The Securities and Exchange Commission (SEC) on June 5, 2018, adopted Rule 30e-3 under the Investment Company Act (the Rule), which permits “notice and access” delivery of investment company shareholder reports via website posting. The Rule provides registered management investment companies and any separate series thereof (i.e., funds) and certain registered unit investment trusts (UITs), including insurance company separate accounts registered as UITs, with an optional internet-based method of satisfying requirements to transmit shareholder reports required by Rule 30e-1 for funds and by Rule 30e-2 for UITs. Under Rule 30e-3, funds and UITs can make internet notice and access delivery the default option, with paper reports required to be mailed to shareholders who request paper. The SEC release (Optional Internet Availability of Investment Company Shareholder Reports, Release Nos. 33-10506; 34- 83380; IC-33115, June 5, 2018, the Adopting Release or Release) is available here.
Background – Shareholder Report Delivery Requirements and Applicability of Rule 30e-3
Rule 30e-1 under the Investment Company Act of 1940 (the 1940 Act) requires registered management investment companies to transmit to shareholders at least semi-annually a report containing financial and other information regarding the fund. The reports must be transmitted within 60 days after the close of the applicable period. The Rule 30e-1 shareholder report requirement applies to open-end funds (i.e., mutual funds), including exchange-traded funds, and to closed-end funds registered as management companies (collectively, funds). Rule 30e-3 provides all of these types of funds with an optional method of delivering the reports to their shareholders.
Rule 30e-2 under the 1940 Act provides that if substantially all of the assets of a UIT consist of shares of a management investment company, then the UIT at least semi-annually must transmit that company’s shareholder report (or a report containing equivalent information) to its (the UIT’s) shareholders, within the same 60-day period specified in Rule 30e-1. The Rule 30e-3 Adopting Release explains that UITs subject to Rule 30e-2 are principally variable annuity and variable life insurance separate accounts.1
Rule 30e-3 Generally
Reliance on Rule 30e-3 is optional. Funds and UITs (together, a Company) can satisfy their Rule 30e-1 and Rule 30e-2 shareholder report delivery obligations by:
- mailing shareholder reports on paper;
- delivering reports pursuant to the SEC’s electronic delivery guidance;2
- providing notice and website accessibility pursuant to Rule 30e-3; or
- using any combination of the foregoing, so long as the conditions of the applicable transmission methods are met.
At this time, the Rule 30e-3 internet availability option is only available for shareholder reports required to be transmitted by Rules 30e-1 or 30e-2; it does not apply to statutory or summary prospectuses or statements of additional information (SAIs), or other documents. In a separate but related release, the SEC is seeking comment on the content, delivery and design of fund disclosure (including variable insurance product disclosure) and may consider in the future an electronic or notice and access delivery framework for documents other than shareholder reports.3
In order to rely on the Rule’s internet availability option, a fund or UIT must meet three basic requirements:
- Website Requirement – post the shareholder report (and certain other specified documents) on a publicly available website;
- Notice Requirement – send a paper notice to shareholders (semi-annually) regarding the website availability of the report; and
- Paper Request Requirement – fulfill all requests for delivery of a paper report.
There is an extended transition period before full effectiveness; the earliest that notices can be sent instead of paper reports is January 1, 2021 (if certain conditions are met), and the Rule is fully effective January 1, 2022. Each of these requirements, as well as the effective date and transition period, are discussed below.
Hosting the Website. Rule 30e-3 does not require that the website where the required materials are posted be maintained by any particular party. Instead, the Rule provides that the required materials must be posted at the website specified in the Notice. The shareholder reports and other required materials (specified below) can be posted on websites hosted by the fund, the broker-dealer firm or a third-party service provider of the fund or intermediary. In the case of variable contracts, the website can be hosted by the issuing insurance company or a third-party service provider.
