SEC Proposes Engaging Dashboards and Revamp to Shareholder Reports and Disclosures for Retail Investors

In today’s world, the ability to obtain relevant information quickly and effectively is crucial to making informed decisions. Last week, the Securities and Exchange Commission (SEC) continued its push to modernize shareholder reporting for mutual funds and exchange traded funds (ETFs) by proposing visually engaging and concise financial and performance dashboards and improved reporting tailored towards retail investors. A summary of the proposal follows below.

Streamline and Deliver Concise Financial Information

“Shareholder reports would become the go-to-document for retail clients, and would take the place of semi-annual and annual reports.” —Dalia Blass, SEC Director of Investment Management Unit

Retail investors are typically non-professional investors buying and selling securities, mutual funds, or ETFs through traditional or online brokerage accounts. They usually do not have the time or sufficient background to understand all of the complex information captured in voluminous annual and semi-annual shareholder reports or fund prospectuses. Based on recent SEC staff analysis, the average annual report length is 134 pages and the average semi-annual report length is 116 pages. If asked, most retail investors would welcome fund sponsor-provided dashboards that include concise financial and performance information needed to make timely and effective investment decisions (i.e., whether to buy, hold, or sell a fund investment).

While annual and semi-annual reports filed via Form N-CSR would still be prepared and available, the SEC proposal would:

• Streamline shareholder reports and provide an alternative snapshot of fund expenses, performance, top holdings and their impact to performance among capturing other fund changes
  • Lengthy annual prospectus updates would no longer be required to be delivered to shareholders after their initial investment in the fund
• Encourage fund sponsors to maximize the use of effective visuals, interactive graphics and tables
• Tailor content to better align disclosures with current market developments and investor expectations
• Support a more comprehensive and relevant disclosure framework for retail investors

See Proposed Example of a Streamlined Report: “Hypothetical Streamlined Shareholder Report”

Promote Clear and Transparent Prospectus Disclosures and Advertising

“By encouraging fund disclosures that use modern communication techniques to emphasize clearly and concisely the information investors find most useful, today’s proposal should facilitate better-informed decision making.” —Jay Clayton, SEC Chairman

Annual prospectus updates can be time consuming and complex exercises for fund sponsors and their teams along with providing information overload to retail investors who may find the sheer volume of the documents overwhelming. The proposal amends prospectus disclosure requirements to provide clearer and consistent data points to investors regarding fees, expenses, and principal risks.

The SEC proposal would:

• Replace the existing fee table in the summary section of the prospectus with a simplified fee summary, while continuing to maintain the existing fee table within the prospectus to be used by certain investors seeking additional details
• Clarify language and terms used in the current fee table so that they can be more easily understood
• Promote disclosure of principal risks rather than daunting non-principal risk disclosures

Fund sponsors also prepare materials that can be published in newspapers, magazines, radio, television, fact sheets, direct mail advertisements or other avenues. Given increased industry focus on fees and fee-based competition, the SEC also proposed amendments to advertising rules of investment companies (including other registered investment companies such as closed-end interval funds and business development companies) to promote more transparency around investment costs in such advertisements and sales literature. Current rules do not set the presentation of fees and expenses in advertisements to address concerns about comparability or potentially misleading information.

The SEC proposal would:

• Require fee and expense advertisements in such materials to include certain standardized figures (i.e., consistent with relevant prospectus fee table presentation) and be reasonably current
• Amend potentially misleading statements around fees and expenses in such advertisements

See Illustrative Disclosure Framework: “SEC’s Contemplated Disclosure Framework”

Our Take

As the world continues to move towards increased automation and modernization, we welcome the proposed changes to help everyday investors make quicker and more informed decisions. With the launch of recent commission-free trading platforms such as Robinhood, and the increased entry of new Millennial and Gen Z investors, the need for simplicity, clarity and transparency has never been greater. Continuous modernization and timely relevant information will help drive improved decision-making ability for retail investors, management, boards and external service providers.

The proposed rule is open for public comment 60 days after publication in the Federal Register.
 
Contact Syed Farooq at sfarooq@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.