The SEC finalized the new Tailored Shareholder Reporting rules - have you started your project plan?

Clearly the SEC has been busy this past year with the pace of rulemaking at a fever pitch. One very significant and highly anticipated project that was finalized late in 2022 was the new Tailored Shareholder Reporting rules. These new rules will definitely take some effort and coordination to implement and the clock is ticking given the relatively tight timeline to complete the rollout (on top of the day job!) I’ll share some highlights to help you think through how to get the ball rolling.?

What happened??

The SEC adopted rules that will require mutual funds and ETFs that are registered on Form N-1A (“funds”) to transmit new tailored (3-4 page) annual and semi-annual shareholder reports by individual share class that are concise and visually engaging starting in July 2024.?

These share class level tailored shareholder reports will need to:

• highlight key information on expenses, performance, holdings, key statistics, material changes and other summary information.
• be presented in “plain English,” using graphic and text features to make it more “effective and visually engaging.”?
• compare performance to the overall applicable securities market using a newly defined broad based securities market index?

To bring all of this to life will take coordination across financial reporting, legal, compliance, marketing, IT/website development, and any applicable vendors. This will not be a simple task so putting in place a project plan now is paramount to successful implementation.

Timing Considerations

The volume of reports will increase given the tailored shareholder report must be prepared for each individual share class. This is a key consideration given the transmission and filing deadlines have not been extended. This information will need to be compiled, transmitted and filed with the Commission on Form N-CSR in the same time frame as is currently required (60 days to transmit to shareholders and 10 days subsequent to the transmission to shareholders to file with the SEC) so fund management will need to work through production plans in order to handle the increased volume of reports within the same reporting timeframe.?

Funds will also need to coordinate with the independent public accountants given they will be required to review the information contained within the annual tailored shareholder reports to ensure consistency with the audited financial statements that will be filed as a separate item within the amended Form N-CSR.?

Also in terms of impact on mailing, the final amendments eliminate the use of 30e-3 for open-end funds and ETFs. This historically allowed funds to provide a postcard to those shareholders that had not opted into electronic communication notifying them where they could locate their shareholder reports online. Now, funds will need to revamp processes to ensure timely mailing of the full tailored shareholder report to those shareholders that do not opt into electronic delivery, as well as posting to the Company’s website.

Education

Given the tailored shareholder report is intended to provide key information that is important for retail investors to assess and monitor their fund investments, organizations should undertake an education initiative to help investors understand the changes in the information being presented to them and an appreciation for where other publicly available information can still be found.?

Strategy

This is a great opportunity to reimagine the investor experience as the new tailored shareholder report will go directly to each shareholder.

As companies think through their strategic approach around implementation of the final rules, consideration should be given to automation and robust controls to ensure effective, complete and accurate document production.?

We encourage companies to think about flexible architecture for any technology solutions given the SEC has indicated a continued focus around rulemaking related to fund fees and expenses. Given this, we expect there could be additional amendments in the future that could impact shareholder reporting. Furthermore, given the SEC has adopted a layered disclosure approach, it is imperative that organizations have processes and controls to ensure consistency of information made available, either online, in reports transmitted to shareholders, or in various forms filed with the SEC.???

Hopefully this overview helps get you thinking about some of the aspects around implementation. Should you have questions on this topic, feel free to reach out. Also for more developments impacting the mutual fund space, check out our winter issue of Current developments for the mutual fund industry. ?