SEC Adopts New Rule to Allow Internet Availability of Investment Company Shareholder Reports

The U.S. Securities and Exchange Commission (SEC or Commission) has adopted new Rule 30e-3 under the Investment Company Act of 1940 (1940 Act)¹ that provides an optional “notice and access” method to allow certain registered investment companies (funds) to satisfy their obligation to deliver shareholder reports by making those reports available online free of charge, provided certain conditions are met. The adoption of Rule 30e-3 furthers the Commission’s ongoing efforts to improve and modernize fund disclosures for the benefit of investors. SEC Chair Jay Clayton noted that the adoption of Rule 30e-3 “is an important and positive step toward modernizing the delivery of fund disclosures ... [a]nd, this is only the beginning of the Commission exploring the ways that electronic documents can be more interactive and ultimately useful for investors.”

Separately, the SEC announced that it is seeking public comment on two related topics: (1) additional ways to improve the design, delivery and content of fund disclosures; and (2) potential changes to the regulatory framework governing processing fees paid by funds to certain intermediaries for delivering shareholder reports and other fund disclosure materials.

This OnPoint provides an overview of the key features and conditions of Rule 30e-3, highlighting changes to the final rule from when it was first proposed, and summarizes the requests for comment.

Background 

Rule 30e-3 is part of the Commission’s ongoing initiative to provide investors with more useful and readily accessible information about funds. In May 2015, the SEC proposed Rule 30e-3 in connection with a package of new forms and form amendments designed to modernize certain aspects of fund reporting.² After receiving more than 1,000 comments on the proposed rule (the vast majority of which specifically commented on proposed Rule 30e-3 and whether it should be adopted), the SEC decided not to include Rule 30e-3 in its 2016 package of reforms designed to modernize investment company reporting rules and forms.³ 

On June 4, 2018, the SEC approved the final rule with a 4-1 vote outside of a formal SEC meeting, through a process called seriatim. Commissioner Jackson was the sole Commissioner who voted against the final rule, stating that, by adopting the final rule, the SEC “reverses the default rule for delivery of information to mutual fund investors, a choice contrary to everything we know about how individual investors and funds actually behave.”⁴ Commissioner Stein, who had previously expressed concerns about the proposed rule, voted in favor of the final rule stating “I think we should look at this rule as a pilot program.”⁵ 

The final rule contains changes from the proposed rule that address certain concerns raised by Commissioners in their public comments, as well as by commenters on the proposed rule. Notably, the Commission has adopted an extended transition period and revised notice provisions. These changes appear, at least in part, to be aimed at mitigating concerns that certain shareholders who expect to receive shareholder reports via mail could be negatively impacted because they may not realize that they will need to affirmatively request to continue to receive shareholder reports by mail. These and other changes in the final rule are discussed in more detail in the chart below, where applicable. 

Overview 

The final rule gives funds the option to satisfy their shareholder report delivery obligations by making their shareholder reports available online. This approach would be in addition to the current approaches through which funds may satisfy their delivery obligations: (1) by printing and mailing their shareholder reports to shareholders; or (2) by electronically transmitting (i.e., e-delivery) their shareholder reports to shareholders who have elected to receive reports electronically. To rely on the final rule, funds must comply with certain conditions, key details of which are summarized in the table below: 

Conditions of Rule 30e-3: 

Notice 

• Funds must send each shareholder a paper notice of the website availability of a shareholder report (Notice) within 70 days after the close of the period covered by the relevant shareholder report. 
  • The Notice does not have to be a separate mailing; it may accompany other materials specified in the final rule, such as account statements, summary or statutory prospectuses and SAIs, or notices of internet availability of proxy materials. 
  • For underlying funds of a variable life or variable annuity contract, the Notice may accompany the contract or the statutory prospectus and SAI for such contract. 
  • The Notice must be on paper and cannot be transmitted electronically. General householding rules apply.
  • One Notice may be used for multiple funds within the same fund complex. 
  • The Notice may be sent by a fund’s financial intermediaries (if applicable). 
• The Notice must include: 
  • a prominent legend in bold-face type, stating that an important report to shareholders is available online and in paper by request; 
  • a website address where the report and other required materials are posted, which is specific enough to lead investors directly to the shareholder reports and other required materials; 
  • a toll-free number to contact the fund or the shareholder’s financial intermediary; 
  • clear instructions describing how to request a paper copy of the shareholder report free of charge and an indication that the shareholder will not otherwise receive a paper copy; 
  • clear instructions describing how to request to receive all future shareholder reports in paper form via mail; and 
  • clear instructions describing how to request to receive all future shareholder reports via e-delivery (if applicable). 
• The Notice may, but is not required to, include: 
  • information from the shareholder report, such as graphs, charts or other highlights; and 
  • additional methods for contacting the fund to request paper delivery or e-delivery. 
• The Notice must be written in plain English. To comply with Rule 30e-3(d), the Notice should: 
  • use short sentences; 
  • use definite, concrete, everyday words; 
  • be written with an active voice; 
  • include tabular presentations or bullet point lists for complex material (whenever possible); 
  • avoid the use of legal jargon or highly technical business terms; and 
  • avoid the use of multiple negatives. 

Notable changes to the Notice requirement in the final rule from the proposed rule. 

• The time to mail Notices was extended from 60 days to 70 days after the end of the fiscal period. 
• The Notice may accompany other materials, such as a shareholder's account statement or other fund mailing. 
• The Notice may include pictures, logos or similar design elements, provided the design is not misleading and the Notice is clear. 
• The requirement to include a reply card with the Notice was eliminated. 
• The filing requirement for Notices was changed to require filing only if a Notice contains information from the shareholder report. 

