[Federal Register Volume 85, Number 215 (Thursday, November 5, 2020)]
[Proposed Rules]
[Pages 70716-70896]
[FR Doc No: 2020-17449]

Vol. 85

Thursday,

No. 215

November 5, 2020

Part II

 Securities and Exchange Commission

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17 CFR Parts 200, 230, 239, et al.

 Tailored Shareholder Reports, Treatment of Annual Prospectus Updates
for Existing Investors, and Improved Fee and Risk Disclosure for Mutual
Funds and Exchange-Traded Funds; Fee Information in Investment Company
Advertisements; Proposed Rule

Federal Register / Vol. 85, No. 215 / Thursday, November 5, 2020 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 239, 240, 270, and 274

[Release Nos. 33-10814; 34-89478; IC-33963; File No. S7-09-20]
RIN 3235-AM52

Tailored Shareholder Reports, Treatment of Annual Prospectus
Updates for Existing Investors, and Improved Fee and Risk Disclosure
for Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rule and form amendments that would modernize the disclosure
framework for open-end management investment companies. The disclosure
framework would feature concise and visually engaging shareholder
reports that would highlight key information that is particularly
important for retail investors to assess and monitor their fund
investments. Certain information that may be less relevant to retail
investors--and of more interest to financial professionals and
investors who desire more in-depth information--would no longer appear
in funds' shareholder reports but would be available online, delivered
free of charge upon request, and filed on a semi-annual basis on Form
N-CSR. Funds' shareholder reports would serve as the central source of
fund disclosure for existing shareholders. Thus, instead of delivering
prospectus updates to existing shareholders each year, open-end funds
would have an alternative way to keep shareholders informed. This
framework would rely on the shareholder report (which would include a
summary of material fund changes), along with timely notifications to
shareholders about material fund changes as they occur and continued
availability of the fund's prospectus. The Commission is also proposing
amendments to open-end fund prospectus disclosure requirements to
provide greater clarity and more consistent information about fees,
expenses, and principal risks. Finally, the Commission is proposing
amendments to the advertising rules for registered investment companies
and business development companies to promote more transparent and
balanced statements about investment costs.

DATES: Comments should be received by January 4, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to<EMAIL_ADDRESS>Please include
File No. S7-09-20 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-20. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (http://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Room 1580,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information you wish to make available publicly. Persons
wishing to provide comments regarding the proposal may wish to submit
our Investor Feedback Flier or Smaller Fund Feedback Flier, available
at Appendices B and C, respectively.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Daniel K. Chang,
Mykaila DeLesDernier, Pamela K. Ellis, Angela Mokodean, Senior
Counsels; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin
Johnson, Assistant Director, at<PHONE_NUMBER>, Investment Company
Regulation Office; Daniel Rooney, Assistant Chief Accountant; Keith
Carpenter or Michael Kosoff, Senior Special Counsels, at (202) 551-
6921, Disclosure Review and Accounting Office; Division of Investment
Management; U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.

SUPPLEMENTARY INFORMATION: The Commission is proposing new 17 CFR
230.498B [new rule 498B] under the Securities Act of 1933 (``Securities
Act'').\1\ We also are proposing amendments to the following rules and
forms:
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 80a et seq.
    \3\ 15 U.S.C. 78a et seq.

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            Commission reference                CFR citation [17 CFR]
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Organization; Conduct and Ethics; And        Sec.  Sec.   200.1 through
 Information and Requests.                    200.800.
    Section 800............................  Sec.   200.800.
Securities Act:
    Rule 156...............................  Sec.   230.156.
    Rule 433...............................  Sec.   230.433.
    Rule 482...............................  Sec.   230.482.
    Rule 498...............................  Sec.   230.498.
    Form N-14..............................  Sec.   239.23.
Securities Act and Investment Company Act
 of 1940 (``Investment Company Act''): \2\
    Form N[dash]1A.........................  Sec.  Sec.   239.15A and
                                              274.11A.
Securities Exchange Act of 1934 (``Exchange
 Act''): \3\
    Schedule 14A...........................  Sec.   240.14a-101.
Exchange Act and Investment Company Act:
    Form N-CSR.............................  Sec.  Sec.   249.331 and
                                              274.128.

Investment Company Act:
    Rule 30e-1.............................  Sec.   270.30e-1.
    Rule 30e-3.............................  Sec.   270.30e-3.
    Rule 31a-2.............................  Sec.   270.31a-2.
    Rule 34b-1.............................  Sec.   270.34b-1.
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Table of Contents

I. Introduction and Background
    A. Current Approach To Disclosure for Fund Shareholders
    B. Information About Investor Preferences
    1. Fund Shareholder Preferences Regarding Ongoing Disclosures
    2. Fee and Risk Disclosure Preferences
    3. Disclosure Delivery Preferences
    C. Developments Affecting Fund Disclosure and Marketing
Practices
II. Discussion
    A. Overview of Proposed New Disclosure Framework
    1. Executive Summary
    2. Considerations and Goals
    B. Annual Shareholder Report
    1. Scope of Annual Report Disclosure, and Registrants Subject to
Amendments
    2. Contents of the Proposed Annual Report
    3. Format and Presentation of Annual Report
    4. Electronic Annual Reports
    C. Semi-Annual Shareholder Report
    1. Scope and Contents of the Proposed Semi-Annual Report
    2. Format and Presentation of Semi-Annual Report
    3. Electronic Semi-Annual Reports
    D. New Form N-CSR and website Availability Requirements
    1. Proposed Form N-CSR Filing Requirements
    2. Proposed website Availability Requirements
    3. Proposed Delivery Upon Request Requirements
    E. Disclosure Item Proposed To Be Removed From Shareholder
Report and Not Filed on Form N-CSR
    F. Proposed Rule 498B and Treatment of Annual Prospectus Updates
Under Proposed Disclosure Framework
    1. Overview
    2. Scope of Proposed New Rule 498B
    3. Conditions To Rely Upon Proposed New Rule 498B
    4. Other Requirements
    G. Amendments Narrowing Scope of Rule 30e-3
    H. Proposed Amendments To Fund Prospectus Disclosure
Requirements
    1. Improved Prospectus Fee Disclosures
    2. Improved Prospectus Risk Disclosures
    3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)
    I. Investment Company Advertising Rule Amendments
    J. Technical and Conforming Amendments
    K. Compliance Date
III. Economic Analysis
    A. Introduction
    B. Economic Baseline and Affected Parties
    1. Descriptive Industry Statistics
    2. Fund Prospectuses
    3. Fund Shareholder Reports
    4. Delivery of Fund Prospectuses and Shareholder Reports
    5. Investor Use of Fund Disclosure
    6. Fund Advertisements
    C. Costs and Benefits
    1. Broad Economic Considerations
    2. Modified Disclosure Framework for Existing Fund Shareholders
    3. Prospectus Disclosure Amendments
    4. Advertising Rule Amendments
    D. Effects on Efficiency, Competition, and Capital Formation
    E. Reasonable Alternatives
    1. More or Less Frequent Disclosure
    2. More or Less Information in Shareholder Reports
    3. Retaining Rule 30e-3 Flexibility for Open-End Funds
Registered on Form N-1A
    4. Limiting the Advertising Rule Amendments to ETFs and Mutual
Funds
    5. Amending Prospectus Fee, Expense, and Principal Risk
Disclosure in a Different Manner
    6. Amending Shareholder Report Requirements for Variable
Insurance Contracts or Registered Closed-End Funds
    7. Requiring Funds To Comply With Proposed Rule 498B
    8. Requiring Form N-CSR to be Tagged in Inline XBRL Format
    9. Modifying the AFFE Amendment
    F. Request for Comment
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Form N-1A
    C. Proposed New Shareholder Report Requirements Under Rule 30e-1
    D. Form N-CSR
    E. Proposed Rule 498B
    F. Rule 482
    G. Rule 34b-1
    H. Rule 433
    I. Rule 30e-3
    J. Rule 498
    K. Request for Comment
V. Initial Regulatory Flexibility Act Analysis
    A. Reasons for and Objectives of the Proposed Actions
    B. Legal Basis
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    1. Annual and Semi-Annual Reports
    2. New Form N-CSR and website Availability Requirements
    3. Proposed Rule 498B, and Treatment of Annual Prospectus
Updates under Proposed Disclosure Framework
    4. Amendments to Scope of Rule 30e-3
    5. Proposed Amendments to Fund Prospectus Disclosure
Requirements
    6. Investment Company Advertising Rules
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. General Request for Comment
VI. Consideration of Impact on the Economy
VII. Statutory Authority

I. Introduction and Background

    The Commission is proposing to tailor the disclosures that mutual
funds and exchange-traded funds (``ETFs'' and, collectively with mutual
funds, ``funds'') must provide to investors to highlight key
information investors need to assess and monitor their fund investments
and make informed investment decisions.\4\ Currently, most mutual funds
and ETFs rely on a layered disclosure framework with respect to the
prospectus information they provide to fund investors in order to
tailor this disclosure to investors' informational needs.\5\ The vast
majority of funds provide: (1) A summary prospectus to investors in
connection with their initial investment decision; and (2) more-
detailed information that may be of interest to some investors, which
is available online in the form of the ``statutory prospectus'' and
Statement of Additional Information (``SAI'').\6\ However, this
approach to

layered, tailored disclosure does not extend to other disclosure funds
provide to their shareholders. After making their initial decision to
invest in a fund, fund shareholders typically receive an updated
prospectus annually, as well as annual and semi-annual shareholder
reports (or ``annual reports'' and ``semi-annual reports''
respectively, and collectively ``shareholder reports'').\7\ These
shareholder reports provide detailed information about a fund's
operations and activities during the last full- or half-year period and
can be quite lengthy. For example, it is not unusual for annual reports
to exceed 100 pages in length.
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    \4\ For purposes of this release, the term ``fund'' generally
refers to an open-end management investment company registered on
Form N-1A or a series thereof, unless otherwise specified. Mutual
funds and most ETFs are open-end management investment companies
registered on Form N-1A. An open-end management investment company
is an investment company, other than a unit investment trust or
face-amount certificate company, that offers for sale or has
outstanding any redeemable security of which it is the issuer. See
sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-
4 and 80a-5(a)(1)].
    \5\ Throughout this release, we generally use the term
``investor'' to refer to both prospective investors in a fund and
fund shareholders (i.e., persons who hold an investment in
securities issued by a fund). We generally use the term
``shareholder'' to refer specifically to those who hold an
investment in securities issued by a fund.
    \6\ See section 5(b)(2) of the Securities Act [15 U.S.C.
77e(b)(2)] (generally requiring that a fund or financial
intermediary deliver a prospectus to an investor in connection with
his or her purchase of the fund's securities). Funds generally amend
their prospectuses annually to reflect changes to the disclosed
information.
     A fund's prospectus generally must include information
contained in the fund's registration statement. See section 10(a) of
the Securities Act [15 U.S.C. 77j(a)]. For purposes of this release,
a prospectus meeting the requirements of a section 10(a) prospectus
is referred to as a ``statutory prospectus.'' Form N-1A requires a
fund to disclose the information that Items 2 through 8 of Form N-1A
require in numerical order at the front of the prospectus. See
General Instruction C.3.a to Form N-1A. For purposes of this
release, we refer to this front section of the statutory prospectus
as the ``summary section of the statutory prospectus.''
     A fund may use a summary prospectus (which includes the
information required or permitted by Items 2 through 8 of Form N-1A)
to satisfy prospectus delivery obligations under certain conditions
(e.g., the statutory prospectus is posted online). See rule 498
under the Securities Act [17 CFR 230.498]. For purposes of this
release, a summary prospectus that a fund uses to satisfy its
prospectus delivery obligations, as rule 498 permits, is referred to
as a ``summary prospectus.''
    \7\ See section 30(e) of the Investment Company Act [15 U.S.C.
80a-29(e)]; rule 30e-1 under the Investment Company Act [17 CFR
270.30e-1]. Shareholders in a fund typically receive an annual
update of the fund's prospectus to satisfy prospectus delivery
requirements for any additional shares of the fund the shareholder
may purchase. See infra discussion accompanying and following
footnote 11. In addition to the annual prospectus update, a
shareholder also may receive prospectus supplements, or
``stickers,'' during the year if material or other changes occur to
the fund. See infra footnote 13 and accompanying text.
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    In June 2018, the Commission issued a request for comment seeking
feedback on retail investors' experience with fund disclosure and on
ways to improve fund disclosure.\8\ We have considered feedback the
Commission received in response to this request for comment, which
generally showed that retail investors prefer concise, layered
disclosure and feel overwhelmed by the volume of fund information they
currently receive. We have also considered prior investor testing and
surveys, past fund disclosure reform initiatives, and developments
affecting fund disclosure practices.\9\
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    \8\ See Request for Comment on Fund Retail Investor Experience
and Disclosure, Investment Company Act Release No. 33113 (June 5,
2018) [83 FR 26891 (June 11, 2018)] (``Fund Investor Experience
RFC'').
    \9\ See, e.g., infra Sections I.B and I.C.
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    After considering this information, we are proposing a layered
disclosure framework for fund shareholders that would highlight key
information for assessing and monitoring a fund investment and
informing investment decisions (e.g., whether to buy additional shares,
continue to hold, or sell a fund investment), with additional
information available online and upon request. The proposal would
implement this new framework principally by amending the requirements
for funds' annual and semi-annual reports to highlight information that
we believe is particularly important for retail shareholders to assess
and monitor their ongoing fund investments. These tailored shareholder
reports would serve as the primary fund disclosure that existing
shareholders receive each year, in addition to notices of certain
material changes if they occur during the year.
    The proposal is designed to alleviate concerns that fund retail
shareholders currently may receive disclosure materials that are not
well-suited to their needs, which may contribute to investor confusion
or indifference. Current disclosures, for example, may include
information that is less useful for most retail shareholders to assess
and monitor their fund investments, either because the information is
primarily designed to inform an initial purchase decision, or because
the information is of interest to only some investors (for example,
those investors who want detailed fund information), as well as
financial professionals and market analysts. Furthermore, current fund
disclosures in some cases are delivered close in time to one another
and include similar sets of information that may appear redundant or
inconsistent to shareholders. Under the proposal, the amounts and types
of available fund information would remain largely unchanged. However,
information that is of interest only to some shareholders, or
information that we believe generally is less useful for purposes of
assessing and monitoring an ongoing investment, would be available
online and delivered upon request to fund shareholders who want that
additional information.
    In addition to layering disclosure for existing fund shareholders,
we are proposing certain amendments to the way funds present their fees
and expenses and principal risks in prospectuses. Many retail investors
responding to the Fund Investor Experience RFC stated that current fee
and expense and principal risk disclosure is difficult to understand
and use. The proposed amendments are designed to provide investors with
simpler, easier-to-understand information about a fund's fees and
expenses and principal risks, including a summary presentation of
bottom-line fee figures that uses plain language descriptions and more
concise principal risk disclosure that generally orders risks by
importance. Consistent with the current layered approach to prospectus
disclosure, additional information about a fund's fee and expenses and
risks would remain available for interested investors.
    To improve the clarity of fee and expense information that is
available to investors more generally, we also propose to amend the
Commission's investment company advertising rules. The proposed
amendments would require that a registered investment company or
business development company (``BDC'') advertisement discussing fees
and expenses include certain standardized figures and provide
reasonably current information. In addition, we are proposing
amendments to address potentially misleading statements about fees and
expenses in these investment company advertisements.

