paragraphs (e)(1) through (e)(4) of this Item, that the SAI 
includes a description of all arrangements with any person to permit 
frequent purchases and redemptions of Fund shares.
    (f) Tax Consequences.
    (1) Describe the tax consequences to shareholders of buying, 
holding, exchanging and selling the Fund's shares, including, as 
applicable, that:
    (i) The Fund intends to make distributions that may be taxed as 
ordinary income and capital gains (which may be taxable at different 
rates depending on the length of time the Fund holds its assets). If 
the Fund expects that its distributions, as a result of its investment 
objectives or strategies, will consist primarily of ordinary income or 
capital gains, provide disclosure to that effect.
    (ii) The Fund's distributions, whether received in cash or 
reinvested in additional shares of the Fund, may be subject to Federal 
income tax.
    (iii) An exchange of the Fund's shares for shares of another fund 
will be treated as a sale of the Fund's shares and any gain on the 
transaction may be subject to Federal income tax.
    (2) For a Fund that holds itself out as investing in securities 
generating tax-exempt income:
    (i) Modify the disclosure required by paragraph (f)(1) to reflect 
that the Fund intends to distribute tax- exempt income.
    (ii) Also disclose, as applicable, that:
    (A) The Fund may invest a portion of its assets in securities that 
generate income that is not exempt from Federal or state income tax;
    (B) Income exempt from Federal tax may be subject to state and 
local income tax; and
    (C) Any capital gains distributed by the Fund may be taxable.
    (3) If the Fund does not expect to qualify as a regulated 
investment company under Subchapter M of the Internal Revenue Code 
[I.R.C. 851 et seq.], explain the tax consequences. If the Fund expects 
to pay an excise tax under the Internal Revenue Code [I.R.C. 4982] with 
respect to its distributions, explain the tax consequences.
    (g) Exchange-Traded Funds. If the Fund is an Exchange-Traded Fund:
    (1) The Fund may omit from the prospectus the information required 
by Items 11(a)(2), (b), and (c).
    (2) Provide a table showing the number of days the Market Price of 
the Fund shares was greater than the Fund's net asset value and the 
number of days it was less than the Fund's net asset value (i.e., 
premium or discount) for the most recently completed calendar year, and 
the most recently completed calendar quarters since that year (or the 
life of the Fund, if shorter). The Fund

[[Page 70866]]

may omit the information required by this paragraph if it satisfies the 
requirements of paragraphs (c)(1)(ii)-(iv) and (c)(1)(vi) of Rule 6c-11 
[17 CFR 270.6c-11(c)(1)(ii)-(iv) and (c)(1)(vi)] under the Investment 
Company Act.
Instruction
    1. Provide the information in tabular form.
    2. Express the information as a percentage of the net asset value 
of the Fund, using separate columns for the number of days the Market 
Price was greater than the Fund's net asset value and the number of 
days it was less than the Fund's net asset value. Round all percentages 
to the nearest hundredth of one percent.
    3. Adjacent to the table, provide a brief explanation that: 
Shareholders may pay more than net asset value when they buy Fund 
shares and receive less than net asset value when they sell those 
shares, because shares are bought and sold at current market prices.
    4. Include a statement that the data presented represents past 
performance and cannot be used to predict future results.

Item 12. Distribution Arrangements

    (a) Sales Loads.
    (1) Describe any sales loads, including exit charges, applied to 
purchases of the Fund's shares. Include in a table any purchase charge 
(and each breakpoint in the charge, if any) as a percentage of both the 
offering price and the net amount invested.
Instructions
    1. If the Fund's shares are sold subject to a purchase charge, 
explain that the term ``offering price'' includes the purchase charge.
    2. Disclose, if applicable, that purchase charges are imposed on 
shares, or amounts representing shares, that are purchased with 
reinvested dividends or other distributions.
    3. Discuss, if applicable, how exit charges are imposed and 
calculated, including:
    (a) Whether the specified percentage of the exit charge is based on 
the offering price, or the lesser of the offering price or net asset 
value at the time the exit charge is paid.
    (b) The amount of the exit charge as a percentage of both the 
offering price and the net amount invested.
    (c) A description of how the exit charge is calculated (e.g., in 
the case of a partial redemption, whether or not the exit charge is 
calculated as if shares or amounts representing shares not subject to 
an exit charge are redeemed first, and other shares or amounts 
representing shares are then redeemed in the order purchased).
    (d) If applicable, the method of paying an installment exit charge 
(e.g., by withholding of dividend payments, involuntary redemptions, or 
separate billing of a shareholder's account).
    (2) Unless disclosed in response to paragraph (a)(1), briefly 
describe any arrangements that result in breakpoints in, or elimination 
of, purchase charges or exit charges (e.g., letters of intent, 
accumulation plans, dividend reinvestment plans, withdrawal plans, 
exchange privileges, employee benefit plans, redemption reinvestment 
plans, and waivers for particular classes of investors). Identify each 
class of individuals or transactions to which the arrangements apply 
and state each different breakpoint as a percentage of both the 
offering price and the net amount invested. If applicable, state that 
additional information concerning purchase charge or exit charge 
breakpoints is available in the Fund's SAI.
Instructions
    1. The description, pursuant to paragraph (a)(1) or (a)(2) of this 
Item 12, of arrangements that result in breakpoints in, or elimination 
of, purchase charges or exit charges must include a brief summary of 
shareholder eligibility requirements, including a description or list 
of the types of accounts (e.g., retirement accounts, accounts held at 
other financial intermediaries), account holders (e.g., immediate 
family members, family trust accounts, solely controlled business 
accounts), and fund holdings (e.g., funds held within the same fund 
complex) that may be aggregated for purposes of determining eligibility 
for purchase charge or exit charge breakpoints.
    2. The description pursuant to paragraph (a)(2) of this Item 12 
need not contain any information required by Items 17(d) and 23(b).
    (3) Describe, if applicable, the methods used to value accounts in 
order to determine whether a shareholder has met purchase charge or 
exit charge breakpoints, including the circumstances in which and the 
classes of individuals to whom each method applies. Methods that should 
be described, if applicable, include historical cost, net amount 
invested, and offering price.
    (4) Eligibility for Breakpoints
    (i) State, if applicable, that, in order to obtain a breakpoint 
discount, it may be necessary at the time of purchase for a shareholder 
to inform the Fund or his or her financial intermediary of the 
existence of other accounts in which there are holdings eligible to be 
aggregated to meet purchase charge or exit charge breakpoints. Describe 
any information or records, such as account statements, that it may be 
necessary for a shareholder to provide to the Fund or his or her 
financial intermediary in order to verify his or her eligibility for a 
breakpoint discount. This description must include, if applicable:
    (A) Information or records regarding shares of the Fund or other 
funds held in all accounts (e.g., retirement accounts) of the 
shareholder at the financial intermediary;
    (B) Information or records regarding shares of the Fund or other 
funds held in any account of the shareholder at another financial 
intermediary; and
    (C) Information or records regarding shares of the Fund or other 
funds held at any financial intermediary by related parties of the 
shareholder, such as members of the same family or household.
    (ii) If the Fund permits eligibility for breakpoints to be 
determined based on historical cost, state that a shareholder should 
retain any records necessary to substantiate historical costs because 
the Fund, its transfer agent, and financial intermediaries may not 
maintain this information.
    (5) State whether the Fund makes available free of charge, on or 
through the Fund's website at a specified address, and in a clear and 
prominent format, the information required by paragraphs (a)(1) through 
(a)(4) and Item 23(a), including whether the website includes 
hyperlinks that facilitate access to the information. If the Fund does 
not make the information required by paragraphs (a)(1) through (a)(4) 
and Item 23(a) available in this manner, disclose the reasons why it 
does not do so (including, where applicable, that the Fund does not 
have a website).
    Instruction. All information required by paragraph (a) of this Item 
12 must be adjacent to the table required by paragraph (a)(1) of this 
Item 12; must be presented in a clear, concise, and understandable 
manner; and must include tables, schedules, and charts as expressly 
required by paragraph (a)(1) of this Item 12 or where doing so would 
facilitate understanding.
    (b) Selling Fees. If the Fund has adopted a plan under rule 12b-1, 
state the amount of the distribution fee payable under the plan and 
provide disclosure to the following effect:
    (1) The Fund has adopted a plan under rule 12b-1 that allows the 
Fund to pay distribution fees for the sale and distribution of its 
shares; and

[[Page 70867]]

    (2) Because these fees are paid out of the Fund's assets on an on-
going basis, over time these fees will increase the cost of your 
investment and may cost you more than paying other types of sales 
charges.
    Instruction. If the Fund pays service fees under its rule 12b-1 
plan, modify this disclosure to reflect the payment of these fees 
(e.g., by indicating that the Fund pays distribution and other fees for 
the sale of its shares and for services provided to shareholders). For 
purposes of this paragraph, service fees have the same meaning given 
that term under FINRA rule 2341.
    (c) Multiple Class and Master-Feeder Funds.
    (1) Describe the main features of the structure of the Multiple 
Class Fund or Master-Feeder Fund.
    (2) If more than one Class of a Multiple Class Fund is offered in 
the prospectus, provide the information required by paragraphs (a) and 
(b) for each of those Classes.
    (3) If a Multiple Class Fund offers in the prospectus shares that 
provide for mandatory or automatic conversions or exchanges from one 
Class to another Class, provide the information required by paragraphs 
(a) and (b) for both the shares offered and the Class into which the 
shares may be converted or exchanged.
    (4) If a Feeder Fund has the ability to change the Master Fund in 
which it invests, describe briefly the circumstances under which the 
Feeder Fund can do so.
    Instruction. A Feeder Fund that does not have the authority to 
change its Master Fund need not disclose the possibility and 
consequences of its no longer investing in the Master Fund.

Item 13. Financial Highlights Information

    (a) Provide the following information for the Fund, or for the Fund 
and its subsidiaries, audited for at least the latest 5 years and 
consolidated as required in Regulation S-X [17 CFR 210].
Financial Highlights
    The financial highlights table is intended to help you understand 
the Fund's financial performance for the past 5 years [or, if shorter, 
the period of the Fund's operations]. Certain information reflects 
financial results for a single Fund share. The total returns in the 
table represent the rate that an investor would have earned [or lost] 
on an investment in the Fund (assuming reinvestment of all dividends 
and distributions). This information has been audited by _____, whose 
report, along with the Fund's financial statements, are included in 
[the SAI or annual Form N-CSR report], and are available on the Fund's 
website and upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Per Share Market Value, End of Period [for ETFs only]
Total Return
-----------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
Portfolio Turnover Rate
Instructions
1. General
    (a) Present the information in comparative columnar form for each 
of the last 5 fiscal years of the Fund (or for such shorter period as 
the Fund has been in operation), but only for periods subsequent to the 
effective date of the Fund's registration statement. Also present the 
information for the period between the end of the latest fiscal year 
and the date of the latest balance sheet or statement of assets and 
liabilities. When a period in the table is for less than a full fiscal 
year, a Fund may annualize ratios in the table and disclose that the 
ratios are annualized in a note to the table.
    (b) List per share amounts at least to the nearest cent. If the 
offering price is expressed in tenths of a cent or more, then state the 
amounts in the table in tenths of a cent. Present the information using 
a consistent number of decimal places.
    (c) Include the narrative explanation before the financial 
information. A Fund may modify the explanation if the explanation 
contains comparable information to that shown.
2. Per Share Operating Performance
    (a) Derive net investment income data by adding (deducting) the 
increase (decrease) per share in undistributed net investment income 
for the period to (from) dividends from net investment income per share 
for the period. The increase (decrease) per share may be derived by 
comparing the per share figures obtained by dividing undistributed net 
investment income at the beginning and end of the period by the number 
of shares outstanding on those dates. Other methods of computing net 
investment income may be acceptable. Provide an explanation in a note 
to the table of any other method used to compute net investment income.
    (b) The amount shown at the Net Gains or Losses on Securities 
caption is the balancing figure derived from the other amounts in the 
statement. The amount shown at this caption for a share outstanding 
throughout the year may not agree with the change in the aggregate 
gains and losses in the portfolio securities for the year because of 
the timing of sales and repurchases of the Fund's shares in relation to 
fluctuating market values for the portfolio.
    (c) For any distributions made from sources other than net 
investment income and capital gains, state the per share amounts 
separately at the Returns of Capital caption and note the nature of the 
distributions.
3. Total Return
    (a) To calculate total return based on net asset value per share:
    (i) Assume an initial investment made at the net asset value 
calculated on the last business day before the first day of each period 
shown.
    (ii) Do not reflect purchase charges, exit charges, or account fees 
in the initial investment, but, if purchase charges, exit charges, or 
account fees are imposed, note that they are not reflected in total 
return.
    (iii) Reflect any purchase charge assessed upon reinvestment of 
dividends or distributions.
    (iv) Assume a redemption at the price calculated on the last 
business day of each period shown.
    (v) For a period less than a full fiscal year, state the total 
return for the period and disclose that total return is not annualized 
in a note to the table.
    (b) For ETFs only, present as a separate caption total return based 
on market value per share. To calculate total return based on per share 
market value, assume a purchase of common stock at the current market 
price on the first day and a sale at the current market price on the 
last day of each period reported on the table. A Registrant also should 
briefly explains in a note the differences between this calculation and 
the calculation required by Instruction 3(a).
4. Ratios/Supplemental Data
    (a) Calculate ``average net assets'' based on the value of the net 
assets

[[Page 70868]]

determined no less frequently than the end of each month.
    (b) Calculate the Ratio of Expenses to Average Net Assets using the 
amount of expenses shown in the Fund's statement of operations for the 
relevant fiscal period, including increases resulting from complying 
with paragraph 2(g) of rule 6-07 of Regulation S-X and reductions 
resulting from complying with paragraphs 2(a) and (f) of rule 6-07 
regarding fee waivers and reimbursements.
    (c) A Fund that is a Money Market Fund may omit the Portfolio 
Turnover Rate.
    (d) Calculate the Portfolio Turnover Rate as follows:
    (i) Divide the lesser of amounts of purchases or sales of portfolio 
securities for the fiscal year by the monthly average of the value of 
the portfolio securities owned by the Fund during the fiscal year. 
Calculate the monthly average by totaling the values of portfolio 
securities as of the beginning and end of the first month of the fiscal 
year and as of the end of each of the succeeding 11 months and dividing 
the sum by 13.
    (ii) Exclude from both the numerator and the denominator amounts 
relating to all securities, including options, whose maturities or 
expiration dates at the time of acquisition were one year or less. 
Include all long-term securities, including long-term U.S. Government 
securities. Purchases include any cash paid upon the conversion of one 
portfolio security into another and the cost of rights or warrants. 
Sales include net proceeds of the sale of rights and warrants and net 
proceeds of portfolio securities that have been called or for which 
payment has been made through redemption or maturity.
    (iii) If the Fund acquired the assets of another investment company 
or of a personal holding company in exchange for its own shares during 
the fiscal year in a purchase-of-assets transaction, exclude the value 
of securities acquired from purchases and securities sold from sales to 
realign the Fund's portfolio. Adjust the denominator of the portfolio 
turnover computation to reflect these excluded purchases and sales and 
disclose them in a footnote.
    (iv) Include in purchases and sales any short sales that the Fund 
intends to maintain for more than one year and put and call options 
with expiration dates more than one year from the date of acquisition. 
Include proceeds from a short sale in the value of the portfolio 
securities sold during the period; include the cost of covering a short 
sale in the value of portfolio securities purchased during the period. 
Include premiums paid to purchase options in the value of portfolio 
securities purchased during the reporting period; include premiums 
received from the sale of options in the value of the portfolio 
securities sold during the period.
    (e) A Fund may incorporate by reference the Financial Highlights 
Information from Form N-CSR into the prospectus in response to this 
Item if the Fund transmits the annual report required by rule 30e-1(b) 
with the prospectus or, if the report has been previously transmitted 
(e.g., to a current shareholder), the Fund includes the statement 
required by Item 1(b)(1).

Part B--Information Required in a Statement of Additional Information

Item 14. Cover Page and Table of Contents

    (a) Front Cover Page. Include the following information on the 
outside front cover page of the SAI:
    (1) The Fund's name and the Class or Classes, if any, to which the 
SAI relates. If the Fund is a Series, also provide the Registrant's 
name.
    (2) The exchange ticker symbol of the Fund's securities or, if the 
SAI relates to one or more Classes of the Fund's securities, adjacent 
to each such class, the exchange ticker symbol of such Class of the 
Fund's securities. If the Fund is an Exchange-Traded Fund, also 
identify the principal U.S. market or markets on which the Fund shares 
are traded.
    (3) A statement or statements:
    (i) That the SAI is not a prospectus;
    (ii) How the prospectus may be obtained; and
    (iii) Whether and from where information is incorporated by 
reference into the SAI, as permitted by General Instruction D.
    Instruction. Any information incorporated by reference into the SAI 
must be delivered with the SAI unless the information has been 
previously delivered in a shareholder report (e.g., to a current 
shareholder), and the Fund states that the shareholder report is 
available, without charge, upon request. Provide a toll-free telephone 
number to call to request the report.
    (4) The date of the SAI and of the prospectus to which the SAI 
relates.
    (b) Table of Contents. Include under appropriate captions (and 
subcaptions) a list of the contents of the SAI and, when useful, 
provide cross-references to related disclosure in the prospectus.

Item 15. Fund History

    (a) Provide the date and form of organization of the Fund and the 
name of the state or other jurisdiction in which the Fund is organized.
    (b) If the Fund has engaged in a business other than that of an 
investment company during the past 5 years, state the nature of the 
other business and give the approximate date on which the Fund 
commenced business as an investment company. If the Fund's name was 
changed during that period, state its former name and the approximate 
date on which it was changed. Briefly describe the nature and results 
of any change in the Fund's business or name that occurred in 
connection with any bankruptcy, receivership, or similar proceeding, or 
any other material reorganization, readjustment or succession.

