assess? If not, why not? Would requiring separate annual reports for
each series increase the reports' relevance to shareholders and
increase the likelihood that shareholders would read them? If not, why
not? How would this proposed requirement affect the approach fund
registrants currently use to prepare and transmit shareholder reports?
Are there ways to modify the proposed instruction that would further
improve disclosure for shareholders or reduce burdens for fund
registrants? Instead of the proposed instruction, should we continue to
permit fund registrants to prepare a single annual report that covers
multiple fund series, as they may today? If so, why, and should there
be any limits on the number of series for which information is
presented?
    2. Are there certain types of funds for which a multi-series
presentation in an annual report may be useful to shareholders? If so,
which types of funds, and what are the benefits of a multi-series
presentation to shareholders? Should we permit certain types of funds,
but not others, to prepare annual reports covering multiple series of
the same fund?
    3. Are there ways we could allow multi-series presentations in
annual reports while also promoting our goals of providing concise,
readable disclosure to existing shareholders that is tailored to their
informational needs? If so, how?
    4. A fund may have multiple share classes with differing fee
structures. Should these multi-class funds be permitted to reflect only
one or a subset of classes, rather than all share classes in a
shareholder report so long as a fund produces a shareholder report that
relates to each share class? Would such an approach reduce the
complexity of the disclosure and provide more-tailored information that
is specific to a shareholder's investment in the fund? Or, conversely,
would such a requirement not benefit shareholders? For example, could
it reduce shareholders' ability to compare classes of a fund? Should
there be limits on the number or types of classes that a single annual
report may cover to reduce potential complexity or length? For example,
should we prohibit an annual report transmitted to retail shareholders
from including disclosure related to a fund's institutional class? Are
there potential complexities or burdens associated with such an
approach? Please explain.
b. Scope of Content
    As a general matter, we are proposing to allow a fund to include in
its annual report only the information that Item 27A of Form N-1A
specifically permits or requires.\115\ We believe that allowing only
the required or permitted information to appear in a fund's annual
report would promote consistency of information presented to
shareholders and would allow retail shareholders to focus on
information particularly helpful in monitoring their investment in a
fund.\116\ We also believe this approach would encourage more impartial
information by preventing funds from adding information commonly used
in marketing materials.
---------------------------------------------------------------------------

    \115\ See Instruction 3 to proposed Item 27A(a) of Form N-1A;
see also infra Section II.B.2 (discussing the content requirements
of the proposed annual report, as well as certain optional content
that a fund may include in its annual report).
     We are, however, proposing flexibility with respect to the use
of online tools to assist shareholders in understanding the contents
of an annual report that appears online or otherwise is provided
electronically. See Instruction 8 to proposed Item 27A(a) of Form N-
1A; see also discussion at section II.B.4 infra.
    \116\ Many of the proposed instructions to each requirement
provide some flexibility so that a fund can tailor its presentation
of information to match how the fund invests. For instance, a fund
has the ability to select the categories that are reasonably
designed to depict clearly the types of a fund's investments when
preparing its graphical representation of holdings. See proposed
Item 27A(f) of Form N-1A.
---------------------------------------------------------------------------

    We recognize, however, that there may be limited circumstances in
which it may be appropriate for a fund to provide more or less
information than what proposed Item 27A of Form N-1A would permit or
require. Specifically, if a fund's particular circumstances may cause
the required disclosures to be misleading, the proposal would allow the
fund to add additional information to the report that is necessary to
make the required disclosure items not misleading.\117\ As an example,
if a fund changed its investment policies or structure during or since
the period shown, the expense, performance, or holdings information
that a fund must include in its annual report may require additional
disclosure to render those presentations not misleading. Disclosure in
response to this provision should generally be as brief as possible.
Moreover, if a required disclosure is inapplicable, the proposed rule
would permit the fund to omit the disclosure.\118\ Similarly, to
promote better-tailored disclosure, a fund would be permitted to modify
a required legend or narrative information if the modified language
contains comparable information to what is otherwise required.\119\
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    \117\ See Instruction 2 to proposed Item 27A of Form N-1A
(permitting a fund to include disclosure that is required under 17
CFR 270.8b-20 (rule 8b-20 under the Investment Company Act)); rule
8b-20 under the Investment Company Act (providing, ``[i]n addition
to the information expressly required to be included in a
registration statement or report, there shall be added such further
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'').
    \118\ See Instruction 7 to proposed Item 27A(a) of Form N-1A.
    \119\ See id.
---------------------------------------------------------------------------

    The proposed amendments to Form N-1A would not permit a fund to
incorporate by reference any information into its annual report.\120\
That is, a fund could not refer to information that is located in other
disclosure documents in order to satisfy the content requirements for
an annual report. The limited number of proposed disclosure items in
the annual report is designed to promote the goal of providing a
concise, more-engaging report that gives shareholders key information
to assess and monitor their ongoing fund investments.\121\ We do not
believe that permitting funds to

incorporate information by reference into the shareholder report is
consistent with this goal, because it would require shareholders to
take an additional step to locate information that funds incorporate by
reference into their reports. While the proposed rule would require or
permit a fund's shareholder report to refer to other materials in some
cases, those other materials would not incorporate information into the
fund's shareholder report for purposes of satisfying the annual report
disclosure requirements.\122\
---------------------------------------------------------------------------

    \120\ See Instruction 5 to proposed Item 27A(a). Incorporation
by reference refers to the practice of, instead of including
disclosure in a specific document, referring to another document
that contains the specified information.
    \121\ See, e.g., Instructions 1, 3, and 5 to proposed Item
27A(a) of Form N-1A.
    \122\ See, e.g., Instructions 8 and 9 to proposed Item 27A(a) of
Form N-1A; proposed Items 27A(b)(4) and 27A(j) of Form N-1A.
---------------------------------------------------------------------------

    Although the proposed rule would only permit the inclusion of
certain information in the annual report, it would not prevent a fund
from referring shareholders to the availability of certain additional
website information near the end of the report or providing additional
information to shareholders in the same transmission as the annual
report.\123\ For example, the proposed rule would not preclude a fund
from providing a letter to investors explaining its management
philosophy or investment outlook in the same transmission that includes
the annual report. However, the proposal would require that the
shareholder report be given greater prominence than these other
materials, except for certain specified disclosure materials.\124\ We
would generally consider a fund to satisfy the ``greater prominence''
requirement if, for example, the shareholder report is on top of a
group of paper documents that are provided together or, in the case of
an electronic transmission, the email or other message includes a
direct link to the report or provides the report in full in the body of
the message.\125\ This proposed requirement would not, however, apply
to certain specified disclosure materials that a fund may transmit with
an annual report, which include summary prospectuses, statutory
prospectuses, notices of the online availability of proxy materials,
and other shareholder reports.\126\
---------------------------------------------------------------------------

    \123\ See proposed Item 27A(j) of Form N-1A; infra Section
II.B.2.i (discussing the provision that would allow funds to refer
to the availability of additional website information, if the fund
reasonably believes shareholders would likely view the information
as important).
    \124\ See Instruction 12 to proposed Item 27A(a) of Form N-1A.
This is substantially similar to a requirement in rule 498, which
provides that a fund's summary prospectus generally must be given
greater prominence than other materials that accompany the summary
prospectus. See rule 498(f)(2).
    \125\ These examples of how funds may satisfy the proposed
prominence requirement are consistent with interpretations of
similar requirements in other Commission rules and forms. See, e.g.,
2009 Summary Prospectus Adopting Release, supra footnote 10, at text
accompanying n.220 (``Generally, we believe that the `greater
prominence' requirement would be satisfied if the placement of the
Summary Prospectus is more prominent than accompanying materials,
e.g., the Summary Prospectus is on top of a group of paper documents
that are provided together.''); General Instructions 10.C and 10.D
of Form CRS (requiring a relationship summary delivered in paper
format to be the first among any documents delivered at that time,
and a relationship summary delivered electronically to be presented
prominently in the electronic medium (e.g., as a direct link or in
the body of an email or message)).
    \126\ See id.
---------------------------------------------------------------------------