A. Current Approach To Disclosure for Fund Shareholders

    Today, a fund investor receives a prospectus in connection with his
or her initial purchase of fund shares. A fund's prospectus serves as
the principal selling document for potential investors to help inform
investment decisions and facilitate fund comparisons. Fund prospectuses
provide important information that an investor should consider when
making an investment, including information about a fund's principal
investment strategies, fees and expenses, principal risks, and
performance.\10\ Under the Federal securities laws, a fund (or a
financial intermediary) must deliver an updated copy of the fund's
summary or statutory prospectus to an existing fund shareholder if the
shareholder purchases additional shares of the fund.\11\ We understand
that, to satisfy

applicable prospectus delivery requirements, most funds send an updated
summary or statutory prospectus annually to all shareholders to avoid
the need to track each shareholder's additional purchase activity
throughout the year. Other funds may track this activity and send a
summary or statutory prospectus only to those shareholders who have
purchased fund shares during the relevant period. The vast majority of
funds use summary prospectuses.\12\ Outside of the annual prospectus
update, a fund shareholder may also receive updates at other times
during the year when a fund supplements, or ``stickers,'' its
prospectus disclosure to reflect material or other changes.\13\
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    \10\ See, e.g., Enhanced Disclosure and New Prospectus Delivery
Option for Registered Open-End Management Investment Companies,
Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546
(Jan. 26, 2009)] (``2009 Summary Prospectus Adopting Release''). The
summary prospectus that the Commission adopted took into account
investors' preferences as reflected in focus group interviews and a
telephone survey. See 2009 Summary Prospectus Adopting Release at
n.32 and accompanying text.
    \11\ Section 10(a)(3) of the Securities Act, and section 24(e)
and 17 CFR 270.8b-16 [rule 8b-16 under the Investment Company Act],
generally require a fund to update its registration statement (which
includes its prospectus) annually. The effect of section 10(a)(3) is
to require funds to update their prospectuses annually to reflect
current fee, performance, and other financial information (the
``annual prospectus update'').
     Section 5(b)(2) of the Securities Act makes it unlawful to
deliver a security for purposes of sale or for delivery after sale
``unless accompanied or preceded'' by a statutory prospectus.
Because the requirements of section 5(b)(2) are applicable to ``any
person,'' its obligations apply to financial intermediaries through
which funds are sold, as well as to the funds themselves. See supra
footnote 6 (recognizing that a fund or financial intermediary may
deliver a summary prospectus to satisfy this prospectus delivery
obligation under certain conditions).
    \12\ We estimate that as of December 31, 2018, approximately 93%
of mutual funds and ETFs use summary prospectuses. This estimate is
based on data on the number of mutual funds and ETFs that filed a
summary prospectus in 2018 in the Commission's Electronic Data,
Gathering, Analysis, and Retrieval system (``EDGAR'') (10,808) and
the Investment Company Institute's estimated number of mutual funds
and ETFs as of December 31, 2018 (11,656). See Investment Company
Institute, 2019 Investment Company Fact Book, at 50, available at
https://www.ici.org/pdf/2019_factbook.pdf.
    \13\ See generally 17 CFR 230.497 [rule 497 under the Securities
Act]; see also section 12(a)(2) of the Securities Act (providing a
civil remedy if a prospectus includes an untrue statement of a
material fact or omits to state a fact necessary in order to make
the statements, in the light of the circumstances under which they
were made, not misleading); 17 CFR 230.408 [rule 408 under the
Securities Act] (requiring registrants to include, in addition to
the information expressly required to be included in a registration
statement, such further material information, if any, as may be
necessary to make the required statements, in the light of the
circumstances under which they are made, not misleading).
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    In addition to annual prospectus updates and interim stickers, fund
shareholders also receive shareholder reports on a semi-annual
basis.\14\ These reports include detailed information about a fund's
operations over a given half- or full-year period, including
information about the following items. Certain of this information,
including fund performance information, appears only in annual reports.
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    \14\ See section 30(e) of the Investment Company Act [15 U.S.C.
80a-29(e)]; rule 30e-1 under the Investment Company Act [17 CFR
270.30e-1]. A fund or an intermediary may transmit the shareholder
report to an investor. Most fund investors engage an investment
professional and hold their fund investments as beneficial owners
through accounts with intermediaries. As a result, intermediaries
commonly assume responsibility for distributing fund shareholder
reports to beneficial owners. See Optional internet Availability of
Investment Company Shareholder Reports, Investment Company Act
Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)]
(``Rule 30e-3 Adopting Release''), at paragraph accompanying n.274.
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     The ongoing costs of a $1,000 fund investment for the most
recent fiscal half-year, including actual expenses (which a shareholder
can use to understand his or her ongoing costs of investing in the
fund) and hypothetical expenses (which a shareholder can use to compare
different funds' ongoing costs);
     Performance, including information about the fund's
performance over the past 10 years and fund management's discussion of
fund performance for the last fiscal year;
     Portfolio holdings, which includes a list of the fund's
investments and graphical representations of the fund's holdings by
certain categories (e.g., type of security, industry sector, geographic
region, credit quality, or maturity); \15\
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    \15\ A fund may include a summary schedule of its investments in
securities of unaffiliated issuers, which includes approximately its
50 largest holdings, in the financial statements it provides in the
shareholder report, provided it makes the complete list of
investments in unaffiliated issuers available online and upon
request. Alternatively, a fund must include that complete list of
its investments in securities of unaffiliated issuers in its
shareholder reports. See Instruction 1 to Item 27(b)(1) of Form N-
1A; Instruction to Item 27(c)(1) of Form N-1A; 17 CFR 210.12-12B
[rule 12-12B of Regulation S-X].
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     Fund financials, including financial statements and
financial highlights, which are audited in annual reports; \16\
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    \16\ See Items 27(b)(1) and 27(b)(2) of Form N-1A. The financial
statements and financial highlights in a fund's semi-annual report
need not be audited. See Items 27(c)(1) and 27(c)(2) of Form N-1A.
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     A fund's board of directors and management, including
remuneration that the fund paid to these and certain other parties;
     Results of any shareholder vote held during the relevant
period;
     The availability of additional information regarding the
fund's proxy voting record, code of ethics, quarterly portfolio
holdings, and board of directors;
     Changes in and disagreements with fund accountants;
     Any board approval of an investment advisory contract
during the relevant period; and
     The operation and effectiveness of the fund's liquidity
risk management program.\17\
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    \17\ See Item 27(b), (c), and (d) of Form N-1A; rule 30e-1(b)
under the Investment Company Act [17 CFR 270.30e-1(b)].
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    Additionally, some funds currently include other information in
their shareholder reports that is not required by Commission rules or
forms. For example, some funds typically include in their shareholder
reports information such as president's letters, interviews with
portfolio managers, market commentary, or specific portfolio statistics
that are not required (e.g., top ten largest holdings, summary
statistics with respect to debt yields and maturities).\18\ Based on
staff analysis, the average annual report is approximately 134 pages
long, and the average semi-annual report is approximately 116 pages
long.\19\
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    \18\ See, e.g., Fund Investor Experience RFC, supra footnote 8,
at Section II.D.5.
    \19\ We recognize, however, that the length of funds'
shareholder reports can vary substantially. For example, the staff
observed annual reports ranging in length from 22 pages to more than
600 pages. These figures are based on a 2020 staff review that
included a sample of reports from large, mid-sized, and small funds
that were available on fund websites. One apparent reason for the
different lengths of these reports is that some reports covered a
single fund (or series), while others covered many. For example,
most reports that were between 22 and 45 pages long covered a single
series. However, the number of series a report covered did not
solely explain the differences in length. For reports that were
longer than 45 pages, there generally was not a clear and consistent
relationship between the number of series a report covered and the
report's length. See also Comment Letter of Investment Company
Institute on File No. S7-08-15 (Mar. 14, 2016), at n.49, available
at https://www.sec.gov/comments/s7-08-15/s70815-581.pdf (estimating
that, in 2016, the average annual report was 114 pages long).
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    Shareholder reports and prospectuses provide some of the same
categories of information, including information about expenses and
performance. A fund shareholder typically receives an annual report and
an annual prospectus update close in time, commonly within two months
of one another.\20\ We understand that some funds even deliver a
shareholder report and the annual prospectus update at the same time.
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    \20\ Under rule 30e-1, funds generally must transmit annual
reports within 60 days after the close of the fiscal year. See rule
30e-1(c) [17 CFR 270.30e-1(c)]. Under Securities Act section
10(a)(3) and Investment Company Act rule 8b-16(a), funds typically
update their prospectuses within 120 days of the end of fiscal year-
end, and updated prospectuses are often delivered to existing
shareholders soon thereafter.
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    With respect to the delivery mechanism, a fund shareholder
currently receives shareholder reports and prospectuses in paper or
electronically.\21\ We understand that

shareholders electing electronic delivery of fund disclosure materials
typically receive an email that contains a link to where the materials
are available online. Additionally, if a fund chooses to rely on rule
30e-3, beginning as early as January 1, 2021, a shareholder who
currently receives fund shareholder reports in the mail may begin
receiving instead notices that a shareholder report is available at an
identified website address.\22\ Nonetheless, a shareholder may continue
to receive the full report in paper if he or she notifies the fund (or
relevant financial intermediary) that he or she wishes to receive paper
copies of the reports. The costs of delivering prospectuses and
shareholder reports, including printing and mailing costs and
processing fees, are generally fund expenses borne by shareholders.
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    \21\ See Use of Electronic Media for Delivery Purposes,
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458
(Oct. 13, 1995)] (providing Commission views on the use of
electronic media to deliver information to investors, with a focus
on electronic delivery of prospectuses, annual reports, and proxy
solicitation materials); Use of Electronic Media by Broker-Dealers,
Transfer Agents, and Investment Advisers for Delivery of
Information, Investment Company Act Release No. 21945 (May 9, 1996)
[61 FR 24644 (May 15, 1996)]; Use of Electronic Media, Investment
Company Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4,
2000)].
    \22\ See rule 30e-3 under the Investment Company Act [17 CFR
270.30e-3]; Rule 30e-3 Adopting Release, supra footnote 14.
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    Beyond prospectuses and shareholder reports, many funds prepare
other information for potential or current investors that the
securities laws and Commission rules do not require. For example, many
funds prepare advertising materials, which can include materials in
newspapers, magazines, radio, television, direct mail advertisements,
fact sheets, newsletters, and on various web-based platforms.
Advertising materials are subject to certain requirements under
Commission rules.\23\ As an example, many funds prepare monthly or
quarterly fact sheets that concisely provide certain information about
a fund, such as the fund's performance and strategies, illustrations of
the fund's holdings, and certain fund statistics (e.g., net asset
value, expense ratio). Fact sheets are often one or two pages long.
Some shareholders or financial professionals may use fact sheets to
monitor fund investments because, for example, they include more up-to-
date performance information than shareholder reports or prospectuses.
---------------------------------------------------------------------------

