The Securities and Exchange Commission voted 4 to 1 on June 4 to adopt new Rule 30e-3 under the Investment Company Act of 1940 and related form amendments, allowing registered funds to replace paper delivery of shareholder reports with online access.1 With an earliest operational date of January 1, 2021, the new framework is probably the most transformative — and, in the view of most industry participants, long overdue — advancement in embracing the reality of digital communication as a primary way investors consume information. The SEC also requested comments on enhancing fund disclosures to “improve the investor experience” and on the framework for processing fees charged to funds by intermediaries for the forwarding of fund shareholder reports and other materials to investors.

New Optional Delivery Method

The Rule provides an optional “notice and access” method to allow funds to satisfy their obligations to transmit shareholder reports. This is a profoundly different approach from the SEC’s decades-old electronic delivery guidance, established principally through interpretive releases issued in 1995, 1996 and 2000, which generally requires notice, access and evidence of delivery. Subject to conditions in the Rule, funds will now be able to make their reports and other required materials accessible at a specified website address and send investors a paper notice of each report’s availability by mail. Each notice provided to investors under the Rule is required to explain how investors may access the report and request paper copies. Funds will be permitted to satisfy their delivery obligations for shareholder reports by mailing reports in paper, delivering reports electronically to investors who have chosen this method under the current electronic delivery guidance, providing notice and website accessibility under the Rule, or a combination of the two. Of course, investors may still elect to receive all reports in paper that are sent by the fund complex or forwarded by a financial intermediary, or request to receive particular reports in paper.

The Rule provides for an extended transition period that is intended to better inform current investors of the coming change and better enable them to easily continue to receive paper reports if they wish.

The main conditions of the Rule include:

  • Report Accessibility. The shareholder report and the fund’s most recent prior report must be publicly accessible, free of charge, at a specified website.
  • Availability of Quarterly Holdings. Quarterly holdings for the last fiscal year must also be publicly accessible at the website. These holdings would include those in the shareholder reports, which would cover the second and fourth fiscal quarters, and would also include holdings for the first and third fiscal quarters.
  • Format. Funds must satisfy conditions designed to ensure accessibility of reports for shareholders, including format and location.
  • Notice. Investors will receive a notice of the availability of each report, which includes a website address where the shareholder report and other required information is posted and instructions for requesting a free paper copy or electing paper transmission in the future. The notice may include certain additional information, such as (i) instructions by which an investor can elect to receive shareholder reports or other documents by electronic delivery and (ii) additional content from the shareholder report.
  • Ad Hoc Paper and Investor Elections for Paper. Funds must send a free paper copy of any of the materials upon request from time to time. Additionally, an investor may elect at any time to receive all future reports in paper by calling a toll-free telephone number or otherwise notifying the fund or intermediary. Elections to receive reports in paper with respect to one fund will apply to other funds held currently or in the future in the same account with the fund complex or financial intermediary.
  • Extended Transition Period. The Rule will become effective on January 1, 2019. Funds will generally be required to provide two years of notice to shareholders if relying on the Rule before January 1, 2022. Therefore, funds that begin providing notice at the start of 2019 will complete the two-year notice period and may begin relying on the Rule on January 1, 2021. Funds that are newly offered during the period of January 1, 2019 through December 31, 2020 may rely on the Rule starting January 1, 2021 if they provide notice to shareholders starting with their first public offering. New funds on or after January 1, 2021 would not be subject to the condition and can therefore rely on the Rule immediately without providing any advance notice through required statements. All other funds may not rely on the rule until they have completed a full two-year notice period or until January 1, 2022, whichever comes first.

Request for Comment on Enhancing Fund Disclosure and Intermediary Processing and Delivery Fees

The SEC is seeking input, particularly from individual investors, on enhancing fund disclosures. The release requests feedback directly from individual investors, academics, literacy and design experts, market observers, and fund advisers and boards of directors on the design, delivery and content of fund disclosure, including shareholder reports as well as prospectuses, advertising and other types of disclosure. The SEC is also soliciting feedback on investor preferences for means of delivery and how to make better use of current technology, including how to make disclosure more interactive and personalized.

With the adoption of the Rule, the SEC is also considering more broadly the overall framework for the processing fees that broker-dealers and other intermediaries charge funds. These fees are charged in connection with forwarding shareholder reports and other materials to beneficial shareholders under current rules of the New York Stock Exchange and other self-regulatory organizations. The scope of requested comments includes an assessment of processing fees, transparency of these fees, remittances received by financial intermediaries for delivery of fund documents, and whether the structure and level of processing fees should be set by another entity. The SEC will seek public input on the two requests for comment until October 31, 2018.