    We request comment on the scope of content that the proposed rule
would require or permit a fund to include in its annual report,
including the following:
    5. Is it appropriate to restrict the content of a fund's annual
report to include only the information the form would permit or
require? If not, why not? Would these proposed limits on content create
a more effective presentation for investors? Are there other approaches
we should consider (such as permitting space in the annual report for
funds to disclose other information they deem important to investors)?
What are the benefits and drawbacks of shorter or longer disclosure, or
a more flexible approach to disclosure, for investors relative to the
proposed approach?
    6. Is it appropriate for funds to have flexibility to include other
communications to shareholders in the same transmission as a
shareholder report? Should the shareholder report be subject to the
proposed prominence requirement? If not, should we require other
prominence or formatting standards if the transmission includes other
materials, or should we impose other requirements or limitations
associated with materials that funds could transmit along with the
shareholder report?
    7. As proposed, should we allow a fund to modify a required legend
or narrative information as long as the modified language contains
comparable information? If not, why not? Should we use this approach
for all aspects of the annual report, or are there particular areas
where requiring uniform language across all funds' annual reports would
be particularly valuable to shareholders, for example, to facilitate
comparisons or improve shareholder understanding? If so, how should we
balance the potential value of uniform language with potential concerns
that uniform language may not be well-tailored to a particular fund or
its shareholders?
    8. Is it appropriate not to permit funds to incorporate information
by reference into their annual reports, as proposed? If not, why not?
Is there certain information that a fund should be permitted to
incorporate by reference into its annual report? If so, what
information, and why?
c. Scope With Respect to Other Registrants
    Our proposed amendments to annual reports would only apply to
shareholder reports for investment companies registered on Form N-1A.
These funds represent the vast majority of investment company assets
under management.\127\ We also have recently adopted changes to the
disclosure framework for closed-end funds and variable insurance
contracts tailored to these investment companies' characteristics and,
in the case of closed-end funds, to implement congressional
directives.\128\ The recently adopted changes to closed-end fund
disclosure include multiple changes to these funds' shareholder report
disclosures, and we would like to understand funds' and investors'
experience with this new disclosure framework before proposing
additional disclosure amendments.\129\ Similarly, we anticipate that
the recently adopted changes to the variable insurance contract
disclosure framework would significantly change investors' experience
with variable contract disclosure. While these changes are focused more
on prospectus disclosure and not shareholder report disclosure, we
would like to assess the impact of these changes prior to proposing
additional disclosure changes for variable contracts.\130\ Our proposed
amendments therefore do not extend at this time to other investment
companies such as closed-end funds, unit investment trusts, or managed
open-end investment companies not registered on Form N-1A (i.e.,
issuers of variable

annuity contracts registered on Form N-3).
---------------------------------------------------------------------------

    \127\ See infra Section III.B.1.
    \128\ See Variable Contract Summary Prospectus Adopting Release,
supra footnote 27; Securities Offering Reform for Closed-End
Investment Companies, Investment Company Act Release No. 33836 (Apr.
8, 2020) [85 FR 33290 (Jun. 1, 2020)] (``Closed-End Fund Offering
Reform Adopting Release'').
    \129\ See, e.g., Closed-End Fund Offering Reform Adopting
Release, supra footnote 128, at Section II.I.2.a (discussing new
annual report requirements for funds that file a short-form
registration statement), Section II.I.2.b (discussing proposed MDFP
disclosure that would appear in registered closed-end funds' annual
reports), and Section II.I.5 (discussing enhancements to certain
registered closed-end funds' annual report disclosure).
    \130\ Moreover, of the variable contract structures, only
variable contracts with separate accounts structured as management
investment companies--those registered on Form N-3--have annual and
semi-annual shareholder reporting requirements under rule 30e-1.
---------------------------------------------------------------------------

    We request comment on the scope of entities that would be covered
by our proposed amendments to annual reports, including the following:
    9. To what extent, if any, should the proposed amendments to
shareholder reports be extended to other investment companies besides
open-end mutual funds and ETFs organized as management investment
companies?
    10. For example, ETFs can be organized as management investment
companies registered on Form N-1A or as unit investment trusts
(``UITs'') that are registered on Form N-8B-2 and subject to certain
Commission exemptive orders. UIT ETFs are organized differently than
and subject to a different disclosure framework than funds.\131\ For
example, exemptive orders for UIT ETFs generally require these ETFs to
transmit annual reports that include their financial statements, but
the content of these ETFs' annual reports is not necessarily the same
as the current content of funds' annual reports. Despite these
differences between funds and UIT ETFs, should UIT ETFs be permitted to
rely upon proposed rule 498B, or permitted or required to use a
tailored annual report? If so, to what extent, if any, should the
conditions to rely on proposed rule 498B or use a tailored annual
report be modified for UIT ETFs? If a UIT ETF were to use a tailored
annual report, should the content of its report differ from the content
of a tailored annual report for open-end management companies? For
example, should this ETF's financial statements remain in the report in
accordance with its exemptive order, or should it be able to provide
its financial statements through other means (e.g., on a website and
through a Form N-CSR report, even though these ETFs are not otherwise
required to file Form N-CSR reports), subject to potential conditions
that the ETF provide other information in an annual report? Do
shareholders in UIT ETFs have the same informational needs as fund
shareholders? For example, do UIT ETFs' shareholders need the same
performance information, or do their needs differ since a UIT ETF
generally replicates an index?
---------------------------------------------------------------------------

    \131\ A UIT is an investment company organized under a trust
indenture or similar instrument that issues redeemable securities.
See section 4(2) of the Investment Company Act [15 U.S.C. 80a-4]. By
statute, a UIT is unmanaged and its portfolio is fixed. A UIT does
not have a board of directors, corporate officers, or an investment
adviser to render advice during the life of the trust. ETFs
organized as UITs seek to track the performance of an index by
investing in the component securities of an index in the same
approximate proportions as the index. See ETF Adopting Release,
supra footnote 75, at nn.42, 44.
---------------------------------------------------------------------------

    11. Should the Commission amend the requirements for registered
closed-end funds' and BDCs' annual reports, to reflect any of the
amendments we are proposing for open-end funds' annual reports?\132\ As
an example, the Commission recently adopted rules requiring: (1)
Certain closed-end funds (registered closed-end funds, as well as BDCs)
to include key information in their annual reports regarding fees and
expenses, premiums and discounts, and outstanding senior securities
that the funds currently disclose in their prospectuses; and (2)
registered closed-end funds to provide management's discussion of fund
performance in their annual reports to shareholders.\133\ If the
Commission were to propose to tailor closed-end funds' shareholder
reports in a manner that is similar to how we are proposing to tailor
open-end funds' shareholder reports, how should such tailoring
incorporate these recently adopted disclosure requirements, as well as
the other content that currently appears in closed-end funds'
shareholder reports? For example, should we propose to update the fee
and expense information that appears in closed-end funds' shareholder
reports to more closely match the proposed fund expense presentation
that would appear in open-end funds' shareholder reports? As another
example, would it be appropriate to require closed-end funds to file on
Form N-CSR certain information that currently appears in their
shareholder reports (such as their full financial statements) and make
this information available on a website, instead of including it in
their reports, as we are proposing for open-end funds?
---------------------------------------------------------------------------

    \132\ See also infra text accompanying footnote 645 (asking
whether to extend any of the new requirements for funds' prospectus
risk disclosure to the risk disclosure that certain closed-end funds
are required to include in their annual reports).
    \133\ See supra footnote 129.
---------------------------------------------------------------------------

2. Contents of the Proposed Annual Report
    The following table outlines the information the proposed rule
would generally require funds to include in their annual reports. As is
the case today, the proposed annual report would not be subject to page
or word limits. We are not proposing page or word limits because we
believe such limits could constrain appropriate disclosure or lead
funds to omit material information. However, we believe that the
proposed limits on the contents of these reports would limit their
length, which would support our goal of concise, readable
disclosure.\134\
---------------------------------------------------------------------------

    \134\ For example, we believe funds generally would be able to
reduce the length of their annual reports from more than 100 pages
on average to a more concise presentation that is approximately 3 to
4 pages in length for paper reports, or an equivalent length for
electronic reports. For paper reports, the amendments may allow
funds to deliver annual reports using a trifold self-mailer (or a
similarly concise mailing). A trifold self-mailer can eliminate the
need for an envelope or separate pieces of paper. It is generally a
large piece of paper that is folded to create multiple pages of
information within a self-contained piece of mail.

