Whitney Chatterjee, Donald Crawshaw, and William G. Farrar are Partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Chatterjee, Mr. Crawshaw, Mr. Farrar, Eric M. Diamond, Joseph A. Hearn, and Frederick Wertheim.
Amendments Modify the Disclosure Framework for Mutual Funds and Exchange-Traded Funds to Create a New Layered Disclosure Approach to Highlight Key Information for Retail Investors
SUMMARY
On October 26, 2022, the Securities and Exchange Commission (the “SEC”) adopted, by a unanimous vote, its previously proposed[1] amendments to the mutual fund and exchange-traded fund disclosure framework for annual and semi-annual shareholder reporting, with the goal of modernizing the disclosure framework for such funds and better tailoring fund disclosures to retail investors’ needs.[2] The final amendments modify the scope of rule 30e-3 to exclude open-end funds (as defined below) so that shareholders of such funds will directly receive in paper the new tailored annual and semi-annual reports. The final rules also amend investment company advertising rules with the stated goal of promoting more transparent and balanced statements concerning investment costs. The amendments to the disclosure framework and investment company advertising rules were adopted substantially as proposed with certain modifications.
Proposed amendments to funds’ prospectus disclosure of fund fees, expenses and principal risks and a new rule providing an alternative approach to satisfy prospectus delivery requirements for existing fund investors were not adopted. Among other things, the proposed amendments would have refined existing requirements for funds to disclose the acquired fund fees and expenses (“AFFE”) associated with investments in other funds by permitting open-end funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table and instead disclose the amount of the fund’s AFFE in a footnote to the fee table and fee summary.[3] This change would have addressed, in part, concerns that current AFFE disclosure requirements overstate the costs of investing in business development companies (“BDCs”), and as a result, deter funds from investing in BDCs.[4] Commissioner Hester M. Peirce, in her statement supporting the rulemaking but noting that more can be done to improve mutual fund disclosure, emphasized that the final rules “jettison[ed]” the change to the AFFE disclosure, which she called a “small but important proposal” that could have facilitated investments in BDCs and the reintroduction of BDCs into indexes.[5]
The amendments will be effective 60 days after the date of publication in the Federal Register. However, as described below under “Compliance Dates,” extended transition periods will be available for compliance with certain amendments.
