SEC Building (Credit: AP)

The Securities and Exchange Commission has proposed what Cipperman Compliance Services is calling a “complete overhaul” of the disclosure framework for mutual funds and exchange traded funds, including to the prospectus, annual report and fund advertising.

The Investment Company Institute says the proposed framework, announced Wednesday, would feature “concise and visually engaging shareholder reports” highlighting information that is particularly important for retail investors to assess and monitor their fund investments.

The proposal is now out for a 60-day comment period.

“The Commission is committed to improving the Main Street investor experience and modernizing information content and delivery,” said SEC Chairman Jay Clayton said in a statement.

“By encouraging fund disclosures that use modern communication techniques to emphasize clearly and concisely the information investors find most useful, [the] proposal should facilitate better-informed decision making,” Clayton added.

Details of Disclosure Plan

The proposal would:

  • Require streamlined reports to shareholders that would include, among other things, fund expenses, performance, illustrations of holdings and material fund changes;
  • Significantly revise the content of these items to better align disclosures with developments in the markets and investor expectations;
  • Encourage funds to use graphic or text features — such as tables, bullet lists, and question-and-answer formats — to promote effective communication; and
  • Promote a layered and comprehensive disclosure framework by continuing to make available online certain information that is currently required in shareholder reports but may be less relevant to retail shareholders generally.

Overall, the framework aims to “provide an alternative approach to keeping investors informed about their ongoing fund investments,” ICI explained in a recent note on the SEC’s plan.

“Instead of receiving both prospectus updates and shareholder reports, which today can be lengthy and complex, existing investors would receive the streamlined shareholder report,” the mutual trade group said. “This would provide investors with timely and concise information to effectively assess and monitor their fund investments.”

Information currently required in shareholder reports that is not included in the streamlined shareholder report would be available online, delivered free of charge upon request, and filed on a semi-annual basis with the Commission, ICI added.

Thinking Behind the Proposal

As Cipperman notes in its online briefing, the SEC “also wants to revise the fees and risks section of the prospectus, moving much of the text out of the summary prospectus.”

In addition, the regulatory body is proposing “to make fund advertisements more clear and comparable with standardized performance information,” said the compliance services firm, which applauded changes to annual reports.

“Although it requires that fund firms create yet another document, it will ultimately save them the hassle of delivering voluminous (and inscrutable) shareholder reports along with an updated prospectus that nobody reads,” Cipperman said.

However, “We are more dubious about the tinkering with the prospectus or advertising rules as past efforts haven’t seemed to satisfy retail investors or make them more savvy,” the firm opined.

The proposals, Cipperman added, “will likely generate significant debate and comment” before becoming final.