                                   Table 2--Outline of Proposed Annual Report
----------------------------------------------------------------------------------------------------------------
                                                                                Current item of form N-
                                             Description           Proposed item of form  1A containing  similar
                                                                           N-1A                 requirements
----------------------------------------------------------------------------------------------------------------
Cover Page or Beginning of Report..  Fund/Class Name(s).........  Item 27A(b)...........  ......................
                                     Ticker Symbol(s)...........  Item 27A(b)...........  ......................
                                     Principal U.S. Market(s)     Item 27A(b)...........  ......................
                                      for ETFs.
                                     Statement Identifying as     Item 27A(b)...........  ......................
                                      ``Annual Shareholder
                                      Report''.
                                     Legend.....................  Item 27A(b)...........  ......................
Content............................  Expense Example............  Item 27A(c)...........  Item 27(d)(1).
                                     Management's Discussion of   Item 27A(d)...........  Item 27(b)(7).
                                      Fund Performance.
                                     Fund Statistics............  Item 27A(e)...........  ......................
                                     Graphical Representation of  Item 27A(f)...........  Item 27(d)(2).
                                      Holdings.
                                     Material Fund Changes......  Item 27A(g)...........  ......................

                                     Changes in and               Item 27A(h)...........  Item 27(b)(4).
                                      Disagreements with
                                      Accountants.
                                     Statement Regarding          Item 27A(i)...........  Item 27(d)(6)(ii).
                                      Liquidity Risk Management
                                      Program.
                                     Availability of Additional   Item 27A(j)...........  Item 27(d)(3) through
                                      Information.                                         (5).
                                     Householding Disclosure      Item 27A(k)...........  *.
                                      (optional).
----------------------------------------------------------------------------------------------------------------

    * Rule 30e-1(f)(3) currently requires a fund to explain, at least
once a year, how a shareholder may revoke his or her consent to
householding. This explanation is not currently required in funds'
shareholder reports, and we similarly would not require it in the
proposed annual report.
    To help market participants understand this proposed disclosure,
Appendix A to this release includes a hypothetical annual report. This
hypothetical annual report is provided solely for illustrative purposes
and is not intended to imply that it would reflect a ``typical'' annual
report under the proposed amendments. We also are providing the
hypothetical annual report to illustrate for investors what a more
concise, tailored shareholder report could look like and are providing
a feedback flier that investors can use to provide their views on the
hypothetical report and other issues in Appendix B.\135\
---------------------------------------------------------------------------

    \135\ The hypothetical annual report is substantially similar to
the prototype summary shareholder report that two commenters used in
investor surveys. See supra footnote 44. For example, both of these
sample reports provide information about a fund's expenses,
performance, and holdings. The primary differences between the
sample reports are that the hypothetical annual report would include
a modified expense presentation, a performance line graph similar to
current shareholder reports, and two new items related to fund
statistics and material fund changes. Further, while the commenter
that developed the prototype summary shareholder report supported
the inclusion of liquidity risk management program disclosure, the
prototype did not include this disclosure because the underlying
requirement was not effective at that time. See ICI Comment Letter
I.
---------------------------------------------------------------------------

    We discuss each of the proposed content requirements in detail
below, including specific requests for comment regarding each proposed
item of the annual report. In addition to the more-specific requests
for comment below, we also request general comments on the proposed
content requirements for funds' annual reports.
    12. In addition to the proposed content requirements for funds'
annual reports, should we require or permit funds to provide additional
information in their shareholder reports? For example, is there other
information that funds typically include in their annual reports as a
matter of practice or to comply with other regulatory requirements
(e.g., tax-related disclosure under the Internal Revenue Code about the
fund's distributions)? Would it be beneficial to shareholders to
receive any additional information in the annual report, or should
funds provide this information through other mechanisms (e.g., on their
websites, in materials separately transmitted with the annual report,
or in account statements)?
    13. Are the topics that funds would discuss in their annual reports
under the proposed amendments appropriate to provide fund shareholders
with key information for assessing and monitoring their fund
investments? Are there additional topics that should be required?
Please explain. Are any of the topics redundant with information that
appears in other disclosure requirements? If so, which topics, and why
are they redundant?
    14. How would the proposed amendments affect the length of funds'
annual reports? Would the length of the proposed reports affect a
fund's approach for delivering the full report in the mail, relative to
its current approach for mailing annual reports?
    15. Would proposed Item 27A result in disclosure that is of an
appropriate length to be engaging and accessible to fund shareholders,
or should we take additional steps to limit the length or complexity of
annual report disclosure? For example, should we impose page or word
limits on annual reports? If so, what should they be? Should we limit
the length of any particular section of the annual shareholder report,
and if so, what should these limits be?
a. Cover Page or Beginning of the Report
    The proposed amendments to Form N-1A would require a fund to
provide the following information on the cover page or at the beginning
of the annual report:
     The name of the fund, as well as the class(es) to which
the annual report relates;
     The exchange ticker symbol of the fund's shares, or the
ticker symbol of each class adjacent to the class name;
     If the fund is an ETF, the principal U.S. market(s) on
which the fund's shares are traded;
     A statement identifying the document as an ``annual
shareholder report;'' and
     The following legend: ``This annual shareholder report
contains important information about [the Fund] for the period of
[beginning date] to [end date] [as well as certain changes to the
Fund]. You can find additional information about the Fund at [Fund
website address]. You can also request this information by contacting
us at [toll-free telephone number and, as applicable, email address].''
\136\
---------------------------------------------------------------------------

    \136\ See proposed Item 27A(b) of Form N-1A. The reference to
the ``beginning'' of an annual report is designed to address
circumstances in which there is not a physical page that would
precede the report, for example, when the report appears online or
on a mobile device. See infra Section II.B.4.
---------------------------------------------------------------------------

    Currently, funds are not required to include specific cover page
information in their shareholder reports. However, we understand that,
as a matter of practice, funds typically include identifying
information--such as the fund's name, the period of time the report
covers, and whether the report is an annual or semi-annual report--at
the beginning of the report or on a cover page. We are proposing to
require specific identifying information at the beginning of the annual
report so that shareholders can readily identify the purpose and scope
of the report. This is also substantially similar to information that
must appear at the beginning of fund prospectuses.\137\
---------------------------------------------------------------------------

    \137\ See Item 1 of Form N-1A.
---------------------------------------------------------------------------

    The proposed legend is designed to help shareholders understand the
purpose of the annual report, as well as the time period covered by the
report. It also describes how a shareholder can obtain additional
information about the

fund, consistent with similar legends that appear on the cover page of
the summary prospectus.\138\ The website address a fund would provide
in the legend would need to be specific enough to lead shareholders
directly to the materials that would be required to be accessible on
the fund's website under this proposal, including the fund's financial
statements and financial highlights.\139\ Funds also would have
discretion to include other ways a shareholder can find or request
additional information about the fund, such as Quick Response Code
(``QR code'') or referring the reader to mobile applications.\140\
---------------------------------------------------------------------------

    \138\ See rule 498(b)(1)(v).
    \139\ See Instruction 2 to proposed Item 27A(b); infra Section
II.C. The website could be a central site with prominent links to
the materials that would need to be accessible under the proposed
amendments to rule 30e-1.
    \140\ A QR code is a two-dimensional barcode capable of encoding
information such as a website address, text information, or contact
information. For example, when included on print materials, these
codes can be read using the camera on a smartphone to take the user
directly to a specific website address.
---------------------------------------------------------------------------

