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Shareholder reports are changing. New rules, introduced by the Securities and Exchange Commission (SEC), require open-end mutual funds, including exchange-traded funds (ETFs), to produce concise, visually engaging and – critically – personalized annual and semi-annual shareholder reports. Closed-end funds will continue to rely on Rule 30e-3.

The move is part of the SEC’s ongoing efforts to modernize and simplify disclosure requirements for investment companies and improve the transparency and accessibility of information for investors.

Here are 5 key facts about how the new rules affect fund companies.

1. What are tailored shareholder reports (TSRs)?

TSRs provide succinct, easily comprehensible, and visually engaging content about fund investments. A TSR will typically be two to three pages in length, include a summary of key information that investors need to make informed decisions, and present information about fund performance, fees and other key facts.

In addition to brevity and a more visually engaging design, TSRs must be tailored to the needs and sophistication of retail investors. An important factor for funds with different shareholder classes is that reports will have to be prepared separately for each series and share class of a fund, and shareholders will only receive a shareholder report for the specific series and share class that the shareholder is invested in.

The fund’s report must include a brief plain-English statement that certain additional information is available on the fund’s website with instructions on how shareholders can request such information. In a change from recent moves to digitize communications, note that TSRs should be mailed to investors by default. eDelivery requires consent, although pre-existing consent is accepted.

2. When is this happening?

The rule came into effect on January 24, 2023, but an 18-month transition period occurs before compliance becomes mandatory. That means the final deadline for TSR adoption is July 24, 2024.

A significant provision through the transition period is that the details in the rule concerning misleading representation of fees and expenses have been effective from the start, i.e., since January 24, 2023.

3. Why has the SEC introduced TSRs?

The SEC’s rationale is that TSRs will make it easier for non-professional investors to quickly and easily access important information about their investments without having to wade through lengthy, jargon-filled documents. The average length of shareholder reports before this rule was 134 pages.

The SEC hopes that TSRs will increase retail investor engagement and satisfaction by providing them with the information they need in a format that is easy to understand and digest. This falls into the SEC’s moves to improve disclosure requirements for investment companies as part of its broader mission to protect investors and ensure that they have access to the information they need to make informed investment decisions.

4. What do TSRs mean for retail investors?

Although TSRs are intended to help retail investors, those who are accustomed to long-form reports may have questions about the reasons for the change and where to access the additional information previously available in the shareholder reports. Much of that information will now be available in the fund’s Form N-CSR filing. Funds will need to make this information available to shareholders on their website and deliverable to shareholders upon their request.

The SEC does not require funds to communicate the change to TSRs in advance, but funds may wish to mitigate concerns by including guidance for investors as TSRs are rolled out.

5. What will be the impact of TSRs and where can I get advice?

The benefits of TSRs include increased transparency, better understanding of investment risks, and more informed decision-making. Funds may see advantages from improved communication with investors and enhanced shareholder engagement.

However, challenges may occur in the implementation of TSRs as funds determine the appropriate level of customization and introduce processes to ensure accuracy. Some additional costs to generate and mail TSRs are likely.

Mediant, a BetaNXT business, is always ready to provide personalized advice for clients as they adapt to new regulations, including the TSR rule. More broadly, we are actively working with the industry to:

  • Modernize the disclosure framework for open-end funds
  • Serve as the central source of disclosure, eliminating the need to send prospectus updates
  • Provide investors with simpler, easier-to-understand information
  • Offset the cost of TSRs by increase eDelivery consent rates through omnichannel shareholder engagement services

Let’s Talk

To find out more about tailored shareholder reports, please contact us.

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