Website Address. The website address must be specific enough to lead investors directly to the documents that are required to be posted online under the Rule. The website address could be a central site with prominent links to each document, but could not be a home page or section of the website that then takes you through a link or multiple links to the page where the documents are posted.
Required Materials and Format. The posted materials must provide investors with easy access to a full year of complete portfolio holdings information in one location (the specified website). Generally this means that the website must have the fund’s current and prior report to shareholders (which would have portfolio holdings for the second and fourth quarters) and complete portfolio holdings for the most recent first and third fiscal quarters.4
The materials must be posted in a format, or formats, that are convenient for both reading online and printing on paper, so that persons accessing the materials can permanently retain, free of charge, an electronic version of such materials.
Timing Requirements. These materials must be publicly accessible and free of charge on the website from the date the fund or UIT transmits the shareholder report as required by Rule 30e-1 or Rule 30e-2, respectively, until the Company transmits the next report required by those rules.
Safe Harbor for Posting Requirements. The Rule includes a safe harbor provision that is intended for times when, due to events beyond a Company’s control, such as system outages or other technological issues, natural disasters, acts of terrorism, pandemic illnesses or other circumstances, a Company may be temporarily not in compliance with the posting requirements of the Rule. The safe harbor allows a Company to continue relying on the Rule even if it did not satisfy the posting condition of the Rule for a temporary period of time.
The safe harbor provides that the website requirements shall be deemed to be met, notwithstanding the fact that the required documents are not available for a time in the required manner, provided that the Company (A) has reasonable procedures in place to ensure that the required materials are posted on the specified website in the required manner, and (B) takes “prompt action” to correct the non-compliance “as soon as practicable” after the earlier of when the Company “knows or reasonably should have known” that the required documents are not available in the manner prescribed by the posting requirements of the Rule.
Insurance Product Participation Agreements. Insurers choosing to rely on Rule 30e-3 should review their participation agreements with underlying VIP funds in light of these website requirements. For example, if an insurance company (or its administrative agent) is hosting the website then the applicable participation agreement with the underlying VIP fund should specify the fund’s obligation to provide such reports in a timely manner. Alternatively, if reliance will be on the fund’s website, then such agreements should provide for the fund’s obligation to post the required documents in a manner consistent with the Rule.
Requirement. A “Notice” (as defined and specified in paragraph (c) of the Rule) must be sent to the shareholder within 70 days after the close of the period for which the shareholder report is being made. For management investment companies, shareholder reports are required semi-annually and are due within 60 days after the close of each fiscal year and fiscal half-year (Rule 30e-1). Therefore utilization of Rule 30e-3 requires semi-annual Notices.5
Consolidated Notices. The Rule as adopted permits the use of a single, consolidated Notice for funds within the same fund complex or for funds held in the same intermediary account or variable insurance contract. The Adopting Release explains that if a consolidated Notice is used, the Notice must incorporate all elements required by the Rule with respect to each fund shareholder report covered by the Notice. For example, if the website address for one report covered by the Notice does not apply for one or more other funds covered by the Notice, then additional website addresses would be required in the Notice. In such case, the SEC believes that it should be clear to investors which website address is associated with each shareholder report covered by the consolidated Notice.
Required Contents of Notice. First, the Notice must contain a specified legend in bold-face type regarding the availability of the shareholder report online and in print by request, and state that the report contains important information about the fund (including portfolio holdings and financial statements). Second, the Notice must provide a toll-free (or collect) telephone number to contact “the Company or the shareholder’s financial intermediary” in order to request paper documents (i.e., to “opt out” of the internet notice and access delivery),6 and provide instructions on how to request a paper or email copy of the report and other materials required to be posted. As long as a toll-free number is always included, the Rule also permits the Company to provide additional methods by which shareholders (or contract owners) can respond. Third, the Notice must specify the website where the report and other required materials are available.
This required information must be presented before any additional permitted content.
