Statement by Commissioner Lee on Proposed Summary Shareholder Report

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

More and more, America’s families save for their children’s education, for their own retirement, and for a host of other purposes by investing their money in mutual funds and relying on the asset management industry to put their money to work. That’s what I have done for my family just as many folks on this call have as well. We know that it is vital for investors to understand exactly how their money is managed and how their investments perform over time. To that end, 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. [1]

For example, the proposal would simplify the presentation of fees and expenses, in both the prospectus and the new summary shareholder report, by adopting plain English headings and requiring that funds include illustrative dollar amounts for each expense rather than only percentages. The changes would also tailor the disclosure requirements to provide investors with the information that is more directly relevant to them at the time. New purchasers will get a prospectus as before, but existing shareholders will get a summary shareholder report that has more detailed information about the fund’s performance, investments, and expenses over the past year. [2]

I’m also pleased to see proposed changes targeted at specific disclosure problems that the Commission and staff have seen with existing funds. For instance, requiring funds to disclose principal risks in order of importance, as opposed to alphabetically or otherwise, just makes sense and reduces the chance that important risks may be obscured. Similarly, consistent with our longstanding interpretation of an “appropriate broad-based securities market index,” the proposal would require funds to compare their performance to the overall applicable market, rather than selecting a narrow index against which the fund may compare more favorably. [3] These proposed changes are smart and sensible in terms of promoting straightforward presentations that investors can digest and use to make informed decisions about their investments.

That said, there are some features in the proposal that I believe merit close scrutiny by commenters and might be improved. For example, I am concerned about the proposal’s treatment of acquired fund fees and expenses (“AFFE”). Specifically, the proposal would allow funds to exclude AFFE from their bottom line expense figure if the fund invests less than 10% of its assets in other funds. [4] But using the percentage invested in other funds as the trigger for disclosure, instead of using the amount of AFFE as a percentage of net assets, has the potential to obscure expense information even when it may be material. For example, compare a mutual fund that invests just below 10% in funds with very high expense ratios with a mutual fund that invests slightly more than 10% in funds with low expense ratios. The former likely has a higher total AFFE than the latter in this example, but the fund with the higher AFFE would not be required to include it in the presentation of its ongoing annual fees. [5] I hope to hear from commenters about how the Commission should address this in any final rule to ensure that our approach promotes transparency and consistency.

Finally, today’s proposal also includes a “feedback flier” specifically designed to elicit feedback from retail investors. I hope this will encourage those investors, and their advocates, to provide input on the proposal.

I am also pleased that the Commission’s proposal draws on existing research related to disclosure effectiveness and investor preferences, but that is not a replacement for actual investor testing of the disclosure that we propose to require. As I have said before, we should undertake our own investor testing to ensure that rules are properly designed for retail investors. Getting disclosure right for retail investors may be our most fundamental job at the Commission. It runs to the core of our mission, and we should devote the time and resources needed in this area.

One final point, in light of the on-going challenges presented by COVID-19, I would have supported a longer comment period to ensure the public, and especially retail investors, have sufficient time to research and consider this proposal. [6] I encourage anyone who finds that more time is needed to reach out to the Commission, including my office, and let us know.

With that, I want to thank the staff again for this very thoughtful and promising proposal. I look forward to helpful feedback from the public, and an assessment of how best to ensure that the final rules serve their intended purpose of improving disclosure for retail investors.


1I want to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work on today’s recommendation. Specifically, from the Division of Investment Management: Director Dalia Blass, Sarah ten Siethoff, Alison Staloch, Brian Johnson, Amanda Wagner, Zeena Abdul-Rahman, Daniel Chang, Mykaila DeLesDernier, Pamela Ellis, Angela Mokodean, Keith Carpenter, Michael Kosoff, Daniel Rooney, Mike Spratt, and Jennifer McHugh; from the Division of Economic and Risk Analysis: Director S.P. Kothari, Malou Huth, Hari Phatak, Alex Schiller, Cindy Alexander, Adam Large, and PJ Hamidi; and from the Office of the General Counsel: General Counsel Bob Stebbins, Meridith Mitchell, Lori Price, Natalie Shioji, Cathy Ahn, and Sean Bennett.(go back)

2While existing shareholders would no longer automatically receive a new prospectus each year, as is the current practice, the rules would continue to require that funds notify existing shareholders of material changes to the fund both at the time of the change and in summary form in the new summary shareholder report.(go back)

3The proposed changes to the definition of “appropriate broad-based securities market index” are consistent with the Commission’s intent when it adopted the requirement for funds to compare their performance to a benchmark index. See Disclosure of Mutual Fund Performance and Portfolio Managers, Investment Company Act Rel. No. 19382 (Apr. 6, 1993) (stating that the change “requires that a broad-based securities market index, such as the S & P 500, the Nikkei Index, or the Lehman Corporate Bond Index be used in the graphic comparison. The Commission has chosen to require funds to use a broad-based index in order to provide investors with a benchmark for evaluating fund performance that affords a greater basis for comparability than a narrow index would afford.”). The Commission also stated that “[a]broad-based index is one that provides investors with a performance indicator of the overall applicable stock or bond markets, as appropriate. An index would not be considered to be broad-based if it is composed of securities of firms in a particular industry or group of related industries.” Id.(go back)

4The amount of AFFE for these funds would continue to be disclosed in a footnote to the fee table, but its omission from the bottom line presentation of ongoing annual fees could cause investor confusion in comparing expenses across funds.(go back)

5Moreover, the omission of AFFE from ongoing annual fees would mean that existing investors in a significant population of funds would not learn of even material changes in the amount of AFFE for their fund. The expense would continue to be presented in a footnote in the fund’s prospectus—which an investor will receive at the time of purchase—but funds investing less than 10% of assets in other funds would not be required to disclose changes to this figure in summary shareholder reports provided to existing investors, even while updates to other expense amounts would be required. By requiring AFFE to be disclosed in the prospectus for all funds—whether in the fee table or in a footnote—the Commission implicitly acknowledges the materiality of this information. But today’s proposal would absolve funds of the requirement to update their shareholders even when expenses changes materially.(go back)

6The release states that comments should be received by the Commission within 60 days of the proposal’s publication in the Federal Register. A lengthened comment period would be especially useful in the context of this proposal, which would effectuate substantial changes to mutual fund disclosure for all retail investors. A longer comment period would provide investors, the fund industry, and academics with time to evaluate the proposal and to potentially study the effectiveness of the disclosure that we propose to require. Given the length and complexity of today’s proposal, however, I would expect from the Commission’s recent experience that it will likely take a month or longer from today’s vote for the proposal to be published. This will have the practical effect of lengthening the comment period. I intend to watch this closely, and I encourage interested parties to reach out to my office if you believe that additional time is warranted.(go back)

Both comments and trackbacks are currently closed.