On August 5, 2020, the Securities and Exchange Commission (SEC) proposed amendments to the disclosure framework for mutual funds and exchange-traded funds (ETFs) and to the advertising rules applicable to investment companies more broadly.1 The proposed amendments would:

  • permit funds to replace the annual prospectus update delivery requirement with a layered disclosure framework, under which fund investors would receive notices of material changes to the fund as they occur, and streamlined shareholder reports highlighting certain key fund statistics and changes;
  • continue to make the fund’s prospectus, and information that is currently required in shareholder reports but may be less relevant to retail investors, available online and for delivery upon request;
  • amend prospectus disclosure requirements relating to fees, expenses and principal risks; and 
  • require presentation of fees and expenses in investment company advertisements to be standardized in a manner consistent with the relevant prospectus fee table, providing guidance on when statements involving a fund’s fees and expenses could be materially misleading. 

According to the SEC, the proposed amendments are designed to modernize the content and delivery of information, and improve “the Main Street investor experience” by addressing concerns “that shareholder report and prospectus disclosures may appear redundant or inconsistent” and 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.”

Streamlined Shareholder Reports

The proposed amendments include revised instructions to Forms N-1A and N-CSR, which together would significantly streamline annual and semi-annual reports to highlight key information, including fund expenses, performance and portfolio holdings. These streamlined shareholder reports are intended to be the “central source of fund disclosure” for existing investors, and disclosures deemed less relevant for current retail shareholders would be moved elsewhere, mostly to form N-CSR, as discussed below. At a high level, the proposal includes the following changes to the content of annual and semi-annual shareholder reports:

  • Added disclosures: 
    •  identifying information at the beginning of the report, substantially similar to what is currently required in fund prospectuses;
    • certain fund statistics (some of which are currently reported under fund financial highlights), including the fund’s net assets, total number of portfolio holdings and portfolio turnover rate; and
    • material fund changes,2 which would include material fee increases and any changes to the fund’s name, investment objectives, principal strategies or principal risks, or investment adviser(s) or portfolio manager(s). 
  • Streamlined disclosures: 
    • a simplified example of fund expenses;3 
    • management’s discussion of fund performance (MDFP),4 which would include:
      • certain narrative discussion and disclosures;
      • a table showing average annual total returns for the past one-, five- and 10-year periods (or for the life of the fund, if shorter);
      • comparisons against the performance of an appropriate broad-based securities market index (and, if desired, of additional, more narrowly based indexes that reflect the market sectors of the fund’s investments); 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;
    • high-level notification of changes in and disagreements with auditors, if any; 
    • tailored, concise statement regarding the fund’s liquidity risk management program;5 and 
    • a general statement that certain additional information is available on the fund’s website.
  • Disclosures moved to Form N-CSR: details of changes in and disagreements with auditors; financial statements, including schedule of investments; financial highlights; results of any shareholder votes; remuneration paid to directors, officers and others; and statement regarding the basis for the board’s approval of investment advisory contracts.
  • Omitted disclosures: management information and statement regarding availability of additional information about fund directors, as this information already appears in funds’ Statements of Additional Information (SAIs); and Rule 30e-3 disclosure, as the proposal would no longer allow mutual funds and ETFs to take advantage of this rule’s alternative to shareholder report delivery.6  
  • Retained disclosures: graphical representation of holdings; and an optional explanation of how an investor may revoke consent to householding. 

Any information that is not explicitly permitted or required under the proposed instructions would be prohibited from being included in a shareholder report. Shareholder reports would be required to follow a prescribed order of disclosures; use short, direct sentences and simple vocabulary; comply with legibility requirements; and provide easy access to cross-referenced information that is available online. The proposed instructions would encourage the use of alternative presentation options—such as graphics, charts and, for electronic reports, interactive design features like expense calculators and pop-ups7—to improve report readability. 

The SEC has published a sample of a three-page, colorful, streamlined annual shareholder report, along with a table that compares, at a high level, the current requirements for shareholder report content to those under the proposed changes.8

Form N-CSR, Website Availability and Delivery Upon Request

The proposal would relocate certain information, deemed less relevant to retail investors, from shareholder reports to an amended version of Form N-CSR. These relocated items, listed above, are characterized in the proposal as “important for investors who desire more in-depth information, financial professionals, and other market participants.”