Item 16. Description of the Fund and Its Investments and Risks

    (a) Classification. State that the Fund is an open-end, management 
investment company and indicate, if applicable, that the Fund is 
diversified.
    (b) Investment Strategies and Risks. Describe any investment 
strategies, including a strategy to invest in a particular type of 
security, used by an investment adviser of the Fund in managing the 
Fund that are not principal strategies and the risks of those 
strategies.
    (c) Fund Policies.
    (1) Describe the Fund's policy with respect to each of the 
following:
    (i) Issuing senior securities;
    (ii) Borrowing money, including the purpose for which the proceeds 
will be used;
    (iii) Underwriting securities of other issuers;
    (iv) Concentrating investments in a particular industry or group of 
industries;
    (v) Purchasing or selling real estate or commodities;
    (vi) Making loans; and
    (vii) Any other policy that the Fund deems fundamental or that may 
not be changed without shareholder approval, including, if applicable, 
the Fund's investment objectives.
    Instruction. If the Fund reserves freedom of action with respect to 
any practice specified in paragraph (c)(1), state the maximum 
percentage of assets to be devoted to the practice and disclose the 
risks of the practice.
    (2) State whether shareholder approval is necessary to change any 
policy specified in paragraph (c)(1). If so, describe the vote required 
to obtain this approval.
    (d) Temporary Defensive Position. Disclose, if applicable, the 
types of investments that a Fund may make while assuming a temporary 
defensive

[[Page 70869]]

position described in response to Item 9(b).
    (e) Portfolio Turnover. Explain any significant variation in the 
Fund's portfolio turnover rates over the two most recently completed 
fiscal years or any anticipated variation in the portfolio turnover 
rate from that reported for the last fiscal year in response to Item 
13.
Instruction
    This paragraph does not apply to a Money Market Fund.
    (f) Disclosure of Portfolio Holdings
    (1) Describe the Fund's policies and procedures with respect to the 
disclosure of the Fund's portfolio securities to any person, including:
    (i) How the policies and procedures apply to disclosure to 
different categories of persons, including individual investors, 
institutional investors, intermediaries that distribute the Fund's 
shares, third-party service providers, rating and ranking 
organizations, and affiliated persons of the Fund;
    (ii) Any conditions or restrictions placed on the use of 
information about portfolio securities that is disclosed, including any 
requirement that the information be kept confidential or prohibitions 
on trading based on the information, and any procedures to monitor the 
use of this information;
    (iii) The frequency with which information about portfolio 
securities is disclosed, and the length of the lag, if any, between the 
date of the information and the date on which the information is 
disclosed;
    (iv) Any policies and procedures with respect to the receipt of 
compensation or other consideration by the Fund, its investment 
adviser, or any other party in connection with the disclosure of 
information about portfolio securities;
    (v) The individuals or categories of individuals who may authorize 
disclosure of the Fund's portfolio securities (e.g., executive officers 
of the Fund);
    (vi) The procedures that the Fund uses to ensure that disclosure of 
information about portfolio securities is in the best interests of Fund 
shareholders, including procedures to address conflicts between the 
interests of Fund shareholders, on the one hand, and those of the 
Fund's investment adviser; principal underwriter; or any affiliated 
person of the Fund, its investment adviser, or its principal 
underwriter, on the other; and
    (vii) The manner in which the board of directors exercises 
oversight of disclosure of the Fund's portfolio securities.
    Instruction. Include any policies and procedures of the Fund's 
investment adviser, or any other third party, that the Fund uses, or 
that are used on the Fund's behalf, with respect to the disclosure of 
the Fund's portfolio securities to any person.
    (2) Describe any ongoing arrangements to make available information 
about the Fund's portfolio securities to any person, including the 
identity of the persons who receive information pursuant to such 
arrangements. Describe any compensation or other consideration received 
by the Fund, its investment adviser, or any other party in connection 
with each such arrangement, and provide the information described by 
paragraphs (f)(1)(ii), (iii), and (v) of this Item with respect to such 
arrangements.
Instructions
    1. The consideration required to be disclosed by Item 16(f)(2) 
includes any agreement to maintain assets in the Fund or in other 
investment companies or accounts managed by the investment adviser or 
by any affiliated person of the investment adviser.
    2. The Fund is not required to describe an ongoing arrangement to 
make available information about the Fund's portfolio securities 
pursuant to this Item, if, not later than the time that the Fund makes 
the portfolio securities information available to any person pursuant 
to the arrangement, the Fund discloses the information in a publicly 
available filing with the Commission that is required to include the 
information.
    3. The Fund is not required to describe an ongoing arrangement to 
make available information about the Fund's portfolio securities 
pursuant to this Item if:
    (a) The Fund makes the portfolio securities information available 
to any person pursuant to the arrangement no earlier than the day next 
following the day on which the Fund makes the information available on 
its website in the manner specified in its prospectus pursuant to 
paragraph (b); and
    (b) the Fund has disclosed in its current prospectus that the 
portfolio securities information will be available on its website, 
including (1) the nature of the information that will be available, 
including both the date as of which the information will be current 
(e.g., month-end) and the scope of the information (e.g., complete 
portfolio holdings, Fund's largest 20 holdings); (2) the date when the 
information will first become available and the period for which the 
information will remain available, which shall end no earlier than the 
date on which the Fund files its Form N-CSR or Form N-PORT for the last 
month of the Fund's first or third fiscal quarters with the Commission 
for the period that includes the date as of which the website 
information is current; and (3) the location on the Fund's website 
where either the information or a prominent hyper link (or series of 
prominent hyperlinks) to the information will be available.
    (g) Money Market Fund Material Events. If the Fund is a Money 
Market Fund (except any Money Market Fund that is not subject to the 
requirements of Sec. Sec.  270.2a-7(c)(2)(i) and/or (ii) of this 
chapter pursuant to Sec.  270.2a-7(c)(2)(iii) of this chapter, and has 
not chosen to rely on the ability to impose liquidity fees and suspend 
redemptions consistent with the requirements of Sec. Sec.  270.2a-
7(c)(2)(i) and/or (ii)) disclose, as applicable, the following events:
    (1) Imposition of Liquidity Fees and Temporary Suspensions of Fund 
Redemptions.
    (i) During the last 10 years, any occasion on which the Fund has 
invested less than ten percent of its total assets in weekly liquid 
assets (as provided in Sec.  270.2a-7(c)(2)(ii)), and with respect to 
each such occasion, whether the Fund's board of directors determined to 
impose a liquidity fee pursuant to Sec.  270.2a-7(c)(2)(ii) and/or 
temporarily suspend the Fund's redemptions pursuant to Sec.  270.2a-
7(c)(2)(i).
    (ii) During the last 10 years, any occasion on which the Fund has 
invested less than thirty percent, but more than ten percent, of its 
total assets in weekly liquid assets (as provided in Sec.  270.2a-
7(c)(2)(i)) and the Fund's board of directors has determined to impose 
a liquidity fee pursuant to Sec.  270.2a-7(c)(2)(i) and/or temporarily 
suspend the Fund's redemptions pursuant to Sec.  270.2a-7(c)(2)(i).
Instructions
    1. With respect to each such occasion, disclose: The dates and 
length of time for which the Fund invested less than ten percent (or 
thirty percent, as applicable) of its total assets in weekly liquid 
assets; the dates and length of time for which the Fund's board of 
directors determined to impose a liquidity fee pursuant to Sec.  
270.2a-7(c)(2)(i) or Sec.  270.2a-7(c)(2)(ii), and/or temporarily 
suspend the Fund's redemptions pursuant to Sec.  270.2a-7(c)(2)(i); and 
the size of any liquidity fee imposed pursuant to Sec.  270.2a-
7(c)(2)(i) or Sec.  270.2a-7(c)(2)(ii).
    2. The disclosure required by Item 16(g)(1) should incorporate, as

[[Page 70870]]

appropriate, any information that the Fund is required to report to the 
Commission on Items E.1, E.2, E.3, E.4, F.1, F.2, and G.1 of Form N-CR 
[17 CFR 274.222].
    3. The disclosure required by Item 16(g)(1) should conclude with 
the following statement: ``The Fund was required to disclose additional 
information about this event [or ``these events,'' as appropriate] on 
Form N-CR and to file this form with the Securities and Exchange 
Commission. Any Form N-CR filing submitted by the Fund is available on 
the EDGAR Database on the Securities and Exchange Commission's website 
at https://www.sec.gov.''
    (2) Financial Support Provided to Money Market Funds. During the 
last 10 years, any occasion on which an affiliated person, promoter, or 
principal underwriter of the Fund, or an affiliated person of such a 
person, provided any form of financial support to the Fund, including a 
description of the nature of support, person providing support, brief 
description of the relationship between the person providing support 
and the Fund, date support provided, amount of support, security 
supported (if applicable), and the value of security supported on date 
support was initiated (if applicable).
Instructions
    1. The term ``financial support'' includes any capital 
contribution, purchase of a security from the Fund in reliance on Sec.  
270.17a-9, purchase of any defaulted or devalued security at par, 
execution of letter of credit or letter of indemnity, capital support 
agreement (whether or not the Fund ultimately received support), 
performance guarantee, or any other similar action reasonably intended 
to increase or stabilize the value or liquidity of the Fund's 
portfolio; excluding, however, any routine waiver of fees or 
reimbursement of Fund expenses, routine inter-fund lending, routine 
inter-fund purchases of Fund shares, or any action that would qualify 
as financial support as defined above, that the board of directors has 
otherwise determined not to be reasonably intended to increase or 
stabilize the value or liquidity of the Fund's portfolio.
    2. If during the last 10 years, the Fund has participated in one or 
more mergers with another investment company (a ``merging investment 
company''), provide the information required by Item 16(g)(2) with 
respect to any merging investment company as well as with respect to 
the Fund; for purposes of this Instruction, the term ``merger'' means a 
merger, consolidation, or purchase or sale of substantially all of the 
assets between the Fund and a merging investment company. If the person 
or entity that previously provided financial support to a merging 
investment company is not currently an affiliated person, promoter, or 
principal underwriter of the Fund, the Fund need not provide the 
information required by Item 16(g)(2) with respect to that merging 
investment company.
    3. The disclosure required by Item 16(g)(2) should incorporate, as 
appropriate, any information that the Fund is required to report to the 
Commission on Items C.1, C.2, C.3, C.4, C.5, C.6, and C.7 of Form N-CR 
[17 CFR 274.222].
    4. The disclosure required by Item 16(g)(2) should conclude with 
the following statement: ``The Fund was required to disclose additional 
information about this event [or ``these events,'' as appropriate] on 
Form N-CR and to file this form with the Securities and Exchange 
Commission. Any Form N-CR filing submitted by the Fund is available on 
the EDGAR Database on the Securities and Exchange Commission's website 
at https://www.sec.gov.''

Item 17. Management of the Fund

Instructions
    1. For purposes of this Item 17, the terms below have the following 
meanings:
    (a) The term ``family of investment companies'' means any two or 
more registered investment companies that:
    (1) Share the same investment adviser or principal underwriter; and
    (2) Hold themselves out to investors as related companies for 
purposes of investment and investor services.
    (b) The term ``fund complex'' means two or more registered 
investment companies that:
    (1) Hold themselves out to investors as related companies for 
purposes of investment and investor services; or
    (2) Have a common investment adviser or have an investment adviser 
that is an affiliated person of the investment adviser of any of the 
other registered investment companies.
    (c) The term ``immediate family member'' means a person's spouse; 
child residing in the person's household (including step and adoptive 
children); and any dependent of the person, as defined in section 152 
of the Internal Revenue Code [26 U.S.C. 152].
    (d) The term ``officer'' means the president, vice-president, 
secretary, treasurer, controller, or any other officer who performs 
policy-making functions.
    2. When providing information about directors, furnish information 
for directors who are interested persons of the Fund separately from 
the information for directors who are not interested persons of the 
Fund. For example, when furnishing information in a table, you should 
provide separate tables (or separate sections of a single table) for 
directors who are interested persons and for directors who are not 
interested persons. When furnishing information in narrative form, 
indicate by heading or otherwise the directors who are interested 
persons and the directors who are not interested persons.
    (a) Management Information.
    (1) Provide the information required by the following table for 
each director and officer of the Fund, and, if the Fund has an advisory 
board, member of the board. Explain in a footnote to the table any 
family relationship between the persons listed.

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
 Name, Address,    Position(s) Held    Term of Office          Principal          Number of              Other
 and Age (or Year        with Fund      and Length of      Occupation(s)      Portfolios in      Directorships
       of Birth)                      Time Served (or      During Past 5              Fund CompHeld by Director
                                         Year Service              Years        Overseen by
                                               Began)                              Director
----------------------------------------------------------------------------------------------------------------

Instructions
    1. For purposes of this paragraph, the term ``family relationship'' 
means any relationship by blood, marriage, or adoption, not more remote 
than first cousin.
    2. For each director who is an interested person of the Fund, 
describe, in a footnote or otherwise, the relationship, events, or 
transactions by reason of which the director is an interested person.
    3. State the principal business of any company listed under column 
(4) unless the principal business is implicit in its name.

[[Page 70871]]

    4. Indicate in column (6) directorships not included in column (5) 
that are held by a director in any company with a class of securities 
registered pursuant to section 12 of the Securities Exchange Act [15 
U.S.C. 78l] or subject to the requirements of section 15(d) of the 
Securities Exchange Act [15 U.S.C. 78o(d)] or any company registered as 
an investment company under the Investment Company Act, and name the 
companies in which the directorships are held. Where the other 
directorships include directorships overseeing two or more portfolios 
in the same fund complex, identify the fund complex and provide the 
number of portfolios overseen as a director in the fund complex rather 
than listing each portfolio separately.
    (2) For each individual listed in column (1) of the table required 
by paragraph (a)(1) of this Item 17, except for any director who is not 
an interested person of the Fund, describe any positions, including as 
an officer, employee, director, or general partner, held with 
affiliated persons or principal underwriters of the Fund.
Instruction
    When an individual holds the same position(s) with two or more 
registered investment companies that are part of the same fund complex, 
identify the fund complex and provide the number of registered 
investment companies for which the position(s) are held rather than 
listing each registered investment company separately.
    (3) Describe briefly any arrangement or understanding between any 
director or officer and any other person(s) (naming the person(s)) 
pursuant to which he was selected as a director or officer.
Instruction
    Do not include arrangements or understandings with directors or 
officers acting solely in their capacities as such.
    (b) Leadership Structure and Board of Directors.
    (1) Briefly describe the leadership structure of the Fund's board, 
including the responsibilities of the board of directors with respect 
to the Fund's management and whether the chairman of the board is an 
interested person of the Fund. If the chairman of the board is an 
interested person of the Fund, disclose whether the Fund has a lead 
independent director and what specific role the lead independent 
director plays in the leadership of the Fund. This disclosure should 
indicate why the Fund has determined that its leadership structure is 
appropriate given the specific characteristics or circumstances of the 
Fund. In addition, disclose the extent of the board's role in the risk 
oversight of the Fund, such as how the board administers its oversight 
function and the effect that this has on the board's leadership 
structure.
    (2) Identify the standing committees of the Fund's board of 
directors, and provide the following information about each committee:
    (i) A concise statement of the functions of the committee;
    (ii) The members of the committee;
    (iii) The number of committee meetings held during the last fiscal 
year; and
    (iv) If the committee is a nominating or similar committee, state 
whether the committee will consider nominees recommended by security 
holders and, if so, describe the procedures to be followed by security 
holders in submitting recommendations.
    (3) Positions Held by Directors and Their Immediate Family Members
    (i) Unless disclosed in the table required by paragraph (a)(1) of 
this Item 17, describe any positions, including as an officer, 
employee, director, or general partner, held by any director who is not 
an interested person of the Fund, or immediate family member of the 
director, during the two most recently completed calendar years with:
    (A) The Fund;
    (B) An investment company, or a person that would be an investment 
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) 
[15 U.S.C. 80a-3(c)(1) and (c)(7)], having the same investment adviser 
or principal underwriter as the Fund or having an investment adviser or 
principal underwriter that directly or indirectly controls, is 
controlled by, or is under common control with an investment adviser or 
principal underwriter of the Fund;
    (C) An investment adviser, principal underwriter, or affiliated 
person of the Fund; or
    (D) Any person directly or indirectly controlling, controlled by, 
or under common control with an investment adviser or principal 
underwriter of the Fund.
    (ii) Unless disclosed in the table required by paragraph (a)(1) of 
this Item 17 or in response to paragraph (b)(3) of this Item 17, 
indicate any directorships held during the past five years by each 
director in any company with a class of securities registered pursuant 
to section 12 of the Securities Exchange Act [15 U.S.C. 78l] or subject 
to the requirements of section 15(d) of the Securities Exchange Act [15 
U.S.C. 78o(d)] or any company registered as an investment company under 
the Investment Company Act, and name the companies in which the 
directorships were held.
    Instruction. When an individual holds the same position(s) with two 
or more portfolios that are part of the same fund complex, identify the 
fund complex and provide the number of portfolios for which the 
position(s) are held rather than listing each portfolio separately.
    (4) For each director, state the dollar range of equity securities 
beneficially owned by the director as required by the following table:
    (i) In the Fund; and
    (ii) On an aggregate basis, in any registered investment companies 
overseen by the director within the same family of investment companies 
as the Fund.

------------------------------------------------------------------------
        (1)                    (2)                        (3)
------------------------------------------------------------------------
Name of Director     Dollar Range of Equity    Aggregate Dollar Range of
                     Securities in the Fund    Equity Securities in All
                                                 Registered Investment
                                                                      Companies Overseen by
                                                 Director in Family of
                                                           Investment Companies
------------------------------------------------------------------------

Instructions
    1. Information should be provided as of the end of the most 
recently completed calendar year. Specify the valuation date by 
footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 16a-
1(a)(2) under the Exchange Act [17 CFR 240.16a-1(a)(2)].
    3. If the SAI covers more than one Fund or Series, disclose in 
column (2) the dollar range of equity securities beneficially owned by 
a director in each Fund or Series overseen by the director.
    4. In disclosing the dollar range of equity securities beneficially 
owned by a director in columns (2) and (3), use the following ranges: 
None, $1-$10,000, $10,001-$50,000, $50,001-$100,000, or over $100,000.

[[Page 70872]]

    (5) For each director who is not an interested person of the Fund, 
and his immediate family members, furnish the information required by 
the following table as to each class of securities owned beneficially 
or of record in:
    (i) An investment adviser or principal underwriter of the Fund; or
    (ii) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser or principal underwriter of the Fund:

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name of Director    Name of Owners                   Company   Title of Class      Value of        Percent of Class
                   and Relationships                                             Securities
                       to Director
----------------------------------------------------------------------------------------------------------------

Instructions
    1. Information should be provided as of the end of the most 
recently completed calendar year. Specify the valuation date by 
footnote or otherwise.
    2. An individual is a ``beneficial owner'' of a security if he is a 
``beneficial owner'' under either rule 13d-3 or rule 16a-1(a)(2) under 
the Exchange Act [17 CFR 240.13d-3 or 240.16a-1(a)(2)].
    3. Identify the company in which the director or immediate family 
member of the director owns securities in column (3). When the company 
is a person directly or indirectly controlling, controlled by, or under 
common control with an investment adviser or principal underwriter, 
describe the company's relationship with the investment adviser or 
principal underwriter.
    4. Provide the information required by columns (5) and (6) on an 
aggregate basis for each director and his immediate family members.
    (6) Unless disclosed in response to paragraph (b)(5) of this Item 
17, describe any direct or indirect interest, the value of which 
exceeds $120,000, of each director who is not an interested person of 
the Fund, or immediate family member of the director, during the two 
most recently completed calendar years, in:
    (i) An investment adviser or principal underwriter of the Fund; or
    (ii) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser or principal underwriter of the Fund.
Instructions
    1. A director or immediate family member has an interest in a 
company if he is a party to a contract, arrangement, or understanding 
with respect to any securities of, or interest in, the company.
    2. The interest of the director and the interests of his immediate 
family members should be aggregated in determining whether the value 
exceeds $120,000.
    (7) Describe briefly any material interest, direct or indirect, of 
any director who is not an interested person of the Fund, or immediate 
family member of the director, in any transaction, or series of similar 
transactions, during the two most recently completed calendar years, in 
which the amount involved exceeds $120,000 and to which any of the 
following persons was a party:
    (i) The Fund;
    (ii) An officer of the Fund;
    (iii) An investment company, or a person that would be an 
investment company but for the exclusions provided by sections 3(c)(1) 
and 3(c)(7) [15 U.S.C. 80a-3(c)(1) and (c)(7)], having the same 
investment adviser or principal underwriter as the Fund or having an 
investment adviser or principal underwriter that directly or indirectly 
controls, is controlled by, or is under common control with an 
investment adviser or principal underwriter of the Fund;
    (iv) An officer of an investment company, or a person that would be 
an investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) [15 U.S.C. 80a-3(c)(1) and (c)(7)], having the same 
investment adviser or principal underwriter as the Fund or having an 
investment adviser or principal underwriter that directly or indirectly 
controls, is controlled by, or is under common control with an 
investment adviser or principal underwriter of the Fund;
    (v) An investment adviser or principal underwriter of the Fund;
    (vi) An officer of an investment adviser or principal underwriter 
of the Fund;
    (vii) A person directly or indirectly controlling, controlled by, 
or under common control with an investment adviser or principal 
underwriter of the Fund; or
    (viii) An officer of a person directly or indirectly controlling, 
controlled by, or under common control with an investment adviser or 
principal underwriter of the Fund.
Instructions
    1. Include the name of each director or immediate family member 
whose interest in any transaction or series of similar transactions is 
described and the nature of the circumstances by reason of which the 
interest is required to be described.
    2. State the nature of the interest, the approximate dollar amount 
involved in the transaction, and, where practicable, the approximate 
dollar amount of the interest.
    3. In computing the amount involved in the transaction or series of 
similar transactions, include all periodic payments in the case of any 
lease or other agreement providing for periodic payments.
    4. Compute the amount of the interest of any director or immediate 
family member of the director without regard to the amount of profit or 
loss involved in the transaction(s).
    5. As to any transaction involving the purchase or sale of assets, 
state the cost of the assets to the purchaser and, if acquired by the 
seller within two years prior to the transaction, the cost to the 
seller. Describe the method used in determining the purchase or sale 
price and the name of the person making the determination.
    6. Disclose indirect, as well as direct, material interests in 
transactions. A person who has a position or relationship with, or 
interest in, a company that engages in a transaction with one of the 
persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item 17 may have an indirect interest in the transaction by reason of 
the position, relationship, or interest. The interest in the 
transaction, however, will not be deemed ``material'' within the 
meaning of paragraph (b)(7) of this Item 17 where the interest of the 
director or immediate family member arises solely from the holding of 
an equity interest (including a limited partnership interest, but 
excluding a general partnership interest) or a creditor interest in a 
company that is a party to the transaction with one of the persons 
specified in paragraphs (b)(7)(i)