Permitted Contents. Rule 30e-3 permits, but does not require, the Notice to include the following additional information: (i) pictures, logos or similar design elements; (ii) information identifying the fund, the fund’s sponsor, adviser or sub- adviser; (iii) information identifying a variable annuity or variable life insurance contract or insurance company issuer thereof; (iv) content from the fund’s shareholder report; (v) other Notices; and (vi) in addition to the required website, any other equivalent method or means to access the report and other required materials. The Notice can also identify a financial intermediary and, if applicable, include instructions on how to receive shareholder reports and other communications by electronic delivery. The Notice cannot contain other information.
Accompanying Documents. The Notice must be sent separately from other shareholder communications and may not accompany any other document, except that the Notice can accompany (or be accompanied by): (i) one or more other Notices, if the Company is not consolidating all Notices; (ii) summary prospectuses, statutory prospectuses and SAIs for the funds; (iii) a variable annuity or variable life insurance contract and the statutory prospectus or SAI for such contract; and (iv) shareholder (including contract owner) account statements.
Plain English Requirement. The Rule specifies that the Notice must be written using plain English principles. Specifically, this requirement is met if the Notice “substantially complies” with the following: short sentences; definite, concrete everyday words; active voice; tabular presentation or bullet lists of complex material wherever possible; no legal jargon or technical business terms; and no multiple negatives.
Paper Delivery Requirements
The Rule’s requirements for paper delivery are clear in certain respects, but also present certain significant ambiguities.
Ad hoc Requests. Paragraph (e) of Rule 30e-3, headed “Delivery of Paper Copy Upon Request,” provides that a paper copy of the reports and other materials required to be posted must be transmitted to “any person” requesting such a copy. This provision effectively provides that ad hoc requests for paper copies of particular shareholder reports and other documents required to be posted must be honored. (The Adopting Release does not discuss why this provision refers to “any person” requesting a paper copy, rather than to a “shareholder” as provided in other provisions of the Rule). Paragraph (e) provides that paper copies must be delivered at no cost to the requestor and by US first class mail or other reasonably prompt means, within three business days after a request for a paper copy is received.
Ongoing Account Level Elections. Paragraph (f) of Rule 30e-3, headed “Investor Elections to Receive Future Reports in Paper,” provides that requests for ongoing paper delivery of shareholder reports must be honored. Elections to receive paper reports will apply on an account-level basis, instead of a fund-by-fund basis; that is, an election for paper copies will apply to any and all current and future funds held through an account or accounts with a financial intermediary. Specifically, paragraph (f) of the Rule provides in part:
A shareholder who has notified the Company (or the shareholder’s financial intermediary) that the shareholder wishes to receive paper copies of shareholder reports with respect to a Fund will be deemed to have requested paper copies of shareholder reports with respect to: (i) Any and all current and future Funds held through an account or accounts with (A) the Fund’s transfer agent or principal underwriter … or (B) a financial intermediary; and (ii) Any and all Funds held currently and in the future in a separate account funding a variable annuity or variable life insurance contract. (Emphasis added).
Possible Ambiguities. The Adopting Release states, “for clarity,” that paragraph (e) of the Rule (“requiring funds to deliver a paper report in response to a shareholder’s ad hoc request”) operates independently of paragraph (f) (“requiring funds to deliver paper reports to a shareholder, who has elected a shareholder preference to receive paper reports”). Nevertheless, certain ambiguities remain.
First, the Rule language and Adopting Release do not address whether, and if so how, an ongoing request for paper copies can be revoked. The Adopting Release discusses paragraph (f) under the heading “Permanent Elections for Paper Reports.” The Rule language quoted above – “will be deemed to have requested paper copies” for all “current and future” funds or all funds “held currently and in the future in a separate account” – could perhaps be read as making the request irrevocable, but there appears to be no reason not to allow a request to be revoked.
