The SEC approved a rule and two requests for comments relating to mutual fund disclosure. The SEC voted to (i) adopt a new rule that will implement an optional, online delivery method for fund shareholder reports, (ii) request input from fund investors on how to enhance fund disclosures and (iii) request feedback on the processing fees charged by broker-dealers and other intermediaries for the delivery of fund materials.
First, the SEC adopted ICA Rule 30e-3, which provides funds with an optional “notice and access” method for delivery of shareholder reports by making such reports available on a website specified in a notice to investors. The rule requires funds relying on Rule 30e-3 to, among other things:
- provide the current shareholder report and the most recent prior shareholder report on a publicly accessible website, free of charge;
- make quarterly holdings available for the last fiscal year;
- ensure the accessibility of reports, including their format and location;
- issue a paper notice that the online report is available with instructions for accessing it;
- provide a free paper copy of the shareholder report upon request; and
- allow investors to elect to receive all future reports on paper.
SEC Chair Jay Clayton stated that the final rule contains several changes to the proposed rule aimed at improving investor protections, such as (i) an extended transition period and (ii) more flexibility in communications with investors. SEC Commissioner Kara M. Stein criticized the rule for requiring an extra step for an investor to select paper delivery, warning that it may be “too high” a hurdle for some. She advised the SEC to view the rule as a pilot program and reevaluate its effectiveness after it has been implemented. Funds will be allowed to rely on the new rule beginning January 1, 2021. In general, funds will be required to provide shareholders with two years’ notice if relying on the rule before January 1, 2022.
Second, the SEC issued a request for comments, particularly from individual investors, on how to improve the “delivery, design and content of fund disclosures.” The SEC is seeking comments on, among other things, preferred methods of delivery and the modernization of disclosure requirements.
Third, the SEC requested comments on the current framework for processing fees charged by broker-dealers and intermediaries for delivering fund shareholder reports and other materials to investors. The SEC is requesting comments on:
- the assessment of the processing fees;
- the transparency of these fees;
- remittances received by financial intermediaries for delivery of fund documents;
- whether the structure and level of processing fees should be set by another entity; and
- fees in cases where intermediaries are paid shareholder servicing fees separately from fund assets.
Comments on the two requests must be submitted by October 31, 2018.
Lofchie Comment: This should be the first among several steps that the SEC takes to make it easier for regulated firms to electronically deliver all documents. By way of example, broker-dealers should be able to assume, in the absence of client objection, that they may deliver all required disclosure documents electronically.
The printing and transmission of paper documents, many of which go right into the wastebasket, is expensive and wasteful (and anti-green).