[[Page 70873]]

through (b)(7)(viii) of this Item 17, and the transaction is not 
material to the company.
    7. The materiality of any interest is to be determined on the basis 
of the significance of the information to investors in light of all the 
circumstances of the particular case. The importance of the interest to 
the person having the interest, the relationship of the parties to the 
transaction with each other, and the amount involved in the transaction 
are among the factors to be considered in determining the significance 
of the information to investors.
    8. No information need be given as to any transaction where the 
interest of the director or immediate family member arises solely from 
the ownership of securities of a person specified in paragraphs 
(b)(7)(i) through (b)(7)(viii) of this Item 17 and the director or 
immediate family member receives no extra or special benefit not shared 
on a pro rata basis by all holders of the Class of securities.
    9. Transactions include loans, lines of credit, and other 
indebtedness. For indebtedness, indicate the largest aggregate amount 
of indebtedness outstanding at any time during the period, the nature 
of the indebtedness and the transaction in which it was incurred, the 
amount outstanding as of the end of the most recently completed 
calendar year, and the rate of interest paid or charged.
    10. No information need be given as to any routine, retail 
transaction. For example, the Fund need not disclose that a director 
has a credit card, bank or brokerage account, residential mortgage, or 
insurance policy with a person specified in paragraphs (b)(7)(i) 
through (b)(7)(viii) of this Item 17 unless the director is accorded 
special treatment.
    (8) Describe briefly any direct or indirect relationship, in which 
the amount involved exceeds $120,000, of any director who is not an 
interested person of the Fund, or immediate family member of the 
director, that existed at any time during the two most recently 
completed calendar years with any of the persons specified in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17. 
Relationships include:
    (i) Payments for property or services to or from any person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17;
    (ii) Provision of legal services to any person specified in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17;
    (iii) Provision of investment banking services to any person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 17, 
other than as a participating underwriter in a syndicate; and
    (iv) Any consulting or other relationship that is substantially 
similar in nature and scope to the relationships listed in paragraphs 
(b)(8)(i) through (b)(8)(iii) of this Item 17.
Instructions
    1. Include the name of each director or immediate family member 
whose relationship is described and the nature of the circumstances by 
reason of which the relationship is required to be described.
    2. State the nature of the relationship and the amount of business 
conducted between the director or immediate family member and the 
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item 17 as a result of the relationship during the two most recently 
completed calendar years.
    3. In computing the amount involved in a relationship, include all 
periodic payments in the case of any agreement providing for periodic 
payments.
    4. Disclose indirect, as well as direct, relationships. A person 
who has a position or relationship with, or interest in, a company that 
has a relationship with one of the persons listed in paragraphs 
(b)(7)(i) through (b)(7)(viii) of this Item 17 may have an indirect 
relationship by reason of the position, relationship, or interest.
    5. In determining whether the amount involved in a relationship 
exceeds $120,000, amounts involved in a relationship of the director 
should be aggregated with those of his immediate family members.
    6. In the case of an indirect interest, identify the company with 
which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) 
of this Item 17 has a relationship; the name of the director or 
immediate family member affiliated with the company and the nature of 
the affiliation; and the amount of business conducted between the 
company and the person specified in paragraphs (b)(7)(i) through 
(b)(7)(viii) of this Item 17 during the two most recently completed 
calendar years.
    7. In calculating payments for property and services for purposes 
of paragraph (b)(8)(i) of this Item 17, the following may be excluded:
    A. Payments where the transaction involves the rendering of 
services as a common contract carrier, or public utility, at rates or 
charges fixed in conformity with law or governmental authority; or
    B. Payments that arise solely from the ownership of securities of a 
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item 17 and no extra or special benefit not shared on a pro rata basis 
by all holders of the class of securities is received.
    8. No information need be given as to any routine, retail 
relationship. For example, the Fund need not disclose that a director 
has a credit card, bank or brokerage account, residential mortgage, or 
insurance policy with a person specified in paragraphs (b)(7)(i) 
through (b)(7)(viii) of this Item 17 unless the director is accorded 
special treatment.
    (9) If an officer of an investment adviser or principal underwriter 
of the Fund, or an officer of a person directly or indirectly 
controlling, controlled by, or under common control with an investment 
adviser or principal underwriter of the Fund, served during the two 
most recently completed calendar years, on the board of directors of a 
company where a director of the Fund who is not an interested person of 
the Fund, or immediate family member of the director, was during the 
two most recently completed calendar years, an officer, identify:
    (i) The company;
    (ii) The individual who serves or has served as a director of the 
company and the period of service as director;
    (iii) The investment adviser or principal underwriter or person 
controlling, controlled by, or under common control with the investment 
adviser or principal underwriter where the individual named in 
paragraph (b)(9)(ii) of this Item 17 holds or held office and the 
office held; and
    (iv) The director of the Fund or immediate family member who is or 
was an officer of the company; the office held; and the period of 
holding the office.
    (10) For each director, briefly discuss the specific experience, 
qualifications, attributes, or skills that led to the conclusion that 
the person should serve as a director for the Fund at the time that the 
disclosure is made, in light of the Fund's business and structure. If 
material, this disclosure should cover more than the past five years, 
including information about the person's particular areas of expertise 
or other relevant qualifications.
    (c) Compensation. For all directors of the Fund and for all members 
of any advisory board who receive compensation from the Fund, and for 
each of the three highest paid officers or any affiliated person of the 
Fund who received aggregate compensation from the Fund for the most 
recently completed fiscal year exceeding $60,000 (``Compensated 
Persons''):
    (1) Provide the information required by the following table:

[[Page 70874]]



                                               Compensation Table
----------------------------------------------------------------------------------------------------------------
         (1)                    (2)                    (3)                    (4)                    (5)
----------------------------------------------------------------------------------------------------------------
  Name of Person,              Aggregate      Pension or Retirement   Estimated Annual                 Total Compensation
          Position                      CompenBenefits Accrued As        Benefits Upon      From Fund and Fund
                                    Fund          Part of Funds             Retirement                       Complex Paid to
                                                       Expenses                                     Directors
----------------------------------------------------------------------------------------------------------------

Instructions
    1. For column (1), indicate, as necessary, the capacity in which 
the remuneration is received. For Compensated Persons who are directors 
of the Fund, compensation is amounts received for service as a 
director.
    2. If the Registrant has not completed its first full year since 
its organization, furnish the information for the current fiscal year, 
estimating future payments that would be made pursuant to an existing 
agreement or understanding. Disclose in a footnote to the Compensation 
Table the period for which the information is furnished.
    3. Include in column (2) amounts deferred at the election of the 
Compensated Person, whether pursuant to a plan established under 
Section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)] or 
otherwise for the fiscal year in which earned. Disclose in a footnote 
to the Compensation Table the total amount of deferred compensation 
(including interest) payable to or accrued for any Compensated Person.
    4. Include in columns (3) and (4) all pension or retirement 
benefits proposed to be paid under any existing plan in the event of 
retirement at normal retirement date, directly or indirectly, by the 
Registrant, any of its subsidiaries, or other companies in the Fund 
Complex. Omit column (4) where retirement benefits are not 
determinable.
    5. For any defined benefit or actuarial plan under which benefits 
are determined primarily by final compensation (or average final 
compensation) and years of service, provide the information required in 
column (4) in a separate table showing estimated annual benefits 
payable upon retirement (including amounts attributable to any defined 
benefit supplementary or excess pension award plans) in specified 
compensation and years of service classifications. Also provide the 
estimated credited years of service for each Compensated Person.
    6. Include in column (5) only aggregate compensation paid to a 
director for service on the board and all other boards of investment 
companies in a Fund Complex specifying the number of such other 
investment companies.
    (2) Describe briefly the material provisions of any pension, 
retirement, or other plan or any arrangement, other than fee 
arrangements disclosed in paragraph (c)(1), under which the Compensated 
Persons are or may be compensated for services provided, including 
amounts paid, if any, to the compensated Person under these 
arrangements during the most recently completed fiscal year. 
Specifically include the criteria used to determine amounts payable 
under the plan, the length of service or vesting period required by the 
plan, the retirement age or other event that gives rise to payment 
under the plan, and whether the payment of benefits is secured or 
funded by the Fund.
    (d) Sales Loads. Disclose any arrangements that result in 
breakpoints in, or elimination of, purchase charges or exit charges for 
directors and other affiliated persons of the Fund. Identify each class 
of individuals and transactions to which the arrangements apply and 
state each different breakpoint as a percentage of both the offering 
price and the net amount invested of the Fund's shares. Explain, as 
applicable, the reasons for the difference in the price at which 
securities are offered generally to the public, and the prices at which 
securities are offered to directors and other affiliated persons of the 
Fund.
    (e) Codes of Ethics. Provide a brief statement disclosing whether 
the Fund and its investment adviser and principal underwriter have 
adopted codes of ethics under rule 17j-1 of the Investment Company Act 
[17 CFR 270.17j-1] and whether these codes of ethics permit personnel 
subject to the codes to invest in securities, including securities that 
may be purchased or held by the Fund.
    Instruction: A Fund that is not required to adopt a code of ethics 
under rule 17j-1 of the Investment Company Act is not required to 
respond to this item
    (f) Proxy Voting Policies. Unless the Fund invests exclusively in 
non-voting securities, describe the policies and procedures that the 
Fund uses to determine how to vote proxies relating to portfolio 
securities, including the procedures that the Fund uses when a vote 
presents a conflict between the interests of Fund shareholders, on the 
one hand, and those of the Fund's investment adviser; principal 
underwriter; or any affiliated person of the Fund, its investment 
adviser, or its principal underwriter, on the other. Include any 
policies and procedures of the Fund's investment adviser, or any other 
third party, that the Fund uses, or that are used on the Fund's behalf, 
to determine how to vote proxies relating to portfolio securities. 
Also, state that information regarding how the Fund voted proxies 
relating to portfolio securities during the most recent 12-month period 
ended June 30 is available (1) without charge, upon request, by calling 
a specified toll-free telephone number; or on or through the Fund's 
website at a specified address; or both; and (2) on the Commission's 
website at https://www.sec.gov.
Instructions
    1. A Fund may satisfy the requirement to provide a description of 
the policies and procedures that it uses to determine how to vote 
proxies relating to portfolio securities by including a copy of the 
policies and procedures themselves.
    2. If a Fund discloses that the Fund's proxy voting record is 
available by calling a toll-free telephone number, and the Fund (or 
financial intermediary through which shares of the Fund may be 
purchased or sold) receives a request for this information, the Fund 
(or financial intermediary) must send the information disclosed in the 
Fund's most recently filed report on Form N-PX, within three business 
days of receipt of the request, by first-class mail or other means 
designed to ensure equally prompt delivery.
    3. If a Fund discloses that the Fund's proxy voting record is 
available on or through its website, the Fund must make available free 
of charge the information disclosed in the Fund's most recently filed 
report on Form N-PX on or through its website as soon as reasonably 
practicable after filing the report with the Commission. The 
information disclosed in the Fund's most recently filed report on Form 
N-PX must remain available on or through the Fund's website for as long 
as the Fund remains subject to the requirements of Rule 30b1-4 [17 CFR 
270.30b1-4] and discloses that the Fund's proxy voting record is 
available on or through its website.

[[Page 70875]]

Item 18. Control Persons and Principal Holders of Securities

    Provide the following information as of a specified date no more 
than 30 days prior to the date of filing the registration statement or 
an amendment.
    (a) Control Persons. State the name and address of each person who 
controls the Fund and explain the effect of that control on the voting 
rights of other security holders. For each control person, state the 
percentage of the Fund's voting securities owned or any other basis of 
control. If the control person is a company, give the jurisdiction 
under the laws of which it is organized. List all parents of the 
control person.
    Instruction. For purposes of this paragraph, ``control'' means (i) 
the beneficial ownership, either directly or through one or more 
controlled companies, of more than 25% of the voting securities of a 
company; (ii) the acknowledgment or assertion by either the controlled 
or controlling party of the existence of control; or (iii) an 
adjudication under section 2(a)(9), which has become final, that 
control exists.
    (b) Principal Holders. State the name, address, and percentage of 
ownership of each person who owns of record or is known by the Fund to 
own beneficially 5% or more of any Class of the Fund's outstanding 
equity securities.
Instructions
    1. Calculate the percentages based on the amount of securities 
outstanding.
    2. If securities are being registered under or in connection with a 
plan of acquisition, reorganization, readjustment or succession, 
indicate, as far as practicable, the ownership that would result from 
consummation of the plan based on present holdings and commitments.
    3. Indicate whether the securities are owned of record, 
beneficially, or both. Show the respective percentage owned in each 
manner.
    (c) Management Ownership. State the percentage of the Fund's equity 
securities owned by all officers, directors, and members of any 
advisory board of the Fund as a group. If the amount owned by directors 
and officers as a group is less than 1% of the Class, provide a 
statement to that effect.

Item 19. Investment Advisory and Other Services

    (a) Investment Advisers. Disclose the following information with 
respect to each investment adviser:
    (1) The name of any person who controls the adviser, the basis of 
the person's control, and the general nature of the person's business. 
Also disclose, if material, the business history of any organization 
that controls the adviser.
    (2) The name of any affiliated person of the Fund who also is an 
affiliated person of the adviser, and a list of all capacities in which 
the person is affiliated with the Fund and with the adviser.
    Instruction. If an affiliated person of the Fund alone or together 
with others controls the adviser, state that fact. It is not necessary 
to provide the amount or percentage of the outstanding voting 
securities owned by the controlling person.
    (3) The method of calculating the advisory fee payable by the Fund 
including:
    (i) The total dollar amounts that the Fund paid to the adviser 
(aggregated with amounts paid to affiliated advisers, if any), and any 
advisers who are not affiliated persons of the adviser, under the 
investment advisory contract for the last three fiscal years;
    (ii) If applicable, any credits that reduced the advisory fee for 
any of the last three fiscal years; and
    (iii) Any expense limitation provision.
Instructions
    1. If the advisory fee payable by the Fund varies depending on the 
Fund's investment performance in relation to a standard, describe the 
standard along with a fee schedule in tabular form. The Fund may 
include examples showing the fees that the adviser would earn at 
various levels of performance as long as the examples include 
calculations showing the maximum and minimum fee percentages that could 
be earned under the contract.
    2. State separately each type of credit or offset.
    3. When a Fund is subject to more than one expense limitation 
provision, describe only the most restrictive provision.
    4. For a Registrant with more than one Series, or a Multiple Class 
Fund, describe the methods of allocation and payment of advisory fees 
for each Series or Class.
    (b) Principal Underwriter. State the name and principal business 
address of any principal underwriter for the Fund. Disclose, if 
applicable, that an affiliated person of the Fund is an affiliated 
person of the principal underwriter and identify the affiliated person.
    (c) Services Provided by Each Investment Adviser and Fund Expenses 
Paid by Third Parties.
    (1) Describe all services performed for or on behalf of the Fund 
supplied or paid for wholly or in substantial part by each investment 
adviser.
    (2) Describe all fees, expenses, and costs of the Fund that are to 
be paid by persons other than an investment adviser or the Fund, and 
identify those persons.
    (d) Service Agreements. Summarize the substantive provisions of any 
other management-related service contract that may be of interest to a 
purchaser of the Fund's shares, under which services are provided to 
the Fund, indicating the parties to the contract, and the total dollars 
paid and by whom for the past three years.
Instructions
    1. The term ``management-related service contract'' includes any 
contract with the Fund to keep, prepare, or file accounts, books, 
records, or other documents required under federal or state law, or to 
provide any similar services with respect to the daily administration 
of the Fund, but does not include the following:
    (a) Any contract with the Fund to provide investment advice;
    (b) Any agreement with the Fund to perform as custodian, transfer 
agent, or dividend-paying agent for the Fund; and
    (c) Any contract with the Fund for outside legal or auditing 
services, or contract for personal employment entered into with the 
Fund in the ordinary course of business.
    2. No information need be given in response to this paragraph with 
respect to the service of mailing proxies or periodic reports to the 
Fund's shareholders.
    3. In summarizing the substantive provisions of any management-
related service contract, include the following:
    (a) The name of the person providing the service;
    (b) The direct or indirect relationships, if any, of the person 
with the Fund, an investment adviser of the Fund or the Fund's 
principal underwriter; and
    (c) The nature of the services provided, and the basis of the 
compensation paid for the services for the last three fiscal years.
    (e) Other Investment Advice. If any person (other than a director, 
officer, member of an advisory board, employee, or investment adviser 
of the Fund), through any understanding, whether formal or informal, 
regularly advises the Fund or the Fund's investment adviser with 
respect to the Fund's investing in, purchasing, or selling securities 
or other property, or has the authority to determine what securities or 
other property should be purchased or sold by the Fund, and receives 
direct or indirect

[[Page 70876]]

remuneration, provide the following information:
    (1) The person's name;
    (2) A description of the nature of the arrangement, and the advice 
or information provided; and
    (3) Any remuneration (including, for example, participation, 
directly or indirectly, in commissions or other compensation paid in 
connection with transactions in the Fund's portfolio securities) paid 
for the advice or information, and a statement as to how the 
remuneration was paid and by whom it was paid for the last three fiscal 
years.
    Instruction. Do not include information for the following:
    1. Persons who advised the investment adviser or the Fund solely 
through uniform publications distributed to subscribers;
    2. Persons who provided the investment adviser or the Fund with 
only statistical and other factual information, advice about economic 
factors and trends, or advice as to occasional transactions in specific 
securities, but without generally advising about the purchase or sale 
of securities by the Fund;
    3. A company that is excluded from the definition of ``investment 
adviser'' of an investment company under section 2(a)(20)(iii) [15 
U.S.C. 80a-2(a)(20)(iii)];
    4. Any person the character and amount of whose compensation for 
these services must be approved by a court; or
    5. Other persons as the Commission has by rule or order determined 
not to be an ``investment adviser'' of an investment company.
    (f) Dealer Reallowances. Disclose any purchase charge reallowed to 
dealers as a percentage of the offering price of the Fund's shares.
    (g) Rule 12b-1 Plans. If the Fund has adopted a plan under rule 
12b-1, describe the material aspects of the plan, and any agreements 
relating to the implementation of the plan, including:
    (1) A list of the principal types of activities for which payments 
are or will be made, including the dollar amount and the manner in 
which amounts paid by the Fund under the plan during the last fiscal 
year were spent on:
    (i) Advertising;
    (ii) Printing and mailing of prospectuses to other than current 
shareholders;
    (iii) Compensation to underwriters;
    (iv) Compensation to broker-dealers;
    (v) Compensation to sales personnel;
    (vi) Interest, carrying, or other financing charges; and
    (vii) Other (specify).
    (2) The relationship between amounts paid to the distributor and 
the expenses that it incurs (e.g., whether the plan reimburses the 
distributor only for expenses incurred or compensates the distributor 
regardless of its expenses).
    (3) The amount of any unreimbursed expenses incurred under the plan 
in a previous year and carried over to future years, in dollars and as 
a percentage of the Fund's net assets on the last day of the previous 
year.
    (4) Whether the Fund participates in any joint distribution 
activities with another Series or investment company. If so, disclose, 
if applicable, that fees paid under the Fund's rule 12b-1 plan may be 
used to finance the distribution of the shares of another Series or 
investment company, and state the method of allocating distribution 
costs (e.g., relative net asset size, number of shareholder accounts).
    (5) Whether any of the following persons had a direct or indirect 
financial interest in the operation of the plan or related agreements:
    (i) Any interested person of the Fund; or
    (ii) Any director of the Fund who is not an interested person of 
the Fund.
    (6) The anticipated benefits to the Fund that may result from the 
plan.
    (h) Other Service Providers.
    (1) Unless disclosed in response to paragraph (d), identify any 
person who provides significant administrative or business affairs 
management services for the Fund (e.g., an ``administrator''), describe 
the services provided, and the compensation paid for the services.
    (2) State the name and principal business address of the Fund's 
transfer agent and the dividend-paying agent.
    (3) State the name and principal business address of the Fund's 
custodian and independent public accountant and describe generally the 
services performed by each. If the Fund's portfolio securities are held 
by a person other than a commercial bank, trust company, or depository 
registered with the Commission as custodian, state the nature of the 
business of that person or persons.
    (4) If an affiliated person of the Fund, or an affiliated person of 
the affiliated person, acts as custodian, transfer agent, or dividend-
paying agent for the Fund, describe the services that the person 
performs and the basis for remuneration.
    (i) Securities Lending.
    (1) Provide the following dollar amounts of income and fees/
compensation related to the securities lending activities of each 
Series during its most recent fiscal year:
    (i) Gross income from securities lending activities, including 
income from cash collateral reinvestment;
    (ii) All fees and/or compensation for each of the following 
securities lending activities and related services: Any share of 
revenue generated by the securities lending program paid to the 
securities lending agent(s) (``revenue split''); fees paid for cash 
collateral management services (including fees deducted from a pooled 
cash collateral reinvestment vehicle) that are not included in the 
revenue split; administrative fees that are not included in the revenue 
split; fees for indemnification that are not included in the revenue 
split; rebates paid to borrowers; and any other fees relating to the 
securities lending program that are not included in the revenue split, 
including a description of those other fees;
    (iii) The aggregate fees/compensation disclosed pursuant to 
paragraph (ii); and
    (iv) Net income from securities lending activities (i.e., the 
dollar amount in paragraph (i) minus the dollar amount in paragraph 
(iii)).
    Instruction. If a fee for a service is included in the revenue 
split, state that the fee is ``included in the revenue split.''
    (2) Describe the services provided to the Series by the securities 
lending agent in the Series' most recent fiscal year.

