SEC Approves E-Delivery of Shareholder Reports, Requests Comments on Other Areas

by Morgan Lewis
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The US Securities and Exchange Commission recently adopted Rule 30e-3 under the Investment Company Act of 1940, which will provide registered funds with a “notice and access” option for delivering shareholder reports. Although the new delivery structure will not be entirely paperless, it promises to substantially reduce printing and mailing expenses for the registered fund industry beginning on January 1, 2021.

Originally proposed more than three years ago as part of a package of reporting modernization initiatives,[1] Rule 30e-3 provides an optional “notice and access” method for the delivery of shareholder reports,[2] pursuant to which reports may be made available solely on a free, public website, provided that shareholders receive a hard copy notice that directs them to the website. The notice also must inform shareholders that they are entitled to continue to receive hard copies of shareholder reports if they take certain prescribed steps. All registered funds (including exchange-traded funds that are registered investment companies) and most registered unit investment trusts will be able to rely on Rule 30e-3.[3]

The rule is not mandatory, so funds can choose to continue transmitting hard copies of shareholder reports or to electronically deliver reports to those shareholders who have consented to electronic delivery, pursuant to the Securities and Exchange Commission’s (SEC’s) prior guidance in this area.[4]

Notice Requirements

Rule 30e-3 sets forth certain content and format requirements for the notice that must be sent to shareholders each time a shareholder report is posted to the website.[5]

The notice must prominently state that an important report to shareholders has been made available online and also is available in hard copy upon request, and that the report includes important information about the fund such as its portfolio holdings and financial statements. The notice also must provide the website address where the report and other information is posted. The website listed may be a homepage that houses multiple reports or reports for multiple funds. However, investors must be able to go from the website listed in the notice to a report with a single mouse click. Many fund sponsors already have websites that will meet the rule’s requirements with little or no modification. It should be noted that providing the address of the SEC EDGAR page where a fund’s shareholder report is listed will not be sufficient.

The notice also must include a toll-free phone number where shareholders can contact the fund or its intermediaries. Further, the notice must describe how shareholders can request a paper or email copy of a report, free of charge, and explain that the shareholder can elect to receive paper copies of reports at any time in the future (including instructions for how to make such changes, such as by contacting the fund or its intermediaries). Fund families set up for electronic delivery of shareholder reports (e.g., by email) also must include instructions on how shareholders can “opt in” for electronic delivery of shareholder reports or other fund communications.

Website Requirements

Websites must have posted the two most recent shareholder reports as well as a complete list of portfolio holdings for each of a fund’s last four fiscal quarters. There is no current requirement to disclose to investors the portfolio holdings for the first and third fiscal quarters, only the requirement to file Form N-Q with the SEC.[6] Funds relying on Rule 30e-3 will be required to post Form N-Q reports, or equivalent information, on the website indicated in the notice. And all materials on the website must be posted in a format that is convenient for online reading and printing and which allows shareholders to permanently retain electronic copies. In other words, materials cannot be uploaded in a “locked” fashion that would prohibit printing or downloading.

Supplementary Material and Timing of Delivery

Funds will be permitted to leverage the required mailing of the hard copy notice by including certain other documents (e.g., summary or statutory prospectuses, statements of additional information, or proxy notices) in the same envelope. Account statements and report notices for other funds also will be permitted to be mailed together with the hard copy notice—which will be particularly helpful to intermediaries that may offer their customers access to a number of different fund families given that a single consolidated mailing could deliver the customer’s account statement and all applicable shareholder report notices.

The Adopting Release also notes that a combined mailing might increase the likelihood that a shareholder becomes aware of a notice if the accompanying document is something that the shareholder is likely to read. As drafted, Rule 30e-3 does not expressly permit a prospectus supplement (“sticker”) to be mailed together with the notice, but given the ability to mail a summary prospectus or an entire statutory prospectus with a notice, it seems reasonable that a fund could include stickers together with notices, however, this is an area where additional SEC guidance would be useful. Similarly, for funds relying on exemptive relief to operate in a manager-of-managers model where delivery of an information statement describing new sub-advisers is a condition of the relief, the rule would not expressly permit a notice to be accompanied with an information statement—another area that would benefit from additional SEC guidance.

Under Rule 30e-3, a fund must provide shareholders with the notice within 70 days after the close of the time period covered by the report that is the subject of the notice. The 2015 proposal set forth a 60-day delivery period, which was expanded to 70 to allow funds to include other information in the mailing (e.g., account statements) as well as to permit notices to include additional information about the funds from the shareholder report, such as graphical representations of holdings, lists of the fund’s top holdings, and performance information. The longer time period may encourage certain funds to prepare client-friendly notices that serve a secondary marketing or client relations purpose. When a fund family takes advantage of the ability to include shareholder report information with the notice itself, the rule requires that the notice be filed with the SEC as part of the fund’s Form N-CSR report. However, when notices are more formulaic and stick to the bare minimum regulatory requirements, they will not have to be filed with the SEC. The SEC cautioned in its Adopting Release that any extra information provided in the notice cannot be misleading and would be subject to the anti-fraud provisions of the federal securities laws.