    \23\ See infra Section II.I (discussing the Commission's
advertising rules and certain proposed changes to these rules).
---------------------------------------------------------------------------

B. Information About Investor Preferences

    Our understanding of investor preferences regarding fund disclosure
is informed by many sources, including responses to the Fund Investor
Experience RFC, prior investor testing and surveys, and past disclosure
reform initiatives. In response to the Fund Investor Experience RFC,
the Commission received many comments from individual investors,
including through a Feedback Flier on Improving Fund Disclosure (the
``Feedback Flier'') that accompanied the release to facilitate retail
investor input.\24\ In addition to the input we received from
individual investors, some other commenters on the Fund Investor
Experience RFC provided the results of investor surveys they conducted
regarding fund disclosure.\25\ Moreover, the Commission and its staff
have been involved with other relevant investor testing and surveys,
including investor testing regarding shareholder reports in 2011 and a
study on financial literacy in 2012.\26\ Several past Commission
rulemakings have also provided information about investors' disclosure
preferences, including rulemakings regarding summary prospectuses for
mutual funds and ETFs, summary prospectuses for variable annuity and
variable life insurance contracts, and broker-dealer and investment
adviser relationship summaries.\27\
---------------------------------------------------------------------------

    \24\ The majority of individual investors responding to the Fund
Investor Experience RFC used the Feedback Flier to provide their
views. See Fund Investor Experience RFC, supra footnote 8, at
Appendix B. Unless otherwise indicated, comments cited in this
release are the public comments on the Fund Investor Experience RFC,
supra footnote 8, which are available at https://www.sec.gov/comments/s7-12-18/s71218.htm.
    \25\ See, e.g., Comment Letter of Broadridge Financial
Solutions, Inc. (Oct. 31, 2018) (``Broadridge Comment Letter I'');
Comment Letter of the Consumer Federation of America (Oct. 31, 2018)
(``CFA Comment Letter''); Comment Letter of Investment Company
Institute (Oct. 24, 2018) (``ICI Comment Letter I''); Comment Letter
of Broadridge Financial Solutions, Inc. (Apr. 28, 2020)
(``Broadridge Comment Letter II'').
    \26\ See Investor Testing of Selected Mutual Fund Annual Reports
(Feb. 9, 2012) (``2012 Report on Investor Testing of Fund Annual
Reports''), available at https://www.sec.gov/comments/s7-08-15/s70815-3.pdf; SEC Staff, Study Regarding Financial Literacy Among
Investors (Aug. 2012) (``Financial Literacy Study''), available at
http://www.investor.gov/publications-research-studies/sec-research;
see also Recommendation of the Investor Advisory Committee on
Disclosure Effectiveness (May 21, 2020) (``IAC Disclosure
Effectiveness Recommendation''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/disclosure-effectiveness.pdf (discussing, among other things, research findings
relating to investors' understanding of fund disclosure).
    \27\ See 2009 Summary Prospectus Adopting Release, supra
footnote 10; Updated Disclosure Requirements and Summary Prospectus
for Variable Annuity and Variable Life Insurance Contracts,
Investment Company Act Release No. 33814 (Mar. 11, 2020) [85 FR
25964 (May 1, 2020)] (``Variable Contract Summary Prospectus
Adopting Release''); Form CRS Relationship Summary; Amendments to
Form ADV, Investment Advisers Act Release No. 5247 (June 5, 2019)
[84 FR 33492 (July 12, 2019)] (``Form CRS Adopting Release'').
---------------------------------------------------------------------------

1. Fund Shareholder Preferences Regarding Ongoing Disclosures
    Based on available information, as detailed below, we understand
that many fund shareholders would prefer to receive a smaller volume of
fund disclosures each year. In addition, many shareholders view funds'
current annual and semi-annual reports as overly long and complex.
Available evidence suggests that, as a result of the volume and
complexities of fund disclosures, many shareholders do not read much,
if any, of the ongoing disclosures they receive. We understand that
fund shareholders would prefer concise, layered shareholder report
disclosure that highlights key information and that uses design
features to make the reports easier to understand and use.
Investor Preferences for Concise, Layered Disclosure
    The vast majority of individual investors responding to questions
in the Fund Investor Experience RFC about summary disclosure expressed
a preference for summary disclosure with additional information
available online or upon request, while only a very few stated that
they did not prefer concise, summary disclosure.\28\ Some investors
specifically addressed and supported a more concise, summary
shareholder report.\29\ Moreover, several investors expressed concern
about the current length of fund disclosure materials.\30\ Commenters'
overall preference for summary disclosure is generally consistent with
other information the Commission has received--through investor
testing, surveys, and other information-gathering--that similarly

indicates that investors strongly prefer concise, layered
disclosure.\31\
---------------------------------------------------------------------------

    \28\ For example, of the 49 individual investors who responded
to a question about summary disclosure in the Feedback Flier, 46
investors preferred summary disclosure and three investors did not.
See, e.g., Comment Letter of Carol Palmer (June 5, 2018) (``Palmer
Comment Letter''); Comment Letter of Perry Balke (June 5, 2018)
(``Balke Comment Letter'') (``Seems like there should be a
disclosure for the ultimate investor and then additional/other
disclosures for Advisors/Institutions to analyze.''); Comment Letter
of Sara Karlidag (June 6, 2018) (``Karlidag Comment Letter'');
Comment Letter of Chip Morton (Dec. 28, 2018) (``Morton Comment
Letter'') (``I like the more detailed reports''). Investors who
responded to the Fund Investor Experience outside of the Feedback
Flier also supported more concise, summary disclosure. See, e.g.,
Comment Letter of Virginia Lamp (Aug. 13, 2018); Comment Letter of
Mark Pitts (July 15, 2018).
    \29\ See, e.g., Comment Letter of Ann Watters (Oct. 8, 2018);
Comment Letter of Allen Weaver (Oct. 8, 2018) (``Weaver Comment
Letter''); Comment Letter of Steve Henry (Oct. 8, 2018) (``Henry
Comment Letter'').
    \30\ See, e.g., Comment Letter of Carla Rojas (June 9, 2018)
(``Rojas Comment Letter'') (stating that fund disclosure is too
long); Comment Letter of Richard Franco (Sept. 24, 2018) (``Franco
Comment Letter''); Comment Letter of Lisa Nevin (June 13, 2018)
(``Nevin Comment Letter''); Comment Letter of Mike Woods (Sept. 2,
2018) (``Woods Comment Letter''); Comment Letter of David (Aug. 30,
2018) (``David Comment Letter'') (stating that fund disclosures are
too overwhelming to be useful).
    \31\ See, e.g., Broadridge Comment Letter I; ICI Comment Letter
I; Broadridge Comment Letter II; 2012 Report on Investor Testing of
Fund Annual Reports, supra footnote 26 (noting that the concept of a
shortened annual report appealed to many focus group participants);
see also 2009 Summary Prospectus Adopting Release, supra footnote
10, at Section II (discussing investors' preferences for summary
disclosure with respect to fund prospectuses); Financial Literacy
Study, supra footnote 26 (noting that, based on the feedback of
commenters and the results of quantitative and qualitative research,
``[w]ith respect to investment product disclosures, investors favor
summary documents containing key information about the investment
product''); Understanding Investor Preferences for Mutual Fund
Information, Investment Company Institute (2006) (``Investor
Preferences Report''), available at https://www.ici.org/pdf/rpt_06_inv_prefs_full.pdf; Form CRS Adopting Release, supra footnote
27, at n.36 (discussing similar preferences for concise disclosure
with respect to broker-dealer and investment adviser relationship
summaries); Variable Contract Summary Prospectus Adopting Release,
supra footnote 27, at n.33 (discussing commenters' support for
layered disclosure in the case of variable annuity and variable life
insurance contracts); IAC Disclosure Effectiveness Recommendation,
supra footnote 26 (discussing, among other things, the use of
layered disclosure as an approach to develop more investor-friendly
disclosures).
---------------------------------------------------------------------------

Investor Views on the Usability and Design of Funds' Shareholder
Reports
    Available evidence suggests that investors generally view fund
shareholder reports as difficult to understand. Several investors
responding to the Fund Investor Experience RFC stated that fund
disclosure is too complicated.\32\ For instance, many investors
indicated that there is too much technical writing in fund
disclosure.\33\ Investors also expressed a strong preference for the
inclusion of more tables, charts, and graphs in fund disclosure to make
information more understandable to the average investor.\34\ Similarly,
the majority of investors participating in certain past quantitative
and qualitative investor testing initiatives on the Commission's behalf
expressed the view that funds' annual reports are written more for
advanced investors, financial professionals, or regulators than for an
average investor.\35\ Investor surveys that other market participants
have conducted further support the conclusion that investors view
funds' shareholder reports as too lengthy and complicated, and
difficult for the average investor to use to effectively find
information of interest.\36\ These surveys have found that, for
example, approximately 41% to 72% of surveyed investors find fund
shareholder reports difficult to understand.\37\
---------------------------------------------------------------------------

