Tailored Shareholder Reports: 6 considerations before your first filing

7 minute read
Tailored Shareholder Reports: 6 things to consider before your first filing


To modernize shareholder communications the SEC will require condensed, easily comprehensible, visually engaging content, with a simplified fee disclosure, tailored to each shareholder class, be mailed to shareholders. And as we have seen with recent SEC rulings, iXBRL tagging is also now required for tailored shareholder reports.

In January 2023, the U.S. Securities and Exchange Commission (SEC) finalized new rules and amendments related to how mutual fund and ETF (exchange-traded fund) providers file and deliver annual and semi-annual reports.

What is the SEC’s new tailored shareholder report rule?

Shareholder reports have long been a required filing for mutual fund and ETF providers. The new requirement makes significant content presentation changes and calls for the annual and semi-annual reports to be tailored by fund share class, in a concise and visually engaging format.

Although presented in a completely different format, more like a Fact Sheet than a financial report, much of the required content for the tailored shareholder report already exists. The new rule will introduce workflow changes to “map” how the content will be created for the new format. Identifying the currently existing content and incorporating it with new content for the report needs to be part of your implementation planning. Once you have “assembled” the information for the rule-compliant report, the next step is understanding how to apply the new iXBRL requirements. Although still in draft form, the SEC has released the Open-End Fund (OEF) taxonomy, which will be applied to the new TSR, as well as Risk Return Summary tagging. 

For a visually engaging format, the shareholder report design template and readability are being changed. The SEC is eliminating the long, hard-to-understand content, moving to easy-to-consume, information at-a-glance.

These changes are a focused effort to furnish investors detailed information that can be used to analyze and monitor their investments. Tailored shareholder reports must also include a depiction and definition of an “appropriate broad-based securities market index” alongside performance metrics in the prospectus and full report.

To ensure industry standards and to direct focus on salient facts, any non-prescriptive information may not be included in the report. Any added fund information will be filed with the SEC on Form N-CSR and may be shared online or by written request. In addition, mutual fund and ETF providers may no longer rely solely on online distribution of shareholder reports. Beginning July 2024, shareholder reports are to be postmarked and mailed to shareholders within 60 days of the period end.

The SEC also changed how fee information is presented in investment company advertisements. For this change, investment and business development companies are required to have up-to-date transparent information about performance and investment costs in all advertising. The new rules and amendments went into effect Jan. 24, 2023, with a compliance date of July 2024.

Why the SEC made changes to tailored shareholder reports

Gary Gensler, the SEC chair, explained the reasons for the changes in a recent news release, “Shareholder reports are amongst the most important documents that fund investors receive. These reports, however, often are more than 100 pages in length. As a result, a retail investor looking to understand the performance, fees and other operations of a mutual fund or exchange-traded fund may need to sift through extensive financial information. Today’s final rules will require fund companies to share a concise set of materials to the heart of the matter. Further, today’s final rules are designed to promote transparent and balanced presentations of fees and expenses in investment company advertisements.”

Preparing for SEC compliance

In brief, tailored shareholder reports will be much shorter — typically around four pages — and include iXBRL tagging. In addition, reports must be tailored to each investor class — meaning that all reports will feature variable information related to the investor share class. These shorter reports must be mailed to investors, with additional information available online and in paper format upon request.

6 things you need to know

1. Brevity:

These changes have been made to streamline and modernize shareholder reports, with the ultimate goal of making them accessible to investors at all levels of proficiency. For example, in 2009, the SEC introduced Summary Prospectuses for mutual funds, streamlining and simplifying Prospectus disclosure.

2. Sections to include:

  • The beginning of the report or cover page should state the fund’s name, type of report, the ticker symbol or class, the markets the fund is traded on, required legends and brief instructions on how to find additional information.
  • A simplified expense example in a $10,000 investment format and include a column for expenses as a percent of the shareholder’s investment. The table should only report the expenses for the past year or six months, depending on the type of report being filed.
  • The expense example replaces the preamble and two-table expense example. The table also does not need to include total fund returns or transaction costs. However, some additional information, like extraordinary expenses, can be included in the footnotes.
  • The Management’s Discussion of Fund Performance Section will need to be concise. It should only highlight key points about the investing narrative and include past performance and benchmark information, like the historical 10-year performance according to the class of investor for which the report has been prepared.
  • The Fund statistics section must now clearly present the types of investments the fund has made and how that relates to the fund’s objective. In addition, funds can now report holdings in terms of their total exposure and include a list of the top 10 holdings and metrics.
  • Aside from reformatting the section to be as concise as possible, no significant changes were made to the material Fund Changes Section.
  • A new Availability of Additional Information Section must now be included. This section will highlight in detail where shareholders can find different types of information, including the prospectus, holdings and proxy voting information.

3. Delivery:

One tailored shareholder report per share class will be delivered to each household. An explanation of this may be included in the report. In addition, reports are to be delivered in paper form by mail unless the account owner has previously consented to electronic delivery.  

Funds must also electronically file these reports with the SEC, under form type N-CSR, along with additional information.

4. XBRL:

The SEC has been continuously integrating the use of the XBRL language in reporting.

Those responsible for preparing reports should ensure the software they use is equipped for the change. For example, some SaaS solutions might not allow you to quickly set variable fields, leaving you to manually create individual reports for each class. This will be time-consuming and will make the process vulnerable to copy-and-paste errors.

5. Advertising amendments:

Investment company advertisements must now include the maximum amount of any sales load, or other nonrecurring fee, and the total annual expense without a fee waiver or reimbursement arrangement, presented prominently as additional fees. This change addresses concerns about advertising that might lead investors to think that fees are lower than they are.  

6. Client communications:

Aside from the necessary change management and due diligence to ensure that reports comply, clients may wonder why they are receiving a four-page report in the mail rather than the Notice they’ve been receiving for the past two years, or the full shareholder report they received prior to Rule 30e-3.  

Although not required, client communications about the impending changes will help set investor expectations and mitigate client and customer service concerns. In addition to meeting the requirements, ensure you have a solution to educate direct owners in an engaging way.

Compliance — getting started

While the SEC’s tailored shareholder requirements may seem straightforward, filers should not underestimate the changes necessary to existing workflows to gather the content to produce the report, iXBRL tag, file and distribute the new reports. With the creation of the documents by share class, the changes to house holding delivery guidelines have to be considered. 

Toppan Merrill continues to carefully follow the SEC modernization changes. We have simple and straightforward platform solutions to help you manage the SEC tailored shareholder report requirements from end to end. 

If you have questions about the rule changes or would like assistance in evaluating your current report software solution, client communications systems or other matters concerning the 1940 Securities Act, the experts at Toppan Merrill can help.

Guy Stanzione - Director, SEC Compliance Services

Guy Stanzione provides deep insight on the Securities Act of 1933, the Investment Company Act of 1940 and SEC regulatory compliance, as well as investment company solutions for regulatory document preparation, filing and distribution including Tailored Shareholder Reports. Leveraging more than 40 years of financial services, shareholder communication, printing and compliance service expertise he is a vital resource for financial services professionals navigating the complexities and pace of SEC regulatory changes .

Guy Stanzione - Director, SEC Compliance Services's Photo

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