Item 20. Portfolio Managers

    (a) Other Accounts Managed. If a Portfolio Manager required to be 
identified in response to Item 5(b) is primarily responsible for the 
day-to-day management of the portfolio of any other account, provide 
the following information:
    (1) The Portfolio Manager's name;
    (2) The number of other accounts managed within each of the 
following categories and the total assets in the accounts managed 
within each category:
    (A) Registered investment companies;
    (B) Other pooled investment vehicles; and
    (C) Other accounts.
    (3) For each of the categories in paragraph (a)(2) of this Item, 
the number of accounts and the total assets in the accounts with 
respect to which the advisory fee is based on the performance of the 
account; and
    (4) A description of any material conflicts of interest that may 
arise in connection with the Portfolio Manager's management of the 
Fund's investments, on the one hand, and the investments of the other 
accounts included in response to paragraph (a)(2) of this Item, on the 
other. This description would include,

[[Page 70877]]

for example, material conflicts between the investment strategy of the 
Fund and the investment strategy of other accounts managed by the 
Portfolio Manager and material conflicts in allocation of investment 
opportunities between the Fund and other accounts managed by the 
Portfolio Manager.
Instructions
    1. Provide the information required by this paragraph as of the end 
of the Fund's most recently completed fiscal year, except that, in the 
case of an initial registration statement or an update to the Fund's 
registration statement that discloses a new Portfolio Manager, 
information with respect to any newly identified Portfolio Manager must 
be provided as of the most recent practicable date. Disclose the date 
as of which the information is provided.
    2. If a committee, team, or other group of persons that includes 
the Portfolio Manager is jointly and primarily responsible for the day-
to-day management of the portfolio of an account, include the account 
in responding to paragraph (a) of this Item.
    (b) Compensation. Describe the structure of, and the method used to 
determine, the compensation of each Portfolio Manager required to be 
identified in response to Item 5(b). For each type of compensation 
(e.g., salary, bonus, deferred compensation, retirement plans and 
arrangements), describe with specificity the criteria on which that 
type of compensation is based, for example, whether compensation is 
fixed, whether (and, if so, how) compensation is based on Fund pre- or 
after-tax performance over a certain time period, and whether (and, if 
so, how) compensation is based on the value of assets held in the 
Fund's portfolio. For example, if compensation is based solely or in 
part on performance, identify any benchmark used to measure performance 
and state the length of the period over which performance is measured.
Instructions
    1. Provide the information required by this paragraph as of the end 
of the Fund's most recently completed fiscal year, except that, in the 
case of an initial registration statement or an update to the Fund's 
registration statement that discloses a new Portfolio Manager, 
information with respect to any newly identified Portfolio Manager must 
be provided as of the most recent practicable date. Disclose the date 
as of which the information is provided.
    2. Compensation includes, without limitation, salary, bonus, 
deferred compensation, and pension and retirement plans and 
arrangements, whether the compensation is cash or non-cash. Group life, 
health, hospitalization, medical reimbursement, relocation, and pension 
and retirement plans and arrangements may be omitted, provided that 
they do not discriminate in scope, terms, or operation in favor of the 
Portfolio Manager or a group of employees that includes the Portfolio 
Manager and are available generally to all salaried employees. The 
value of compensation is not required to be disclosed under this Item.
    3. Include a description of the structure of, and the method used 
to determine, any compensation received by the Portfolio Manager from 
the Fund, the Fund's investment adviser, or any other source with 
respect to management of the Fund and any other accounts included in 
the response to paragraph (a)(2) of this Item. This description must 
clearly disclose any differences between the method used to determine 
the Portfolio Manager's compensation with respect to the Fund and other 
accounts, e.g., if the Portfolio Manager receives part of an advisory 
fee that is based on performance with respect to some accounts but not 
the Fund, this must be disclosed.
    (c) Ownership of Securities. For each Portfolio Manager required to 
be identified in response to Item 5(b), state the dollar range of 
equity securities in the Fund beneficially owned by the Portfolio 
Manager using the following ranges: None, $1-$10,000, $10,001-$50,000, 
$50,001-$ 100,000, $100,001-$500,000, $500,001-$1,000,000, or over 
$1,000,000.
Instructions
    1. Provide the information required by this paragraph as of the end 
of the Fund's most recently completed fiscal year, except that, in the 
case of an initial registration statement or an update to the Fund's 
registration statement that discloses a new Portfolio Manager, 
information with respect to any newly identified Portfolio Manager must 
be provided as of the most recent practicable date. Specify the 
valuation date.
    2. Determine ``beneficial ownership'' in accordance with rule 16a-
1(a)(2) under the Exchange Act [17 CFR 240.16a-1(a)(2)].

Item 21. Brokerage Allocation and Other Practices

    (a) Brokerage Transactions. Describe how transactions in portfolio 
securities are affected, including a general statement about brokerage 
commissions, markups, and markdowns on principal transactions and the 
aggregate amount of any brokerage commissions paid by the Fund during 
its three most recent fiscal years. If, during either of the two years 
preceding the Fund's most recent fiscal year, the aggregate dollar 
amount of brokerage commissions paid by the Fund differed materially 
from the amount paid during the most recent fiscal year, state the 
reason(s) for the difference(s).
    (b) Commissions.
    (1) Identify, disclose the relationship, and state the aggregate 
dollar amount of brokerage commissions paid by the Fund during its 
three most recent fiscal years to any broker:
    (i) That is an affiliated person of the Fund or an affiliated 
person of that person; or
    (ii) An affiliated person of which is an affiliated person of the 
Fund, its investment adviser, or principal underwriter.
    (2) For each broker identified in response to paragraph (b)(1), 
state:
    (i) The percentage of the Fund's aggregate brokerage commissions 
paid to the broker during the most recent fiscal year; and
    (ii) The percentage of the Fund's aggregate dollar amount of 
transactions involving the payment of commissions effected through the 
broker during the most recent fiscal year.
    (3) State the reasons for any material difference in the percentage 
of brokerage commissions paid to, and the percentage of transactions 
effected through, a broker disclosed in response to paragraph (b)(1).
    (c) Brokerage Selection. Describe how the Fund will select brokers 
to effect securities transactions for the Fund and how the Fund will 
evaluate the overall reasonableness of brokerage commissions paid, 
including the factors that the Fund will consider in making these 
determinations.
Instructions
    1. If the Fund will consider the receipt of products or services 
other than brokerage or research services in selecting brokers, specify 
those products and services.
    2. If the Fund will consider the receipt of research services in 
selecting brokers, identify the nature of those research services.
    3. State whether persons acting on the Fund's behalf are authorized 
to pay a broker a higher brokerage commission than another broker might 
have charged for the same transaction in recognition of the value of 
(a) brokerage or (b) research services provided by the broker.
    4. If applicable, explain that research services provided by 
brokers through

[[Page 70878]]

which the Fund effects securities transactions may be used by the 
Fund's investment adviser in servicing all of its accounts and that not 
all of these services may be used by the adviser in connection with the 
Fund. If other policies or practices are applicable to the Fund with 
respect to the allocation of research services provided by brokers, 
explain those policies and practices.
    (d) Directed Brokerage. If, during the last fiscal year, the Fund 
or its investment adviser, through an agreement or understanding with a 
broker, or otherwise through an internal allocation procedure, directed 
the Fund's brokerage transactions to a broker because of research 
services provided, state the amount of the transactions and related 
commissions.
    (e) Regular Broker-Dealers. If the Fund has acquired during its 
most recent fiscal year or during the period of time since 
organization, whichever is shorter, securities of its regular brokers 
or dealers as defined in rule 10b-1 [17 CFR 270.10b-1] or of their 
parents, identify those brokers or dealers and state the value of the 
Fund's aggregate holdings of the securities of each issuer as of the 
close of the Fund's most recent fiscal year.
    Instruction. The Fund need only disclose information about an 
issuer that derived more than 15% of its gross revenues from the 
business of a broker, a dealer, an underwriter, or an investment 
adviser during its most recent fiscal year.

Item 22. Capital Stock and Other Securities

    (a) Capital Stock. For each Class of capital stock of the Fund, 
provide:
    (1) The title of each Class; and
    (2) A full discussion of the following provisions or 
characteristics of each Class, if applicable:
    (i) Restrictions on the right freely to retain or dispose of the 
Fund's shares;
    (ii) Material obligations or potential liabilities associated with 
owning the Fund's shares (not including investment risks);
    (iii) Dividend rights;
    (iv) Voting rights (including whether the rights of shareholders 
can be modified by other than a majority vote);
    (v) Liquidation rights;
    (vi) Preemptive rights;
    (vii) Conversion rights;
    (viii) Redemption provisions;
    (ix) Sinking fund provisions; and
    (x) Liability to further calls or to assessment by the Fund.
Instructions
    1. If any Class described in response to this paragraph possesses 
cumulative voting rights, disclose the existence of those rights and 
explain the operation of cumulative voting.
    2. If the rights evidenced by any Class described in response to 
this paragraph are materially limited or qualified by the rights of any 
other Class, explain those limitations or qualifications.
    (b) Other Securities. Describe the rights of any authorized 
securities of the Fund other than capital stock. If the securities are 
subscription warrants or rights, state the title and amount of 
securities called for, and the period during which and the prices at 
which the warrants or rights are exercisable.

Item 23. Purchase, Redemption, and Pricing of Shares

    (a) Purchase of Shares. To the extent that the prospectus does not 
do so, describe how the Fund's shares are offered to the public. 
Include any special purchase plans or methods not described in the 
prospectus or elsewhere in the SAI, including letters of intent, 
accumulation plans, dividend reinvestment plans, withdrawal plans, 
exchange privileges, employee benefit plans, redemption reinvestment 
plans, and waivers for particular classes of shareholders.
    (b) Fund Reorganizations. Disclose any arrangements that result in 
breakpoints in, or elimination of, purchase charges or exit charges in 
connection with the terms of a merger, acquisition, or exchange offer 
made under a plan of reorganization. Identify each class of individuals 
to which the arrangements apply and state each different purchase 
charge or exit charge available as a percentage of both the offering 
price and the net amount invested.
    (c) Offering Price. Describe the method followed or to be followed 
by the Fund in determining the total offering price at which its shares 
may be offered to the public and the method(s) used to value the Fund's 
assets.
Instructions
    1. Describe the valuation procedure(s) that the Fund uses in 
determining the net asset value and public offering price of its 
shares.
    2. Explain how the excess of the offering price over the net amount 
invested is distributed among the Fund's principal underwriters or 
others and the basis for determining the total offering price.
    3. Explain the reasons for any difference in the price at which 
securities are offered generally to the public, and the prices at which 
securities are offered for any class of transactions or to any class of 
individuals.
    4. Unless provided as a continuation of the balance sheet in 
response to Item 27, include a specimen price-make-up sheet showing how 
the Fund calculates the total offering price per unit. Base the 
calculation on the value of the Fund's portfolio securities and other 
assets and its outstanding securities as of the date of the balance 
sheet filed by the Fund.
    (d) Redemption in Kind. If the Fund has received an order of 
exemption from section 18(f) or has filed a notice of election under 
rule 18f-1 that has not been withdrawn, describe the nature, extent, 
and effect of the exemptive relief or notice.
    (e) Arrangements Permitting Frequent Purchases and Redemptions of 
Fund Shares. Describe any arrangements with any person to permit 
frequent purchases and redemptions of Fund shares, including the 
identity of the persons permitted to engage in frequent purchases and 
redemptions pursuant to such arrangements, and any compensation or 
other consideration received by the Fund, its investment adviser, or 
any other party pursuant to such arrangements.
Instructions
    1. The consideration required to be disclosed by Item 23(e) 
includes any agreement to maintain assets in the Fund or in other 
investment companies or accounts managed by the investment adviser or 
by any affiliated person of the investment adviser.
    2. If the Fund has an arrangement to permit frequent purchases and 
redemptions by a group of individuals, such as the participants in a 
defined contribution plan that meets the requirements for qualification 
under Section 401(k) of the Internal Revenue Code [26 U.S.C. 401(k)], 
the Fund may identify the group rather than identifying each individual 
group member.

Item 24. Taxation of the Fund

    (a) If applicable, state that the Fund is qualified or intends to 
qualify under Subchapter M of the Internal Revenue Code. Disclose the 
consequences to the Fund if it does not qualify under Subchapter M.
    (b) Disclose any special or unusual tax aspects of the Fund, such 
as taxation resulting from foreign investment or from status as a 
personal holding company, or any tax loss carry-forward to which the 
Fund may be entitled.

[[Page 70879]]

Item 25. Underwriters

    (a) Distribution of Securities. For each principal underwriter 
distributing securities of the Fund, state:
    (1) The nature of the obligation to distribute the Fund's 
securities;
    (2) Whether the offering is continuous; and
    (3) The aggregate dollar amount of underwriting commissions and the 
amount retained by the principal underwriter for each of the Fund's 
last three fiscal years.
    (b) Compensation. Provide the information required by the following 
table with respect to all commissions and other compensation received 
by each principal underwriter, who is an affiliated person of the Fund 
or an affiliated person of that affiliated person, directly or 
indirectly, from the Fund during the Fund's most recent fiscal year:

----------------------------------------------------------------------------------------------------------------
         (1)                    (2)                    (3)                    (4)                    (5)
----------------------------------------------------------------------------------------------------------------
Name of Principal       Net Underwriting                       Compensation Brokerage Commissions      Other Compensation
      Underwriter          Discounts and        Redemptions and
                                        Commissions Repurchases
----------------------------------------------------------------------------------------------------------------

Instruction
    Disclose in a footnote to the table the type of services rendered 
in consideration for the compensation listed under column (5).
    (c) Other Payments. With respect to any payments made by the Fund 
to an underwriter or dealer in the Fund's shares during the Fund's last 
fiscal year, disclose the name and address of the underwriter or 
dealer, the amount paid and basis for determining that amount, the 
circumstances surrounding the payments, and the consideration received 
by the Fund. Do not include information about:
    (1) Payments made through deduction from the offering price at the 
time of sale of securities issued by the Fund;
    (2) Payments representing the purchase price of portfolio 
securities acquired by the Fund;
    (3) Commissions on any purchase or sale of portfolio securities by 
the Fund; or
    (4) Payments for investment advisory services under an investment 
advisory contract.
Instructions
    1. Do not include in response to this paragraph information 
provided in response to paragraph (b) or with respect to service fees 
under the Instruction to Item 12(b)(2). Do not include any payment for 
a service excluded by Instructions 1 and 2 to Item 19(d) or by 
Instruction 2 to Item 34.
    2. If the payments were made under an arrangement or policy 
applicable to dealers generally, describe only the arrangement or 
policy.

Item 26. Calculation of Performance Data

    (a) Money Market Funds. Yield quotation(s) for a Money Market Fund 
included in the prospectus should be calculated according to paragraphs 
(a)(1)-(4).
    (1) Yield Quotation. Based on the 7 days ended on the date of the 
most recent balance sheet included in the registration statement, 
calculate the Fund's yield by determining the net change, exclusive of 
capital changes and income other than investment income, in the value 
of a hypothetical pre-existing account having a balance of one share at 
the beginning of the period, subtracting a hypothetical charge 
reflecting deductions from shareholder accounts, and dividing the 
difference by the value of the account at the beginning of the base 
period to obtain the base period return, and then multiplying the base 
period return by (365/7) with the resulting yield figure carried to at 
least the nearest hundredth of one percent.
    (2) Effective Yield Quotation. Based on the 7 days ended on the 
date of the most recent balance sheet included in the registration 
statement, calculate the Fund's effective yield, carried to at least 
the nearest hundredth of one percent, by determining the net change, 
exclusive of capital changes and income other than investment income, 
in the value of a hypothetical pre-existing account having a balance of 
one share at the beginning of the period, subtracting a hypothetical 
charge reflecting deductions from shareholder accounts, and dividing 
the difference by the value of the account at the beginning of the base 
period to obtain the base period return, and then compounding the base 
period return by adding 1, raising the sum to a power equal to 365 
divided by 7, and subtracting 1 from the result, according to the 
following formula:

EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)^365/7] - 1.

    (3) Tax Equivalent Current Yield Quotation. Calculate the Fund's 
tax equivalent current yield by dividing that portion of the Fund's 
yield (as calculated under paragraph (a)(1)) that is tax- exempt by 1 
minus a stated income tax rate and adding the quotient to that portion, 
if any, of the Fund's yield that is not tax-exempt.
    (4) Tax Equivalent Effective Yield Quotation. Calculate the Fund's 
tax equivalent effective yield by dividing that portion of the Fund's 
effective yield (as calculated under paragraph (a)(2)) that is tax-
exempt by 1 minus a stated income tax rate and adding the quotient to 
that portion, if any, of the Fund's effective yield that is not tax-
exempt.
Instructions
    1. When calculating yield or effective yield quotations, the 
calculation of net change in account value must include:
    (a) The value of additional shares purchased with dividends from 
the original share and dividends declared on both the original shares 
and additional shares; and
    (b) All fees, other than non-recurring account or sales charges, 
that are imposed on all shareholder accounts in proportion to the 
length of the base period. For any account fees that vary with the size 
of the account, assume an account size equal to the Fund's mean (or 
median) account size.
    2. Exclude realized gains and losses from the sale of securities 
and unrealized appreciation and depreciation from the calculation of 
yield and effective yield. Exclude income other than investment income.
    3. Disclose the amount or specific rate of any nonrecurring account 
or sales charges not included in the calculation of the yield.
    4. If the Fund holds itself out as distributing income that is 
exempt from Federal, state, or local income taxation, in calculating 
yield and effective yield (but not tax equivalent yield or tax 
equivalent effective yield), reduce the yield quoted by the effect of 
any income taxes on the shareholder receiving dividends, using the 
maximum rate for individual income taxation. For example, if the Fund 
holds itself out as distributing income exempt from Federal taxation 
and the income taxes of State A, but invests in some securities of 
State B, it must reduce its yield by the effect of state income taxes 
that must be paid by the residents of State A on that portion of the 
income attributable to the securities of State B.

[[Page 70880]]

    (b) Other Funds. Performance information included in the prospectus 
should be calculated according to paragraphs (b)(1)-(6).
    (1) Average Annual Total Return Quotation. For the 1-, 5-, and 10-
year periods ended on the date of the most recent balance sheet 
included in the registration statement (or for the periods the Fund has 
been in operation), calculate the Fund's average annual total return by 
finding the average annual compounded rates of return over the 1-, 5-, 
and 10-year periods (or for the periods of the Fund's operations) that 
would equate the initial amount invested to the ending redeemable 
value, according to the following formula:

P(1 + T)\n\ = ERV

Where:

P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made 
at the beginning of the 1-, 5-, or 10-year periods at the end of the 
1-, 5-, or 10- year periods (or fractional portion).
Instructions
    1. Assume the maximum purchase charge (or other charges deducted 
from payments) is deducted from the initial $1,000 payment.
    2. Assume all distributions by the Fund are reinvested at the price 
stated in the prospectus (including any purchase charge imposed upon 
reinvestment of dividends) on the reinvestment dates during the period.
    3. Include all recurring fees that are charged to all shareholder 
accounts. For any account fees that vary with the size of the account, 
assume an account size equal to the Fund's mean (or median) account 
size. Reflect, as appropriate, any recurring fees charged to 
shareholder accounts that are paid other than by redemption of the 
Fund's shares.
    4. Determine the ending redeemable value by assuming a complete 
redemption at the end of the 1-, 5-, or 10-year periods and the 
deduction of all nonrecurring charges deducted at the end of each 
period. If shareholders are assessed an exit charge, assume the maximum 
exit charge is deducted at the times, in the amounts, and under the 
terms disclosed in the prospectus.
    5. State the average annual total return quotation to the nearest 
hundredth of one percent.
    6. Total return information in the prospectus need only be current 
to the end of the Fund's most recent fiscal year.
    (2) Average Annual Total Return (After Taxes on Distributions) 
Quotation. For the 1-, 5-, and 10-year periods ended on the-date-of the 
most recent balance sheet included in the registration statement (or 
for the periods the Fund has been in operation), calculate the Fund's 
average annual total return (after taxes on distributions) by finding 
the average annual compounded rates of return over the 1-, 5-, and 10-
year periods (or for the periods of the Fund's operations) that would 
equate the initial amount invested to the ending value, according to 
the following formula:

P(1 + T)\n\ = ATVD

Where:

P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ATVD = ending value of a hypothetical $1,000 payment made 
at the beginning of the 1-, 5-, or 10-year periods at the end of the 
1-, 5-, or 10-year periods (or fractional portion), after taxes on 
fund distributions but not after taxes on redemption.
Instructions
    1. Assume the maximum purchase charge (or other charges deducted 
from payments) is deducted from the initial $1,000 payment.
    2. Assume all distributions by the Fund, less the taxes due on such 
distributions, are reinvested at the price stated in the prospectus 
(including any purchase charge imposed upon reinvestment of dividends) 
on the reinvestment dates during the period.
    3. Calculate the taxes due on any distributions by the Fund by 
applying the tax rates specified in Instruction 4 to each component of 
the distributions on the reinvestment date (e.g., ordinary income, 
short-term capital gain, long-term capital gain). The taxable amount 
and tax character of each distribution should be as specified by the 
Fund on the dividend declaration date, but may be adjusted to reflect 
subsequent recharacterizations of distributions. Distributions should 
be adjusted to reflect the Federal tax impact the distribution would 
have on an individual taxpayer on the reinvestment date. For example, 
assume no taxes are due on the portion of any distribution that would 
not result in Federal income tax on an individual, e.g., tax-exempt 
interest or non-taxable returns of capital. The effect of applicable 
tax credits, such as the foreign tax credit, should be taken into 
account in accordance with Federal tax law.
    4. Calculate the taxes due using the highest individual marginal 
Federal income tax rates in effect on the reinvestment date. The rates 
used should correspond to the tax character of each component of the 
distributions (e.g., ordinary income rate for ordinary income 
distributions, short-term capital gain rate for short-term capital gain 
distributions, long-term capital gain rate for long-term capital gain 
distributions). Note that the required tax rates may vary over the 
measurement period. Disregard any potential tax liabilities other than 
Federal tax liabilities (e.g., state and local taxes); the effect of 
phaseouts of certain exemptions, deductions, and credits at various 
income levels; and the impact of the Federal alternative minimum tax.
    5. Include all recurring fees that are charged to all shareholder 
accounts. For any account fees that vary with the size of the account, 
assume an account size equal to the Fund's mean (or median) account 
size. Assume that no additional taxes or tax credits result from any 
redemption of shares required to pay such fees. Reflect, as 
appropriate, any recurring fees charged to shareholder accounts that 
are paid other than by redemption of the Fund's shares.
    6. Determine the ending value by assuming a complete redemption at 
the end of the 1-, 5-, or 10-year periods and the deduction of all 
nonrecurring charges deducted at the end of each period. If 
shareholders are assessed an exit charge, assume the maximum exit 
charge is deducted at the times, in the amounts, and under the terms 
disclosed in the prospectus. Assume that the redemption has no tax 
consequences.
    7. State the average annual total return (after taxes on 
distributions) quotation to the nearest hundredth of one percent.
    (3) Average Annual Total Return (After Taxes on Distributions and 
Redemption) Quotation. For the 1-, 5-, and 10-year periods ended on the 
date of the most recent balance sheet included in the registration 
statement (or for the periods the Fund has been in operation), 
calculate the Fund's average annual total return (after taxes on 
distributions and redemption) by finding the average annual compounded 
rates of return over the 1-, 5-, and 10-year periods (or for the 
periods of the Fund's operations) that would equate the initial amount 
invested to the ending value, according to the following formula:

P(1 + T)\n\ = ATVDR

Where:

P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions and 
redemption).
n = number of years.
ATVDR = ending value of a hypothetical $1,000 payment 
made at the beginning of

[[Page 70881]]

the 1-, 5-, or 10-year periods (or fractional portion), after taxes 
on fund distribution and redemption.
Instructions
    1. Assume the maximum purchase charge (or other charges deducted 
from payments) is deducted from the initial $1,000 payment.
    2. Assume all distributions by the Fund, less the taxes due on such 
distributions, are reinvested at the price stated in the prospectus 
(including any purchase charge imposed upon reinvestment of dividends) 
on the reinvestment dates during the period.
    3. Calculate the taxes due on any distributions by the Fund by 
applying the tax rates specified in Instruction 4 to each component of 
the distributions on the reinvestment date (e.g., ordinary income, 
short-term capital gain, long-term capital gain). The taxable amount 
and tax character of each distribution should be as specified by the 
Fund on the dividend declaration date, but may be adjusted to reflect 
subsequent recharacterizations of distributions. Distributions should 
be adjusted to reflect the Federal tax impact the distribution would 
have on an individual taxpayer on the reinvestment date. For example, 
assume no taxes are due on the portion of any distribution that would 
not result in Federal income tax on an individual, e.g., tax-exempt 
interest or non-taxable returns of capital. The effect of applicable 
tax credits, such as the foreign tax credit, should be taken into 
account in accordance with Federal tax law.
    4. Calculate the taxes due using the highest individual marginal 
Federal income tax rates in effect on the reinvestment date. The rates 
used should correspond to the tax character of each component of the 
distributions (e.g., ordinary income rate for ordinary income 
distributions, short-term capital gain rate for short-term capital gain 
distributions, long-term capital gain rate for long-term capital gain 
distributions). Note that the required tax rates may vary over the 
measurement period. Disregard any potential tax liabilities other than 
Federal tax liabilities (e.g., state and local taxes); the effect of 
phaseouts of certain exemptions, deductions, and credits at various 
income levels; and the impact of the Federal alternative minimum tax.
    5. Include all recurring fees that are charged to all shareholder 
accounts. For any account fees that vary with the size of the account, 
assume an account size equal to the Fund's mean (or median) account 
size. Assume that no additional taxes or tax credits result from any 
redemption of shares required to pay such fees. Reflect, as 
appropriate, any recurring fees charged to shareholder accounts that 
are paid other than by redemption of the Fund's shares.
    6. Determine the ending value by assuming a complete redemption at 
the end of the 1-, 5-, or 10-year periods and the deduction of all 
nonrecurring charges deducted at the end of each period. If 
shareholders are assessed an exit charge, assume the maximum exit 
charge is deducted at the times, in the amounts, and under the terms 
disclosed in the prospectus.
    7. Determine the ending value by subtracting capital gains taxes 
resulting from the redemption and adding the tax benefit from capital 
losses resulting from the redemption.
    (a) Calculate the capital gain or loss upon redemption by 
subtracting the tax basis from the redemption proceeds (after deducting 
any nonrecurring charges as specified by Instruction 6).
    (b) The Fund should separately track the basis of shares acquired 
through the $1,000 initial investment and each subsequent purchase 
through reinvested distributions. In determining the basis for a 
reinvested distribution, include the distribution net of taxes assumed 
paid from the distribution, but not net of any purchase charges imposed 
upon reinvestment. Tax basis should be adjusted for any distributions 
representing returns of capital and any other tax basis adjustments 
that would apply to an individual taxpayer, as permitted by applicable 
Federal tax law.
    (c) The amount and character (e.g., short-term or long-term) of 
capital gain or loss upon redemption should be separately determined 
for shares acquired through the $1,000 initial investment and each 
subsequent purchase through reinvested distributions. The Fund should 
not assume that shares acquired through reinvestment of distributions 
have the same holding period as the initial $1,000 investment. The tax 
character should be determined by the length of the measurement period 
in the case of the initial $1,000 investment and the length of the 
period between reinvestment and the end of the measurement period in 
the case of reinvested distributions.
    (d) Calculate the capital gains taxes (or the benefit resulting 
from tax losses) using the highest Federal individual capital gains tax 
rate for gains of the appropriate character in effect on the redemption 
date and in accordance with Federal tax law applicable on the 
redemption date. For example, applicable Federal tax law should be used 
to determine whether and how gains and losses from the sale of shares 
with different holding periods should be netted, as well as the tax 
character (e.g., short-term or long-term) of any resulting gains or 
losses. Assume that a shareholder has sufficient capital gains of the 
same character from other investments to offset any capital losses from 
the redemption so that the taxpayer may deduct the capital losses in 
full.
    8. State the average annual total return (after taxes on 
distributions and redemption) quotation to the nearest hundredth of one 
percent.
    (4) Yield Quotation. Based on a 30-day (or one month) period ended 
on the date of the most recent balance sheet included in the 
registration statement, calculate the Fund's yield by dividing the net 
investment income per share earned during the period by the maximum 
offering price per share on the last day of the period, according to 
the following formula:

[GRAPHIC] [TIFF OMITTED] TP05NO20.005


Where:

a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period 
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the 
period.
Instructions
    1. To calculate interest earned on debt obligations for purposes of 
``a'' above:
    (a) Calculate the yield to maturity of each obligation held by the 
Fund based on the market value of the obligation (including actual 
accrued interest) at the close of business on the last business day of 
each month or, with respect to obligations purchased during the month, 
the purchase price (plus actual accrued interest). The maturity of an 
obligation with a call provision(s) is the next call date on which the 
obligation reasonably may be expected to be called, or if none, the 
maturity date.
    (b) Divide the yield to maturity by 360 and multiply the quotient 
by the market value of the obligation (including actual accrued 
interest) to determine the interest income on the obligation for each 
day of the subsequent month that the obligation is in the portfolio. 
Assume that each month has 30 days.
    (c) Total the interest earned on all debt obligations and all 
dividends accrued on all equity securities during the 30-day (or one 
month) period. Although the period for calculating interest earned is 
based on calendar

[[Page 70882]]

months, a 30-day yield may be calculated by aggregating the daily 
interest on the portfolio from portions of 2 months. In addition, a 
Fund may recalculate daily interest income on the portfolio more than 
once a month.
    (d) For a tax-exempt obligation issued without original issue 
discount and having a current market discount, use the coupon rate of 
interest in lieu of the yield to maturity. For a tax-exempt obligation 
with original issue discount in which the discount is based on the 
current market value and exceeds the then-remaining portion of original 
issue discount (market discount), base the yield to maturity on the 
imputed rate of the original issue discount calculation. For a tax-
exempt obligation with original issue discount, where the discount 
based on the current market value is less than the then-remaining 
portion of original issue discount (market premium), base the yield to 
maturity on the market value.
    2. For discount and premium on mortgage or other receivables-backed 
obligations that are expected to be subject to monthly payments of 
principal and interest (``paydowns''):
    (a) Account for gain or loss attributable to actual monthly 
paydowns as an increase or decrease to interest income during the 
period; and
    (b) The Fund may elect:
    (i) To amortize the discount and premium on the remaining 
securities, based on the cost of the securities, to the weighted 
average maturity date, if the information is available, or to the 
remaining term of the securities, if the weighted average maturity date 
is not available; or
    (ii) Not to amortize the discount or premium on the remaining 
securities.
    3. Solely for the purpose of calculating yield, recognize dividend 
income by accruing 1/360 of the stated dividend rate of the security 
each day that the security is in the portfolio.
    4. Do not use equalization accounting in calculating yield.
    5. Include expenses accrued under a plan adopted under rule 12b-1 
in the expenses accrued for the period. Reimbursement accrued under the 
plan may reduce the accrued expenses, but only to the extent the 
reimbursement does not exceed expenses accrued for the period.
    6. Include in the expenses accrued for the period all recurring 
fees that are charged to all shareholder accounts in proportion to the 
length of the base period. For any account fees that vary with the size 
of the account, assume an account size equal to the Fund's mean (or 
median) account size.
    7. If a broker-dealer or an affiliate of the broker-dealer (as 
defined in rule 1-02(b) of Regulation S-X [17 CFR 210.1-02(b)]) has, in 
connection with directing the Fund's brokerage transactions to the 
broker-dealer, provided, agreed to provide, paid for, or agreed to pay 
for, in whole or in part, services provided to the Fund (other than 
brokerage and research services as those terms are used in section 
28(e) of the Securities Exchange Act [15 U.S.C. 78bb(e)]), add to 
expenses accrued for the period an estimate of additional amounts that 
would have been accrued for the period if the Fund had paid for the 
services directly in an arm's length transaction.
    8. Undeclared earned income, calculated in accordance with 
generally accepted accounting principles, may be subtracted from the 
maximum offering price. Undeclared earned income is the net investment 
income that, at the end of the base period, has not been declared as a 
dividend, but is reasonably expected to be and is declared as a 
dividend shortly thereafter.
    9. Disclose the amount or specific rate of any nonrecurring account 
or sales charges.
    10. If, in connection with the sale of the Fund's shares, an exit 
charge payable in installments is imposed, the ``maximum public 
offering price'' includes the aggregate amount of the installments 
(``installment charge amount'').
    (5) Tax Equivalent Yield Quotation. Based on a 30-day (or one 
month) period ended on the date of the most recent balance sheet 
included in the registration statement, calculate the Fund's tax 
equivalent yield by dividing that portion of the Fund's yield (as 
calculated under paragraph (b)(2)) that is tax-exempt by 1 minus a 
stated income tax rate and adding the quotient to that portion, if any, 
of the Fund's yield that is not tax-exempt.
    (6) Non-Standardized Performance Quotation. A Fund may calculate 
performance using any other historical measure of performance (not 
subject to any prescribed method of computation) if the measurement 
reflects all elements of return.

Item 27. Financial Statements

    (a) Include, in a separate section following the responses to the 
preceding Items, the financial statements and schedules required by 
Regulation S-X. The specimen price- make-up sheet required by 
Instruction 4 to Item 23(c) may be provided as a continuation of the 
balance sheet specified by Regulation S-X.
Instructions
    1. The statements of any subsidiary that is not a majority-owned 
subsidiary required by Regulation S-X may be omitted from Part B and 
included in Part C.
    2. In addition to the requirements of rule 3-18 of Regulation S-X 
[17 CFR 210.3-18], any Fund registered under the Investment Company Act 
that has not previously had an effective registration statement under 
the Securities Act must include in its initial registration statement 
under the Securities Act any additional financial statements and 
condensed financial information (which need not be audited) necessary 
to make the financial statements and condensed financial information 
included in the registration statement current as of a date within 90 
days prior to the date of filing.

Item 27A. Annual and Semi-Annual Shareholder Report

    (a) Annual and Semi-Annual Reports. Every annual shareholder report 
required by rule 30e-1 must contain the information required by 
paragraphs (b) through (i) of this Item and may contain the information 
permitted by paragraph (j) of this Item. Every semi-annual shareholder 
report required by rule 30e-1 must contain the information required by 
paragraphs (b), (c), (e), (f), (h), and (i) of this Item and may 
contain other information permitted or required in annual shareholder 
reports.
Instructions
    1. For annual shareholder reports, disclose the information 
required or permitted by paragraphs (b) through (j) of this Item in the 
same order as these items appear below. In an annual shareholder report 
that appears on a website or is otherwise provided electronically, 
organize the information in a manner that gives each item similar 
prominence as that provided by the order prescribed in this 
Instruction.
    2. For semi-annual shareholder reports, disclose the information 
that must appear in the report pursuant to paragraph (a) of this Item 
in the same order as these items appear below. Any other information 
permitted in annual shareholder reports, which the Fund chooses to 
include in its semi-annual shareholder report pursuant to this Item, 
must also be included in the same order as these items appear below. 
For example, if a Fund chooses to include the information described in 
paragraph (g) in its semi-annual shareholder report, the information in 
the Fund's semi-annual report must appear in the following order: 
Paragraphs (b), (c), (e),

[[Page 70883]]

(f), (g), (h), and (i). In a semi-annual shareholder report that 
appears on a website or electronically, organize the information in a 
manner that gives each item similar prominence as that provided by the 
order prescribed in this Instruction.
    3. Do not include information in an annual or semi-annual 
shareholder report other than disclosure that Item 27A and its 
Instructions require or permit in annual or semi-annual shareholder 
reports, as applicable, or as provided by rule 8b-20 under the 
Investment Company Act [17 CFR 270.8b-20].
    4. Prepare a separate annual or semi-annual shareholder report for 
each Series of a Fund.
    5. A Fund may not incorporate by reference any information into its 
annual or semi-annual shareholder report.
    6. Use plain English in an annual or semi-annual shareholder 
report, taking into consideration Fund shareholders' level of financial 
experience. Include white space and use other design features to make 
the annual or semi-annual shareholder report easy to read. The annual 
or semi-annual shareholder report should be concise and direct. 
Specifically: (i) Use short sentences and paragraphs; (ii) use 
definite, concrete, everyday words; (iii) use active voice; (iv) avoid 
legal jargon or highly technical business terms unless clearly 
explained; (v) avoid multiple negatives; (vi) use ``you,'' ``we,'' etc. 
to speak directly to shareholders; and (vii) use descriptive headers 
and sub-headers. Do not use vague or imprecise ``boilerplate.''
    7. If a required disclosure is inapplicable, a Fund may omit the 
disclosure from an annual or semi-annual shareholder report. A Fund may 
modify a required legend or narrative information if the modified 
language contains comparable information.
    8. Funds should use design techniques that promote effective 
communication. Funds are encouraged to use, as appropriate, question-
and-answer formats, charts, graphs, tables, bullet lists, and other 
graphics or text features to respond to the required disclosures.
    For an annual or semi-annual shareholder report that appears on a 
website or is otherwise provided electronically, funds are encouraged 
to use online tools (for example, tools that populate discrete sets of 
information based on investor selections--e.g., Class-specific 
information, performance information over different time horizons, or 
the dollar value used to illustrate the Fund's expenses or to populate 
the performance line graph, as applicable). The default presentation 
must use the value that the applicable form requirement prescribes. 
Funds also may include: (i) A means of facilitating electronic access 
to video or audio messages, or other forms of information (e.g., 
hyperlink, website address, Quick Response Code (``QR code''), or other 
equivalent methods or technologies); (ii) mouse-over windows; (iii) 
pop-up boxes; (iv) chat functionality; (v) expense calculators; or (vi) 
other forms of electronic media, communications, or tools designed to 
enhance an investor's understanding of material in the annual or semi-
annual shareholder report. Any information that is not included in the 
annual or semi-annual shareholder report filed on Form N-CSR shall have 
the same status, under the Federal securities laws, as any other 
website or electronic content that the Fund produces or disseminates.
    9. In an annual or semi-annual shareholder report posted on a 
website or otherwise provided electronically, Funds must provide a 
means of facilitating access to any information that is referenced in 
the annual or semi-annual shareholder report if the information is 
available online, including, for example, hyperlinks to the Fund's 
prospectus and financial statements. In an annual or semi-annual 
shareholder report that is delivered in paper format, Funds may include 
website addresses, QR codes, or other means of facilitating access to 
such information. Funds must provide a link specific enough to lead 
investors directly to the particular information, rather than to the 
home page or section of the fund's website other than on which the 
information is posted. The link may be to a central site central site 
with prominent links to the referenced information.
    10. Explanatory or supplemental information included in an annual 
or semi-annual shareholder report under Instruction 8 or 9 may not, 
because of the nature, quantity, or manner of presentation, obscure or 
impede understanding of the information that must be included. When 
using interactive graphics or tools, Funds may include instructions on 
their use and interpretation.
    11. Unless otherwise indicated, the reporting period for an annual 
shareholder report is the Fund's most recent fiscal year, and the 
reporting period for a semi-annual shareholder report is the Fund's 
most recent fiscal half-year.
    12. The Fund's annual or semi-annual shareholder report must be 
given greater prominence than other materials that accompany the 
report, with the exception of other shareholder reports, summary 
prospectuses or statutory prospectuses (both as defined in rule 498 
under the Securities Act [17 CFR 230.498]), or a notice of internet 
availability of proxy materials under rule 14a-6 under the Securities 
Exchange Act [17 CFR 240.14a-6].
    13. In an annual or semi-annual shareholder report posted on a 
website or otherwise provided electronically, Funds may satisfy 
legibility requirements applicable to printed documents by presenting 
all required information in a format that promotes effective 
communication as described in Instruction 8. The body of every printed 
annual or semi-annual shareholder report and other tabular data 
included therein shall comply with the applicable legibility of 
prospectus requirements set forth in rule 420 under the Securities Act 
of 1933.
    (b) Cover Page or Beginning of Annual or Semi-Annual Shareholder 
Report. Include on the cover page or at the beginning of the annual or 
semi-annual shareholder report:
    (1) The Fund's name and the Class or Classes, if any, to which the 
annual or semi-annual shareholder report relates.
    (2) The exchange ticker symbol of the Fund's shares or, if the 
annual or semi-annual shareholder report relates to one or more Classes 
of the Fund's shares, adjacent to each such Class, its exchange ticker 
symbol. If the Fund is an Exchange-Traded Fund, also identify the 
principal U.S. market or markets on which the Fund's shares are traded.
    (3) A statement identifying the document as an ``annual shareholder 
report'' or a ``semi-annual shareholder report,'' as applicable.
    (4) The following statement:
    This [annual or semi-annual] shareholder report contains important 
information about [the Fund] for the period of [beginning date] to [end 
date] [as well as certain changes to the Fund]. You can find additional 
information about the Fund at [______]. You can also request this 
information by contacting us at [______].
Instructions
    1. A Fund may include graphics, logos, and other design or text 
features on the cover page or at the beginning of its annual or semi-
annual shareholder report to help shareholders identify the materials 
as the Fund's annual or semi-annual shareholder report.
    2. In the statement required under paragraph (b)(4), provide the 
toll-free telephone number and, as applicable, email address that 
shareholders can use to request additional information about

[[Page 70884]]

the Fund. Provide a website address where information about the Fund is 
available. The website address must be specific enough to lead 
shareholders directly to the materials that are required to be 
accessible under rule 30e-1, rather than to the home page or a section 
of the website other than on which the materials are posted. The 
website may be a central site with prominent links to the materials 
that must be accessible under rule 30e-1. In addition to the website 
address, a Fund may include other ways an investor can find or request 
additional information about the Fund (e.g., QR code, mobile 
application). A Fund that discloses material fund changes under 
paragraph (g) of this Item 27A must include the bracketed language in 
the required statement referring to certain changes to the Fund.
    (c) Fund Expenses.
    In a table, provide the expenses of an ongoing $10,000 investment 
in the Fund during the reporting period. The table must show: (i) The 
beginning value of the account; (ii) total return during the period, 
before deducting expenses; (iii) expenses in dollars paid during the 
period; (iv) the ending value of the account based on net asset value 
return; (v) for ETFs only, the ending value of the account based on 
market value return; and (vi) expenses as a percent of an investor's 
investment in the Fund (i.e. expense ratio).
[GRAPHIC] [TIFF OMITTED] TP05NO20.006