Effective Date and Advance Disclosure Requirements

Although the rule is effective as of January 1, 2019, funds will not be able to rely on it before January 1, 2021. Between those dates, funds will be required to prominently disclose to shareholders the change in delivery method through the fund’s prospectus, summary prospectus, and annual and semiannual reports.

For funds that begin to offer shares between January 1, 2019 and December 31, 2020, the fund must provide the prominent disclosure in all applicable documents from the initial offering through December 31, 2020, but may begin to use the “notice and access” method as of January 1, 2021, even though the shareholder disclosure period will have been less than two years. Similarly, funds that launch after January 1, 2021 will not be required to have an advance period of disclosure prior to relying on the rule to deliver notices.

View our Rule 30e-3 Compliance Checklist.

Requests for Comment on Additional Areas

Two additional SEC releases request public comment on enhancing fund disclosure to improve the investor experience and the framework for processing fees that intermediaries charge to funds for forwarding certain materials to investors. Responses to these releases requesting public comment are due by October 31, 2018.

Enhancing Fund Disclosure to Improve Investor Experience

The SEC is seeking public input on how disclosures could be enhanced in ways that would improve an investor’s experience and help investors make more informed decisions.[7] The SEC is focusing on individual investors with this outreach to learn how investors use disclosure and how the delivery, design, and content of disclosures can be improved to help investors make investment decisions. The request examines the methods of technology preferable to investors for the purposes of delivering fund disclosure and also includes a “Feedback Flier” that contains more than 100 questions on which the SEC seeks input, including such topics as electronic delivery, the length of risk disclosure, the ability to use technology to pull disclosure together from multiple funds held by a single investor, the terminology of Rule 12b-1 fees, and the use of “soft dollars.”

Intermediary Processing Fees for Forwarding Fund Materials to Investors

The SEC’s second release requests comment on the processing fees charged under New York Stock Exchange or other self-regulatory organization rules by intermediaries for the forwarding of fund materials (including shareholder reports and prospectuses) to end investors. Among other issues, the SEC is interested in the assessment of processing fees, transparency of the fees, remittances received by financial intermediaries for delivery of fund documents, whether the structure and level of processing fees should be set by a different entity, and the appropriateness of the fees charged. Shareholder servicing arrangements continue to be an area of particular interest to the SEC and its staff, following the “distribution in guise” initiative, the issuance of prior public comment releases on transfer agent regulation,[8] and staff guidance on distribution arrangements.[9]

Resource for Funds: Rule 30e-3 Compliance Checklist

Funds choosing to rely on the rule’s “notice and access” method to deliver shareholder reports will have to meet certain conditions, which we have outlined in our Rule 30e-3 Compliance Checklist.

View our Rule 30e-3 Compliance Checklist.


 

[1] See Investment Company Reporting Modernization, Investment Company Act Rel. No. 31,610 (May 20, 2015). See also our prior LawFlash about the 2015 proposals. The various proposals—with the exception of Rule 30e-3—were adopted by the SEC in October 2016.

[2] See Optional Internet Availability of Investment Company Shareholder Reports, Investment Company Act Rel. No. 33,115 (June 5, 2018) (hereinafter, Adopting Release).

[3] Specifically, the rule applies to all registered funds that are required to provide shareholder reports under Rule 30e-1 under the Investment Company Act of 1940 and all registered unit investment trusts that are required to provide shareholder reports under Rule 30e-2.

[4] See Adopting Release at footnote 18 for a full list of the SEC’s prior guidance on electronic delivery.

[5] It is worth pointing out that managers to registered funds that are also commodity pools, and therefore subject to regulation under Commodity Futures Trading Commission (CFTC) rules, currently are required to deliver an annual report to investors pursuant to CFTC Rule 4.22(c). Although CFTC Rule 4.12(c)(3) provides relief from the requirement that operators of such commodity pools deliver account statements to shareholders, that relief does not extend to delivery of annual reports. Accordingly, in the absence of corresponding relief or other guidance from the CFTC, managers to registered funds that are also commodity pools may still be required to deliver hard copies of annual reports to those shareholders who have not consented to electronic delivery, notwithstanding Rule 30e-3. In addition, the “notice and access” method of Rule 30e-3 is conceptually similar to Rule 14a-16 under the Securities and Exchange Act of 1934, which provides for a “notice and access” method for the delivery of proxy statements.

[6] Effective May 1, 2020, Form N-Q will be rescinded and replaced by Form N-PORT.

[7] See Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Rel. No. 33,113 (June 5, 2018).

[8] See Transfer Agent Regulations, Exchange Act Rel. No. 76,743 (Dec. 22, 2015).

[9] See IM Guidance Update No. 2016-01 (Jan. 2016).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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