    In addition, the proposed amendments would permit funds to include
graphics, logos, and other design or text features to help shareholders
identify the materials as the fund's annual report.\141\
---------------------------------------------------------------------------

    \141\ See Instruction 1 to proposed Item 27A(b) of Form N-1A.
---------------------------------------------------------------------------

    We request comment generally on the proposed content requirements
for the cover page or beginning of the annual report, and specifically
on the following issues:
    16. Is there additional information that we should permit or
require funds to provide on the cover page or at the beginning of their
annual reports? If so, what are the benefits of that additional
information? For example, should we permit or require funds to include
a table of contents, or would a table of contents add undue length to
the shareholder report and provide limited benefits to shareholders
given the general brevity of the report?
    17. Should we remove or modify any of the information the proposed
rule would permit or require funds to include on the cover page or at
the beginning of their annual report, and if so, what information and
how should we modify it?
b. Fund Expenses
    We are proposing a simplified expense presentation in the annual
report that would require a fund to provide the expenses associated
with a hypothetical $10,000 investment in the fund during the preceding
reporting period. In particular, the table must show: (1) An assumed
$10,000 beginning account value; (2) total return during the period,
before deducting expenses; (3) expenses in dollars paid during the
period; (4) ending account value in dollars, based on net asset value
return and the assumed $10,000 beginning account value; and (5)
expenses as a percent of an investor's investment in the fund (i.e.
expense ratio).\142\ ETFs must also include the ending value of the
account based on market value return.\143\ The proposed expense example
would appear as follows, and the individual aspects of the example are
described in more detail below.
---------------------------------------------------------------------------

    \142\ See proposed Item 27A(c) of Form N-1A; see also discussion
at infra Section II.B.4 and infra footnote 338 and accompanying text
for a discussion of additional tools a fund can provide online to
facilitate shareholder engagement.
    \143\ See proposed Item 27A(c) of Form N-1A.
---------------------------------------------------------------------------

    What were your Fund costs for the period? (based on a hypothetical
$10,000 investment)
[GRAPHIC] [TIFF OMITTED] TP05NO20.000

    Commenters on the Fund Investor Experience RFC stated that
shareholders believe the information provided in the current
shareholder report expense example is important because it helps them
understand the costs associated with investing in the fund.\144\ The
proposed expense information is intended to reflect shareholders'
preferences to understand fee and expense information, while
simplifying the expense example that currently appears in funds'
shareholder reports.
---------------------------------------------------------------------------

    \144\ See, e.g., ICI Comment Letter I (stating that the
information provided in the current expense example is responsive to
investors' keen interest in knowing how much it will cost them to
invest in a fund); see also Capital Group Comment Letter (noting
that the current expense example provides investors with information
on the cost of their investments).
---------------------------------------------------------------------------

    Funds' shareholder reports currently include an expense example
consisting of two different tables.\145\
---------------------------------------------------------------------------

    \145\ See Item 27(d)(1) of Form N-1A. The instructions to this
item require a fund to calculate the expense example using a fund's
expense ratio for the preceding six months and not to include the
impact of sales loads, if any.
---------------------------------------------------------------------------

     The first table shows the actual cost in dollars for a
$1,000 investment in the fund over the prior six-month period based on
the actual return of the fund. This presentation is intended to help a
shareholder calculate the actual ongoing fund expenses, in dollars,
that he or she has incurred.
     The second table shows the cost in dollars for a $1,000
investment in the fund over the prior six-month period based on a
hypothetical 5% annual return (and not, as for the first table, the
actual return of the fund during that period). Because funds are
required to use the same hypothetical annual return in calculating
their expenses here, this second table is designed to help shareholders
compare the expenses of their fund with those of other funds.\146\
---------------------------------------------------------------------------

    \146\ The first table does not permit a direct comparison of
fund costs because positive performance would make fund expenses
expressed as a dollar amount higher and negative performance would
make fund expenses expressed as a dollar amount lower. So, for
example, if two funds had the same fees, the fund with the better
performance would appear more expensive. See February 2004
Shareholder Report Adopting Release, supra footnote 83.
---------------------------------------------------------------------------

    Currently, the fund expenses presented in the shareholder report
expense examples are different in several respects from those in the
prospectus fee table and example. The shareholder report example is
derived from a fund's financial statements and therefore reflects
actual historical expenses that a shareholder incurred over the past
year (i.e., backwards-looking expenses). The prospectus example, on the
other hand, reflects hypothetical future expenses (i.e., forward-
looking expenses).\147\ Currently, the prospectus fee table also
reflects sales loads that an investor would pay and the expenses
associated with the fund's investments in another fund (referred to as
Acquired Fund Fees and Expenses (``AFFE'')), whereas the shareholder
report expense presentation does not, because these elements are not
reflected in the fund's financial statements.\148\ Additionally, unlike
the shareholder report example, the prospectus fee table must reflect
any material changes in fees that occurred since the prior fiscal year
and cannot reflect certain fee waivers.\149\
---------------------------------------------------------------------------

    \147\ See February 2004 Shareholder Report Adopting Release,
supra footnote 83, at text following n.96.
    \148\ See Item 27(d)(1) of Form N-1A; see also Section II.H.1.g
(discussing proposed changes to the disclosure requirements for AFFE
in fund prospectuses, which would permit funds that invest 10% or
less of their total assets in acquired funds to omit the AFFE line
item in the fee table and instead disclose the amount of the fund's
AFFE in a footnote to the fee table).
    \149\ See Instruction 3(d)(ii) and 3(e) of Item 3 of Form N-1A
(prohibiting a fund from reflecting fee waivers unless they reduce
the fund's operating expenses for no less than one year from the
effective date of the fund's prospectus).
---------------------------------------------------------------------------

    The information about fund expenses that we are proposing funds
include in the annual report is designed to simplify the expense
example that currently appears in funds' shareholder reports, and to
provide shareholders with additional tools to understand the expenses
they paid during the prior fiscal year. The proposal would replace the
two current expense examples in the shareholder report with one
simplified expense table. The new table would vary from the current
disclosures in several respects. First, under the proposal, funds would
have to provide the expenses associated with a $10,000 investment in
the fund, rather than the current $1,000 investment amount.\150\ We are
proposing to increase the dollar value because we believe that $10,000
is a more realistic investment amount for an individual shareholder
today.\151\ Additionally, because Form N-1A requires funds to use an
assumed $10,000 investment for the expense presentation in the
prospectus, the proposal would align this aspect of the two expense
presentations and promote a more consistent disclosure experience for
investors.\152\ Similarly, we are proposing to align the rounding
conventions of the expense presentations in the shareholder report with
those of the prospectus.\153\
---------------------------------------------------------------------------

    \150\ See proposed Item 27A(c) of Form N-1A.
    \151\ See Registration Form Used by Open-End Management
Investment Companies, Investment Company Act Release No. 23064 (Mar.
13, 1998) [63 FR 13916 (Mar. 23, 1998] (``1998 Form N-1A Prospectus
Amendments''), at n.74 and accompanying text (increasing the
hypothetical investment to $10,000 in the prospectus example
presentation because the Commission recognized that the typical fund
investment was increasing in size). Because we are proposing to
raise the hypothetical investment amount to $10,000, we are also
proposing to similarly raise the required rounding conventions for
dollar values in the table to the nearest dollar, rather than the
nearest cent.
    \152\ But see supra footnotes 147 through 149 and accompanying
text (discussing the key differences between the presentation of
expense information in the prospectus and the shareholder report).
    \153\ See proposed Instruction 1(a) of Item 27A(c) of Form N-1A
(requiring all percentages in the table to be rounded to the nearest
hundredth of one percent and all dollar figures in the table to be
rounded to the nearest dollar).
---------------------------------------------------------------------------