Instructions
    1. General.
    (a) Round all percentages in the table to the nearest hundredth of 
one percent and round all dollar figures in the table to the nearest 
dollar.
    (b) Provide the amounts in each of the columns as a mathematical 
expression, as appropriate (i.e., include +,-and = symbols). Costs paid 
during the period must be expressed as a negative amount. Total return, 
if negative during the period, must be expressed as a negative amount.
    (c) Use text and/or table features to make the ``costs paid'' and 
``costs paid as a percentage of your investment'' columns more 
noticeable and more prominent than the other columns of the table 
through, for example: Graphics, larger font size, different border 
width or column shading, or different colors or font styles.
    (d) If the Fund is a Feeder Fund, reflect the aggregate expenses of 
the Feeder Fund and the Master Fund. In a footnote to the expense 
table, state that the expense table reflects the expenses of both the 
Feeder and Master Funds.
    (e) If the report covers more than one Class of a Multiple Class 
Fund, provide a separate expense table, or a separate line item in the 
expense table, for each Class.
    (f) In a footnote to the ``Total return before costs paid'' column, 
the Fund must qualitatively describe, in plain English under rule 
421(d) under the Securities Act, other costs included in total return, 
if material to the fund. For example, if applicable, the Fund must 
explain that the total return includes fund investment transaction 
costs, securities lending costs, or acquired fund fees and expenses, 
which materially reduced total return.
    (g) In a footnote to the ``Costs paid'' and the ``Costs paid as a 
percentage of your investment'' columns, the Fund must briefly explain, 
in plain English under rule 421(d) under the Securities Act, that the 
table does not reflect shareholder transaction costs associated with 
purchasing or selling Fund shares.
    (h) If the Fund is an Exchange-Traded Fund:
    (i) In addition to the ``Ending account value'' column (which, for 
an Exchange-Traded Fund, must be titled ``Ending account value (based 
on net asset value return)''), also provide the ``Ending account value 
(based on market value return)'' column in the expense table.
    (ii) Modify the narrative explanation to state that investors may 
pay brokerage commissions on their purchases and sales of Exchange-
Traded Fund shares, which are not reflected in the expense table; and
    (iii) Exclude any fees charged for the purchase and redemption of 
the Fund's creation units.
    (i) If the Fund's annual or semi-annual shareholder report covers a 
period of time that is less than the full reporting period of the 
annual or semi-annual report, the Fund must include a footnote to the 
table to briefly explain

[[Page 70885]]

that expenses for the full reporting period would be higher.
    (j) If the disclosed expenses include extraordinary expenses, the 
Fund may include a brief footnote to the ``Costs paid as a percentage 
of your investment'' column disclosing what actual costs would have 
been if extraordinary expenses were not included. ``Extraordinary 
expenses'' refers to expenses that are distinguished by their unusual 
nature and by the infrequency of their occurrence. Unusual nature means 
the expense has a high degree of abnormality and is clearly unrelated 
to, or only incidentally related to, the ordinary and typical 
activities of the Fund, taking into account the environment in which 
the Fund operates. Infrequency of occurrence means the expense is not 
reasonably expected to recur in the foreseeable future, taking into 
consideration the environment in which the Fund operates. The 
environment of a Fund includes such factors as the characteristics of 
the industry or industries in which it operates, the geographical 
location of its operations, and the nature and extent of government 
regulation.
    2. Computation.
    (a) To determine ``Costs paid,'' 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.
    (b) Assume reinvestment of all dividends and distributions.
    (c) In the annual shareholder report, disclose the expense ratio in 
the ``Costs paid as a percentage of your investment'' column as it 
appears in the Fund's most recent audited financial statements or 
financial highlights. In the semi-annual shareholder report, the Fund's 
expense ratio in the ``Costs paid as a percentage of your investment 
column'' should be calculated in the manner required by Instruction 
4(b) to Item 13(a) using the expenses for the Fund's most recent fiscal 
half-year. Express the expense ratio on an annualized basis.
    (d) The figure reflected in the ``Total return before costs paid'' 
column should equal the figure in the ``Ending account value (based on 
net asset value return)'' column less the figure in the ``Beginning 
account value'' column less the figure in the ``Costs paid'' column.
    (e) To calculate the Fund's ``Ending account value (based on net 
asset value return),'' multiply $10,000 by the Fund's net asset value 
return. In the annual shareholder report, use the Fund's net asset 
value return as it appears in the Fund's most recent audited financial 
statements or financial highlights. In the semi-annual report, the 
Fund's net asset value return should be calculated in the manner 
required by Instruction 3 to Item 13(a).
    (f) For Exchange-Traded Funds only, calculate the Fund's ``Ending 
account value (based on market value return)'' by multiplying $10,000 
by the Fund's market value return. In the semi-annual report, the 
Fund's market value return should be calculated in the manner required 
by Instruction 3 to Item 13(a). In the annual shareholder report, use 
the Fund's market value return as it appears in the Fund's most recent 
audited financial statements or financial highlights.
    (d) Management's Discussion of Fund Performance. Disclose the 
following information unless the Fund is a Money Market Fund:
    (1) Briefly summarize the key factors that materially affected the 
Fund's performance during the reporting period, including the relevant 
market conditions and the investment strategies and techniques used by 
the Fund's investment adviser.
Instruction
    1. As appropriate, use graphics or text features, such as bullet 
lists or tables, to present the key factors. Do not include a lengthy, 
generic, or overly broad discussion of the factors that generally 
affected market performance during the reporting period.
    (2) Line graph and table.
    (i) Provide a line graph comparing the initial and subsequent 
account values at the end of each of the most recently completed 10 
fiscal years of the Fund (or for the life of the Fund, if shorter), but 
only for periods subsequent to the effective date of the Fund's 
registration statement. Assume a $10,000 initial investment at the 
beginning of the first fiscal year in an appropriate broad-based 
securities market index for the same period.
    (ii) In a table placed within or next to the graph, provide the 
Fund's average annual total returns for the 1-, 5-, and 10-year periods 
as of the end of the reporting period (or for the life of the Fund, if 
shorter), but only for periods subsequent to the effective date of the 
Fund's registration statement. Separately provide the average annual 
total returns with and without sales charges, as applicable. Also 
provide the average annual total returns of an appropriate broad-based 
securities market index for the same periods.
    (iii) Include a statement accompanying the graph and table to the 
effect that:
    (A) The Fund's past performance is not a good predictor of the 
Fund's future performance. Use text features to make the statement 
noticeable and prominent through, for example: Graphics, larger font 
size, or different colors or font styles.
    (B) The graph and table do not reflect the deduction of taxes that 
a shareholder would pay on fund distributions or redemption of fund 
shares.
Instructions
    1. Line Graph Computation.
    (a) Assume that the initial investment was made at the offering 
price last calculated on the business day before the first day of the 
first fiscal year.
    (b) Base subsequent account values on the net asset value of the 
Fund last calculated on the last business day of the first and each 
subsequent fiscal year.
    (c) Calculate the final account value by assuming the account was 
closed and redemption was at the price last calculated on the last 
business day of the reporting period.
    (d) Base the line graph on the Fund's required minimum initial 
investment if that amount exceeds $10,000.
    2. Sales Load. Reflect any purchase charges (or any other fees 
charged at the time of purchasing shares or opening an account) by 
beginning the line graph at the amount that actually would be invested 
(i.e., assume that the maximum purchase charge, and other charges 
deducted from payments, is deducted from the initial $10,000 
investment). For a Fund whose shares are subject to a contingent exit 
charge, assume the deduction of the maximum exit charge (or other 
charges) that would apply for a complete redemption that received the 
price last calculated on the last business day of the reporting period. 
For any other exit charge, assume that the deduction is in the 
amount(s) and at the time(s) that the exit charge actually would have 
been deducted.
    3. Dividends and Distributions. Assume reinvestment of all of the 
Fund's dividends and distributions on the reinvestment dates during the 
period, and reflect any purchase charge imposed upon reinvestment of 
dividends or distributions or both.
    4. Account Fees. Reflect recurring fees that are charged to all 
accounts.
    (a) For any account fees that vary with the size of the account, 
assume a $10,000 account size.
    (b) Reflect, as appropriate, any recurring fees charged to 
shareholder accounts that are paid other than by redemption of the 
Fund's shares.
    (c) Reflect an annual account fee that applies to more than one 
Fund by

[[Page 70886]]

allocating the fee in the following manner: Divide the total amount of 
account fees collected during the year by the Funds' total average net 
assets, multiply the resulting percentage by the average account value 
for each Fund and reduce the value of each hypothetical account at the 
end of each fiscal year during which the fee was charged.
    5. Table Computation. Compute average annual total returns in 
accordance with Item 26(b)(1). To calculate average annual total 
returns without sales charges, do not deduct sales charges, as 
applicable, as otherwise described in the instructions to Item 
26(b)(1). For the Fund's 1-year annual total return without sales 
charges in an annual shareholder report, use the 1-year total return in 
the Fund's most recent audited financial highlights.
    6. Appropriate Broad-Based Securities Market Index. For purposes of 
this Item, an ``appropriate broad-based securities market index'' is 
one that is administered by an organization that is not an affiliated 
person of the Fund, its investment adviser, or principal underwriter, 
unless the index is widely recognized and used. A ``broad-based index'' 
is an index that represents the overall applicable domestic or 
international equity or debt markets, as appropriate. Adjust the index 
to reflect the reinvestment of dividends on securities in the index, 
but do not reflect the expenses of the Fund.
    7. Additional Indexes. A Fund is encouraged to compare its 
performance not only to the required broad-based index, but also to 
other more narrowly based indexes that reflect the market sectors in 
which the Fund invests. A Fund also may compare its performance to an 
additional broad-based index, or to a non-securities index (e.g., the 
Consumer Price Index), so long as the comparison is not misleading.
    8. Change in Index. If the Fund uses an index that is different 
from the one used for the immediately preceding reporting period, 
explain the reason(s) for the change and compare the Fund's annual 
change in the value of an investment in the hypothetical account with 
the new and former indexes.
    9. Interim Periods. The line graph may compare the ending values of 
interim periods (e.g., monthly or quarterly ending values), so long as 
those periods are after the effective date of the Fund's registration 
statement.
    10. Scale. The axis of the graph measuring dollar amounts may use 
either a linear or a logarithmic scale.
    11. New Funds. A New Fund (as defined in Instruction 7 to Item 8A) 
is not required to include the information specified by this Item in 
its annual shareholder report, unless Form N-1A (or the Fund's annual 
Form N-CSR report) contains audited financial statements covering a 
period of at least 6 months.
    12. Change in Investment Adviser. If the Fund has not had the same 
investment adviser for the previous 10 fiscal years, the Fund may begin 
the line graph on the date that the current adviser began to provide 
advisory services to the Fund so long as:
    (a) Neither the current adviser nor any affiliate is or has been in 
``control'' of the previous adviser under section 2(a) (9) [15 U.S.C. 
80a-2(a)(9)];
    (b) The current adviser employs no officer(s) of the previous 
adviser or employees of the previous adviser who were responsible for 
providing investment advisory or portfolio management services to the 
Fund; and
    (c) The graph is accompanied by a statement explaining that 
previous periods during which the Fund was advised by another 
investment adviser are not shown.
    13. Multiple Class Funds.
    (a) Provide information about account values in the line graph 
under Item 27A(d)(2)(i) for at least one Class. The Fund can select 
which Class to include (e.g., the oldest Class, the Class with the 
greatest net assets) if the Fund:
    (i) Selects the Class with 10 or more years of annual returns if 
other Classes have fewer than 10 years of annual returns;
    (ii) Selects the Class with the longest period of annual returns 
when the Classes all have fewer than 10 years of annual returns; and
    (iii) If the Fund provides account values in the line graph for a 
Class that is different from the Class selected for the most 
immediately preceding annual shareholder report, briefly explain in a 
footnote to the line graph the reasons for selecting a different Class.
    (b) Provide information about each Class's average annual total 
returns in the table under Item 27A(d)(2)(ii).
    14. Material Changes. If a material change to the Fund has occurred 
during the period covered by the line graph and table, such as a change 
in investment adviser or a change to the Fund's investment strategies, 
the Fund may include a brief legend or footnote to describe the 
relevant change and when it occurred.
    15. Availability of Updated Performance Information. If the Fund 
provides updated performance information on its website or through 
other widely accessible mechanisms, direct shareholders to where they 
can find this information.
    (3) If the Fund has a policy or practice of maintaining a specified 
level of distributions to shareholders, disclose if the Fund was unable 
to meet the specified level of distribution during the reporting 
period. Also discuss the extent to which the Fund's distribution policy 
resulted in distributions of capital.
    (4) For an Exchange-Traded Fund, provide a table showing the number 
of days the Market Price of the Fund shares was greater than the Fund's 
net asset value and the number of days it was less than the Fund's net 
asset value (i.e., premium or discount) for the most recently completed 
calendar year, and the most recently completed calendar quarters since 
that year (or the life of the Fund, if shorter). The Fund may omit the 
information required by this paragraph if it satisfies the requirements 
of paragraphs (c)(1)(ii)-(iv) and (c)(1)(vi) of Rule 6c-11 [17 CFR 
270.6c-11(c)(1)(ii)-(iv) and (c)(1)(vi)] under the Investment Company 
Act.
Instructions
    1. Provide the information in tabular form.
    2. Express the information as a percentage of the net asset value 
of the Exchange-Traded Fund, using separate columns for the number of 
days the Market Price was greater than the Fund's net asset value and 
the number of days it was less than the Fund's net asset value. Round 
all percentages to the nearest hundredth of one percent.
    3. Adjacent to the table, provide a brief explanation that: 
Shareholders may pay more than net asset value when they buy Fund 
shares and receive less than net asset value when they sell those 
shares, because shares are bought and sold at current market prices.
    4. Include a statement that the data presented represents past 
performance and cannot be used to predict future results.
    (e) Fund Statistics. Disclose the Fund's net assets, total number 
of portfolio holdings, and portfolio turnover rate as of the end of the 
reporting period. A Fund may provide additional statistics that the 
Fund believes would help shareholders better understand the Fund's 
activities and operations during the reporting period (e.g., tracking 
error, maturity, duration, average credit quality, or yield).
Instructions
    1. If the Fund provides a statistic that is otherwise described in 
this form, it must follow any associated instructions describing the 
calculation method for the relevant statistic.

[[Page 70887]]

    2. As appropriate, use graphics or text features, such as bullet 
lists or tables, to present the fund statistics.
    3. If the Fund provides a statistic in a shareholder report that is 
otherwise included in, or could be derived from, the Fund's financial 
statements or financial highlights, the fund must use or derive such 
statistic from the Fund's most recent financial statements or financial 
highlights.
    4. A Fund may briefly describe the significance or limitations of 
any disclosed statistics in a parenthetical, footnote, or similar 
presentation.
    5. A Fund may include additional statistics only if they are 
reasonably related to the Fund's investment strategy.
    (f) Graphical Representation of Holdings. One or more tables, 
charts, or graphs depicting the portfolio holdings of the Fund, as of 
the end of the reporting period, by reasonably identifiable categories 
(e.g., type of security, industry sector, geographic regions, credit 
quality, or maturity) showing the percentage of (i) net asset value, 
(ii) total investments, (iii) net exposure, or (iv) total exposure 
attributable to each. The categories and the basis of the presentation 
should be disclosed in a manner reasonably designed to depict clearly 
the types of investments made by the Fund, given its investment 
objectives. A fund that uses ``net exposure'' or ``total exposure'' as 
a basis for representing its holdings may also include a brief 
explanation of this presentation. If the Fund depicts portfolio 
holdings according to the credit quality, it should include a brief 
description of how the credit quality of the holdings were determined, 
and if credit ratings, as defined in section 3(a)(60) of the Securities 
Exchange Act [15 U.S.C. 78(c)(a)(60)], assigned by a credit rating 
agency, as defined in section 3(a)(61) of the Securities Exchange Act 
[15 U.S.C. 78(c)(a)(61)], are used, concisely explain how they were 
identified and selected. This description should be included near, or 
as part of, the graphical representation.
    (g) Material Fund Changes. Briefly describe any material change, 
with respect to any of the following items, that has occurred since the 
beginning of the reporting period or that the Fund plans to make in 
connection with updating its prospectus under section 10(a)(3) of the 
Securities Act for the current fiscal year. The Fund also may describe 
other material changes that it would like to disclose to its 
shareholders.
    (1) The Fund's name (as described in Item 1(a)(1));
    (2) The Fund's investment objectives or goals (as described in Item 
2);
    (3) With respect to material increases, the Fund's ongoing annual 
fees, transaction fees, or maximum account fee (as described in Item 
3);
    (4) The Fund's principal investment strategies (as described in 
Item 4(a));
    (5) The principal risks of investing in the Fund (as described in 
Item 4(b)(1));
    (6) The Fund's investment adviser(s) (as described in Item 5(a)); 
and
    (7) The Fund's portfolio manager(s) (as described in Item 5(b)).
Instructions
    1. Provide a concise description of each material change that the 
fund describes as specified in this Item 27A(g). Provide enough detail 
to allow shareholders to understand each change and how each change may 
affect shareholders.
    2. Include a legend to the effect of the following: ``This is a 
summary of certain changes [and planned changes] to the Fund since 
[date]. For more complete information, you may review the Fund's next 
prospectus, which we expect to be available by [date] at [____] or upon 
request at [____].'' Provide the toll-free telephone number and, as 
applicable, email address that shareholders can use to request copies 
of the Fund's prospectus. If the updated prospectus will be made 
available on a website, provide the address of the central site where a 
link to the prospectus will be available.
    3. A Fund is not required to disclose a material change that 
occurred during the reporting period if the Fund already disclosed this 
change in its last annual shareholder report because, for example, the 
change occurred before the last annual shareholder report was 
transmitted to shareholders or the Fund planned to make the change in 
connection with updating its prospectus under section 10(a)(3) of the 
Securities Act at that time.
    (h) Changes in and Disagreements with Accountants. If the Fund is 
required to disclose on Form N-CSR the information that Item 304(a)(1) 
of Regulation S-K [17 CFR 229.304] requires, provide:
    (1) A statement of whether the former accountant resigned, declined 
to stand for re-election, or was dismissed and the date thereof; and
    (2) A brief, plain English description of disagreements(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.
    (i) Statement Regarding Liquidity Risk Management Program. If the 
board of directors reviewed the Fund's liquidity risk management 
program pursuant to rule 22e-4(b)(2)(iii) of the Act [17 CFR 270.22e-
4(b)(2)(iii)] during the Fund's most recent fiscal half-year, briefly 
summarize the: (i) Key factors or market events that materially 
affected the fund's liquidity risk during the reporting period; (ii) 
key features of the Fund's liquidity risk management program; and (iii) 
effectiveness of the Fund's liquidity risk management program over the 
past year.
Instructions
    1. The disclosure responsive to this item should be tailored to the 
fund rather than rely on generic, standard disclosures.
    2. If the board reviews the liquidity risk management program more 
frequently than annually, a fund may choose to include the discussion 
of the program's operation and effectiveness over the past year in one 
of either the fund's annual or semi-annual reports, but does not need 
to include it in both reports.
    (j) Availability of Additional Information. Provide a brief, plain 
English statement that certain additional Fund information is available 
on the Fund's website. Include plain English references to, as 
applicable, the fund's prospectus, financial information, holdings, and 
proxy voting information. A Fund may also refer to other information 
available on the Fund's website if it reasonably believes that 
shareholders would likely view the information as important.
Instructions
    1. Provide means of facilitating shareholders' access to the 
additional information in accordance with Instruction 9 to Item 27A(a).
    2. If the Fund provides prominent links to the additional 
information it refers to under this Item 27A(j) on the same central 
site the Fund discloses under Item 27A(b), the Fund may state that 
materials are available at the website address included at the 
beginning of its annual or semi-annual shareholder report. The Fund 
would not need to provide other means of facilitating shareholders' 
access to the relevant additional information under these 
circumstances.
    (k) Householding. A Fund may include disclosure required under rule 
30e-1(e)(3) [17 CFR 270.30e-1(e)(3)] or rule 498B(c)(3) under the 
Securities Act [17 CFR 230.498B(c)(3)] to explain how shareholders who 
have consented to receive a single annual or semi-annual shareholder 
report or notice of material

[[Page 70888]]

changes at a shared address may revoke this consent.