    \32\ See, e.g., Karlidag Comment Letter; Rojas Comment Letter;
Comment Letter of Melanie Jallah (June 12, 2018) (``Jallah Comment
Letter''); Nevin Comment Letter; Comment Letter of Roberto Delmonte
(June 15, 2018) (``Delmonte Comment Letter''); Broadridge Comment
Letter I (stating that in a quantitative survey, 72% of investors
who review mutual fund or ETF disclosure said they do not find the
information easy to understand); Comment Letter of Helen and Bob
Hague (Aug. 30, 2018) (``Hague Comment Letter'') (stating that they
understand summary prospectus disclosure, but not annual report
disclosure); Comment Letter of Michael Dougle (Aug. 30, 2018)
(``Dougle Comment Letter''); David Comment Letter.
    \33\ See, e.g., Comment Letter of Harold Thomas (June 8, 2018)
(``Thomas Comment Letter''); Rojas Comment Letter; Jallah Comment
Letter; Comment Letter of Kate Freedman (June 12, 2018) (``Freedman
Comment Letter''); Nevin Comment Letter; Delmonte Comment Letter;
Comment Letter of Rich Kirchoff (June 21, 2018) (``Kirchoff Comment
Letter''); Comment Letter of Tom Arnold (June 23, 2018) (``Arnold
Comment Letter'') (stating that there is too much boilerplate in
fund disclosures, which are legal documents instead of informative
documents); Comment Letter of Mimi Solo (July 16, 2018) (``Solo
Comment Letter''); Woods Comment Letter (stating that fund
disclosure is not useful because there is too much boilerplate and
legalese).
    \34\ See, e.g., Comment Letter of Jack Wilhelm (Aug. 30, 2018)
(``Wilhelm Comment Letter''); Comment Letter of Frank W. (Aug. 30,
2018) (``Frank W. Comment Letter''); Comment Letter of Caryn Stiles
(Aug. 30, 2018) (``Stiles Comment Letter''); Comment Letter of Mrs.
Kellie (Aug. 30, 2018); Hague Comment Letter; Comment Letter of J.L.
(Aug. 30, 2018) (``J.L. Comment Letter''); Woods Comment Letter;
Comment Letter of Amanda Yukle (Sept. 6, 2018) (``Yukle Comment
Letter''); Comment Letter of Joanna Baker (Sept. 11, 2018) (``Baker
Comment Letter''). However, one investor expressed a preference for
text disclosure. See Comment Letter of Mark Freeland (Dec. 2, 2018)
(``Freeland Comment Letter'').
     See also Financial Literacy Study, supra footnote 26
(explaining that, based on public comments and qualitative and
quantitative research, investors prefer that disclosures be written
in clear, concise, understandable language, using bullet points,
tables, charts, and/or graphs); Investor Preferences Report, supra
footnote 31 (indicating that investors prefer graphics and charts
describing an investment over a narrative description).
    \35\ See 2012 Report on Investor Testing of Fund Annual Reports,
supra footnote 26, at 10, 75, and 80. For example, one focus group
participant in the 2012 research described the annual report
disclosure they reviewed as ``mind-clogging,'' while another
participant suggested that annual reports ``should be written in
fifth grade English.'' Another participant stated, ``If they're
sending it to us, use a summary and pie charts. (The more
sophisticated investors) can go online.''
    \36\ See Broadridge Comment Letter I (explaining the findings of
qualitative feedback from 45 retail investors regarding a typical
mutual fund annual report, including that investors found the
document to be too long and overwhelming and preferred disclosures
that can be read in a few minutes and that focus on essential
information); Mutual Fund Investors' Views on Shareholder Reports:
Reactions to a Summary Shareholder Report Prototype, Investment
Company Institute (Oct. 2018) (``ICI Investor Survey''), available
at https://www.ici.org/pdf/ppr_18_summary_shareholder.pdf;
Broadridge Comment Letter II.
    \37\ See Broadridge Comment Letter I (stating that 72% of
surveyed investors that review mutual fund or ETF disclosures do not
find them easy to understand); ICI Investor Survey, supra footnote
36 (stating that 67% of surveyed mutual fund investors who recalled
receiving fund shareholder reports indicated that the reports are
difficult to understand); Broadridge Comment Letter II (providing
the results of two surveys in which 41% and 53% of surveyed
investors, respectively, found the reports very or somewhat
difficult to understand, with older investors and those with lower
incomes more likely to find the reports difficult to understand).
---------------------------------------------------------------------------

Investors' Current Use of Fund Disclosures
    Several investors responding to the Fund Investor Experience RFC
stated that they do not review funds' disclosure materials at all.\38\
Investor testing and surveys also suggest that many fund shareholders
tend to read very little, if any, of funds' disclosure materials. For
example, in one investor survey, 12% of fund shareholders stated that
they ``never'' review mutual fund or ETF disclosure, while an
additional 37% said that they review this disclosure ``some of the
time.''\39\ Another survey found that 63% of mutual fund shareholders
who recalled receiving fund shareholder reports read, at most, very
little of them.\40\ Two other surveys found somewhat higher readership
levels of shareholder reports, with only 4% and 8% of surveyed
shareholders responding that they do not read the reports.\41\ However,
a majority of fund shareholders in one of these surveys also indicated
that they spend 15 minutes or less reviewing the reports.\42\
---------------------------------------------------------------------------

    \38\ See, e.g., Delmonte Comment Letter; Comment Letter of
Helena Krus (July 29, 2018) (``Krus Comment Letter''); Comment
Letter of Logan Fowler (Aug. 13, 2018) (``Fowler Comment Letter'');
Wilhelm Comment Letter; Comment Letter of Nina Grano (Aug. 30, 2018)
(``Grano Comment Letter''); Comment Letter of Jack Olstrom (Aug. 30,
2018) (``Olstrom Comment Letter''); Dougle Comment Letter; Comment
Letter of Frank J. (Aug. 30, 2018); J.L. Comment Letter; Franco
Comment Letter; Comment Letter of Irwin Joseph (Nov. 19, 2018)
(``Joseph Comment Letter''). Some of these commenters stated that
they do not review fund disclosure materials because they are too
long or complex, or generally are not well suited to investors'
needs. See, e.g., Fowler Comment Letter; Franco Comment Letter;
Grano Comment Letter.
    \39\ See Broadridge Comment Letter I.
    \40\ See ICI Investor Survey, supra footnote 36; see also 2012
Report on Investor Testing of Fund Annual Reports, supra footnote
26, at 61, 69 (stating that, of participants in the qualitative
component of this testing, 52% read a few key sections of fund
annual reports, 14% scan the table of contents and/or the first few
pages, and 25% file it or discard it unread; of online survey
respondents, 72% read a few key sections, 10% scan the first few
pages, and 3% file it or discard it unread).
    \41\ See Broadridge Comment Letter II. One of these surveys
found that 8% of surveyed investors do not read the reports, 19%
read very little of the reports, and 28% read some of the reports.
The other survey found that 4% of surveyed investors do not read the
reports and 56% read some of the reports.
    \42\ See id. (providing the results of a survey in which 21% of
investors said that they typically spend 5 minutes or less reviewing
shareholder reports and an additional 41% of investors said that
they typically spend 6 to 15 minutes reviewing the reports).
---------------------------------------------------------------------------

    Survey results relating to readership of shareholder reports also
suggest that shareholders may not read some, or all,

of a fund's shareholder report due, in part, to the fact that many view
shareholder reports as overly long and complex documents that are not
designed to meet the average shareholder's needs.\43\ Fund shareholders
may, however, be more likely to read a more concise version of a fund's
shareholder report.\44\ Academic research similarly suggests that, due
to limits on an individual's ability to absorb and process information,
investors may be more likely to understand and effectively use concise
disclosure that is well-organized and focused on key information.\45\
---------------------------------------------------------------------------

    \43\ See, e.g., ICI Investor Survey, supra footnote 36 (``The
survey results demonstrate that mutual fund investors who find the
current reports difficult to understand are less likely to read
them.'').
    \44\ See, e.g., Broadridge Comment Letter I (discussing the
results of a quantitative survey related to fund disclosure in which
approximately 39% of investors said they would be more likely to
look at or review a summary format of a fund's annual and semi-
annual reports); ICI Comment Letter I (discussing an investor survey
of a summary shareholder report prototype, in which more than 90% of
participants indicated that they would be more likely to read the
summary prototype than a full-length shareholder report); Broadridge
Comment Letter II (providing the results of a survey in which 88% of
investors indicated that they were more likely to read a summary
shareholder report than a full-length report). Two commenters used
the same summary shareholder report prototype, developed by the ICI,
in their investor surveys. The prototype was approximately three
pages in length and primarily focused on performance, fund expenses,
and illustrations of fund holdings. See ICI Comment Letter I;
Broadridge Comment Letter II.
    \45\ See, e.g., Disclosure: Psychology Changes Everything,
George Loewenstein, Cass R. Sunstein, and Russell Goldman, Annual
Review of Economics (2014) (providing a comprehensive survey of
literature relevant to disclosure regulation and suggesting that
``[g]iven the limits of human attention, perhaps the most obvious
way to improve the effectiveness of disclosures is to simplify them
. . . [and] to reduce the number of less important disclosures so as
to increase the salience of the most important ones''); see also
infra Section III.C.1 (discussing additional academic research on
characteristics that may increase the effectiveness of a given
disclosure).
---------------------------------------------------------------------------

Investor Views on the Content of Funds' Shareholder Reports
    Investors participating in investor testing and surveys have
expressed a consistent interest in certain specific shareholder report
disclosure items.\46\ The principal items of interest that investors
have consistently identified for purposes of monitoring an ongoing fund
investment include performance, holdings, and fund expenses.\47\ For
example, investor testing and surveys have found that approximately 60%
to more than 80% of investors believe that fund performance information
is important.\48\ As for fund holdings information, testing and surveys
have found that approximately 38% to 79% of investors view this
information as important.\49\ Testing and surveys have also found that
approximately 34% to 72% of investors believe that fund expense
information is important.\50\
---------------------------------------------------------------------------

    \46\ We are not aware of investor testing or surveys that
specifically have explored fund shareholders' level of interest in
prospectus-related disclosure they receive through annual prospectus
updates or interim prospectus stickers. However, the results of at
least one survey suggest that fund shareholders are more likely to
use shareholder reports than prospectuses to monitor their fund
investments. See Investor Preferences Report, supra footnote 31, at
15.
    \47\ See 2012 Report on Investor Testing of Fund Annual Reports,
supra footnote 26, at 51-52 (stating that about half of online
survey respondents considered items regarding performance, holdings,
and expenses as ``absolutely essential information for any
investor''); Broadridge Comment Letter I; ICI Comment Letter I;
Investor Preferences Report, supra footnote 31; Broadridge Comment
Letter II. Some commenters on the Fund Investor Experience RFC also
suggested that a summary or streamlined shareholder report should
focus on a fund's expenses, performance, and holdings. See, e.g.,
Comment Letter of The Capital Group Companies (Oct. 30, 2018)
(``Capital Group Comment Letter''); Henry Comment Letter. Similarly,
we understand that these content topics are those that experts
recommend that investors consider in understanding a fund
investment. See, e.g., IAC Disclosure Effectiveness Recommendation,
supra footnote 26, at n.4 and accompanying text (``To select a
mutual fund, for example, experts are nearly unanimous in
recommending that investors consider the fund's investment
objectives and strategies, risks, fees and expenses, past
performance, including the volatility of that performance, the
reputation of the fund manager, tax implications of an investment in
the fund, and information about such account features as investment
minimums.'').
    \48\ See Broadridge Comment Letter I (finding that, of the 50%
of surveyed investors that review mutual fund or ETF annual and
semi-annual reports ``always'' or ``most of the time,'' 75% of those
investors often look at or review fund performance information);
2012 Report on Investor Testing of Fund Annual Reports, supra
footnote 26, at 49 (stating that 61% of participants in the
qualitative component of this testing ranked the discussion of fund
performance in the top three most important shareholder report
items); ICI Comment Letter I (finding that approximately 83% of
surveyed investors said that performance highlights information is
very important or somewhat important); Investor Preferences Report,
supra footnote 31 (stating that, after purchase, 76% of investors
review performance information); Broadridge Comment Letter II
(providing the results of an investor survey in which 89% of
investors rated the performance section of the annual report as
important and 63% rated the portfolio commentary (or performance
highlights) section as important).
    \49\ See Broadridge Comment Letter I (stating that, of the 50%
of surveyed investors that review mutual fund or ETF annual and
semi-annual reports ``always'' or ``most of the time,'' 67% of those
investors often look at or review fund portfolio holdings
information); 2012 Report on Investor Testing of Fund Annual
Reports, supra footnote 26, at 49 (finding that 38% of participants
in the qualitative component of this testing ranked the graphical
representation of holdings in the top three most important
shareholder report items); see also ICI Comment Letter I (stating
that approximately 79% of surveyed investors said that graphical
representation of holdings information is very important or somewhat
important); Investor Preferences Report, supra footnote 31 (stating
that, after purchase, 41% of investors review portfolio holdings);
Broadridge Comment Letter II (discussing a survey in which 63% of
investors rated disclosure about the characteristics of a fund--
including top holdings, asset allocations, and industry
allocations--as important for annual reports and 64% of investors
rated this disclosure as important for semi-annual reports).
    \50\ See Broadridge Comment Letter I (stating that, of the 50%
of surveyed investors that review mutual fund or ETF annual and
semi-annual reports ``always'' or ``most of the time,'' 61% of those
investors often look at or review fund expense information); 2012
Report on Investor Testing of Fund Annual Reports, supra footnote
26, at 49 (finding that 34% of participants in the qualitative
component of this testing ranked the expense example in the top
three most important shareholder report items); Broadridge Comment
Letter II (discussing a survey in which 69% of investors rated
expense disclosure as important for annual reports and 66% of
investors rated it as important for semi-annual reports); see also
ICI Comment Letter I (stating that approximately 72% of surveyed
investors said that the fund expense example is very important or
somewhat important); Investor Preferences Report, supra footnote 31
(stating that, after purchase, 55% of investors review fund fees and
expenses).
---------------------------------------------------------------------------

    Investors have expressed varying levels of interest in reviewing a
fund's financial statements and financial highlights. For example, at
least one survey has found somewhat high levels of interest in this
information from shareholders who currently review fund shareholder
reports (i.e., 63% of these investors often review a fund's financial
statements), and another survey found that a majority of investors
rated financial highlights disclosure as important.\51\ Other surveys,
as well as comments on the Investor Experience RFC, suggest that the
average investor may have less interest in financial statements and
financial highlights.\52\ As for other types of shareholder report
disclosure, investors typically have expressed less interest in these
other disclosures.\53\
---------------------------------------------------------------------------