Second, it is not entirely clear whether a shareholder (or contract owner) can elect paper reports for only some, but not all, of the funds in his or her account (or contract). The language in the Rule regarding “[a]ny and all Funds” certainly allows a Company to apply an election on an account (or contract) level basis. However, the language on its face could be read as requiring an account level application (the Rule says “will be deemed”), although there appears to be no policy reason (at least none is given or discussed in the Adopting Release) for such a requirement (although Companies, including insurers, may find it operationally impractical not to apply elections on an account or contract level basis).
Third, Companies relying on Rule 30e-3 will need procedures to distinguish between ad hoc (paragraph (e)) requests and ongoing (paragraph (f)) requests. In this regard, there is no “reasonable basis” or other standard for identifying a request as ad hoc or ongoing (a Future Reports request). There may be a risk that a Company’s determination that a request is ad hoc, just for a particular report, could be second-guessed by the SEC (or later disputed by the shareholder or contract owner), putting the Company in “retroactive” violation of Rule 30e-1, Rule 30e- 2 and/or Rule 30e-3. Accordingly, Companies should carefully tailor procedures in order to minimize such risk.
Effective Date and Transition Period
Effective Date. The Rule generally has an “effective date” of January 1, 2019, when it will officially be added to the SEC’s Rules and Regulations and when required statements of intent to rely on the optional notice-and-access internet delivery method can first be sent. However, rather than making Rule 30-e-3 effective immediately (or fully effective on January 1, 2019) and requiring an Initial Statement (the Initial Statement requirement, and the reply card requirement, included in the 2015 proposal, have been eliminated), the SEC is adopting a somewhat intricate extended transition period, which effectively ends on January 1, 2022. After that date, Rule 30e-3 is fully effective and can simply be relied on by all Companies.
Transition Period Procedures. During the extended transition period, the earliest that Notices may be transmitted to investors in lieu of paper reports is January 1, 2021. In general, Companies relying on the Rule before January 1, 2022, will be required to provide shareholders with two years of “required statements” (see below) of the Company’s intent to rely on the Rule. Therefore, Companies that begin providing the required statements at the start of 2019 will complete the two-year notice period, and may begin relying on the Rule, on January 1, 2021.3 Funds and variable contracts that are newly offered during the period from January 1, 2019, through December 31, 2020, may rely on the Rule starting January 1, 2021, if they provide the required statements to shareholders starting with their first public offering and ending on December 31, 2020.
Funds and variable contracts that are newly offered beginning January 1, 2021, and thereafter may rely on the Rule immediately without providing advance notice. All other funds may not rely on the Rule until they have completed the full two-year notice period or until January 1, 2022, whichever comes first.
Temporary amendments to Forms N-1A, N-2, N-4 and N-6 will require Companies and insurers intending to rely on Rule 30e-3 prior to January 1, 2022, to include prominent disclosure (a “required statement”) on the cover page of their shareholder reports and statutory (and summary) fund or contract prospectuses for two years during the three-year period between January 1, 2019, and December 31, 2021. This “required statement” must disclose, among other things, that: (i) paper copies of shareholder reports will no longer be sent by mail, unless specifically requested from the Registrant or financial intermediary; (ii) instead, the reports will be available on a website; (iii) a notice will be sent by mail each time a report is posted; (iv) any prior elections for electronic delivery will not be affected; and (v) an election to receive reports in paper will apply to all funds in the account or available under the contract. These amendments expire on January 1, 2022.
The extended transition period is designed so that investors will receive disclosures to alert them to the change in the transmission method and allow them to express their delivery preference while also providing Companies and financial intermediaries with a period of time to educate investors of the coming change through disclosures on prospectuses and certain other documents and through other means. It will also provide Companies and financial intermediaries with time to implement any necessary operations and system changes. The SEC believes that the enhanced disclosure requirements during this extended transition period are a more appropriate and effective method of providing investors with advance notice of a Company’s intent to rely on Rule 30e-3 rather than the proposed Initial Statement requirement.