    Furthermore, funds would no longer be required to show the total
amount of expenses along with hypothetical return information for the
period. Instead, funds would continue to provide expense information
along with actual return information, with amendments to this
presentation of expenses that we believe would help show shareholders
how much of their money was actually invested in the market (versus how
much of their money was paid for fees and expenses).\154\ Like the
current expense presentation, the proposed presentation would show an
assumed beginning account value, an ending account value, and expenses
paid during the period. However, rather than only requiring funds to
disclose the ending account value net of fees (as they do today), we
are proposing to require funds to disaggregate this amount. Funds would
individually disclose: (1) The costs paid during the period, (2) the
fund's total return during the period before costs were paid, and (3)
the ending account value based on the fund's net asset value return. A
fund would have to provide each of these figures as a mathematical
expression (using ``+'', ``-'', and ``='' signs), as shown in the
example above.\155\ Costs would have to be expressed as a negative
amount (with a ``-'' sign preceding the cost amount), and total return,
if negative during the period, also would have to be expressed as a
negative amount with a ``-'' sign preceding it. Conversely, if the
fund's total return were positive during the period, it would be
preceded by a ``+'' sign.
---------------------------------------------------------------------------

    \154\ The expense example in the annual report would provide
expense information that covers a 12-month reporting period.
    \155\ See proposed Instructions 1(b) of Item 27A(c) of Form N-1A
(``Provide the amounts in each of the columns as a mathematical
expression, as appropriate (i.e., include +, - and = symbols). Costs
paid during the period must be expressed as a negative amount. Total
return, if negative during the period, must be expressed as a
negative amount.'').

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

    We believe that this presentation would facilitate a shareholder's
understanding of how costs and performance affect his or her ending
account value. Fund fees and expenses are central information for
shareholders because they can significantly affect a fund's investment
returns over time.\156\ We recognize that shareholders could benefit
from additional transparency into the costs associated with investing
in the fund. However, while some of these costs are fixed and easily
quantifiable, others are variable and can be difficult to
calculate.\157\
---------------------------------------------------------------------------

    \156\ See Fund Investor Experience RFC, supra footnote 8, at
text accompanying n. 36. Some commenters on the Fund Investor
Experience RFC expressed concern that fund disclosure may not
accurately represent the full costs associated with a fund
investment. See, e.g., Delmonte Comment Letter; Fowler Comment
Letter; Blanchard Comment Letter.
    \157\ For example, some commenters on the Fund Investor
Experience RFC discussed challenges associated with disclosing
transaction costs, including a potential negative impact on
investors' ability to understand fund costs. See, e.g., ICI Comment
Letter I; Comment Letter of BlackRock, Inc. (Oct. 31, 2018)
(``BlackRock Comment Letter''). Based on experience in certain
jurisdictions that require transaction cost disclosure, these
commenters indicated that transaction cost disclosure can confuse or
mislead investors--including through reported transaction costs of
zero or negative amounts in some instances in those jurisdictions--
because funds may use different calculation methods and certain
calculation inputs are subjective in nature. See ICI Comment Letter
I; see also Slippage Causes Confusion in MiFID II Fund Rules Row,
Chris Flood, Financial Times (Jan. 26, 2018), available at https://www.ft.com/content/7b37016a-00fc-11e8-9650-9c0ad2d7c5b5.
---------------------------------------------------------------------------

    The proposed presentation is designed to help investors evaluate
these costs by disclosing costs directly deducted from the fund's
assets alongside the fund's return. The fund's return will reflect
these costs as well as any performance expenses associated with the
fund's portfolio management activities (such as the fund's securities
lending activities and transaction costs associated with the fund
purchasing and selling portfolio investments). Similarly, some fund
expenses are paid directly as fees for investing in the fund, while
others are performance expenses associated with the fund's portfolio
management activities. We believe it is important for shareholders to
appreciate fully the costs they pay to invest in a fund, and how
performance expenses affect the fund's investment return. We also are
proposing to require that funds qualitatively describe, in a footnote
to the example, any of these performance expenses that are material as
discussed below. We are not proposing to require a similar presentation
based on hypothetical performance, because we believe that the primary
purpose of a shareholder report is to provide shareholders with actual
information about the fund's performance and expenses over the past
year or half-year period.\158\
---------------------------------------------------------------------------

    \158\ See supra footnote 147 and accompanying text. While the
current expense example based on a hypothetical 5% annual return was
designed to help shareholders compare the expenses of their fund
with those of other funds, we believe that the proposed requirement
to present expense information as a percentage as well as a dollar
amount also would provide this comparative value. See supra footnote
146 and accompanying text; infra paragraph accompanying footnote
161.
---------------------------------------------------------------------------

    We also are proposing certain ETF-specific disclosures that would
provide shareholders more transparency into the unique cost structure
of an ETF. Under our proposal, an ETF would be required to disclose two
versions of the ending account value, one based on the ETF's net asset
value return and the other based on its market value return.\159\ This
proposed requirement is designed to allow shareholders to understand
any difference between the ETF's performance and market price, and to
highlight for shareholders the indirect costs associated with investing
in an ETF, including commissions and premium/discount costs.\160\
---------------------------------------------------------------------------

    \159\ We are also proposing conforming changes to Item 13(a) of
Form N-1A to incorporate the requirement for ETFs to disclose total
return based on the ETF's per share market value return in the
financial highlights. See proposed amendments to General Instruction
3 of Item 13(a) of Form N-1A.
    \160\ See proposed General Instruction 1(i)(i) of Item 27A(c) of
Form N-1A. We also are proposing to maintain the current
instructions specific to ETFs, including the requirement to state
that investors may pay brokerage commissions on their purchases and
sales of ETF shares, which are not reflected in the expense table,
as well as the requirement to exclude any fees charged for the
purchase and redemption of the ETF's creation units. See proposed
General Instruction 1(i)(ii) and 1(i)(iii) of Item 27A of Form N-1A.
---------------------------------------------------------------------------

    Unlike the current expense presentation, we are proposing to
require funds to present expense information in two formats: (1) As a
dollar amount, as discussed above; and (2) as a percentage of a
shareholder's investment in the fund (which would be a new addition to
the current presentation). We believe that requiring two formats would
provide shareholders with a more complete understanding of the expenses
associated with their investments. The proposed new percentage-based
expense information is designed to provide shareholders with a basis
for comparing the level of current period expenses of different funds
(as percentages are comparable). This addition would complement the
dollar-based expense presentation, which is designed to permit
shareholders to estimate the costs, in dollars, that they incurred over
the reporting period.We are also proposing to require funds to give the
expense columns (i.e., the ``costs paid'' and ``costs paid as a
percentage of your investment'' columns) of the table more prominence
than the remainder of the expense table to draw the attention of
investors to these important data points. Funds would have flexibility
to use various text and table features to satisfy this
requirement.\161\
---------------------------------------------------------------------------

    \161\ See proposed General Instruction 1(c) of Item 27A(c) of
Form N-1A (providing flexibility for funds to use, for example,
graphics, larger font size, different border width or column
shading, or different colors or font styles to satisfy this
prominence requirement).
---------------------------------------------------------------------------

    We also are proposing several modifications to simplify other
aspects of the required expense disclosure. First, we are proposing to
remove the currently required narrative preamble to the expense table
in its entirety.\162\ As a replacement for this preamble, we are
proposing certain specified brief required footnotes to the table.\163\
We believe that the simplified expense table, along with the footnotes
to the table that we would require funds to include, would provide
shareholders with the most relevant information from the lengthy
preamble that currently precedes the expense example.
---------------------------------------------------------------------------

    \162\ Currently, a fund must precede the expense example with a
narrative preamble explaining that the purpose of the expense
example disclosure is to help shareholders understand the ongoing
costs of investing in the fund and to compare those costs with the
ongoing costs of investing in other mutual funds. The preamble
defines ongoing costs as fund expenses, including management fees
and distribution [and/or service] (12b-1) fees. See Item 27(d)(1) of
Form N-1A.
    \163\ See footnotes to the expense example in proposed Item
27A(c).
---------------------------------------------------------------------------