    \51\ See Broadridge Comment Letter I; Broadridge Comment Letter
II (stating that 55% of investors rated the financial highlights as
important annual report disclosure and 53% of investors rated this
disclosure as important for semi-annual reports, but 47% of surveyed
investors viewed the statement of financial condition and operations
as important disclosure for annual or semi-annual reports).
    \52\ See 2012 Report on Investor Testing of Fund Annual Reports,
supra footnote 26, at 49 and 52 (indicating that approximately 38%
to 41% of surveyed investors found the financial highlights to be
important, while approximately 24% to 33% of surveyed investors
believed that financial statements were important); see also ICI
Comment Letter I (determining not to include financial statements
and most financial highlights data points in a summary shareholder
report mockup and instead concluding that ``they were of a more
technical nature that a typical retail investor would not read or
understand,'' although such information would be available online
under the commenter's proposed approach); Rojas Comment Letter
(``What am I supposed to do with a very long list of holdings and
financial statements?''); Balke Comment Letter (``Financial
Statements are of little value.''); Fowler Comment Letter (``What am
I supposed to do with fund financial statements?'').
    \53\ See Broadridge Comment Letter I (finding that surveyed
investors tended to have less interest in remuneration paid to
directors, officers, and others, as well as information about
directors and officers); 2012 Report on Investor Testing of Fund
Annual Reports, supra footnote 26, at 52 (stating that surveyed
investors generally had less interest in information about changes
in, and disagreements with accountants; results of any shareholder
vote; discussion of the reasons the board approved an advisory
contract; statements about where to find certain additional fund
information; and information about directors and officers);
Broadridge Comment Letter II (providing the results of a survey in
which 26% of investors rated disclosure about the fund's directors
and officers as important, and 25% of investors rated disclosure
about the board's approval of the investment advisory contract as
important).

---------------------------------------------------------------------------

Investor Views on the Volume and Frequency of Fund Disclosure
    In addition to concerns about the length of funds' shareholder
reports, some investors responding to the Fund Investor Experience RFC
expressed concern about the overall volume and frequency of fund
disclosures they receive each year. For example, several investors
expressed the view that they receive too many fund disclosure materials
and that they feel overwhelmed by the amount of information they
receive.\54\ Another investor expressed a preference for less frequent
disclosure.\55\
---------------------------------------------------------------------------

    \54\ See, e.g., Delmonte Comment Letter (``There is too much
information provided to me. I buy a mutual fund because I want
convenience and to more efficiently spend my time. Stop giving me
hours['] worth of reading I do not understand.''); Solo Comment
Letter (stating that there are too many fund disclosure materials,
they are too long, and they do not distill the right information);
Rojas Comment Letter.
    \55\ Comment Letter of Anonymous (Aug. 30, 2018) (``Anonymous
Comment Letter'') (``I invest for the long term. I do not need
constant updates.'')
---------------------------------------------------------------------------

    However, with respect to shareholder reports in particular, one
investor survey found that 86% of investors thought that the current
semi-annual frequency at which they receive reports was ``about the
right frequency,'' while 11% of investors viewed semi-annual reports as
too frequent and 3% expressed a preference for more frequent
shareholder reports. In this survey, investors' preferred frequency
changed somewhat for a prototype summary shareholder report.\56\ If
they were to receive a summary shareholder report, 56% of investors
preferred semi-annual reports, 27% preferred quarterly reports, 17%
preferred annual reports, and 1% did not want to receive the
reports.\57\
---------------------------------------------------------------------------

    \56\ See supra footnote 44 (discussing the prototype summary
shareholder report developed by the ICI).
    \57\ See Broadridge Comment Letter II.
---------------------------------------------------------------------------

2. Fee and Risk Disclosure Preferences
    We understand that investors generally prefer concise, summary
disclosure that allows them to quickly understand key information.
Similarly, we understand that this general preference extends to
investors' preferences about disclosures regarding fund fees and risks.
Investor Views on Fee and Risk Disclosure
    The majority of investors responding to a question in the Feedback
Flier about fee disclosure expressed the view that funds do not clearly
disclose their fees and expenses.\58\ Many of these investors suggested
that funds should simplify their fee and expense disclosure.\59\
Several investors recommended reducing the number of line items in the
prospectus fee table or providing only one ``bottom-line'' number
showing the fees associated with an investment in the fund.\60\ Several
investors also expressed an interest in comparing fees and expenses
across multiple funds to help inform their investment decisions.\61\
Other commenters who responded more generally to the Fund Investor
Experience RFC also expressed concern that fund fees are hard to
understand, and that certain terminology Form N-1A uses (e.g., use of
terms like ``12b-1 fees'' and ``front-end loads'') is similarly
difficult to understand.\62\ Some commenters suggested that funds
should disclose fees in terms of dollars rather than percentages to
make the disclosure more understandable to investors.\63\
---------------------------------------------------------------------------

    \58\ Approximately 33 investors responded to the Feedback Flier
question asking, ``Do you think funds clearly disclose their fees
and expenses?'' Of these 33 investors, 21 investors replied ``no''
and 12 investors replied ``yes.''
    \59\ See, e.g., Krus Comment Letter; Stiles Comment Letter;
Anonymous Comment Letter; Hague Comment Letter; J.L. Comment Letter;
Woods Comment Letter; Comment Letter of Jake Hamm (Sept. 3, 2018);
Yukle Comment Letter.
    \60\ See, e.g., Grano Comment Letter; Anonymous Comment Letter;
Yukle Comment Letter; J.L. Comment Letter.
    \61\ See, e.g., Palmer Comment Letter; Balke Comment Letter;
Karlidag Comment Letter; Kirchoff Comment Letter; Solo Comment
Letter; Krus Comment Letter.
    \62\ See, e.g., Comment Letter of AARP (Oct. 31, 2018) (``AARP
Comment Letter''); Comment Letter of Independent Directors Council
(Oct. 30, 2018); Comment Letter of Carla Ruiz (Aug. 17, 2018)
(``Ruiz Comment Letter''). A recent study of mutual fund financial
literacy also found that many survey participants were unable to
correctly answer certain true-or-false questions about general
aspects of funds' fee structures, as well as other characteristics
of funds. See Brian Scholl and Angela Fontes, Adding Depth to
Financial Literacy: What Does the Public Know About Mutual Funds?
Towards a New Index of Investor Knowledge, SEC Office of the
Investor Advocate (July 18, 2019).
    \63\ See, e.g., AARP Comment Letter; Comment Letter of A. Miller
(July 21, 2018); see also infra footnote 573 (citing other evidence
that dollar-based disclosure may be easier for some investors to
understand).
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Investor Views on Principal Risk Disclosure
    Many investors responding to the Fund Investor Experience RFC also
suggested that disclosure about a fund's risks is too long.\64\ Some
investors suggested that funds should order risks by importance and
provide the most important risks first.\65\ Other investors suggested
that more focused risk disclosure would be helpful.\66\ Consistent with
these investor preferences, Commission staff has encouraged funds to
take steps to improve their principal risk disclosure including by, for
example, ordering risks by importance, better tailoring their risk
disclosure, and concisely summarizing principal risks in the summary
prospectus.\67\
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    \64\ See, e.g., Krus Comment Letter; Solo Comment Letter; Fowler
Comment Letter; Stiles Comment Letter; Comment Letter of Hector
Ewing (Aug. 30, 2018) (``Ewing Comment Letter''); J.L. Comment
Letter; Woods Comment Letter; Baker Comment Letter; Olstrom Comment
Letter.
    \65\ See, e.g., Stiles Comment Letter; Dougle Comment Letter;
J.L. Comment Letter; Ruiz Comment Letter; see also Frank W. Comment
Letter (expressing interest in disclosure that better explains the
level of a given risk).
    \66\ See, e.g., Freeland Comment Letter (stating that funds
should only disclose risks based on how the fund normally and
actually invests).
    \67\ See Division of Investment Management, Accounting and
Disclosure Information 2019-08, Improving Principal Risks
Disclosure, available at https://www.sec.gov/investment/accounting-and-disclosure-information/principal-risks/adi-2019-08-improving-principal-risks-disclosure (``ADI 2019-08'').
---------------------------------------------------------------------------

3. Disclosure Delivery Preferences
    Based on information from the Fund Investor Experience RFC and
investor testing and surveys, investors have shown a general
familiarity with using the internet to find information about a fund
and have expressed a range of preferences regarding how they receive
fund disclosure (i.e., in paper or electronically). In the Fund
Investor Experience RFC, the Commission sought information on
investors' use of the internet to communicate about and find
information on fund investments, as well as their preferences on the
form and manner of disclosure delivery.\68\ In response, many investors
indicated that they go to fund or intermediary websites to get
information about a fund investment.\69\ Many investors also expressed
a preference for receiving fund disclosure electronically, either
through email, mobile application, or

