The 9 critical challenges to be TSR ready

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The SEC has been focusing on digitally transforming and modernizing all aspects of fund operations for many years. Changes including the new Tailored Shareholder Reports (TSR) requirement will make fund costs and performance more transparent and easier to understand.

The TSR requirements may seem straightforward, filers should not underestimate the changes necessary to existing workflows to gather content at the share class level, to produce the report, iXBRL tag, file and distribute. With the share-class creation of the documents, the changes to house holding delivery guidelines must also be considered.

Beginning July 2024, the Securities and Exchange Commission (SEC) mandated that all mutual funds and Exchange Traded Funds (ETF) filing under Form N-1A file, produce Tailored Shareholder Reports (TSR) designed to increase transparency of fund cost and performance.

While preparation for TSR adoption has begun, we continue to receive questions related to maximizing efficiencies to meet SEC requirements. Compliance with the various elements of the rule requires a well-thought approach. Below are the nine critical challenges every fund complex should be addressing right now.

Challenge #1: Mapping data/content to TSR output.

The biggest challenge for fund complexes will be to gather and assemble the required TSR data and content from multiple sources which exist inside and outside of their company.

Choosing the right platform to dynamically map data for each section to utilize the functional benefits of shared and variable content will streamline workflow and minimize workload.

Challenge #2: Managing the three-level content challenge.

We often discuss the effective management of multiple levels of shared, static and variable content as the three-level content challenge.

  1. Shared content across all funds within a fund complex
  2. Shared and variable content within a fund
  3. Shared and variable content at the share-class level

A purpose-built TSR platform designed to manage content at these levels will result in operational efficiencies and compliance accuracy at the critical steps of document creation, investor delivery, web hosting, and SEC filing.

Challenge #3: Creating automated charts and graphics to meet SEC guidelines.

The SEC created TSR guidelines to ensure shareholders could easily understand fund performance and other pertinent information in a summary format. The creation of visually engaging reports used to support a fund complex brand, while utilizing automation, is one of their primary challenges. 

To support document creation efficiencies, TSRs should be created using a publishing platform that automates the creation of charts and graphs directly from data sources, to minimize manual intervention and errors.

Challenge #4: Managing the complexities of TSR printing and distribution at the share-class level.

Although the record keeping of investments is typically at the share class level, the increased number of shareholder reports distributed due to TSR requirements compounds the complexity of accurate document delivery and meeting householding requirements.

Provider selection for this challenge is the most critical decision in the entire TSR print production lifecycle. It is essential to find an end-to-end solution dedicated to ensuring precise delivery of the correct TSR to individual shareholders.

Fund complexes should choose a provider with automated “direct to print” technology to produce share-class versions with flexible press options for short and long-runs. The provider must utilize digital and offset printing, configured to meet rules and business logic, tailored to maximize efficiency, deadline compliance and cost minimization.

Challenge #5: Managing eDelivery at the share-class level to support investors.

Much like print, effectively managing the electronic delivery of share-class specific TSRs is essential to meeting the delivery preferences of individual shareholders.

Fund complexes should select an eDelivery platform that provides access to investor specific microsites for each required document. The platform should be document agnostic and based on investor delivery preference, allowing the flexibility for an investor to receive certain documents electronically, while others in paper format.

Challenge #6: Meeting the EDGAR HTML and iXBRL requirements with the changes to Form N-CSR.

In a significant change to Form N-CSR, the SEC created new Items 7 to 11 specific to Open-End funds. Financial statements, Schedules of Investment and Financial Highlights, previously included in the shareholder report are now required as Items 7a and 7b in the Form N-CSR, with some crossover of content between the TSR and N-CSR.

It came as no surprise when the SEC added the iXBRL requirement to the final TSR rule. To comply with the XBRL requirement, Open-End funds must tag the TSRs using the anticipated Open-End Fund (OEF) taxonomy. In addition to the TSR XBRL requirement there will also be a transition period for fund prospectuses to begin using the new taxonomy. 

To support the iXBRL requirement, the platform used to generate TSRs must be able to support xHTML, the HTML version required to file XBRL. Using a platform that transforms HTML to xHTML is essential to meet validation requirements and compliance deadlines, while maintaining content accuracy and integrity. 

Challenge #7: Selecting a platform to support the EDGAR xHTML assembly and filing.

With the additional disclosure of Items 7 to 11 required in Form N-CSR and the need to transform HTML to xHTML, fund complexes must ensure their provider’s platform automates the assembly of their N-CSR and validates the SEC submission prior to filing.

In compliance with the website hosting requirement, the platform needs to be able to customize the output to dynamically extract Items 7 to 11.

Challenge #8: Ensuring TSRs are website hosted to meet the SEC’s layered disclosure framework.

Fund complexes should choose a provider who’s solution delivers the automated creation, assembly, and separation of the TSRs from the additional web content contained in the N-CSR. This requires integrated technology that automates the extraction of the required disclosure in Items 7 to 11 from the N-CSR, while content is managed in a single source of truth. 

The SEC has introduced a layered disclosure approach, much like the one applied to the Mutual Fund Summary Prospectus (Rule 498) framework. With the SEC requiring a print default model, investors must be able to access the required fund information online within a minimum number of mouse-clicks, similar to accessing Summary Prospectuses. The annual and semi-annual TSR for every share class, along with more detailed disclosure from the N-CSR, must be displayed on a website and accessible in a single click from a landing page. In addition, as a continuation of the Rule 30e-3, funds must continue to host First and Third Quarter Holdings, providing a one-year look back at fund performance.

Challenge #9: Ensuring ADA compliance and incorporating ADA accessibility.

SEC regulations do not require electronic materials to be ADA-accessible and do not oversee The Americans with Disabilities Act (ADA) compliance; the frequency of litigation related to non-compliance has increased over the last few years.

ADA compliance includes a variety of accessibility standards such as the inclusion of a text reader, employment of color contrast and color use standards. All links, images, and videos have alternative text to define the asset for the visually impaired.

How Toppan Merrill can help

Toppan Merrill has been helping funds and variable product issuers with their required financial reporting and compliance requirements for decades. We continually monitor the SEC modernization updates and help with formatting, inline XBRL and website display architecture for the new Tailored Shareholder Report requirements. Our experts are in constant contact with the SEC to clarify rules and ensure our clients are in full compliance.

We offer simple and straightforward solutions that help you bring your filing and reporting into compliance. If you have any questions about the Tailored Shareholder Report Rule, client communications systems, or other matters concerning the 1940 Securities Act, the experts at Toppan Merrill can help. Connect with us or phone at 800.688.4400.

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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