    First, a fund would be required to include a footnote to the
``total return before costs paid'' column that qualitatively describes,
in plain English, other costs that are included in the fund's total
return, if material to the fund. For example, if applicable, the fund
should explain that total return includes fund investment transaction
costs, securities lending costs, or AFFE, and that these costs
materially reduced the fund's return.\164\ We believe that requiring
this qualitative discussion would give funds the opportunity to
describe certain expenses that may be difficult to calculate, but that
materially affect fund performance. Also, by requiring funds to
describe these types of performance expenses in a footnote, while
including the direct costs of the fund in the expense example,
shareholders might be better able to appreciate the fact that the costs
associated with their investment include both fixed costs and indirect
variable costs.
---------------------------------------------------------------------------

    \164\ See Instruction 1(f) to proposed Item 27A(c)

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

    Furthermore, a fund would be required to briefly explain, in plain
English, in a footnote to the ``Costs paid as a percentage of your
investment'' column that the expense information does not reflect
shareholder transaction costs associated with purchasing or selling
fund shares.\165\ This would draw investor attention to the fact that
there may be additional costs not reflected in the expense example, if
applicable. Finally, if a fund's shareholder report covers a period of
time that is less than a full reporting year, the fund would be
required to include a footnote to the table noting this and explaining
that expenses for a full reporting period would be higher than the
figures shown.\166\
---------------------------------------------------------------------------

    \165\ See Instruction 1(g) to proposed Item 27A(c). Funds would
not be required to disclose the amount of such fees.
    \166\ See Instruction 1(i) to proposed Item 27A(c). This would
generally apply to newly formed funds that are required to file an
annual or semi-annual report for a period less than the reporting
period.
---------------------------------------------------------------------------

    We also are proposing certain modifications to the instructions
associated with the computation of fund expenses to reflect the
proposed changes to the expense example. We are proposing an
instruction that would direct funds to calculate ``Costs paid'' by
multiplying the figure in the ``Cost paid as a percentage of your
investment'' column by the average account value over the period based
on an investment of $10,000 at the beginning of the period.\167\ The
figure in the ``Cost paid as a percentage of your investment'' column,
in turn, would be the fund's expense ratio as it appears in the fund's
most recent audited financial statements or financial highlights.\168\
The figure in the ``Ending account value (based on net asset value
return)'' column would similarly be derived from figures in the fund's
audited financial statements or financial highlights. To calculate this
figure, the fund would multiply $10,000 by the fund's net asset value
return as it appears in the fund's most recent audited financial
statements or financial highlights.\169\ The figure in the ``Total
return before costs paid'' column would be calculated by subtracting
$10,000 (the figure in the ``Beginning account value'' column) and the
figure in the ``Costs paid'' column from the ``Ending account value
(based on net asset value return)'' column.\170\ Additionally, for ETFs
we are proposing an instruction for how an ETF should calculate the
ETF's ending account based on market value return.\171\
---------------------------------------------------------------------------

    \167\ See Instruction 2(a) to proposed Item 27A(c) of Form N-1A.
    \168\ See proposed Instruction 2(c). In the semi-annual report,
the fund's expense ratio would be calculated in the manner required
by Instruction 4(b) to Item 13(a) of Form N-1A, using the expenses
for the fund's most recent fiscal half-year. Id.
    \169\ See proposed Instruction 2(e). In the semi-annual report,
the fund's ending account value would be calculated in the manner
required by Instruction 3 to Item 13(a) of Form N-1A. Id.
    \170\ See proposed Instruction 2(d) of Item 27A(c) of Form N-1A.
    \171\ See proposed Instruction 2(f) of Item 27A(c) of Form N-1A
(requiring funds to multiply $10,000 by the fund's market value
return). In an ETF's annual report, an ETF would be required to use
the market value return as it appears in the ETF's most recent
audited financial statements or financial highlights in its
calculations. In the semi-annual report, the fund's market value
return should be calculated in the manner required by Instruction 3
to Item 13(a) of Form N-1A. Id.
---------------------------------------------------------------------------

    We are proposing to maintain certain of the current instructions
that we believe would continue to provide useful information to
shareholders. If a fund incurred any ``extraordinary expenses'' during
the reporting period, we are proposing to continue to allow the fund to
briefly describe, in a footnote to the expense table, what the actual
expenses would have been if these extraordinary expenses were not
incurred.\172\ Similarly, if a fund is a feeder fund, we are proposing
to continue to allow that fund to reflect the aggregate expenses of the
feeder fund and the master fund in the expense table and to include a
footnote stating that the expense table reflects the expenses of both
the feeder and master funds.\173\ Additionally, if the shareholder
report covers more than one class of a fund or more than one feeder
fund that invests in the same master fund, the shareholder report may
include a separate expense table, or a separate line item in the
expense table, for each class or feeder fund.\174\
---------------------------------------------------------------------------

    \172\ See Instruction 1(k) to proposed Item 27A(c) of Form N-1A
(defining ``extraordinary expenses'' as ``expenses that are
distinguished by their unusual nature and by the infrequency of
their occurrence. Unusual nature means the expense has a high degree
of abnormality and is clearly unrelated to, or only incidentally
related to, the ordinary and typical activities of the Fund, taking
into account the environment in which the Fund operates. Infrequency
of occurrence means the expense is not reasonably expected to recur
in the foreseeable future, taking into consideration the environment
in which the Fund operates. The environment of a Fund includes such
factors as the characteristics of the industry or industries in
which it operates, the geographical location of its operations, and
the nature and extent of government regulation''); see also
Instruction 2(a)(ii) to Item 27(d) of Form N-1A.
    \173\ See Instruction 1(d) to proposed Item 27A(c) of Form N-1A.
    \174\ See Instruction 1(e) to proposed Item 27A(c) of Form N-1A.
---------------------------------------------------------------------------

    We request comment on our proposed approach to revising the expense
information that would appear in funds' annual reports, and
specifically on the following issues:
    18. Would the information that would be included in the proposed
expense example permit shareholders to estimate the actual costs, in
dollars, that they incurred over the reporting period and provide
shareholders with a basis for comparing expenses across different
funds? If not, why not? Which, if any, of the proposed disclosure
requirements should we modify? Is there a better way of describing the
fund's expenses to shareholders in the annual report?
    19. Should we, as proposed, require funds to provide the costs in
dollars associated with investing in the fund based on an assumed
$10,000 investment? Should we increase the assumed investment amount
from $1,000 to $10,000, as proposed? Should we use some other amount,
and if so, what amount would be more appropriate and why?
    20. Should we, as proposed, align the rounding conventions included
in the expense example instructions in the shareholder report with
those included in the instructions to the prospectus expense table?
    21. Should we, as proposed, require funds to disclose individually:
(1) The costs paid during the period, (2) the fund's total return
during the period before costs were paid, and (3) the ending account
value based on the fund's net asset value return? Why or why not?
Instead, should we require funds to disclose the total return net of
fees? Are the proposed calculation instructions for these figures
appropriate? Why or why not? Would providing expense information in
this disaggregated manner facilitate shareholder understanding of how
costs and performance each affect the ending account value? Why or why
not?
    22. Should we, as proposed, require funds to disclose the figures
in the expense table as a mathematical expression? Would shareholders
find this presentation useful?
    23. Should we, as proposed, require funds to use text features to
highlight the columns showing costs paid during the period (both in
dollars and as a percentage of the investment)? Would this approach
draw shareholder attention to those figures? Is there a particular
format that we should require to highlight these columns, instead of
(as proposed) providing flexibility in how to highlight them?
    24. Should we require funds to provide the costs associated with
investing in the fund as a percentage of a shareholder's investment in
the fund (i.e., expense ratio)? Would this disclosure assist
shareholders in comparing the level of current period expenses of
different funds?
    25. Should we, as proposed, require ETFs to provide the ending
value of the