website availability.\70\ Several other investors preferred to access
most fund information electronically, with the exception of certain
information they preferred to receive on paper.\71\ Other investors
stated that they generally prefer to receive fund information in paper
format.\72\ A few investors specifically suggested that paper should be
the default delivery mechanism for a ``summary'' shareholder
report.\73\ In addition, investor testing and surveys suggest that many
investors would prefer enhanced availability of fund information on the
internet in a layered disclosure framework, although some investors
prefer to receive fund disclosures in paper format.\74\
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    \68\ See Fund Investor Experience RFC, supra footnote 8, at
Section II.B.2.
    \69\ See, e.g., Karlidag Comment Letter; Thomas Comment Letter;
Jallah Comment Letter; Delmonte Comment Letter; Solo Comment Letter;
Comment Letter of C. Scott (July 26, 2018) (``Scott Comment
Letter''); Comment Letter of James McRitchie (Sept. 4, 2018)
(``McRitchie Comment Letter'').
    \70\ See, e.g., Rojas Comment Letter; Jallah Comment Letter;
Freedman Comment Letter; Nevin Comment Letter; Kirchoff Comment
Letter; Arnold Comment Letter; Scott Comment Letter; Krus Comment
Letter. Some funds responding to the Fund Investor Experience RFC
also suggested that website disclosure is consistent with many
investors' preferences. See, e.g., Capital Group Comment Letter;
Comment Letter of Fidelity Investments (Oct. 31, 2018) (``Fidelity
Comment Letter''); Comment Letter of Vanguard (Oct. 31, 2018)
(``Vanguard Comment Letter'').
    \71\ Many of these investors preferred to receive statements in
paper. See Comment Letter of Arthur Blanchard (Nov. 19, 2018)
(``Blanchard Comment Letter''); Ewing Comment Letter; Joseph Comment
Letter; Krus Comment Letter. Other investors appeared to have
different preferences. See Comment Letter of Mark S. (Aug. 30, 2018)
(preferring to receive ``important'' information by mail); Olstrom
Comment Letter (preferring to receive tax forms in paper); Comment
Letter of Carl Waranowksi (Nov. 25, 2018) (``Waranowski Comment
Letter'') (preferring to receive ``important'' information in
paper).
    \72\ See, e.g., Grano Comment Letter; Comment Letter of Jane D.
Nelson (Aug. 30, 2018); Comment Letter of Duane Lee (Dec. 3, 2018)
(``Lee Comment Letter''); Comment Letter of Mark Moran (Dec. 4,
2018); Morton Comment Letter; Comment Letter of Brad Shockey (Oct.
9, 2018).
    \73\ See Henry Comment Letter; Weaver Comment Letter.
    \74\ For example, the 2012 investor testing suggested that an
investor looking for a fund's annual report is most likely to seek
it out on the fund's website, rather than request it by mail or
phone or by retrieving it from the Commission's EDGAR system. See
2012 Report on Investor Testing of Fund Annual Reports supra
footnote 26, at 72. Many investors indicated that they would prefer
that fund information be made available in both electronic and paper
versions, with a plurality of respondents preferring electronic
transmission by email with the option to easily request a paper copy
of a particular report, though a significant minority indicated that
they would still prefer to receive a paper copy through the mail.
Id. at 183. See also Broadridge Comment Letter I (providing data on
surveyed investors' current methods for receiving mutual fund and
ETF disclosure and preferred delivery methods that suggest that
preferences are mixed, with 47% of investors primarily receiving
fund disclosure by mail and 44% primarily receiving fund disclosure
by email); CFA Comment Letter (stating that the following percent of
respondents to a 2006 survey expressed interest in using the
internet to: (1) Obtain general information about funds (59%); (2)
research individual funds (58%); (3) receive periodic reports and
disclosure documents (49%); (4) use a calculator to compare costs
(47%); (5) communicate with a financial services professional (39%);
or (6) purchase mutual funds (26%)); Broadridge Comment Letter II
(providing the results of a survey in which 34% of investors said
they were more likely to review a summary shareholder report if
received by mail and 50% of investors said they were more likely to
review such a report if received by email). See also infra footnote
76 (discussing increasing internet access over the years).
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C. Developments Affecting Fund Disclosure and Marketing Practices
    In addition to evidence about investor preferences regarding fund
disclosure, our proposal is informed by developments affecting fund
disclosure and marketing practices. With respect to our proposed
amendments to promote more concise, layered disclosure, these
developments include advances in technology and the Commission's
experience with summary prospectus disclosure, as well as the growing
length and complexity of funds' shareholder reports since the mid-
1990s. Additionally, our proposed amendments to investment company
advertising rules are informed by our observations about recent
investment company marketing practices in light of increased industry
focus on fees, and competition based on fees.
Advances in Technology
    For more than 20 years, the Commission has recognized the
internet's important role in providing disclosure materials and other
information to investors and maximizing investor access to
information.\75\ During this time, technology has continued to evolve,
and investors' access to the internet has increased. For example, as of
2019, approximately 94% of households owning mutual funds had internet
access, while only 68% of these households had internet access in
2000.\76\ Moreover, advances in technology, including increasing use of
mobile devices to access information, are expanding the avenues that
funds and intermediaries can use to communicate with investors and make
it easier to provide interactive or customizable information.\77\ We
understand that many funds and financial intermediaries are using
technology in an effort to communicate more effectively with fund
investors and to respond to investor preferences, and continue to
explore additional ways to use technology to better communicate with
investors.\78\ The Commission, while considering the needs and
preferences of investors, also has recognized that modernizing the
manner in which funds and others make information available to
investors allows them to leverage the benefits of technology and reduce
fund costs.\79\
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    \75\ See, e.g., supra footnote 21. For a more-detailed
discussion of other Commission releases that have involved using the
internet to provide or improve access to information, see Rule 30e-3
Adopting Release, supra footnote 14, at n.18; see also Exchange-
Traded Funds, Investment Company Act Release No. 33646 (Sept. 25,
2019) [84 FR 57162 (Oct. 24, 2019)] (``ETF Adopting Release''), at
n.229 (encouraging ETFs to consider whether there are technological
means to make their disclosure more accessible).
    \76\ See Ownership of Mutual Funds, Shareholder Sentiment, and
Use of the internet, ICI Research Perspectives (Oct. 2019) (``Study
on Mutual Fund Investors' Use of the internet''), available at
https://www.ici.org/pdf/per25-08.pdf; see also CFA Comment Letter
(providing a 2014 report discussing the growth of internet usage).
    \77\ See, e.g., Vanguard Comment Letter; ICI Comment Letter I;
CFA Comment Letter.
    \78\ See, e.g., Fidelity Comment Letter; Comment Letter of
Putnam Investments (on behalf of the Mutual Fund Broker-Dealer
Working Group) (Nov. 30, 2018) (``Putnam Comment Letter''); ICI
Comment Letter I; Capital Group Comment Letter (stating that a
growing percentage of fund shareholders and their advisers use the
fund group's website to obtain information about its funds, its
organization, and other investment insights); CFA Comment Letter
(providing a 2014 study entitled ``Can the internet Transform
Disclosures for the Better?'' that, among other things, reviewed the
content and design of fund and intermediary websites). For example,
we understand that several funds and financial intermediaries
provide interactive features on their websites such as fund screener
tools, expense calculators, and retirement planning tools and use
mobile applications to engage with fund shareholders.
    \79\ See Rule 30e-3 Adopting Release, supra footnote 14;
Variable Contract Summary Prospectus Adopting Release, supra
footnote 27.
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Experience With Layered Disclosure, and the Growing Length and
Complexity of Shareholder Reports Over Time
    The Commission also has taken multiple steps with respect to fund
prospectuses to both recognize investors' preferences for concise and
engaging disclosure of key information and ensure that additional
information that may be of interest to some investors is available
through a layered approach to disclosure.\80\ We believe these
initiatives have benefitted investors. For example, research shows that
the introduction of a more concise summary prospectus may allow
investors to spend less time and effort to arrive at the same portfolio
decision they would have made after reading the longer statutory
prospectus.\81\ Approximately

93% of funds use summary prospectuses.\82\
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    \80\ See New Disclosure Option for Open-End Management
Investment Companies, Investment Company Act Release No. 23065 (Mar.
13, 1998) [63 FR 13968 (Mar. 23, 1998); 2009 Summary Prospectus
Adopting Release, supra footnote 10; Variable Contract Summary
Prospectus Adopting Release, supra footnote 27.
    \81\ See John Beshears, James Choi, David Laibson, and Brigitte
Madrian, How Does Simplified Disclosure Affect Individuals' Mutual
Fund Choices?, Explorations in the Economics of Aging, 75, 76 (David
A. Wise ed., 2011), available at https://scholar.harvard.edu/laibson/publications/how-does-simplified-disclosure-affect-individuals-mutual-fund-choices.
    \82\ See supra footnote 12.
---------------------------------------------------------------------------

    On the other hand, the Commission has not taken comprehensive steps
to create a layered disclosure framework for funds' shareholder
reports.\83\ Funds' shareholder reports generally have become longer
and more complex over the years. For example, until 1994, funds were
only required to provide certain financial information in their
shareholder reports, generally consistent with the types of information
that section 30(e) of the Investment Company Act identifies.\84\ During
this time, however, many funds provided other information in these
reports voluntarily, including information about general economic
conditions, the fund's performance, and services provided to
shareholders.\85\ Over the past two decades, the amount of information
that funds are required to include in shareholder reports (or that
funds otherwise voluntarily include in these reports) has increased
substantially.\86\
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    \83\ The Commission has, however, adopted rules that permit
streamlined disclosure of portfolio holdings in funds' shareholder
reports. In 2004, the Commission adopted an approach that gives
funds the option to include summary portfolio schedules in their
shareholder reports, provided the complete portfolio schedule is
filed on Form N-CSR and available, free of charge, to investors. See
Shareholder Reports and Quarterly Portfolio Disclosure of Registered
Management Investment Companies, Investment Company Act Release No.
26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)], at Section II.B
and paragraph accompanying n.111 (``February 2004 Shareholder Report
Adopting Release'') (noting that these amendments were ``designed to
streamline shareholder reports and help investors to focus on a
fund's principal holdings, and thereby better evaluate the fund's
risk profile and investment strategy,'' and would reduce printing
and mailing costs for most funds).
    \84\ See, e.g., Registration Form Used by Open-End Management
Investment Companies, Investment Company Act Release No. 13436 (Aug.
12, 1983) [48 FR 37928, 37951 (Aug. 22, 1983)] (adopting Form N-1A,
which included annual and semi-annual report requirements in what
was then Item 23 of the form). In 1994, the Commission adopted
amendments requiring funds to disclose information in their
shareholder reports about the results of shareholder votes and any
changes in and disagreements with accountants. See, e.g., Amendments
to Proxy Rules for Registered Investment Companies, Investment
Company Act Release No. 20614 (Oct. 13, 1994) [59 FR 52689 (Oct. 19,
1994)]. In 1996, Congress added section 30(f) to the Investment
Company Act, which allows the Commission to require that funds'
semi-annual reports include such other information as the Commission
deems necessary or appropriate in the public interest or for the
protection of investors. National Securities Markets Improvement Act
of 1996, Public Law 104-290, Section 207, 110 Stat. 3416, 3430 (Oct.
11, 1996).
    \85\ See, e.g., Standardization of Financial Statement
Requirements in Management Investment Company Registration
Statements and Reports to Shareholders, Investment Company Act
Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 1980)], at
nn.3-4 and accompanying text.
    \86\ See, e.g., Role of Independent Directors of Investment
Companies, Investment Company Act Release No. 24816 (Jan. 2, 2001)
[66 FR 3734 (Jan. 16, 2001)] (``Independent Directors Release'')
(requiring shareholder report disclosure regarding a fund's board of
directors); Disclosure of Proxy Voting Policies and Proxy Voting
Records by Registered Management Investment Companies, Investment
Company Act Release No. 25922 (Jan. 31, 2003) [68 FR 6564 (Feb. 7,
2003)] (requiring funds to disclose in their annual and semi-annual
reports to shareholders the methods by which shareholders may obtain
information about proxy voting); February 2004 Shareholder Report
Adopting Release, supra footnote 83 (requiring funds to add
shareholder report disclosure regarding fund expenses borne by
shareholders, a tabular or graphic presentation of a fund's
portfolio holdings by identifiable categories, and management's
discussion of fund performance, while allowing funds to include a
summary portfolio schedule in these reports); Disclosure Regarding
Approval of Investment Advisory Contracts by Directors of Investment
Companies, Investment Company Act Release No. 26486 (June 23, 2004)
[69 FR 39798 (June 30, 2004)] (requiring shareholder report
disclosure about the basis for the board's approval of advisory
contracts during the most recent fiscal half-year).
---------------------------------------------------------------------------

Developments Affecting Investment Company Advertisements
    In recent years, investment companies increasingly have been
marketing themselves on the basis of costs in an effort to attract
investors. For instance, we have observed some funds calling themselves
``no-expense'' or ``zero-expense'' funds, or emphasizing their low
expense ratios, despite the fact that investors may experience other
investment costs.\87\ These other investment costs include, for
example, securities lending costs or wrap program fees that may provide
revenue to the fund's adviser, its affiliates, or others and that may
effectively allow the fund to reduce its reported expense ratio because
the prospectus fee table is not required to reflect the relevant
category of costs. Investment company advertising rules currently place
limits on how a fund may present its performance to promote
comparability and prevent potentially misleading advertisements.\88\
These rules, however, generally do not prescribe the presentations of
fees and expenses in advertisements to address similar concerns about
comparability or potentially misleading information.\89\
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    \87\ A fund's expense ratio is the figure in its prospectus fee
table that represents the fund's total annual operating expenses,
expressed as a percent of the fund's average net assets. See also
infra Section II.H.1.c (discussing costs that the expense ratio does
not reflect).
    \88\ See, e.g., Amendments to Investment Company Advertising
Rules, Investment Company Act Release No. 26195 (Sept. 29, 2003) [68
FR 57760 (Oct. 6, 2003)]; Advertising by Investment Companies,
Investment Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868
(Feb. 10, 1988)] (``1988 Advertising Rules Release''); Mutual Fund
Sales Literature Interpretive Rule, Investment Company Act Release
No. 10915 (Oct. 26, 1979) [44 FR 64070 (Nov. 6, 1979)].
    \89\ While Commission rules require a fund to disclose maximum
sales loads in some advertisements, and FINRA rules also limit how a
fund advertisement may describe investment costs in some respects,
these limitations currently apply only to a subset of fund
advertisements. See infra Section II.H.2.
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II. Discussion

