The Securities and Exchange Commission released a proposal Wednesday to reform mutual fund and exchange-traded fund disclosures to help investors better understand their fees, risks and performance.
The proposed disclosures would center on “concise and visually engaging shareholder reports” that illuminate the most important information investors need to evaluate the funds they hold or are considering purchasing, the SEC said in a statement.
Under the proposal, funds would have to provide streamlined reports that highlight expenses, performance, illustration of holdings and material fund changes. Funds would be encouraged to use tables, bullets and question-and-answer formats to make the information more digestible. The SEC posted an example of a streamlined shareholder report.
The streamlined shareholder report would be the primary fund disclosure that investors receive each year. It would replace prospectus updates. The proposal also would amend prospectus disclosures to increase the clarity and consistency of information provided.
Investors would get notices of material fund changes as they occur. More detailed information could be accessed online through what the SEC calls “layered disclosure.”
Part of the agency’s “investor experience” initiative, the proposal is an effort to make often opaque and voluminous fund documents more useful.
“This is a very exciting proposal that significantly modernizes our fund disclosure framework with an investor-first perspective,” SEC Chairman Jay Clayton said at an open meeting Wednesday. “I believe it will significantly enhance the investor experience for millions of Main Street investors.”
All four SEC members approved releasing the proposal for a 60-day public comment period that will begin after the proposal is published in the Federal Register.
The Investment Company Institute, a trade association for the mutual fund industry, said the SEC is on the right track to reform fund communications.
"We are particularly pleased to see that the commission is considering permitting funds to provide shareholders with a more streamlined, investor friendly shareholder report," ICI general counsel Susan Olson said in a statement. "ICI created and conducted investor testing of a prototype summary shareholder report in 2018, and investors indicated that they would be more likely to read the summary than the full-length shareholder report, while also finding the summary helpful to compare different funds."
SEC member Allison Herren Lee said she supports the proposal in part because it would simplify the presentation of fees and expenses and convey them in dollar amounts rather than only in percentages. She also backs the proposal’s requirement to list principal risks in order of importance rather than alphabetically.
“Although there are a couple of items in the proposal that I hope will improve, I’m pleased to support it because it would make a number of helpful changes to fund disclosure requirements to provide investors with information that is more digestible, user-friendly, relevant and engaging,” Lee said at the open meeting.
SEC member Hester Peirce said the proposal would give investors better insight into funds than the disclosures they’re currently receiving and often ignoring.
“A quick perusal — which is usually all these documents get — makes it clear that lawyers, not retail shareholders, are the muses that inspired these documents,” Peirce said at the open meeting. “Today’s proposals would reorient these documents with the retail shareholder in view.”
Peirce added that the SEC doctor should heal itself when it comes to verbosity.
Like most other SEC proposals over the last 20 years, the fund disclosure release is huge, totaling about 700 pages, she said. Lawyers and compliance professionals are more likely to wade through it than the ordinary investors to whom it’s targeted.
“One of the stated goals of today’s proposals is for funds to create shorter, less complicated disclosure documents, drafted in plain English,” Peirce said. “A worthy goal, indeed, and one I think the commission should make greater effort in achieving itself.”
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