account based on market value return, in addition to the value based on
net asset value return? If so, should we require or permit ETFs to
provide any additional information to explain the costs reflected in
these two values to shareholders? For example, should we require or
permit ETFs to provide a narrative explanation of what these values
represent, how they differ from each other, and/or what impact they
have on the fund's performance?
    26. Should we require, as proposed, funds to include the expense
ratio and cost in dollars only for the period covered by the report?
Should we instead require funds to include fund expense information
over other historical periods, such as 5 years, 10 years, or some other
period?
    27. Should we, as proposed, require funds to describe qualitatively
other costs included in total return, if material to the fund? Would
this requirement be helpful to investors, and if so, what types of
investors would find the disclosure to be particularly helpful? If the
disclosure would not be helpful to investors, why not? Should we
instead permit, rather than require, funds to include these costs in
the expense example or in a footnote? Should we require funds to
separately disclose the amount of securities lending costs, or fund
investment transaction costs, that the fund incurred during the period?
Should we require funds to include in the footnote the amount of any
acquired fund fees and expenses that the fund includes in its then-
effective prospectus fee table? Would quantifying acquired fund fees
and expenses in the footnote be appropriate in light of the fact that
acquired fund fees and expenses are not included in a fund's audited
financial statements, and calculation of acquired fund fees and
expenses can require a degree of estimation when the acquired funds
have different fiscal year-ends than the acquiring fund? Would
disclosing quantitative amounts of securities lending or fund
investment transaction costs present the same or additional
considerations? Is it appropriate for any or all of these costs to be
included in a footnote? Should funds instead be required to include
this information in the expense table itself? Is there another, more
appropriate, place to include this information?
    28. Should we, as proposed, require funds to briefly explain in a
footnote that the example does not reflect transaction costs associated
with purchasing or selling fund shares? Alternatively, should we
permit, rather than require, funds to include this footnote?
    29. Should we, as proposed, continue to allow a fund that is a
feeder fund to reflect the aggregate expenses of the feeder fund and
the master fund in the expense table and to include a footnote stating
that the expense table reflects the expenses of both the feeder and
master funds? Should we instead require feeder funds to separately
disclose the fees associated with the feeder and the master funds,
respectively?
    30. Do the proposed footnotes to the expense presentation
adequately convey the information that was previously included in the
preamble to the current expense examples? If not, what additional
information should we require or permit funds to disclose, and in what
format should funds have to present this additional disclosure? Instead
of including the information in footnotes, is there a more appropriate
location for the information? Is there any additional information that
we should permit or require funds to convey in notes to the expense
presentation? For example, if the fund plans to increase its fees
materially and this change would be disclosed in the proposed
``Material Fund Changes'' of the annual report, should we either permit
or require the fund to cross-reference this disclosure as a note to the
expense presentation?
    31. Should we adopt any additional or different expense disclosure
requirements for certain types of funds? For example, in addition to
what we proposed, are there any additional or different expenses that
may only be relevant to ETFs (accounting for the unique characteristics
of their structure) that we should require or permit ETFs to disclose?
    32. Should we allow funds to cross-reference additional resources
that would allow each shareholder to calculate the actual expenses that
he or she paid? For example, should we allow funds to cross-reference
online expense calculators produced by third-party vendors?
Alternatively, should we allow funds to cross-reference an online
expense calculator provided by the Commission or FINRA, such as FINRA's
fund analyzer tool? Since FINRA's fund analyzer only provides forward-
looking information, rather than the actual past expenses that
shareholders have paid during the period, would this information be
useful to shareholders?
    33. In what ways can technology make personalized expense
information possible? For example, should funds or intermediaries
provide calculators or other tools to help investors understand their
individual investment costs? Have improvements in technology since
2004, when the Commission considered requiring personalized expense
information in quarterly account statements, made it easier for funds
or intermediaries to provide personalized expense information in
quarterly account statements or through other mechanisms? \175\ If
funds were to provide personalized expense information, how can we
design the disclosure to reduce potential investor concerns about
sharing their personal information or about data security? Are there
any other concerns associated with such disclosure?
---------------------------------------------------------------------------

    \175\ See February 2004 Shareholder Report Adopting Release,
supra footnote 83, at paragraph accompanying n.36 (recognizing that
a requirement for individualized expense disclosure in quarterly
statements would have required costly systems changes for funds and
intermediaries at that time).
---------------------------------------------------------------------------

    34. Should we require funds to submit interactive data files (for
example, formatted using eXtensible Business Reporting Language
(``XBRL'')) containing their expense example information? Why or why
not? Would it be useful for shareholders to have access to the expense
example in a structured data format? Would this meaningfully complement
the current requirement that funds submit their prospectus risk/return
summary information in Inline XBRL format, or would it be duplicative
with this current requirement? Is there any other information from
funds' shareholder reports that we should require funds to submit in a
structured data format?
c. Management's Discussion of Fund Performance
    Given fund investors' interest in performance information for
purposes of monitoring and assessing their ongoing fund investments, we
propose largely to maintain the current requirements for the
management's discussion of fund performance (``MDFP'') section of the
annual report, with several proposed targeted changes.\176\ Currently,
MDFP disclosure consists of the following:
---------------------------------------------------------------------------

    \176\ See supra footnote 47 and accompanying text (discussing
information about investors' interest in shareholder report
performance information, including the results of various investor
testing and surveys in which approximately 60-80% of surveyed
investors expressed interest in fund performance information or the
narrative discussion of factors affecting the fund's performance).
---------------------------------------------------------------------------

     A narrative discussion of the factors that materially
affected the fund's performance during the most recently completed
fiscal year;
     A line graph providing account values for each of the most
recently completed 10 fiscal years (or for the life of the fund, if
shorter) based on an initial $10,000 investment in comparison to the
returns of an appropriate broad-based securities

market index for the same period (as well as more narrowly based
indexes that reflect the market sectors in which the fund invests, at
the fund's discretion);
     A table showing the fund's average annual total returns
for the past 1-, 5-, and 10-year periods (or for the life of the fund,
if shorter);
     A statement accompanying the line graph and table to the
effect that past performance does not predict future performance and
that these presentations do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of
shares;
     A discussion of the effect of any policy or practice of
maintaining a specified level of distributions to shareholders on the
fund's investment strategies and per share net asset value, as well as
the extent to which the fund's distribution policy resulted in
distributions of capital; and
     For ETFs that do not provide certain premium or discount
information on their websites, a table showing the number of days the
fund shares traded at a premium or discount to net asset value.\177\
---------------------------------------------------------------------------

    \177\ See Item 27(b)(7) of current Form N-1A.
---------------------------------------------------------------------------

    We are proposing amendments to the MDFP requirements to make the
disclosure more concise and to take into account that shareholders may
no longer receive fund prospectuses--which include performance
information--after their initial purchase of fund shares.\178\ These
proposed amendments therefore would require the MDFP to include
additional performance-related information that is available in fund
prospectuses, including certain class-specific performance information
and comparative information showing the average annual total returns of
one or more relevant benchmarks. We also are proposing to amend the
definition of an appropriate broad-based securities market index to
clarify that all funds should compare their performance to the overall
applicable securities market, for purposes of both fund annual reports
and prospectuses.
---------------------------------------------------------------------------