D. Overview of Proposed New Disclosure Framework

1. Executive Summary
    The amendments we are proposing would modify the disclosure
framework for funds registered on Form N-1A to create a new layered
disclosure approach designed to highlight key information for retail
investors. The new disclosure approach is designed to tailor the
information that investors receive to help investors better assess and
monitor their fund investments and make informed investment decisions.
We recognize that investors have different levels of knowledge and
experience, and we seek to promote disclosure that is inviting and
usable to a broad spectrum of investors.
    In order to help achieve these goals, the proposal includes the
following principal elements:
     Shareholder Reports Tailored to the Needs of Retail
Shareholders: Under the proposal, fund investors would continue to
receive fund prospectuses in connection with their initial investment
in a fund, as they do today. Thereafter, a shareholder would receive
concise and visually engaging annual and semi-annual reports designed
to highlight information that we believe is particularly important for
retail shareholders to assess and monitor their fund investments on an
ongoing basis. This information would include--among other things--fund
expenses, performance, and portfolio holdings. We also propose to
provide funds the flexibility to make electronic versions of their
shareholder reports more user-friendly and interactive.
     Availability of Additional Information on Form N-CSR and
Online: Information currently included in annual and semi-annual
reports that may be less relevant to retail fund shareholders, and of
more interest to financial professionals and other investors who desire
more in-depth information, would be made available online and delivered
free of charge in paper or electronically upon request by the fund (or
intermediary through which shares of the fund may be purchased or
sold). This information

also would be filed on a semi-annual basis with the Commission on Form
N-CSR. This information would include, for example, the schedule of
investments and other financial statement elements. Shareholder reports
would contain cover page legends directing investors to websites
containing this information.
     Amendments to Scope of Rule 30e-3 to Exclude Funds
Registered on Form N-1A: The proposal contemplates that a fund's
shareholder reports, as modified pursuant to the proposed rule and form
amendments, would serve as the central source of fund disclosure for
existing shareholders. To ensure that all fund investors would
experience the anticipated benefits of the proposed new tailored
disclosure framework, we are proposing to amend the scope of rule 30e-3
to exclude open-end funds.\90\ Beginning as early as January 1, 2021,
funds may begin relying on rule 30e-3, which generally permits funds to
satisfy shareholder report transmission requirements by making these
reports and other materials available online and providing a notice of
the reports' online availability, instead of directly providing the
reports to shareholders.\91\ The new proposed disclosure framework
considers feedback that commenters provided in response to the Fund
Investor Experience RFC and reflects the Commission's continuing
efforts to search for better ways of providing investors with the
disclosure that they need. In light of these and other considerations,
we preliminarily believe that the proposed disclosure approach
represents a more-effective means of improving investors' ability to
access and use fund information, and of reducing expenses associated
with printing and mailing, than continuing to permit open-end funds to
rely on rule 30e-3.
---------------------------------------------------------------------------

    \90\ We discuss the operational aspects of this proposed
amendment to the scope of rule 30e-3, including compliance date
issues, in Section II.G infra.
    \91\ Notwithstanding rule 30e-3, investors who have elected
electronic delivery of fund documents or have opted in to paper
delivery of shareholder reports receive delivery of shareholder
reports pursuant to their elections. See infra footnote 532 and
accompanying text.
---------------------------------------------------------------------------

     Tailoring Required Disclosures to Needs of New versus
Ongoing Fund Investors: It is currently common for fund shareholders to
receive an updated annual prospectus each year. We are proposing new
rule 498B, which would provide an alternative approach that uses
layered disclosure, discussed in more detail below, to keep investors
informed about their fund investment and updates to their fund that
occur year over year. Under this proposed rule, new investors would
receive a fund prospectus in connection with their initial investment
in a fund, as they currently do, but funds would not deliver annual
prospectus updates to investors thereafter. The proposed layered
disclosure framework would instead rely on the shareholder report
(including a summary in the annual report of material changes that
occurred over the prior year), as well as timely notifications to
shareholders regarding material fund changes as they occur, to keep
investors informed about their fund investments and enable them to make
informed decisions about whether to buy, sell, or hold fund shares.
Current versions of the fund's prospectus would remain available online
and would be delivered upon request in a manner consistent with the
shareholder's delivery preference.
     Improvements to Prospectus Disclosure of Fund Fees and
Risks; Request for Comment on Improving Fund Fee and Expense
Disclosures: We recognize that fund fees and risks are two areas that
investors find particularly important to assessing a prospective fund
investment, and two disclosure areas that can be complex and confusing.
We are proposing amendments to funds' prospectus disclosure that are
designed to help investors more readily understand a fund's fees and
risks, and that use layered disclosure principles that tailor
disclosures of these topics to different types of investors'
informational needs. We are also proposing amendments that would refine
the scope of funds that are required to disclose the fees and expenses
associated with investments in other funds as a component of a fund's
bottom line annual expenses in the prospectus fee table. Furthermore,
we are requesting comment on how we could improve the ways in which
funds disclose their fees and expenses, in order to represent the full
costs associated with a fund investment more accurately and to help
investors better understand their investment costs.
     Fee and Expense Information in Fund Advertisements:
Finally, we are proposing amendments that are designed to respond to
developments that we have observed in fund advertising. The proposed
amendments would require that presentations of investment company fees
and expenses in advertisements and sales literature be consistent with
relevant prospectus fee table presentations and be reasonably current.
The proposed amendments also address representations of fund fees and
expenses that could be materially misleading. The proposed advertising
rule amendments would affect all registered investment company and BDC
advertisements and would not be limited to open-end fund
advertisements.
2. Considerations and Goals
Concerns and Considerations About Current Disclosure Framework
    The proposed new disclosure framework--particularly, the new
tailored approach to disclosure with respect to fund shareholder
reports and prospectuses--is designed to address the concern that
shareholder report and prospectus disclosures may appear redundant or
inconsistent to shareholders, as well as our belief that prospectus
disclosure in particular may often be less relevant to the
informational needs of a shareholder who is simply monitoring his or
her fund investment. As a preliminary matter, fund prospectuses and
shareholder reports have historically served different purposes. The
prospectus acts as the principal selling document for investors to
inform investment decisions and facilitate fund comparisons. The
shareholder report, on the other hand, provides information to a fund's
current shareholders about the fund's operations and performance during
the past fiscal period. Moreover, the shareholder report and prospectus
present certain of the same types of information (e.g., fund
performance and expenses) differently in light of their intended
audiences.\92\
---------------------------------------------------------------------------

    \92\ For example, a shareholder report currently includes
backward-looking information about a fund's actual ongoing expenses
over the most recent fiscal half-year, while a prospectus includes
forward-looking information about fees for new investments in a fund
(i.e., sales charges) and the fund's projected future expenses. As
another example, a shareholder report typically provides performance
and other information as of the end of the fund's most recent fiscal
year, while a prospectus presents fund performance as of the end of
a calendar year to help prospective investors compare potential fund
investments.
---------------------------------------------------------------------------

    As a result, there are ways in which the current disclosure
framework may not tailor fund disclosure contents to the needs of
different types of investors. Much of the information in a fund's
prospectus, including disclosure about the fund's principal investment
strategy and principal risks, often remains the same from year to year.
Receiving continuing disclosure of this unchanging information
therefore might not be useful to existing fund investors, although
investors typically receive annual prospectus updates that include this
content. On the other hand, to the extent a fund has a material change
(e.g., it materially changes its principal investment strategy and has
different

principal risks, or changes its fees), this information may be more
salient to a shareholder's monitoring of his or her investments. Under
the current disclosure framework, these changes might not be
highlighted to shareholders.\93\ The fact that current fund disclosures
might not meet investors' informational needs may contribute to
investor disinterest or confusion. The potential for disinterest or
confusion may be particularly pronounced when a shareholder receives
prospectus and shareholder report disclosure close in time, which often
occurs in the case of the annual report and the annual prospectus
update.\94\
---------------------------------------------------------------------------

    \93\ For example, to the extent a fund has a known or expected
increase in its fees and expenses for the current year, a fund
shareholder would receive information about the new fee and expense
levels in the annual prospectus update. That is, the prospectus fee
table in year 1 would present fees as x%, and in year 2 would
present fees as y%. But the prospectus would not necessarily
highlight or explain the change from year to year, nor would the
fund's shareholder reports.
    \94\ See supra footnote 20 and accompanying text.
---------------------------------------------------------------------------

    Although prospectus disclosure may be less well-suited for
analyzing and monitoring an ongoing fund investment, some fund
shareholders may be more likely to review a fund's prospectus instead
of its shareholder reports based simply on length. Over the past two
decades, the amount of information that funds are required to include
in shareholder reports (or that funds otherwise voluntarily include in
these reports) has increased substantially.\95\ This amount of
disclosure may not correspond with investors' expressed preferences for
concise, layered disclosure that highlights key information. The
substantial length of shareholder reports also may make it more
difficult for investors to understand and effectively use the
information.\96\
---------------------------------------------------------------------------

    \95\ See supra footnote 19 and accompanying text (noting that
the average page length of annual reports is approximately 134
pages).
    \96\ See supra Section I.B.
---------------------------------------------------------------------------

    In addition, we have considered the extent to which modifying the
disclosure framework for funds, for example by requiring funds to
transmit the tailored shareholder reports that this proposal envisions,
could result in cost savings.\97\ Shareholders generally bear these
fund expenses, and therefore may be bearing costs for information they
prefer not to be delivered to them. For example, retail shareholders
may prefer not to have delivered to them information that is more
technical in nature and may be more relevant for financial
professionals and other investors who desire more in-depth information
(such as complete fund financial statements, as opposed to receiving
summary disclosure about fund holdings and expenses).
---------------------------------------------------------------------------

    \97\ See infra Section III.C.2.d (as discussed in this section,
we anticipate that the proposed new disclosure framework would
produce cost savings, due to reduced printing and mailing costs and
processing fees, even after taking into account the effects of our
proposed exclusion of open-end funds from the scope of rule 30e-3).
---------------------------------------------------------------------------

    This proposal reevaluates funds' disclosure framework in light of
all of these considerations. The proposed new approach is based on the
goal of promoting more-digestible, tailored disclosure that fund
shareholders can use to monitor their ongoing fund investments
efficiently and meaningfully, with layered information that may be less
relevant to retail shareholders available online and upon request.
Likewise, the proposed approach is designed to help a fund shareholder
to use shareholder reports to compare funds he or she already owns and
assess how the shareholder's mix of funds fits into his or her overall
investment portfolio.
    The proposed approach to funds' overarching disclosure framework
would be complemented by more-targeted proposed improvements to fund
prospectus fee and risk disclosures, as well as proposed amendments to
investment company advertising rules. Collectively, the proposed
amendments are designed to facilitate investors' ability to make
informed investment decisions and monitor their investments thereafter.
Tailoring Fund Disclosure Using Layered Disclosure Principles
    The layered disclosure approach underlying the proposed new
disclosure framework would build on the Commission's experience in
conforming required fund disclosures to the informational needs of
different types of investors. In recent years, the Commission has
adopted rules that rely on layered disclosure principles to tailor fund
disclosures to the particular needs of retail investors, as well as
financial professionals and other investors who desire more in-depth
information.\98\ Similarly, in past years the Commission has taken into
account the relative informational needs of new investors and ongoing
shareholders in tailoring the requirements for investment company
disclosures.\99\
---------------------------------------------------------------------------

    \98\ See 2009 Summary Prospectus Adopting Release, supra
footnote 10; Variable Contract Summary Prospectus Adopting Release,
supra footnote 27; see also discussion at supra footnotes 5-6 and
accompanying text.
    \99\ See Variable Contract Summary Prospectus Adopting Release,
supra footnote 27. In particular, the Commission received positive
feedback on its proposal to provide an ``initial summary
prospectus'' to new investors in variable annuity and variable life
insurance contracts, and an ``updating summary prospectus'' to
investors each year after their initial investment in a variable
contract. Id. at text accompanying nn.33 and 335. In part on the
basis of that positive feedback, the Commission adopted that
proposal.
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    The proposed new disclosure framework also would reflect various
stakeholders' suggestions and stated preferences for fund disclosure
that more directly highlights key fund information and is tailored to
investors' needs. For example, the Commission's Investor Advisory
Committee has recommended that the Commission develop an approach to
funds' shareholder reports that would rely on summary disclosure and
layered disclosure principles.\100\ Similarly, the proposed new
disclosure framework would reflect investor preferences as we
understand them based on investor testing, surveys, and other
information-gathering, which have consistently indicated that retail
fund investors prefer concise disclosure that focuses on the most
important fund information.\101\
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    \100\ See Recommendation of the Investor Advisory Committee
Regarding Promotion of Electronic Delivery and Development of a
Summary Disclosure Document for Delivery of Investment Company
Shareholder Reports (Dec. 7, 2017), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-promotion-of-electronic-delivery-and-development.pdf.
The recommendation provided, among other things, that the Commission
explore: (1) Methods to encourage a transition to electronic
delivery that respect investor preferences and that increase the
likelihood that investors will see and read important disclosure
documents; and (2) development of a summary, layered disclosure
document for shareholder reports that incorporates key information
from the report along with prominent notice regarding how to obtain
a copy of the full report, and would be designed to be delivered
either by mail or by email (depending on the investors' delivery
preferences). This proposal also takes into account the Investor
Advisory Committee's recent recommendation on improving the
effectiveness of investor disclosures (including in the context of
fund disclosures). See IAC Disclosure Effectiveness Recommendation,
supra footnote 26.
    \101\ See discussion at supra Section I.B.1.
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Leveraging Technology To Modernize Funds' Disclosure Requirements
    In addition, the proposed new disclosure framework would leverage
technology to modernize funds' disclosure requirements.\102\ Our

