On February 11, 2009, the SEC issued a Release adopting rule amendments that will require mutual funds to provide the Risk/Return Summary section of their prospectuses (Items 2, 3, and 4 of Form N-1A, as recently amended) to the SEC in interactive data format, using the eXtensible Business Reporting Language, as an exhibit to registration statements. Funds will also be required to submit an interactive data file exhibit for any form of prospectus filed pursuant to rule 497(c) or (e) under the Securities Act that includes information provided in response to Items 2, 3, or 4 that varies from the registration statement. In addition, funds will be required to post the interactive risk/ return summary data on their websites. The SEC also extended the current interactive data voluntary reporting program to allow mutual funds voluntarily to submit tagged portfolio holdings information. Release Nos. 33-9006, 34-59391, 39-2462, IC-28617; available at http://www.sec.gov/rules/ final/2009/33-9006.pdf.  

Highlights of the Release are briefly summarized below.  

Dates

Effective Date: July 15, 2009; Compliance Date: January 1, 2011

The rules require all mutual funds to submit interactive data with any registration statement or posteffective amendment on Form N-1A that includes or amends risk/return summary information, and with any form of prospectus filed pursuant to rule 497(c) or (e) under the Securities Act that contains risk/return summary information that varies from the registration statement. The first required submissions will be for initial registration statements and post-effective amendments that are annual updates to effective registration statements and that become effective after January 1, 2011. A fund is not required to comply with the provision to submit a tagged risk/return summary exhibit with any form of prospectus filed pursuant to rule 497(c) or (e) under the Securities Act until that fund has first submitted an exhibit with its registration statement.  

The New Requirements

Information in interactive format requires a standard list of tags. These tags are similar to definitions in an ordinary dictionary, and cover a variety of concepts that can be read and understood by software applications. For the risk/return summary, a mutual fund will use the most recent list of tags for risk/return summary information released by XBRL U.S., as required by Regulation S-T and the EDGAR Filer Manual. The rules define the interactive data in machine-readable format required to be submitted as the “interactive data file,” which will be required with every interactive data submission.  

Because information in interactive data format is intended to be processed by software applications, the unprocessed interactive data is not readable. Thus, “viewers” are necessary to convert the interactive data file to “human readable format.” The SEC’s website currently includes a viewer that allows the public to read mutual fund disclosures submitted using interactive data. In this regard, the Release notes that the SEC is implementing changes to develop “a more advanced tool” that will permit filers to conduct test filings and view rendered documents prior to submitting their exhibits. The SEC expects these upgrades to be completed “during mid-2009.” In addition, the SEC will include language within any rendered risk/return summary information on its upgraded mutual fund viewer to: (1) inform users that the information is derived from a portion of the fund’s prospectus; (2) explain that the prospectus contains additional information about the mutual fund; and (3) state that a fund’s prospectus should be read carefully before investing.  

The new interactive data requirements apply to the “Risk/Return Summary” Items of Form N-1A, as recently amended in Investment Company Act Release No. 28584 (Jan. 13, 2009) (i.e., Item 2: Investment Objectives/Goals; Item 3: Fee Table; and Item 4: Investments, Risks, and Performance).

In addition to tagging the data in these Items, funds will be required to provide document and entity identifier tags, such as the form type and the fund’s name. The requirement for interactive data reporting is intended to be “disclosure neutral”; i.e., the SEC does not intend these rules to result in mutual funds providing more, less, or different disclosure for a given disclosure item, depending upon the format, whether ASCII, HTML, or XBRL.  

Note that these requirements build on the SEC’s recent action to require non-investment company issuers to use interactive data in their filings. See Interactive Data to Improve Financial Reporting; Securities Act Release No. 9002 (Jan. 30, 2009). Among other things, the Interactive Data release sets out the text of new rules under Regulation S-T that generally apply to, but are not fully reproduced in, the mutual fund risk/return summary Release. Rule 405 of Regulation S-T (together with new General Instruction C.3.(g) to Form N-1A) imposes content, format, submission, and website posting requirements for an “Interactive Data File,” but would not change the substantive content requirements for the financial and other disclosures in the traditional related filing. Temporary Rule 406T of Regulation S-T (as discussed further below) sets forth liability provisions temporarily applicable to Interactive Data Files.  

Filing with the SEC

The new rules require interactive data tagging of a mutual fund’s Risk/Return Summary information, and a fund will have to submit interactive data for such information that is contained in any filing on Form N-1A that includes or amends information provided in response to Items 2, 3, and/or 4. The rules require funds to provide the interactive data in an exhibit to the fund’s registration statement. Interactive data would be required for all information in the risk/return summary, including information for each series and class included in the fund’s prospectus. Further, the interactive data would have to be submitted in a manner that permits the information for each series and any class-specific information, such as expenses and performance, to be separately identified by series and class. However, information that is not class-specific (such as investment objectives) would not be required to be separately identified by class.  

The Release notes that one of the principal benefits of interactive data is its “extensibility”—that is, the ability to add to the standard list of tags in order to accommodate unique circumstances in a mutual fund’s particular disclosures. However, in order to promote comparability across funds, the rules limit the use of extensions to circumstances where the appropriate element does not exist in the standard list of tags. The SEC is also requiring that, wherever possible, preparers change the label for an element that exists in the standard list of tags, instead of creating a new customized tag.  