Part C--Other Information

Item 28. Exhibits

    Subject to General Instruction D regarding incorporation by 
reference and rule 483 under the Securities Act [17 CFR 230.483], file 
the exhibits listed below as part of the registration statement. Letter 
or number the exhibits in the sequence indicated and file copies rather 
than originals, unless otherwise required by rule 483. Reflect any 
exhibit incorporated by reference in the list below and identify the 
previously filed document containing the incorporated material.
    (a) Articles of Incorporation. The Fund's current articles of 
incorporation, charter, declaration of trust or corresponding 
instruments and any related amendment.
    (b) By-laws. The Fund's current by-laws or corresponding 
instruments and any related amendment.
    (c) Instruments Defining Rights of Security Holders. Instruments 
defining the rights of holders of the securities being registered, 
including the relevant portion of the Fund's articles of incorporation 
or by-laws.
    (d) Investment Advisory Contracts. Investment advisory contracts 
relating to the management of the Fund's assets.
    (e) Underwriting Contracts. Underwriting or distribution contracts 
between the Fund and a principal underwriter, and agreements between 
principal underwriters and dealers.
    (f) Bonus or Profit Sharing Contracts. Bonus, profit sharing, 
pension, or similar contracts or arrangements in whole or in part for 
the benefit of the Fund's directors or officers in their official 
capacity. Describe in detail any plan not included in a formal 
document.
    (g) Custodian Agreements. Custodian agreements and depository 
contracts under section 17(f) [15 U.S.C. 80a-17(f)] concerning the 
Fund's securities and similar investments, including the schedule of 
remuneration.
    (h) Other Material Contracts. Other material contracts not made in 
the ordinary course of business to be performed in whole or in part on 
or after the filing date of the registration statement.
    (i) Legal Opinion. An opinion and consent of counsel regarding the 
legality of the securities being registered, stating whether the 
securities will, when sold, be legally issued, fully paid, and 
nonassessable.
    (j) Other Opinions. Any other opinions, appraisals, or rulings, and 
related consents relied on in preparing the registration statement and 
required by section 7 of the Securities Act [15 U.S.C. 77g].
    (k) Omitted Financial Statements. Financial statements omitted from 
Item 27.
    (l) Initial Capital Agreements. Any agreements or understandings 
made in consideration for providing the initial capital between or 
among the Fund, the underwriter, adviser, promoter or initial 
shareholders and written assurances from promoters or initial 
shareholders that purchases were made for investment purposes and not 
with the intention of redeeming or reselling.
    (m) Rule 12b-1 Plan. Any plan entered into by the Fund under rule 
12b-1 and any agreements with any person relating to the plan's 
implementation.
    (n) Rule 18f-3 Plan. Any plan entered into by the Fund under rule 
18f-3, any agreement with any person relating to the plan's 
implementation, and any amendment to the plan or an agreement.
    (o) Reserved.
    (p) Codes of Ethics. Any codes of ethics adopted under rule 17j-1 
of the Investment Company Act [17 CFR 270.17j-1] and currently 
applicable to the Fund (i.e., the codes of the Fund and its investment 
advisers and principal underwriters). If there are no codes of ethics 
applicable to the Fund, state the reason (e.g., that the Fund is a 
Money Market Fund).
Instructions
    1. A Fund that is a Feeder Fund also must file a copy of all codes 
of ethics applicable to the Master Fund.
    2. Schedules (or similar attachments) to the exhibits required by 
this Item are not required to be filed provided that they do not 
contain information material to an investment or voting decision and 
that information is not otherwise disclosed in the exhibit or the 
disclosure document. Each exhibit filed must contain a list briefly 
identifying the contents of all omitted schedules. Registrants need not 
prepare a separate list of omitted information if such information is 
already included within the exhibit in a manner that conveys the 
subject matter of the omitted schedules and attachments. In addition, 
the registrant must provide a copy of any omitted schedule to the 
Commission or its staff upon request.
    3. The registrant may redact information from exhibits required to 
be filed by this Item if disclosure of such information would 
constitute a clearly unwarranted invasion of personal privacy (e.g., 
disclosure of bank account numbers, social security numbers, home 
addresses and similar information).
    4. The registrant may redact provisions or terms of exhibits 
required to be filed by paragraph (h) of this Item if those provisions 
or terms are both (1) not material and (2) would likely cause 
competitive harm to the registrant if publicly disclosed. If it does 
so, the registrant should mark the exhibit index to indicate that 
portions of the exhibit or exhibits have been omitted and include a 
prominent statement on the first page of the redacted exhibit that 
certain identified information has been excluded from the exhibit 
because it is both (1) not material and (2) would likely cause 
competitive harm to the registrant if publicly disclosed. The 
registrant also must indicate by brackets where the information is 
omitted from the filed version of the exhibit.
    If requested by the Commission or its staff, the registrant must 
promptly provide an unredacted copy of the exhibit on a supplemental 
basis. The Commission staff also may request the registrant to provide 
its materiality and competitive harm analyses on a supplemental basis. 
Upon evaluation of the registrant's supplemental materials, the 
Commission or its staff may request the registrant to amend its filing 
to include in the exhibit any previously redacted information that is 
not adequately supported by the registrant's materiality and 
competitive harm analyses. The registrant may request confidential 
treatment of the supplemental material pursuant to Rule 83 (Sec.  
200.83 of this chapter) while it is in the possession of the Commission 
or its staff. After completing its review of the supplemental 
information, the Commission or its staff will return or destroy it at 
the request of the registrant, if the registrant complies with the 
procedures outlined in Rules 418 (Sec.  230.418 of this chapter).
    5. Each exhibit identified in the exhibit index (other than an 
exhibit filed in eXtensible Business Reporting Language) must include 
an active link to an exhibit that is filed with the registration 
statement or, if the exhibit is incorporated by reference, an active 
hyperlink to the exhibit separately filed on EDGAR. If the registration 
statement is amended, each amendment must include active hyperlinks to 
the exhibits required with the amendment.

Item 29. Persons Controlled by or Under Common Control With the Fund

    Provide a list or diagram of all persons directly or indirectly 
controlled by or under common control with the Fund. For any person 
controlled by another person, disclose the percentage of voting 
securities owned by the immediately controlling person or other

[[Page 70889]]

basis of that person's control. For each company, also provide the 
state or other sovereign power under the laws of which the company is 
organized.
Instructions
    1. Include the Fund in the list or diagram and show the 
relationship of each company to the Fund and to the other companies 
named, using cross-references if a company is controlled through direct 
ownership of its securities by two or more persons.
    2. Indicate with appropriate symbols subsidiaries that file 
separate financial statements, subsidiaries included in consolidated 
financial statements, or unconsolidated subsidiaries included in group 
financial statements. Indicate for other subsidiaries why financial 
statements are not filed.

Item 30. Indemnification

    State the general effect of any contract, arrangements or statute 
under which any director, officer, underwriter or affiliated person of 
the Fund is insured or indemnified against any liability incurred in 
their official capacity, other than insurance provided by any director, 
officer, affiliated person, or underwriter for their own protection.

Item 31. Business and Other Connections of Investment Adviser

    Describe any other business, profession, vocation or employment of 
a substantial nature that each investment adviser, and each director, 
officer or partner of the adviser, is or has been engaged within the 
last two fiscal years for his or her own account or in the capacity of 
director, officer, employee, partner, or trustee.
Instructions
    1. Disclose the name and principal business address of any company 
for which a person listed above serves in the capacity of director, 
officer, employee, partner, or trustee, and the nature of the 
relationship.
    2. The names of investment advisory clients need not be given in 
answering this Item.

Item 32. Principal Underwriters

    (a) State the name of each investment company (other than the Fund) 
for which each principal underwriter currently distributing the Fund's 
securities also acts as a principal underwriter, depositor, or 
investment adviser.
    (b) Provide the information required by the following table for 
each director, officer, or partner of each principal underwriter named 
in the response to Item 25:

------------------------------------------------------------------------
               (1)                        (2)                 (3)
------------------------------------------------------------------------
Name and Principal Business       Positions and       Positions and
 Address.                          Offices with        Offices with
                                   Underwriter.        Fund.
------------------------------------------------------------------------

    (c) Provide the information required by the following table for all 
commissions and other compensation received, directly or indirectly, 
from the Fund during the last fiscal year by each principal underwriter 
who is not an affiliated person of the Fund or any affiliated person of 
an affiliated person:

----------------------------------------------------------------------------------------------------------------
               (1)                        (2)                 (3)                 (4)                 (5)
----------------------------------------------------------------------------------------------------------------
Name of Principal Underwriter...  Net Underwriting    Compensation on     Brokerage           Other
                                   Discounts and       Redemptions and     Commissions.        Compensation.
                                   Commissions.        Repurchases.
----------------------------------------------------------------------------------------------------------------

Instructions
    1. Disclose the type of services rendered in consideration for the 
compensation listed under column (5).
    2. Instruction 1 to Item 25(c) also applies to this Item.

Item 33. Location of Accounts and Records

    State the name and address of each person maintaining physical 
possession of each account, book, or other document required to be 
maintained by section 31(a) [15 U.S.C. 80a-30(a)] and the rules under 
that section.
Instructions
    1. The instructions to Item 20.4 of this form shall also apply to 
this item.
    2. Information need not be provided for any service for which total 
payments of less than $5,000 were made during each of the last three 
fiscal years.
    3. A Fund may omit this information to the extent it is provided in 
its most recent report on Form N-CEN [17 CFR 274.101].

Item 34. Management Services

    Provide a summary of the substantive provisions of any management-
related service contract not discussed in Part A or B, disclosing the 
parties to the contract and the total amount paid and by whom for the 
Fund's last three fiscal years.
Instructions
    1. The instructions to Item 19 also apply to this Item.
    2. Exclude information about any service provided for payments 
totaling less than $5,000 during each of the last three fiscal years.

Item 35. Undertakings

    In initial registration statements filed under the Securities Act, 
provide an undertaking to file an amendment to the registration 
statement with certified financial statements showing the initial 
capital received before accepting subscriptions from more than 25 
persons if the Fund intends to raise its initial capital under section 
14(a)(3) [15 U.S.C. 80a-14(a)(3)].

Signatures

    Pursuant to the requirements of the Securities Act of 1933 and the 
Investment Company Act of 1940, the Fund (certifies that it meets all 
of the requirement for effectiveness of this registration statement 
under rule 485(b) under the Securities Act and) has duly caused this 
registration statement to be signed on its behalf by the undersigned, 
duly authorized, in the city of ___, and State of ___, on the ___ day 
of ___ .
-----------------------------------------------------------------------
Fund

-----------------------------------------------------------------------
By Signature

-----------------------------------------------------------------------
Title

    Pursuant to the requirements of the Securities Act of 1933, this 
registration statement has been signed below by the following persons 
in the capacities and on the dates indicated.
-----------------------------------------------------------------------

[[Page 70890]]

Signature

-----------------------------------------------------------------------
Title

-----------------------------------------------------------------------
Date

0
20. Amend Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) by:
0
a. In the third sentence of the second paragraph on the cover page of 
Form N-CSR, removing ``450 Fifth Street NW, Washington, DC 20549-0609'' 
and adding in its place ``100 F Street NE, Washington, DC 20549-1090'';
0
b. In the first sentence of General Instruction D, removing ``Items 4, 
5, and 12(a)(1)'' adding in its place ``Items 4, 5, and 17(a)I1)'';
0
c. In the second sentence of Instruction (c) to Item 2(a), removing 
``Item 13(a)(1)'' and adding in its place ``Item 18(a)(1)'';
0
d. Revising Item 6(a);
0
e. Redesignating Items 7 through 13 as Items 12 through 18, 
respectively;
0
f. Adding Items 7 through 11; and
0
g. In the first sentence of the instruction to paragraph (a)(2) of Item 
13, removing ``Item 13(a)(1)'' and adding in its place ``Item 
18(a)(1)''.
    The additions read as follows:

    Note:  The text of Form N-CSR does not, and these amendments 
will not, appear in the Code of Federal Regulations.

Form N-CSR

* * * * *
    Item 6. Investments.
    File Schedule I--Investments in securities of unaffiliated issuers 
as of the close of the reporting period as set forth in Sec.  210.1212 
of Regulation S-X [17 CFR 210.12-12], unless the schedule is included 
as part of the report to shareholders filed under Item 1 of this Form 
or is included in the financial statements filed under Item 7 of this 
Form'';
* * * * *
    Item 7. Financial Statements and Financial Highlights for Open-End 
Management Investment Companies.
    (a) An open-end management investment company registered on Form N-
1A [17 CFR 239.15A and 17 CFR 274.11A] must file its most recent annual 
or semi-annual financial statements required, and for the periods 
specified, by Regulation S-X.
    (b) An open-end management investment company registered on Form N-
1A [17 CFR 239.15A and 17 CFR 274.11A] must file the information 
required by Item 13 of Form N-1A.
    Instruction to paragraph (a) and (b).
    The financial statements and financial highlights filed under this 
Item must be audited and be accompanied by any associated accountant's 
report, as defined in rule 1-02(a) of Regulation S-X [17 CFR 210.1-
02(a)], except that in the case of a report on this Form N-CSR as of 
the end of a fiscal half-year, the financial statements and financial 
highlights need not be audited.
    Item 8. Changes in and Disagreements with Accountants for Open-End 
Management Investment Companies.
    An open-end management investment company registered on Form N-1A 
[17 CFR 239.15A and 17 CFR 274.11A] must disclose the information 
concerning changes in and disagreements with accountants and on 
accounting and financial disclosure required by Item 304 of Regulation 
S-K [17 CFR 229.304].
    Item 9. Proxy Disclosures for Open-End Management Investment 
Companies.
    If any matter was submitted during the period covered by the report 
to a vote of shareholders of an open-end management investment company 
registered on Form N-1A [17 CFR 239.15A and 17 CFR 274.11A], through 
the solicitation of proxies or otherwise, the company must furnish the 
following information:
    (1) The date of the meeting and whether it was an annual or special 
meeting.
    (2) If the meeting involved the election of directors, the name of 
each director elected at the meeting and the name of each other 
director whose term of office as a director continued after the 
meeting.
    (3) A brief description of each matter voted upon at the meeting 
and the number of votes cast for, against or withheld, as well as the 
number of abstentions and broker non-votes as to each such matter, 
including a separate tabulation with respect to each matter or nominee 
for office.
    Instruction. The solicitation of any authorization or consent 
(other than a proxy to vote at a shareholders' meeting) with respect to 
any matter shall be deemed a submission of such matter to a vote of 
shareholders within the meaning of this Item.
    Item 10. Remuneration Paid to Directors, Officers, and Others of 
Open-End Management Investment Companies.
    An open-end management investment company registered on Form N-1A 
[17 CFR 239.15A and 17 CFR 274.11A] must disclose the aggregate 
remuneration paid by the company during the period covered by the 
report to:
    (1) All directors and all members of any advisory board for regular 
compensation;
    (2) Each director and each member of an advisory board for special 
compensation;
    (3) All officers; and
    (4) Each person of whom any officer or director of the Fund is an 
affiliated person.
    Item 11. Statement Regarding Basis for Approval of Investment 
Advisory Contract.
    If the board of directors approved any investment advisory contract 
during the Fund's most recent fiscal half-year, discuss in reasonable 
detail the material factors and the conclusions with respect thereto 
that formed the basis for the board's approval. Include the following 
in the discussion:
    (1) Factors relating to both the board's selection of the 
investment adviser and approval of the advisory fee and any other 
amounts to be paid by the Fund under the contract. This would include, 
but not be limited to, a discussion of the nature, extent, and quality 
of the services to be provided by the investment adviser; the 
investment performance of the Fund and the investment adviser; the 
costs of the services to be provided and profits to be realized by the 
investment adviser and its affiliates from the relationship with the 
Fund; the extent to which economies of scale would be realized as the 
Fund grows; and whether fee levels reflect these economies of scale for 
the benefit of Fund investors. Also indicate in the discussion whether 
the board relied upon comparisons of the services to be rendered and 
the amounts to be paid under the contract with those under other 
investment advisory contracts, such as contracts of the same and other 
investment advisers with other registered investment companies or other 
types of clients (e.g., pension funds and other institutional 
investors). If the board relied upon such comparisons, describe the 
comparisons that were relied on and how they assisted the board in 
concluding that the contract should be approved; and
    (2) If applicable, any benefits derived or to be derived by the 
investment adviser from the relationship with the Fund such as soft 
dollar arrangements by which brokers provide research to the Fund or 
its investment adviser in return for allocating Fund brokerage.
Instructions
    (1) Board approvals covered by this Item include both approvals of 
new investment advisory contracts and approvals of contract renewals. 
Investment advisory contracts covered by this Item include subadvisory 
contracts.

[[Page 70891]]

    (2) Conclusory statements or a list of factors will not be 
considered sufficient disclosure. Relate the factors to the specific 
circumstances of the Fund and the investment advisory contract and 
state how the board evaluated each factor. For example, it is not 
sufficient to state that the board considered the amount of the 
investment advisory fee without stating what the board concluded about 
the amount of the fee and how that affected its decision to approve the 
contract.
    (3) If any factor enumerated in paragraph (d)(6)(i) of this Item is 
not relevant to the board's evaluation of an investment advisory 
contract, note this and explain the reasons why that factor is not 
relevant;''
* * * * *

    By the Commission.

    Dated: August 5, 2020.
 J. Matthew DeLesDernier
 Assistant Secretary.

    Note:  The Appendices will not appear in the Code of Federal 
Regulations.

Appendix A

[Graphic: The XYZ Income Fund, XYZ Funds, Inc. Class A--XYZIA Class Z--
XYZIZ]

Annual Shareholder Report January 31, 2020

    This annual shareholder report contains important information 
about the XYZ Income Fund for the period of February 1, 2019 to 
January 31, 2020 as well as certain changes to the Fund. You can 
find additional information at XYZfunds.com/XYZIFdocs or on the XYZ 
App. You can also request this information by contacting us at 1-
800-XYZ-FUND or [email protected].

                                    What Were Your Fund Costs for the Period?
                                  [Based on a hypothetical $10,000 investment]
----------------------------------------------------------------------------------------------------------------
                                                                                                   Costs paid as
                                     Beginning     Total return                   Ending account   a percentage
              Class                account value   before costs     Costs paid      value 1/31/       of your
                                     2/1/2019         paid *         [dagger]          2020         investment
                                                                                                     [dagger]
----------------------------------------------------------------------------------------------------------------
Class A.........................         $10,000           +$723            -$78       = $10,645            0.77
Class Z.........................          10,000            +723             -53        = 10,670            0.52
----------------------------------------------------------------------------------------------------------------
* Certain Fund expenses, such as those associated with buying and selling fund investments, reduced your total
  return.
[dagger] The costs paid during the period do not reflect certain costs paid outside the Fund (such as purchase
  charges you might have paid if you bought shares of the Fund during the period).

How did the Fund perform last year? What affected the Fund's 
performance?

Performance Highlights

     XYZ Income Fund returned 6.45% for Class A and 6.70% 
for Class Z for the 12 months ended January 31, 2020. The Fund 
underperformed its benchmark (the QRS Aggregate Bond Index), which 
returned 7.72%. This underperformance is largely the result of our 
portfolio holding more interest-rate sensitive investments than our 
benchmark.
     Top contributors to performance:
    [cir] Long-term fixed interest rate investments because the 
Federal Reserve reduced interest rates during the period which 
increased long-term bond prices; and
    [cir] investments in technology and financial services 
companies.
     Top detractors from performance:
    [cir] Short duration investments (such as bank loans) and new 
purchases of fixed income instruments because of the lower interest 
rate environment; and
    [cir] investments in oil and telecommunication companies.

Performance Attribution

------------------------------------------------------------------------
                               Asset class
-------------------------------------------------------------------------
Top Contributors:
  [uarr] Corporate--High Yield.
  [uarr] Corporate--High Quality.
  [uarr] Mortgage Backed Securities.
Top Detractors:
  [darr] Bank Loans.
  [darr] Asset Backed Securities.
  [darr] Treasury.
------------------------------------------------------------------------
                                 Sector
------------------------------------------------------------------------
Top Contributors:
  [uarr] Technology.
  [uarr] Financial Services.
  [uarr] Health Care.
Top Detractors:
  [darr] Energy.
  [darr] Telecommunications.
  [darr] Industrials.
------------------------------------------------------------------------

How did the Fund perform over the past 10 years?

    Keep in mind that the Fund's past performance is not a good 
predictor of how the Fund will perform in the future.
    Cumulative Performance: February 1, 2010 through January 31, 
2020. Initial Investment of $10,000.

[Graphic: Line Graph Showing Class Z and Class A Performance Compared 
to Performance of the QRS Aggregate Bond Index]

                                          Average Annual Total Returns
----------------------------------------------------------------------------------------------------------------
                                                                    1 year (%)      5 years (%)    10 years (%)
----------------------------------------------------------------------------------------------------------------
Class A (with purchase charge)..................................            1.21            4.32            5.29
Class A (without purchase charge)...............................            6.45            5.36            5.86
Class Z.........................................................            6.70            5.61            6.11
QRS Aggregate Bond Fund.........................................            7.72            5.21            4.25
----------------------------------------------------------------------------------------------------------------

    Visit xyzfunds.com/XYZG or the XYZ app for more recent 
performance information.