Within 70 days of the close of a fund’s first and third quarters, this relocated information would be filed with the SEC on the amended Form N-CSR and would be made available:9

  • on the fund’s website for a full fiscal year, in a format that is easy to both read online and print in a paper format, and 
  • for delivery by the fund (or relevant intermediary), within three business days of a request, free of charge, in paper or electronic format.

Prospectus Delivery 

Proposed Rule 498B under the 1933 Act would provide funds with an alternative for satisfying the obligation to deliver prospectuses annually to existing shareholders, by instead:

  • delivering annual and semi-annual shareholder reports (including a summary in the annual report of material changes that occurred over the prior year); 
  • delivering timely notifications to shareholders regarding material fund changes as they occur, within three business days of the fund’s post-effective amendment filing or prospectus supplement filing; and
  • making available online, and for delivery within three business days of a request for paper or electronic copies, the fund’s current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports, in each case subject to certain formatting requirements. 

As part of the new layered and streamlined disclosure framework for mutual funds and ETFs registered on Form N-1A, the proposed amendment would exclude these funds from the scope of Rule 30e-3. Accordingly, mutual funds and ETFs would not, under the proposal, be permitted to post shareholder reports online and provide notice of their availability to investors in lieu of delivering the reports to investors directly, as Rule 30e-3 would allow for in-scope funds to do beginning on January 1, 2021.10

Prospectus Fee and Risk Disclosures 

The proposal also aims to tailor prospectus disclosures of fund fees and risks to different types of investors’ informational needs and the specifics of each fund, including by:

  • replacing the existing fee table and example in the summary section of the statutory prospectus with a simplified fee summary, which is generally prohibited from having footnotes and includes a brief introduction, a table showing certain fee rates (both as a percentage and as a dollar amount for a hypothetical $10,000 investment), a simplified fee example showing estimates for one year and 10 (or, for a new fund, three) years, and a brief disclosure on portfolio turnover;11 
  • moving the existing fee table to the statutory prospectus, for use by investors seeking additional details about fund fees; 
  • simplifying fee terminology (e.g., renaming fee waivers and/or expense reimbursements as “temporary discounts,” shareholder fees as “transaction fees,” and sales charges/loads as “purchase” and “exit charges,” depending on context);12 
  • prohibiting the disclosure of non-principal risks in the prospectus (while continuing to permit their disclosure in the SAI); 
  • requiring principal risks to be described in order of importance (rather than alphabetically);
  • encouraging funds to tailor risk disclosures, and discouraging across-the-board risk disclosures for all funds in a fund complex except where appropriate;13 and
  • providing guidance that a principal risk:
    • would place more than 10% of the fund’s assets at risk or is reasonably likely to meet this 10% standard in the future;
    • for a fund of funds should be evaluated at the fund-of-funds level, rather than at the underlying fund level (i.e., so that not every principal risk disclosed by one or more underlying funds is necessarily a principal risk of the fund of funds);
    • for a “go anywhere” fund (i.e., a fund whose manager has the discretion to change its strategy or otherwise to invest in different types of assets) is that an investor may not know—and has no way to know—how the fund will invest in the future and the associated risks.

The proposal would also permit funds that invest 10% or less of their total assets in other funds to disclose the fees and expenses associated with those investments (acquired fund fees and expenses or AFFE) in a footnote to the fee table and fee summary, rather than as a fee table line item and component of the bottom-line expense figure. 

Investment Company Advertising Rule Amendments

The proposal includes the following changes applicable to the “sales literature” of all mutual funds, registered closed-end funds, ETFs and business development companies.14  

  • The proposed amendment to 1933 Act Rule 156 provides guidance on when representations in sales literature about the fees or expenses associated with an investment in a fund could be misleading. Specifically, such representations 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. While this guidance parallels the criteria currently included in the rule for when a statement more generally could be misleading, the proposing release explains that “[a]s 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 proposal specifically mentions in this context funds being marketed as “zero expense,” “no expense” or “low expense,” based solely on the fund’s prospectus fee table, without disclosing other costs and fees (including those collected by the fund’s adviser or its affiliates) that the investor will incur by investing in the fund—e.g., intermediary costs, wrap fees, administrative expenses, securities lending expenses (including those paid through a revenue-sharing arrangement with a securities lending agent) or fees that will kick in after the expiration of a temporary fee waiver or expense reimbursement arrangement. 
  • The proposed amendments to 1933 Act Rules 482 and 433 and 1940 Act Rule 34b-1 would require adding a disclosure legend regarding past performance and return and value fluctuation. In addition, fee and expense presentations in advertisements would have to include 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 1940 Act or 1933 Act registration statement form prescribes for a prospectus.15

Timeline and Comment Period

The SEC proposed an 18-month transition period after the effective date of the amendments, during which funds would be permitted but not required to comply with the new prospectus and shareholder report disclosure and delivery provisions and most of the advertising rule changes. After this transition period, compliance with the mandatory provisions of the proposal would be required.16 The Rule 156 amendments would not be granted an additional post-effective date compliance period under the proposal and would thus apply beginning on the effective date.

