Who may be interested: Registered Investment Companies; Investment Advisers
Quick Take: The staff of the Division of Investment Management’s Disclosure Review & Accounting Office (Staff) issued an Accounting and Disclosure Information (ADI) bulletin to highlight common issues among mutual funds and exchange-traded funds (funds) related to the implementation of tailored shareholder report (shareholder report or TSR) requirements. The ADI also suggests fund practices the Staff has observed in reviews of shareholder reports that may further assist investors. Notably, the Staff urges funds to review their shareholder reports and associated website disclosures to ensure that they are complying with the revised disclosure regime reflected in recent amendments to Rule 30e-1, Item 27A of Form N-1A and Form N-CSR.
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Some of the key observations and recommended practices from the ADI are provided below.
Expense Information: A fund must include a simplified expense presentation in its annual and semi-annual shareholder reports in a specified format.
- Expenses in dollars paid on a $10,000 investment in the semi-annual report should not be annualized. However, in the section disclosing expenses as a percentage of an investor’s investment in the fund, expenses should be annualized.
- To calculate the expenses in dollars paid on a $10,000 investment, a fund must multiply the figure in the “Costs 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.
- Expenses in dollars should be rounded to the nearest dollar, not the nearest cent.
Management’s Discussion of Fund Performance (MDFP): A fund (other than a money market fund) is required to include MDFP in its annual shareholder reports and is permitted to include it in semi-annual shareholder reports.
- Average annual total return disclosures must be based on net asset value. Many ETFs have also disclosed average annual total returns based on market value, but this additional disclosure is not permitted in the TSR. A fund (other than a money market fund) is required to compare its performance to an “appropriate broad-based securities market index” both in its shareholder reports and in its prospectus, and a “broad-based” index is one that represents the overall applicable domestic or international debt or equity markets. Indexes with characteristics such as “growth,” “value,” or “small- or mid-cap,” other indexes that comprise only a subset of the overall applicable market, and commodity indexes do not qualify as “broad-based”. A fund can show narrower indexes that reflect the market segments in which the fund invests as secondary indexes.
- A fund is required to include a statement to the effect that past performance is not a good predictor of the fund’s future performance, and it must be noticeable and prominent.
Fund Statistics: Certain fund statistics must be presented, including the fund’s net assets, total number of portfolio holdings and portfolio turnover rate (other than for money market funds).
- Some funds include portfolio-level statistics such as average maturity or average credit rating under the heading “Graphical Representation of Holdings.” These holdings-based statistics should instead be disclosed under the heading “Fund Statistics.”
Graphical Representation of Holdings: A fund must include one or more tables, charts, or graphs depicting the fund’s portfolio holdings by category, as of the end of the reporting period.
- Some funds disclose holdings as a percentage but do not specify if the percentage is based on net asset value, total investments, or total or net exposure. Form N-1A provides that funds should disclose the basis for their presentation.
- If a fund categorizes holdings on credit quality, it should include a brief description of how the credit quality of the holdings was determined, and if credit ratings assigned by a credit rating agency are used, the fund should concisely explain how they were identified and selected.
Material Changes: A fund’s annual shareholder report must include a brief description of certain material changes that have occurred since the beginning of the reporting period.
- If there have been such material changes, then the fund’s cover page (or beginning) of the shareholder report must prominently state that the report describes material fund changes.
Availability of Additional Information Online: A fund’s annual and semi-annual shareholder reports must include a statement that informs investors about additional information that is available on the fund’s website.
- It is important to ensure that the links provided in the shareholder report work.
- A fund is required to provide a link to the additional information on its website (or a QR code, or other means of facilitating access to such information). The link must be specific enough to lead investors directly to the particular information, rather than to the home page or a section of the fund’s website other than that on which the information is posted. The link can take shareholders to a page with prominent links to the information (such as a page with links to the further information for a set of funds).
- A fund is required to make the disclosures required by Items 7-11 of Form N-CSR available on its website. To assist investors, funds should consider referring to this information by a term that is more descriptive of the collective information required by Items 7-11 of Form N-CSR. For example, some funds refer to these disclosures as “Annual Financial Statements and Additional Information.”
Inline XBRL Data Tagging: Funds are required to tag the information in their shareholder reports using Inline XBRL structured data language in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.
- Some funds tag all of their indexes as “broad-based” indexes instead of tagging their additional indexes with the separate tag intended for additional indexes.
Additional Issues:
- No Free Writing. Some funds include extraneous and sometimes lengthy disclosures such as disclaimers or risk disclosures that are not required or permitted by Item 27A of Form N-1A. While a fund is permitted to add information that is necessary to make the required disclosure items not misleading, these additional disclosures generally should be brief. The contents of shareholder reports are restricted to information which is required or permitted under Item 27A of Form N-1A.
- Funds are required to present the information in shareholder reports in the same order as is required under Item 27A of Form N-1A.
The ADI bulletin can be found here.
The Staff has also published frequently asked questions on shareholder reports that can be found here.
