The Securities and Exchange Commission voted to adopt rule and form amendments around requirements for mutual funds and exchange-traded funds, which would increase transparency of the funds’ reports and advertising practices.
SEC Chair Gary Gensler noted in a press release that fund shareholder reports, which are often more than 100 pages, make it difficult for investors to find relevant information. The new rules require the fund information to be presented in a concise manner to make it easier for shareholders to understand their investments with regard to performance, fees and operation.
There are also new requirements around advertising that require fee and expense information in advertisements and sales literature to be consistent with information in prospectuses.
“The SEC expressed concern that because funds are increasingly marketed based on costs, advertisements and sales literature may present fees and expenses in a way that misleads investors into concluding that the costs of investing in a fund are lower than they actually are,” according to legal analysis of the changes by Morgan Lewis published earlier this month.
A three-page sample version of what a report would look like under the rules includes a table on the first page detailing how much investors could expect to pay for a fund and how it would affect their returns as well as a summary of fund performance that includes attribution analysis. The other two pages in the sample include a line graph of historical performance, key fund statistics, information around holdings and discussions of risks associated with the fund.
SEC Commissioner Mark Uyeda said in a statement that when a commenter on the proposed changes hired a market research firm to present the hypothetical report that complies with the new rules to 2,000 investors, respondents overwhelmingly (91%) said the new format was “useful for monitoring their fund investments.”
The changes become effective 60 days after their entry in the Federal Register. That said, the Commission is allowing for an 18-month transition period to give fund issuers time to align their reports and advertising with the new requirements, though the updated rules around potentially misleading fees and expenses are immediately applicable as of the effective date.
Analysis of the proposed changes by Morgan Lewis suggested new rules would spell additional costs in the immediate term, with a reduction in administrative costs in the long term.
“Due to the transformational nature of the changes in the Adopted Rules, funds should expect to incur significant implementation costs,” analysts noted. “Despite these implementation costs, funds and shareholders likely will benefit from reduced printing and mailing expenses over time.
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