proposal would use the internet as a medium to provide information to
investors and distinguish between information that investors receive
directly (either in paper or electronically, depending on investors'
preferences) and information that is available to investors online. The
proposal also takes steps to encourage funds to use online tools to
enhance and personalize the information that they provide to
shareholders, as constantly developing online technology presents
unique potential to enrich investors' experience in understanding and
engaging with their fund investments.\103\
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    \102\ Individuals' access to and use of the internet has
increased significantly in the last few decades, including among
demographic groups that have previously been less apt to use the
internet. See Pew Research Center, internet/Broadband Fact Sheet
(last updated June 12, 2019), available at https://www.pewresearch.org/internet/fact-sheet/internet-broadband. We
understand these trends extend to individuals' use of online
resources to manage their finances and investments. See, e.g., Can
the internet Transform Disclosures for the Better? Consumer
Federation of America (Jan. 2014), available at https://consumerfed.org/pdfs/can-the-internet-transform-disclosures-for-the-better.pdf.
    \103\ See infra Section II.B.4.
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Shareholder Report as the Central Source of Fund Disclosure for
Existing Shareholders
    In proposing the new disclosure framework, which employs the
shareholder report as the central source of fund disclosure for
existing shareholders, we considered the extent to which permitting
open-end funds to continue relying on rule 30e-3 to transmit
shareholder reports would affect our policy goals. Since adopting rule
30e-3, we have continued to analyze and hear from industry participants
regarding further improvements to our disclosure regime. As a result,
we now believe that a tailored shareholder report that highlights key
information would provide better information for investors than the
notices required under rule 30e-3. Furthermore, if a fund were
permitted to rely upon both rule 30e-3 and proposed rule 498B,
shareholders in such a fund would no longer directly receive
shareholder reports or annual prospectus updates, and thus would not be
sent any periodic regulatory disclosure documents.\104\ We believe the
proposed new disclosure framework would also largely preserve the
expected cost savings to funds and investors that funds would
experience by choosing to rely on rule 30e-3.\105\
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    \104\ See infra Section III.C.2.d.
    \105\ See id.
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E. Annual Shareholder Report

    We are proposing to add new Item 27A to Form N-1A to specify the
design and content of funds' annual and semi-annual reports. We also
are proposing to remove the provisions in current Item 27 of Form N-1A
that relate to annual and semi-annual reports.
    The table below summarizes the proposed content that funds would
include in their annual reports or Form N-CSR reports in comparison to
current shareholder report disclosure requirements.\106\ While the
proposed content requirements for shareholder reports that are
transmitted in paper would generally be the same as the requirements
for reports that are transmitted electronically (and that appear online
or are accessible through mobile electronic devices), we are proposing
instructions that address electronic presentation and are designed to
provide flexibility to enhance the usability of reports that appear
online or on mobile devices.\107\
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    \106\ This release separately discusses the proposed content
requirements for funds' semi-annual reports. See infra Section II.C.
    \107\ See infra Section II.B.4.

                                         Table 1--Annual Report Contents
----------------------------------------------------------------------------------------------------------------
 Current annual shareholder report     Description of proposed    Proposed rule and form
disclosure (current Form provision)           amendments                 provisions         Discussed below in
----------------------------------------------------------------------------------------------------------------
                                     Add new identifying          Item 27A(b) of Form N-  Section II.B.2.a.
                                      information to the           1A.
                                      beginning of the annual
                                      report.
Expense example (Form N-1A Item      Retain in annual report in   Item 27A(c) of Form N-  Section II.B.2.b.
 27(d)(1)).                           a more concise form.         1A.
Management's discussion of fund      Retain in annual report in   Item 27A(d) of Form N-  Section II.B.2.c.
 performance (``MDFP'') (Form N-1A    summary form.                1A.
 Item 27(b)(7)).
                                     Add new fund statistics      Item 27A(e) of Form N-  Section II.B.2.d.
                                      section to the annual        1A.
                                      report.
Graphical representation of          Retain in annual report....  Item 27A(f) of Form N-  Section II.B.2.e.
 holdings (Form N-1A Item 27(d)(2)).                               1A.
                                     Add new material fund        Item 27A(g) of Form N-  Section II.B.2.f.
                                      changes section to the       1A.
                                      annual report.
Changes in and disagreements with    Retain in annual report in   Item 27A(h) of Form N-  Section II.B.2.g
 accountants (Form N-1A Item          summary form.                1A.
 27(b)(4)).
                                     The entirety of the          Item 8 of Form N-CSR..  Section II.D.1.c.
                                      currently-required          Rule 30e-1(b)(2) and
                                      disclosure would move to     (b)(3).
                                      Form N-CSR and would need
                                      to be available online and
                                      delivered (in paper or
                                      electronic format) upon
                                      request.
Statement regarding liquidity risk   Retain in annual report....  Item 27A(i) of Form N-  Section II.B.2.h.
 management program (Form N-1A Item                                1A.
 27(d)(6)(ii)).
Statement regarding the              Include a more general       Item 27A(j) of Form N-  Section II.B.2.i.
 availability of quarterly            reference to the             1A.
 portfolio schedule, proxy voting     availability of additional
 policies and procedures, and proxy   fund information in the
 voting record (Form N-1A Item        annual report.
 27(d)(3) through (5)).
                                     Add provision allowing       Item 27A(k) of Form N-  Section II.B.2.j.
                                      funds to optionally          1A.
                                      disclose in their annual
                                      reports how shareholders
                                      may revoke their consent
                                      to householding.

Financial statements, including      Move to Form N-CSR.........  Item 7(a) of Form N-    Section II.D.1.a.
 schedule of investments (Form N-1A  Would need to be available    CSR.
 Item 27(b)(1)).                      online and delivered (in    Rule 30e-1(b)(2) and
                                      paper or electronic          (b)(3).
                                      format) upon request.
Financial highlights (Form N-1A      Retain certain data points,  Item 7(b) of Form N-    Section II.D.1.b.
 Item 27(b)(2)).                      but generally move to Form   CSR.
                                      N-CSR.                      Rule 30e-1(b)(2) and
                                     Would need to be available    (b)(3).
                                      online and delivered (in
                                      paper or electronic
                                      format) upon request.
Results of any shareholder votes     Move to Form N-CSR.........  Item 9 of Form N-CSR..  Section II.D.1.d.
 during the period (Rule 30e-1(b)).  Would need to be available   Rule 30e-1(b)(2) and
                                      online and delivered (in     (b)(3).
                                      paper or electronic
                                      format) upon request.
Remuneration paid to directors,      Move to Form N-CSR.........  Item 10 of Form N-CSR.  Section II.D.1.e.
 officers, and others (Form N-1A     Would need to be available   Rule 30e-1(b)(2) and
 Item 27(b)(3)).                      online and delivered (in     (b)(3).
                                      paper or electronic
                                      format) upon request.
Statement regarding the basis for    Move to Form N-CSR.........  Item 11 of Form N-CSR.  Section II.D.1.f.
 the board's approval of investment  Would need to be available   Rule 30e-1(b)(2) and
 advisory contract (Form N-1A Item    online and delivered (in     (b)(3).
 27(d)(6)(i)).                        paper or electronic
                                      format) upon request.
Management information and           Remove from shareholder      ......................  Section II.E.
 statement regarding availability     reports, but information
 of additional information about      would remain available in
 fund directors (Form N-1A Item       a fund's SAI, which is
 27(b)(5) and (6)).                   available online or
                                      delivered upon request.
Rule 30e-3 disclosure, if            Remove from shareholder      ......................  Section II.G.
 applicable (Form N-1A Item           reports.
 27(d)(7)).
Funds have discretion to provide     Limit annual report          Instruction 1 to Item   Section II.B.1.b.
 other information in their           disclosure to that which     27A(a) of Form N-1A.
 shareholder reports (e.g.,           is permitted or required
 president's letters).                under proposed Item 27A of
                                      Form N-1A.
----------------------------------------------------------------------------------------------------------------

1. Scope of Annual Report Disclosure, and Registrants Subject to
Amendments
    We propose to limit the scope of funds' annual reports in several
respects to reduce their overall length and complexity. First, we
propose to require a fund to prepare separate annual reports for each
of its series. Second, we generally propose to limit the content a fund
may include in its annual report.
a. Scope With Respect to Separate Series and Classes
    Many mutual funds and ETFs are organized as single registrants with
several series (sometimes referred to as portfolios).\108\ Each series
has its own investment objectives, policies, and restrictions. The
Federal securities laws and Commission rules often treat each series as
a separate fund.\109\ A single fund or series can have multiple share
classes. Classes typically differ based on fee structure, with each
class having a different sales load and distribution fee. Series and
classes of a registrant are often marketed separately, without
reference to other series or classes or to the registrant's name.\110\
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    \108\ See sections 18(f)(1) and (2) of the Investment Company
Act [15 U.S.C. 80a-18(f)(1) and (2)]; 17 CFR 270.18f-2 [rule 18f-2
under the Investment Company Act].
    \109\ See, e.g., 17 CFR 270.22c-2(c)(2); 17 CFR 270.22e-4(a)(5);
General Instruction A to Form N-1A (defining ``fund'' to mean a
registrant or a separate series of the registrant).
    \110\ See Rulemaking for EDGAR System, Investment Company Act
Release No. 26990 (July 18, 2005) [70 FR 43558 (July 27, 2005)], at
text following n.17.
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    Currently, fund registrants may prepare a single shareholder report
that covers multiple series. We believe this approach contributes to
the length and complexity of shareholder reports. For example, a
shareholder that is invested in one series of the registrant would need
to spend more time searching through the report to find disclosure
related to his or her investment. Moreover, a shareholder report that
provides information for multiple series may present an increased risk
of shareholder confusion. For instance, if two series included in the
same shareholder report were to have similar names, there could be a
greater risk that a shareholder would mistakenly review information
that does not relate to his or her investment. Because the length and
complexity associated with multi-series shareholder reports are
inconsistent with our goal of creating concise shareholder report
disclosure that a shareholder can more easily use to assess and monitor
his or her ongoing fund investment, we are proposing to require fund
registrants to prepare separate annual reports for each series of the
fund.\111\ As a result, a shareholder would receive an annual report
that only addresses the series in which he or she is invested. We
believe that this more-focused annual report would be more relevant to
shareholders than a multi-series report and, accordingly, shareholders
would be more likely to read such disclosure.
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    \111\ See Instruction 4 to proposed Item 27A(a). Similarly, we
have generally required that registrants present summary information
separately for each fund in a multiple fund prospectus to promote
the goal of concise, readable summaries. See 2009 Summary Prospectus
Adopting Release, supra footnote 10, at text accompanying nn.43-60.
Under the proposal, fund registrants could continue to include
multiple shareholder reports that cover different series in a single
Form N-CSR report filed on EDGAR. We do not believe this would
affect the usability of the information for shareholders because
shareholder reports for each series would separately be available
online, and we understand that shareholders generally do not go to
EDGAR to find fund shareholder reports. See, e.g., supra footnote
74.
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    Although we are proposing to restrict funds' annual reports to
include only one series of a fund, our proposal would not require a
shareholder report to cover

a single class of a multiple-class fund.\112\ Because different share
classes of a fund represent interests in the same investment portfolio,
much of the proposed shareholder report disclosure would be the same
for all classes.\113\ For disclosure that would differ among classes,
such as expenses and performance data, the amended disclosure
requirements that we are proposing would specifically require funds to
provide certain class-specific information.\114\
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    \112\ See Instruction 4 to proposed Item 27A(a). This approach
is similar to the approach taken in the summary prospectus, which
similarly may describe more than one class of a fund. See rule
498(b)(4) [17 CFR 230.498(b)(4)].
    \113\ For example, this would include, among other disclosure
items, graphical representations of holdings, the required
statistics (i.e., the size of the fund, its number of holdings, and
portfolio turnover rate), the narrative discussion of factors that
affected the fund's performance, and most categories of material
fund changes.
    \114\ We discuss these proposed requirements in more detail
below. See infra Section II.B.2.b (discussing the proposed
requirement to provide expense information for each class) and
Section II.B.2.c.ii (discussing the proposed requirement to disclose
average annual total returns for 1-, 5-, and 10-year periods for
each class).
---------------------------------------------------------------------------

    We request comment on the proposed scope of disclosure for the
annual report, including the following:
    1. Would the proposed requirement that a fund registrant prepare
separate annual reports for each of its series result in shareholder
report disclosure that is easier for fund shareholders to navigate and