On October 2, 2019, the Disclosure Review and Accounting Office staff in the SEC’s Division of Investment Management issued guidance concerning certain performance and fee disclosure issues observed by the staff in fund filings. The staff’s guidance was issued as Accounting and Disclosure Information (ADI) 2019-09 — Performance and Fee Issues. The ADI identifies fund disclosure failures or errors relating to the following disclosure categories:
- Sales Loads. Failure to reflect the deduction of maximum sales loads in the average annual return table, resulting in overstated performance.
- Performance Presentations. (1) Showing negative performance as positive performance in the bar chart and/or average annual return table. (2) transposing performance of fund classes—e.g., showing class A performance as class B performance and vice versa and (3) transposing performance of multiple benchmark indices.
- Fee Waivers and Net Expenses. Listing adviser expense recoupments as a positive fee waiver in the fee table, causing net expenses to be greater than gross expenses. This approach, the staff noted, is inconsistent with Form N-1A requirements, which permit two additional line items to reflect a fee waiver and net expenses only if there is a reduction in gross fees as a result of the waiver.
- Acquired Fund Fees and Expenses. Failure to reflect the appropriate amount of acquired fund fees and expenses.
- Expense Example. Failure to correctly calculate the expense example, which may be attributable to, among other things (1) arithmetic errors, (2) failure to reflect fee waivers for only the term of the waiver or (3) failure to include certain fee items, such as acquired fund fees and expenses.
- Risk Return Summary. Failure to correctly tag risk/return summaries in XBRL, such as by (1) using the wrong tags,(2) entering the data incorrectly or (3) associating the tagged information with the wrong fund or class. Importantly, the staff noted that “tagged data files carry the same liability as the related official filings.”
The ADI advises funds to verify the accuracy of performance and fee disclosures prior to filing them with the SEC and providing them to investors.
The ADI is available here.