[[Page 70892]]



                   What are some key Fund statistics?
                        [as of January 31, 2020]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Fund Size:.................................  $789 mil.
Number of Investments:.....................  722.
Annual Portfolio Turnover:.................  78%.
Average Credit Quality: *..................  BB.*
30-Day SEC Yield: **.......................
   Class A.........................  4.28%.
   Class Z.........................  4.53%.
Effective Duration:........................  1.4 years.
Weighted Average Maturity:.................  5.4 years.
------------------------------------------------------------------------
* The Average Credit Quality is based on credit ratings provided by UVW
  Rating Inc.
** The 30-Day SEC Yield is a standardized calculation so you can compare
  yields across funds.


                      What did the Fund invest in?
                        [as of January 31, 2020]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
                      Asset class (% of net assets)
------------------------------------------------------------------------
Bank Loans..............................................            52.6
Corporate--High Quality.................................            14.3
Corporate--High Yield...................................            11.4
Mortgage Backed Securities..............................             7.1
Treasury................................................             4.8
Asset Backed Securities.................................             3.3
Cash....................................................             1.8
Equity..................................................             1.6
Other...................................................             3.1
------------------------------------------------------------------------
                   Credit quality * (% of net assets)
------------------------------------------------------------------------
U.S. Government.........................................             4.8
AAA.....................................................             3.6
AA......................................................             5.8
A.......................................................            16.7
BBB.....................................................            20.4
BB......................................................            34.9
B.......................................................             8.1
CCC & Below.............................................             3.6
Unrated.................................................             2.1
------------------------------------------------------------------------
* Credit Quality is based on credit ratings provided by UVW Rating Inc.,
  a nationally recognized statistical rating organization, because the
  XYZ Advisers (the Fund's manager) believes they have the broadest
  coverage of securities held by the Fund.


------------------------------------------------------------------------
                        Sector (% of net assets)
-------------------------------------------------------------------------
[Graphic: Pie chart showing percentages of Fund's net assets invested
 in: Technology (23%), Consumer Discretionary (7%), Industrials (9%),
 Financial Services (11%), Consumer Staples (4%), Health Care (12%),
 Telecommunications (9%), Energy (13%), Real Estate (6%), and Materials
 (6%)]
------------------------------------------------------------------------

    Visit www.xyzfunds.com/XYZG or the XYZ App for more recent 
holdings information.

How has the Fund changed?

    Beginning June 1, 2020, the Fund is revising its Interest Rate 
Risk to include risks of very low or negative interest rates. Very 
low or negative interest rates may prevent the Fund from earning 
positive returns and increases the risk of rising interest rates, 
which may negatively impact the Fund's performance.
    This is a summary of a planned change to the Fund's principal 
risk disclosure. For more complete information, you may review the 
Fund's next prospectus, which we expect to be available by June 1, 
2020 at XYZfunds.com/XYZIFdocs or upon request at 1-800-XYZ-FUND or 
[email protected].

How does the Fund ensure that it has money available to pay me when I 
exit the Fund?

    The XYZ Loan Fund has investments that may not be as liquid as 
typical stocks and bonds.

------------------------------------------------------------------------
 Primary source of the Fund's    How does the Fund manage its liquidity
       liquidity risk:                           risk?
------------------------------------------------------------------------
The Fund invested               The Fund has a liquidity risk
 significantly in bank loans.   management program (LRMP) to ensure the
 When a fund sells one of       Fund can pay you on time when you sell
 these loans, it may take a     shares.
 significant amount of time     This program includes: (1)
 before the Fund receives the   Maintaining a minimum amount of highly
 money from the sale.           liquid assets and limiting purchases of
                                illiquid assets; (2) borrowing money and
                                entering into expedited settlement
                                agreements when needed; and (3) stress
                                testing to see how the Fund would
                                perform in stressed market conditions
                                and, if necessary, modifying the Fund's
                                investments in response to these tests.
                                At a meeting on December 5,
                                2019, the Fund's board of directors
                                reviewed a report prepared by XZY
                                Advisers (the LRMP administrator) that
                                described the operation of the Fund's
                                LRMP over the prior year and affirmed
                                that the program effectively managed the
                                fund's liquidity risk.
------------------------------------------------------------------------


[[Page 70893]]

Where can I find additional information about the Fund?

    Additional information is available on the Fund's website, 
including its:

 Prospectus
 financial information
 holdings
 proxy voting information
 description of UVW Rating Inc.'s credit ratings

[Graphic: QR Code that takes the reader to XYZfunds.com/XYZGEdocs]

Appendix B

Feedback Flier: Shareholder Reports

    We require mutual funds and exchange-traded funds (ETFs) to 
provide you with an annual and semi-annual shareholder report. These 
reports include key information about a fund, but they can often be 
long.
    We are proposing changes to these reports to better highlight 
information that would be helpful to you as you monitor your 
investments. We would like to know what you think. Please take a few 
minutes to review this sample annual shareholder report and answer 
any or all of these questions. Thank you for your feedback!

Questions

    1. Overall, would the sample shareholder report be useful in 
monitoring your fund investments? If not, how would you change it?
    2. Rate the sections of the sample shareholder report. Please 
indicate whether you find each section useful or not useful. Please 
consider explaining your responses in the comments.

----------------------------------------------------------------------------------------------------------------
               Section                     Useful         Not useful                      Why?
----------------------------------------------------------------------------------------------------------------
a. ``What was your cost for the                [squ]            [squ]
 period?''.
b. ``How did the Fund perform last             [squ]            [squ]
 year? What affected the Fund's
 performance?''.
c. ``How did the Fund perform over             [squ]            [squ]
 the past 10 years?''.
d. ``What are some key Fund                    [squ]            [squ]
 statistics?''.
e. ``What did the Fund invest in?''.           [squ]            [squ]
f. ``How has the Fund changed?''....           [squ]            [squ]
g. ``How does the Fund ensure that             [squ]            [squ]
 it has money available to pay me
 when I exit the Fund?''.
h. ``Where can I find additional               [squ]            [squ]
 information about the Fund?''.
----------------------------------------------------------------------------------------------------------------

    3. The section titled ``What was your cost for the period?'' 
includes an example of what it costs to hold fund shares this year.
    a. Is the table clear?

[ ] Yes [ ] No

    b. Is it helpful to see ``costs paid'' both in dollars and as a 
percentage of your investment?

[ ] Yes [ ] No

    c. Is it clear how the total returns of the fund minus the costs 
paid result in the ending account value?

[ ] Yes [ ] No

    4. The section titled ``How did the Fund perform last year? What 
affected the Fund's performance?'' includes narrative and graphic 
presentations.
    a. There is a narrative description of the fund's past 
performance in the ``Performance Highlights'' section. Does the 
narrative description help you understand the key drivers of fund 
performance?

[ ] Yes [ ] No

    b. There is a graphic presentation of key drivers of the fund's 
past performance in the ``Performance Attribution'' section. Does 
the graphic presentation help you understand why the fund performed 
as it did over the past year?

[ ] Yes [ ] No

    c. There is a line graph representing the fund's performance in 
dollars over the past 10 years. Does this graph help you understand 
how the fund performed over that time period?

[ ] Yes [ ] No

    d. There is an ``Average Total Returns Table'' showing the 
fund's performance as a percentage over the past 1, 5, and 10 years. 
Does this table help you understand how the fund performed over 
those time periods?
    [ ] Yes [ ] No
    e. Is it helpful to see the fund's performance both in dollars 
and as a percentage?
    [ ] Yes [ ] No
    Is there any information that could be presented more clearly in 
the ``How did the Fund perform last year?'' section?
    5. The sample shareholder report includes key statistics about 
the fund's size, number of investments, and annual portfolio 
turnover. Do these statistics provide meaningful information 
regarding the fund, for example, to help put the fund's performance 
and investments into context?
    [ ] Yes [ ] No
    6. The section titled ``What did the Fund invest in?'' includes 
charts describing the types of investments made by the fund. Do 
these charts help you understand how the fund is investing your 
money?
    [ ] Yes [ ] No
    7. The section titled ``How has the Fund changed?'' describes 
important changes to the fund within the last fiscal year. What 
types of changes are most important to you?
    8. Is there any information in the sample shareholder report 
that is difficult to understand, confusing, too technical, or that 
could be presented more clearly?
    9. Is there additional information that we should require in the 
shareholder report? This could include the fund's full financial 
statements, the results of any shareholder votes and/or how much the 
fund paid to directors, officers, and others. Is there any 
information in the sample shareholder report that should be 
highlighted more?
    10. Under the proposal, in addition to the shareholder report, 
you also would have access to more information about the fund online 
(and delivered in paper on request). How likely would you be to seek 
more information on the following?

a. The fund's full financial statements
b. Key financial information over time
c. Changes in and disagreements with accountants
d. Results of any shareholder votes
e. How much the fund paid to directors, officers and others

    11. Is the length of the document:
    [ ] Too short [ ] Too long [ ] About right
    12. How would you prefer to receive or read a document like the 
sample shareholder report?

-----------------------------------------------------------------------
a. On paper
b. In an email
c. On a website
d. A combination of paper and digital
e. Other (explain)

    13. Do you have any additional suggestions for improving the 
shareholder report?
-----------------------------------------------------------------------
    We will post your feedback on our website. Your submission will 
be posted without change; we do not redact or edit personal 
identifying information from submissions. You should only make 
submissions that you wish to make available publicly.
    If you are interested in more information on the proposal, or 
want to provide feedback on additional questions, click here. 
Comments should be received on or before [[ ]], 2020.

Thank You!

-----------------------------------------------------------------------

Other Ways To Submit Your Feedback

    You also can send us feedback in the following ways (include the 
file number S7-09-20 in your response):
-----------------------------------------------------------------------
    Print Your Responses and Mail: Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
-----------------------------------------------------------------------
    Print a PDF of Your Responses and Email: Use the printer 
friendly page and select a

[[Page 70894]]

PDF printer to create a file you can email to: [email protected].
-----------------------------------------------------------------------
    Print a Blank Copy of This Flier, Fill it Out, and Mail: 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

Appendix C

Feedback Flier: Tailored Fund Disclosure Framework To Highlight Key 
Information

    We are proposing a disclosure framework for mutual funds and 
exchange-traded funds (``funds'') that would highlight key 
information for investors. The proposal includes:
     Amendments to fund shareholder reporting requirements;
     an alternative approach to the current delivery of 
annual prospectus updates to fund investors; and
     amendments to the presentation of fee and principal 
risk disclosure in fund prospectuses.
    In addition, we are proposing amendments to fund advertising 
rules to promote more transparent and balanced statements about 
investment costs. Those amendments would apply to all registered 
investment companies and business development companies.
    More information about the proposal is available at https://www.sec.gov/rules/proposed/2020/34-89478.pdf.
    We are particularly interested in learning what small funds 
think about the proposed disclosure framework. Hearing from small 
funds could help us learn how the proposed amendments and new rule 
would affect these funds. We would appreciate your feedback on any 
or all of the following questions.
    All of the following questions are optional, including any 
questions that ask about identifying information.
    Please note that responses to these questions--including any 
other general identifying information you provide--will be made 
public.

Questions

Item 1: General Identifying Information

    Instructions: At your option, you may include general 
identifying information that would help us contextualize your other 
feedback on the proposal. This information could include responses 
to the following questions, as well as any other general identifying 
information you would like to provide. Responses to these items--
like responses to the other items on this Feedback Flier--will be 
made public.
    i. How big is the fund in terms of net asset value? (This may be 
expressed as a range, for example, $40 million to $50 million.)
    ii. Please include any additional general identifying 
information that you wish to provide, that could add context for 
your feedback on the proposal.

Item 2: Current Shareholder Reporting and Prospectus Delivery 
Practices

    The fund currently must provide annual and semi-annual 
shareholder reports in paper, unless the shareholder has elected 
electronic delivery.
    i. Please provide an estimate of approximately how much it 
currently costs the fund annually to prepare and transmit annual 
shareholder reports. Please provide a dollar range of those costs 
and expenses.
    ii. Please provide an estimate of approximately how much it 
currently costs the fund annually to prepare and transmit semi-
annual shareholder reports. Please provide a dollar range of those 
costs and expenses.
    iii. Rule 30e-3 under the Investment Company Act of 1940 
currently provides an optional ``notice and access'' method to allow 
funds to satisfy their obligations to transmit shareholder reports, 
beginning on January 1, 2021. Do you anticipate that the fund will 
rely on the rule? [yes/no]
    iv. Please provide any other information that you think could be 
helpful regarding the costs and expenses associated with current 
requirements to prepare and transmit annual and semi-annual 
shareholder reports.

Item 3: Principal Elements of the Proposed New Disclosure Framework

Proposed New Requirements for Funds' Annual and Semi-Annual Shareholder 
Reports

    i. We are proposing that shareholder reports include the content 
described below. Please indicate whether the content should remain 
in the shareholder report, as proposed, whether the content should 
be disclosed elsewhere, or whether the content should be eliminated. 
If you think the content should be disclosed elsewhere, please 
explain.

                      Proposed Shareholder Reports
------------------------------------------------------------------------
                                                     Please include any
                                                     comments that you
                                                    would like to share
                                                      about either the
                                    Should the       usefulness of the
                                content remain in    proposed  content,
                                 fund shareholder  including whether the
          Description              reports,  as      content should be
                                 proposed? (yes/     eliminated, or the
                                       no)            location of the
                                                    proposed content. If
                                                   the content should be
                                                    disclosed elsewhere,
                                                      please explain.
------------------------------------------------------------------------
Expense Example...............
Management's Discussion of
 Fund Performance (required in
 Annual Report; optional in
 Semi-Annual Report).
Fund Statistics (fund's size,
 number of investments, and
 annual portfolio turnover).
Graphical Representation of
 Holdings.
Material Fund Changes
 (required in Annual Report;
 optional in Semi-Annual
 Report).
Statement Regarding Liquidity
 Risk Management Program.
------------------------------------------------------------------------

    ii. Is there content that should be added to funds' shareholder 
reports that is not included in the proposal (yes/no)?
    If so, what content should be added to funds' shareholder 
reports?
    iii. Approximately how much do you think it would cost the fund 
to transition to the new requirements for preparing and transmitting 
annual and semi-annual shareholder reports under the proposal? 
Please provide a dollar range of those costs and expenses.

iv. Approximately how much do you think it would cost the fund on an 
ongoing annual basis to prepare and transmit annual shareholder reports 
under the proposal? Please provide a dollar range of those costs and 
expenses.

    v. Approximately how much do you think it would cost the fund on 
an ongoing annual basis to prepare and transmit semi-annual 
shareholder reports under the proposal? Please provide a dollar 
range of those costs and expenses.

Proposed New Form N-CSR and Website Availability Requirements

    i. We are proposing that the fund no longer include the content, 
described in the chart below, in its annual and semi-annual 
shareholder reports. Instead, the fund would include that content in 
its filings on Form N-CSR. Please indicate whether the content 
should be disclosed in the fund's filings on Form N-CSR, as 
proposed, whether the content should remain in the fund's annual and 
semi-annual shareholder reports, or whether the content should be 
eliminated. If

[[Page 70895]]

you think the content should be disclosed elsewhere, please explain.

                                       Proposed New Content for Form N-CSR
----------------------------------------------------------------------------------------------------------------
                                                                                        Should the content be
                                      Should the content be    Should the content       disclosed elsewhere or
            Description               disclosed in filings    remain in shareholder   eliminated? If the content
                                       on Form N-CSR,  as       reports? (yes/no)        should be disclosed
                                       proposed? (yes/no)                             elsewhere, please explain.
----------------------------------------------------------------------------------------------------------------
Financial statements for funds.
Financial highlights for funds.
Remuneration paid to directors,
 officers and others of funds.
Changes in and disagreement with
 accountants for funds.
Matters submitted to fund
 shareholders for a vote.
Statement regarding the basis for
 the board's approval of investment
 advisory contract.
----------------------------------------------------------------------------------------------------------------

    ii. Is there content that a fund should have to disclose on Form 
N-CSR that is not included in the proposal (yes/no)?
    If so, what content requirement(s) should be added to Form N-
CSR?
    iii. Approximately how much do you think it would cost the fund 
to transition to the proposed requirements to file certain new 
information on Form N-CSR instead of including this information in 
its annual and/or semi-annual shareholder reports? Please provide a 
dollar range of those costs and expenses.
    iv. Approximately how much do you think it would cost the fund 
on an ongoing annual basis to comply with the proposed new Form N-
CSR content requirements? Please provide a dollar range of those 
costs and expenses.
    v. We are also proposing to require that a fund would have to 
make available all of new Form N-CSR content (described in the chart 
above), as well as the fund's complete portfolio holdings as of the 
close of the fund's most recent first and third fiscal quarters, on 
a website. In addition, we are proposing that the fund deliver such 
materials to investors upon request, free of charge.
    a. Approximately how much do you think it would cost the fund to 
transition to the proposed new website availability requirements? 
Please provide a dollar range of those costs and expenses.
    b. Approximately how much do you think it would cost the fund on 
an ongoing annual basis to comply with the proposed new website 
availability requirements? Please provide a dollar range of those 
costs and expenses.

Proposed New Treatment of Annual Prospectus Updates

    i. Please provide an estimate of approximately how much it 
currently costs the fund on an annual basis to provide annual 
prospectus updates to shareholders. Please provide a dollar range of 
those costs and expenses.
    ii. Reliance on proposed rule 498B--under which the fund would 
send existing investors certain notices in lieu of annual prospectus 
updates--would be optional. Do you think that the fund would rely on 
proposed rule 498B? [yes/no]
    If you think the fund would rely on proposed rule 498B, 
approximately how much do you think the following would cost the 
fund? Please provide a dollar range of those costs and expenses:
    a. The cost to the fund of transitioning to proposed rule 498B;
    b. The ongoing costs on an annual basis for the fund to comply 
with proposed rule 498B (excluding transmitting notices of material 
changes to shareholders); and
    c. The ongoing costs on an annual basis for the fund to transmit 
notices of material changes to shareholders, if any.

Proposed Changes to Rule 30e-3: Open-End Funds Could No Longer Use 
``Notice and Access'' Model to Transmit Shareholder Reports

    i. Beginning on January 1, 2021, a fund currently would be 
permitted to transmit shareholder reports under rule 30e-3, provided 
certain conditions are met, such as including a required statement 
on each prospectus. However, the proposal would no longer permit 
open-end funds to rely on rule 30e-3 to transmit shareholder 
reports. Approximately how much do you think it would cost the fund 
to transition away from the rule 30e-3 ``notice and access'' model? 
Please provide a dollar range of those costs and expenses.

Proposed Prospectus Disclosure Changes: Fund Fees and Risks

    i. Approximately what do you think it would cost the fund to 
transition to the proposed new requirements for prospectus 
disclosure of fund fees and expenses, and fund principal risks? 
Please provide a dollar range of those costs and expenses.
    ii. Approximately what do you think it would cost the fund on an 
ongoing annual basis to comply with the proposed new requirements 
for prospectus disclosure of fund fees and expenses, and fund 
principal risks? Please provide a dollar range of those costs and 
expenses.
    iii. Should we modify any of the proposed new requirements for 
prospectus disclosure of fund fees and expenses, and fund principal 
risks, and if so, how?
    iv. Are there additional ways to improve how funds disclose 
their fees and expenses to represent more accurately the full costs 
associated with a fund investment and to help investors better 
understand their investment costs?

Proposed Amendments To Fund Advertising Rules

    i. Does the fund currently include fee and expense information 
in its advertisements and other marketing materials? [yes/no]
    ii. We are proposing to amend the advertising rules to require 
that investment company fees and expenses in advertisements and 
supplemental sales literature be consistent with relevant prospectus 
fee table presentations and be reasonably current. The proposed 
amendments also address current representations of fund fees and 
expenses that could be materially misleading.
    Approximately how much do you think it would cost the fund to 
comply with the proposed amendments to the investment company 
advertising rules (please provide a dollar range)?
    iii. Are there additional ways that we could improve the fee and 
expense presentations in fund advertisements and supplemental sales 
literature?

Item 4: Other Feedback

    Instructions: Please provide any additional suggestions or 
comments you have about our fund disclosure proposal.
    In addition, please provide any suggestions or comments about 
what the Commission can do to encourage the use of technology in 
fund disclosure.
    We will post your feedback on our website. Your submission will 
be posted without change; we do not redact or edit personal 
identifying information from submissions. You should only make 
submissions that you wish to make available publicly.
    If you are interested in more information on the proposal, or 
want to provide feedback on additional questions, click here. 
Comments should be received on or before __, 2020.

Thank you!

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[[Page 70896]]

Other Ways To Submit Your Feedback

    You also can send us feedback in the following ways (include the 
file number S7-09-20 in your response):
-----------------------------------------------------------------------
    Print Your Responses and Mail: Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
-----------------------------------------------------------------------
    Print a PDF of Your Responses and Email: Use the printer 
friendly page and select a PDF printer to create a file you can 
email to: [email protected].
-----------------------------------------------------------------------
    Print a Blank Copy of This Flier, Fill it Out, and Mail: 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.
-----------------------------------------------------------------------
[FR Doc. 2020-17449 Filed 11-4-20; 8:45 am]
 BILLING CODE 8011-01-P

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