The rules do not eliminate or alter existing requirements that risk/return summary information be filed in traditional format. Rather, the rules provide that an interactive data exhibit to a Form N-1A filing (whether the filing is an initial registration statement or a post-effective amendment thereto) must be submitted as a post-effective amendment to the registration statement to which the interactive data relates. The amendment that includes the interactive data must be submitted after the related filing becomes effective, but not later than 15 business days after the effective date of the related filing. An exhibit containing interactive data format risk/return summary information could be submitted under Rule 485(b) of the Securities Act (which provides for immediate effectiveness of amendments that make non-material changes), and would only need to contain the new exhibit, a facing page, a signature page, a cover letter explaining the nature of the amendment, and a revised exhibit index. The rules do not require mutual funds to involve third parties, such as auditors, in the creation of the interactive data provided as an exhibit to a mutual fund’s Form N-1A filing, including assurance.  

In addition, the rules require submission of an interactive data file for any form of prospectus filed pursuant to rule 497(c) or (e) under the Securities Act that includes information provided in response to Items 2, 3, or 4 that varies from the registration statement. (By way of background, rule 497(c) requires mutual funds to file, within five days after the effective date of a registration statement or the commencement of a public offering after the effective date of a registration statement, whichever occurs later, 10 copies of each form of prospectus and form of SAI used after the effective date; and rule 497(e) provides that, after the effective date of a registration statement, no prospectus that purports to comply with Section 10 of the Securities Act or SAI that varies from any form of prospectus or form of SAI filed pursuant to rule 497(c) shall be used until filed with the SEC.) In these cases, the interactive data file would be submitted as an exhibit to an affected 497 submission, and the tagged exhibits may be submitted concurrently with the rule 497 filing, or up to 15 business days subsequent to the rule 497 filing.

Website Posting of Interactive Data

A fund is also required to provide the same interactive data on its website (if it has one) that it files with the SEC. The interactive data would have to be posted to a fund’s website by the end of the same calendar day on which the interactive data exhibit to either a Form N-1A filing or a rule 497 filing is deemed officially filed or required to be filed, whichever is earlier. Note that the rules do not allow a fund to comply with the web posting requirement by including a hyperlink to the documents available electronically on the SEC’s website. An Interactive Data File is required to be posted on the Fund’s website “for as long as the registration statement or post-effective amendment to which the Interactive Data File relates remains current.”  

Consequences of Non-Compliance

The SEC also revised Rule 485(b) so that, if a registrant does not provide the required interactive data submission, or post the interactive data on its website, by the required date, the registrant’s ability to file post-effective amendments under Rule 485(b) (which provides for immediate effectiveness of amendments that make non-material and other changes) will be automatically suspended. The suspension would become effective at the time that the registrant fails to meet the requirement to submit or post interactive data, and would terminate as soon as the registrant has submitted and/ or posted that data. The suspension would apply to post-effective amendments filed after the suspension becomes effective, but would not apply to post-effective amendments that were filed before the suspension became effective. The Release makes clear that the suspension will apply to post-effective amendments for all series of a registrant that is organized as a series company.  

Liability Provisions

As noted above, the new rules include provisions (set out in new Temporary Rule 406T of Regulation S-T) to address application of the liability provisions of the federal securities laws applicable to interactive data files. These liability provisions will apply only until October 31, 2014; thereafter, an interactive data file will be subject to the same liability provisions as the related official filing. Rule 406T provides that an interactive data file is:  

  • Subject to the anti-fraud provisions of Section 17(a)(1) of the Securities Act, Section 10(b) of and rule 10b-5 under the Securities Exchange Act of 1934, and Section 206(1) of the Investment Advisers Act of 1940, except as provided below  
  • Deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act or Section 34(b) of the Investment Company Act, and otherwise is not subject to liability under these sections  
  • Deemed filed for purposes of (and, as a result, benefits from) rule 103 of Regulation S-T (pursuant to which, in general, a fund would not be subject to liability for electronic transmission errors beyond its control if the fund corrects the problem through an amendment as soon as reasonably practicable after the fund becomes aware of the problem)  
  • Subject to liability for a failure to comply with rule 405 of Regulation S-T, but shall be deemed to have complied with rule 405 and would not be subject to liability under the anti-fraud provisions set forth above, or under any other liability provision if the electronic filer:  
    • Makes a good-faith attempt to comply with rule 405; and  
    • After the electronic filer becomes aware that the interactive data file fails to comply with rule 405, “promptly” amends the interactive data file to comply with rule 405.  

Note that in regard to correcting an interactive data file, the SEC added the term “promptly” to the list of defined terms in Rule 11 under Regulation S-T. Rule 11 defines “promptly” as “as soon as reasonably practicable under the facts and circumstances at the time.” The definition is followed by a non-exclusive safe harbor. The safe harbor generally provides that a correction made by the later of 24 hours or 9:30 a.m. on the next business day after the filer becomes aware of the need for the correction is deemed promptly made. However, if a fund fails to comply with the safe harbor, the fund still may have corrected promptly, depending on the applicable facts and circumstances.