SEC Proposes to Modernize Disclosure Framework for Mutual Funds and Exchange-Traded Funds, Modify Fee Information in Investment Company and Business Development Company Advertisements

The Securities and Exchange Commission on August 5, 2020 unanimously approved proposed rule and form amendments (Proposed Rule) that would comprehensively revise and update the disclosure framework for mutual funds and exchange-traded funds (ETFs, and collectively with mutual funds and unless otherwise specified, funds) in order to better serve the needs of retail investors. The Proposed Rule is part of the SEC’s investor experience initiative and seeks to respond to feedback from a request for comment on retail investors’ experience with fund disclosure that the SEC issued in 2018. If adopted, the Proposed Rule would, among other things:

• Streamline and tailor shareholder reports;
• Make available online certain information currently included in shareholder reports that the SEC believes may be less relevant to retail investors and of more interest to financial professionals;
• Amend the scope of Rule 30e-3 under the Investment Company Act of 1940 to exclude investment companies registered on Form N-1A;
• Provide an alternative approach to the annual delivery of fund prospectuses, to accommodate the perceived needs of new versus existing shareholders;
• Revise the prospectus disclosure framework for fund fees and risks; and
• Refashion requirements for presentation of fund fees and expenses in advertisements and sales literature for registered investment companies and business development companies (BDCs).

This Dechert OnPoint provides a detailed overview of the Proposed Rule and highlights certain requests for comment. It also discusses liability and litigation concerns that may arise as a result of the Proposed Rule. Comments on the Proposed Rule should be submitted on or before 60 days following the publication of the Proposing Release in the Federal Register (as of September 1, 2020, the Proposing Release had not been published in the Federal Register).

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