Availability

• The shareholder reports (i.e., the fund’s current and prior shareholder reports) and other required materials (i.e., the fund’s complete portfolio holdings for its four most recent fiscal quarter-ends) must be publicly accessible, free of charge, at the website specified in the Notice. 
• The reports and other materials must be presented in formats that are convenient for reading online and printing on paper; those accessing the material must be able to permanently retain, free of charge, an electronic version of the materials. 
• If a shareholder report includes a summary schedule of investments, the fund’s complete portfolio holdings as of the close of the period covered by the report must be posted on the same website.
• If a fund satisfies its shareholder report delivery obligation by relying on Rule 30e-3, the fund’s portfolio holdings for its most recent first and third fiscal quarters (as disclosed on Form N-Q or Form N-PORT, when effective) must be posted at the same website. 
• The website may be hosted by a third party, but it may not be the SEC’s EDGAR filing system. 
• The shareholder reports and other required materials must be continuously accessible at the designated website, although the final rule provides a “safe harbor” for violations of the continuous availability requirement. A fund may continue to rely on Rule 30e-3 even if it did not satisfy the posting condition of the rule for a temporary period of time, provided the fund: adopts and implements policies and procedures reasonably designed to ensure that the required materials are posted on the specified website in the manner required by the rule; and takes prompt action to correct non-compliance with these posting requirements. 

Delivery of Paper Copy Upon Request; Election to Receive Future Reports on Paper 

• A fund must provide a free paper copy of its shareholder reports or other required disclosure materials within three business days after a request for a paper copy is received. 
• A fund may not rely on Rule 30e-3 to transmit a shareholder report if the shareholder has notified the fund (or the shareholder’s financial intermediary) that the shareholder wishes to receive paper copies. 
• The final rule requires that if a shareholder elects paper delivery with respect to one fund within a fund complex, the investor will be deemed to have requested paper delivery for all reports from the fund complex, as well as all reports related to all accounts that the same investor has with the fund’s transfer agent or financial intermediary. 
  • The proposed rule would have required separate requests for each fund and account. 
• A fund needs to track shareholder delivery preferences as soon as it notifies shareholders of its intent to rely on Rule 30e-3 or provides a Notice.

Compliances Dates; Extended Transition Period 

• The final rule is effective on January 1, 2019; however, funds will generally be required to provide a two-year notice to shareholders before relying on Rule 30e-3.
• Funds that begin providing a notice at the start of 2019 will complete the two-year notice period, and first be able to send Notices pursuant to the final rule on January 1, 2021. 
• For new funds that launch subsequent to January 1, 2019, certain exceptions to the general two-year notice requirement are available. 
  • Funds that are newly offered during the extended transition period from January 1, 2019 through December 31, 2020 may rely on Rule 30e-3 starting January 1, 2021, provided such funds provide a Notice to their shareholders in their initial public offering documents. 
  • Funds that are newly offered on or after January 1, 2021 will be able to rely on Rule 30e-3 from the time of their launch without providing a separate Notice to shareholders, provided such funds give notice to their shareholders in their initial public offering documents. 
• The SEC included this extended transition period in the final rule, in order to smooth the transition for shareholders and relevant service providers. 

Request for Comment on Enhancing Fund Disclosure to Improve Investor Experience 

The SEC is seeking feedback from investors – in particular, retail investors – on ways that funds can enhance their disclosures to further improve the investor experience. Specifically, the Commission stated that it would like to better understand investor preferences with respect to: timing, method and content of fund reporting; whether current electronic disclosures are sufficiently user-friendly, personalized and interactive; and how fund disclosure documents could otherwise be improved. The comment period will remain open until October 31, 2018. 

Request for Comment on Processing Fees Intermediaries Charge for Forwarding Fund Materials 

The SEC is also requesting comment on the processing fees charged by intermediaries for distributing fund shareholder reports and other disclosure materials to investors. These fees are charged under current rules of the New York Stock Exchange (NYSE) and other self-regulatory organizations. Specifically, the Commission stated that it would like to better understand investor preferences with respect to: the current processing fee structure (including the application of various processing fees and rates under the NYSE rules); transparency of these fees; whether the structure and level of processing fees should be set by another entity; practices related to the payment of these fees and remittances received by financial intermediaries for delivery of fund documents (including shareholder reports); and the appropriateness of these fees in cases where intermediaries are separately paid shareholder servicing fees from fund assets. The comment period will remain open until October 31, 2018. 

Conclusion 

The Final Rule could result in significant savings of printing and mailing costs for certain funds. In addition, certain investors may prefer accessing shareholder reports and other fund materials online, while others may continue to prefer receiving paper copies. Funds should consider the specific profiles and preferences of their shareholders, when considering whether to exercise the option to rely on the Final Rule. 

Footnotes 

_{1) Optional Internet Availability of Investment Company Shareholder Reports, Release No. IC-33115 (June 5, 2018) (Rule 30e-3 Release).
2) Investment Company Reporting Modernization, Release No. IC-31610 (May 20, 2015). For further information, please refer to Dechert OnPoint, US SEC Approves Proposal to Modernize Investment Company Reporting Regime.
3) Investment Company Reporting Modernization, Release No. IC-32314 (Oct. 13, 2016). For further information, please refer to Dechert OnPoint, SEC Adopts Rules and Forms to Modernize Reporting Requirements for Registered Investment Companies.
4) Statement on Investment Company Disclosure, Commissioner Robert J. Jackson Jr.
5) Statement on Internet Availability of Investment Company Shareholder Reports, Request for Comment on the Investor Experience, and Request for Comment on Intermediary Fees, Commissioner Kara M. Stein.}