Comments on the proposed amendments are due on or before 60 days after the proposal is published in the Federal Register. Short-form feedback fliers (one for funds and another for investors) are available.


The proposed amendments, if adopted, would bring significant changes to the disclosure framework for registered funds. The proposed layered, streamlined approach would, of course, entail initial implementation costs and challenges in reworking disclosure delivery processes, formatting and content, but would hopefully also result in long-term savings as compared with current, more burdensome delivery requirements.

The proposal may also portend closer scrutiny of fund fee and risk disclosures. The details are potentially in flux—among many specific requests for comment in the proposal, the SEC requests ideas for improving 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. However, funds—especially those currently marketing themselves as zero-, no- or low-fee—should review their marketing materials and other disclosures to ensure that the various categories of fees associated with making an investment are adequately explained.

Footnotes - 

  1. Proposed Rule: 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, available here (“Proposing Release”). The Proposing Release proposes a new Rule 498B under the Securities Act of 1933 (“1933 Act”) and amends 1933 Act Rules 156, 433, 482 and 498 and Investment Company Act of 1940 (“1940 Act”) Rules 30e-1, 30e-3, 31a-2 and 34b-1, as well as Forms N-1A, Schedule 14A and Form N-CSR.
  2. Under the proposal, this will be required in the annual report and permitted but not required in the semi-annual report.
  3.  A mockup is available on p. 70 of the Proposing Release.
  4. The MDFP would be required in the annual report and permitted but not required in the semi-annual report.
  5. This statement would briefly summarize (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 program over the past year.
  6. Rule 30e-3 disclosure is currently included in shareholder reports only if applicable (i.e., if the fund wishes to post shareholder reports online and provide notice of their availability to investors in lieu of delivering the reports to investors directly), but would no longer be relevant because the proposal would exclude funds registered on Form N-1A from the scope of Rule 30e-3 under the 1940 Act, as further explained below.
  7. The proposed instructions include a reminder that any such additional online features would be subject to the federal securities laws to the same extent as any other website or other electronic content that the fund produces or disseminates, even if that content is not filed with the SEC as part of Form N-CSR.
  8. The sample annual report is available here. The comparison table is available here
  9. For any fund other than a money market fund, Proposed Rule 30e-1(b)(2) would also apply the availability requirements to the complete portfolio holdings as of the close of the fund’s most recent first and third fiscal quarters (currently disclosed on Form N-PORT). A fund would be permitted to satisfy the website availability requirement with respect to the relocated information by posting its most recent Form N-CSR report, and also has the option of posting the information separately, with some flexibility as to how the information is organized.
  10. If amended as proposed, Rule 30e-3 would apply only to (1) closed-end management investment companies (except small business investment companies) and any other fund permitted to be registered on Form N-2, and (2) separate accounts organized as management investment companies and offering variable annuity contracts, registered on Form N-3. Separately, the proposal would also rescind Rule 30e-1(d), which currently permits a fund to deliver a copy of its prospectus or SAI instead of its shareholder report, if the delivered document includes all the information that would otherwise be required to be included in a shareholder report.
  11. For funds that rely on Rule 498, this information would go in the summary prospectus.
  12. A table showing the terms that would be replaced and their proposed replacements can be found on p. 292 of the Proposing Release.
  13. For instance, the proposal mentions market risk as an example of a principal risk that could apply to all funds in a fund complex.
  14. “Sales literature” includes any advertisement, pamphlet, circular, form letter or other sales literature addressed to or intended for distribution to prospective investors in connection with a public offering.
  15. This information would have to be timely (specifically, no less current than as of the date of the most recent prospectus or, if the fund no longer has an effective registration statement under the 1933 Act, as of its most recent annual report) and prominent (specifically, no less prominent than any other fee and expense figures included in the advertisement).
  16. As noted above, certain elements of the proposal are optional—specifically, proposed Rule 498B would allow but not require funds to deliver a notice of material changes to shareholders in lieu of delivering annual prospectus updates and prospectus stickers.