    \178\ See infra Section II.F.
---------------------------------------------------------------------------

i. Narrative MDFP Disclosure
    We propose to retain the current requirement that funds' annual
reports include a narrative discussion of factors that materially
affected the fund's performance during the most recent fiscal year,
with minor modifications to encourage concise disclosure.\179\ The
narrative MDFP disclosure is designed to aid shareholders in assessing
a fund's performance over the prior year.\180\ We continue to believe
this disclosure provides information that helps shareholders understand
and evaluate fund performance over that time period. However, based on
staff review of current disclosures, we believe that some funds provide
overly long narrative discussions that likely impede shareholders'
ability to understand easily the key factors that affected the fund's
performance. Therefore, we are proposing to amend the current
requirement to specify that the disclosure must ``briefly summarize''
the ``key'' factors that materially affected the fund's performance
during the last fiscal year, including the relevant market conditions
and the investment strategies and techniques used by the fund's
investment adviser.\181\ A proposed instruction would direct funds not
to include lengthy, generic, or overly broad discussions of the factors
that generally affected market performance during a fund's last fiscal
year.\182\ The proposed instruction would also direct funds to use
graphics or text features--such as bullet lists or tables--to present
the key factors, as appropriate. We understand that some funds
currently attempt to make their narrative disclosure easier for
shareholders to understand by, for example, using tables or charts to
show how the fund performed in comparison to a relevant benchmark or to
identify the significant contributors to or detractors from the fund's
performance by holding, industry, geographic region, or other relevant
category. We believe these types of presentations may be helpful to
shareholders, and funds could continue to include them in annual
reports under the proposal.
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    \179\ See Item 27(b)(7)(i) of Form N-1A; proposed Item 27A(d)(1)
of Form N-1A. Currently, funds are required to discuss the factors
that materially affected the fund's performance during the most
recently completed fiscal year, including the relevant market
conditions and the investment strategies and techniques used by the
fund's investment adviser. Item 27(b)(7)(i) of Form N-1A.
    \180\ See February 2004 Shareholder Report Adopting Release,
supra footnote 83, at paragraph accompanying n.96; Disclosure of
Mutual Fund Performance and Portfolio Managers, Investment Company
Act Release No. 19382 (Apr. 6, 1993) [58 FR 19050 (Apr. 12, 1993)]
(``MDFP Adopting Release'').
    \181\ See proposed Item 27A(d)(1) of Form N-1A.
    \182\ See Instruction 1 to proposed Item 27A(d)(1) of Form N-1A.
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    We recognize that funds currently may include additional
information in their shareholder reports that is designed to help
shareholders understand fund performance and market conditions, such as
a fund president's letter to shareholders, interviews with portfolio
managers, market commentary, and other similar information. Under the
proposed amendments, a fund could not include this additional
information in its annual report.\183\ We believe that information
about the key factors affecting a fund's performance, which the
proposal would require, would likely satisfy many fund shareholders'
needs and would provide a more focused presentation. Although we
understand that the additional information funds currently include in
shareholder reports may be helpful to some shareholders, we believe the
potential benefits of this information to a subset of shareholders, on
balance, do not warrant the additional length they would contribute to
the annual report. We also believe that allowing this discretionary
information would not further our goal of presenting shareholders with
the information that is most central to understanding their fund's
performance. Funds would, however, be able to provide materials that
include this additional information to shareholders in the same
transmission as the annual report (e.g., in the same email or
envelope), provided that the annual report is given greater
prominence.\184\ Funds could also provide this additional information
on their websites, as we understand many funds do today. Further, funds
could refer to additional website information near the end of their
shareholder reports if they reasonably believe that shareholders will
likely view the information as important.\185\
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    \183\ See supra Section II.B.1.b (discussing the proposed
instruction that would permit funds only to include in their annual
reports information that is permitted or required by proposed Item
27A).
    \184\ Commission rules currently do not preclude a fund from
including other materials in the same transmission as shareholder
reports. Our proposal similarly would not limit a fund's ability to
provide other materials in the same transmittal as the proposed
annual report. We believe this would allow funds to communicate with
shareholders more efficiently through a single transmittal without
detracting from our goal of concise, readable shareholder reports.
However, we are proposing to require that the annual report be given
greater prominence than other materials, with the exception of
certain other specified disclosure materials. See supra footnotes
124-126 and accompanying text.
    \185\ See infra Section II.B.2.i.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to the narrative MDFP
disclosure, including:
    35. Should we retain the requirement for a fund to include
narrative MDFP disclosure in annual reports? Why or why not? Does this
disclosure help shareholders better understand a fund's performance?
    36. Should we require the narrative MDFP disclosure to summarize
briefly the key factors that materially affected

the fund's performance during the last fiscal year, as proposed? Would
different instructions better further the Commission's goals of making
narrative MDFP disclosure more concise so shareholders can understand
more efficiently the key factors that affected a fund's performance? If
so, what should those alternative instructions be, and how would they
better further our goals?
    37. As proposed, should we direct funds to use graphics or text
features, such as bullet lists or tables, to present the key factors,
as appropriate? Should we require funds to use specific graphics or
text features to help shareholders more readily understand the key
factors affecting fund performance and to create consistency among
annual reports? Or is a more flexible approach, like we propose, more
appropriate to allow funds to develop presentations tailored to
individual funds and the needs of their shareholders?
    38. Should we expressly limit the length of the narrative MDFP
disclosure? If so, how (e.g., word or page limits)? If not, why not?
    39. Are there other ways we could require or encourage funds to
provide concise narrative MDFP disclosure focused on the key factors
that affected the fund's performance, beyond our proposed revisions and
instruction directing funds not to include lengthy, generic, or overly
broad discussions of the factors that generally affected market
performance? For example, should we expressly require a discussion
about the types of investments that drove fund performance, or can
shareholders intuit this by reviewing the fund's investment strategy?
    40. Should we amend the narrative MDFP disclosure requirement to
limit or expand the examples of the types of factors that funds should
discuss? For example, should we refer to other factors, beyond the
current references in this requirement to relevant market conditions
and the investment strategies and techniques the fund's adviser used?
Should we require funds to discuss holdings that significantly
contributed to or detracted from their performance during the past
fiscal year (e.g., by holding, industry, geographic region, or other
relevant category), as many funds do today? Should we require or
encourage funds to discuss other topics, such as: (1) The fund's
performance in relation to its benchmark; (2) the reason for and effect
of any large cash or temporary defensive position on fund performance;
(3) the effect of any tax strategies, or the effects of taxes, on fund
performance; or (4) whether the fund engages in high portfolio turnover
and the effect of portfolio turnover on fund performance?
    41. Should we incorporate concepts or requirements from
management's discussion and analysis requirements that apply to annual
reports of operating companies and BDCs on Form 10-K? \186\ For
example, should we require or encourage funds to disclose material
financial and statistical data that the fund believes would enhance a
shareholder's understanding of the fund's performance? As another
example, would it be appropriate to require or permit forward-looking
disclosure? If so, are there any related rules or rule amendments we
should adopt to facilitate this disclosure? For instance, should we
require or permit a fund to disclose when a key factor that materially
affected the fund's performance for the last fiscal year is not
expected to materially affect the fund's future performance (e.g.,
because the fund has sold the underlying investment or because of an
unusual or infrequent event or transaction)?
---------------------------------------------------------------------------

    \186\ See, e.g., Item 303 of Regulation S-K; Management's
Discussion and Analysis, Selected Financial Data, and Supplementary
Financial Information, Securities Act Release No. 10750 (Jan. 30,
2020) [85 FR 12068 (Feb. 28, 2020)].
---------------------------------------------------------------------------

    42. Are there ways we could prevent funds from providing generic or
boilerplate narrative MDFP disclosure that does not change much from
year to year? If so, how?
    43. Are there any best practices in narrative MDFP disclosure that
we should encourage or require?
    44. Should we permit or require additional information in the
annual report that is intended to help shareholders understand fund
performance, such as interviews with portfolio managers or a
president's letter? Is this additional information helpful to
shareholders? If so, should it be included as part of the MDFP, or in
some other part of a fund's annual report?
ii. Performance Line Graph and Request for Comment on Use of Market
Indexes in Performance Disclosure
    We also are proposing to retain the requirements for the
performance line graph currently included in annual reports, with
certain amendments designed to improve the current presentation.\187\
The line graph generally shows the performance of a $10,000 investment
in the fund and in an appropriate broad-based securities market index
over a 10-year period.\188\ This disclosure is designed to permit a
comparison of the performance of the fund with ``the market'' and to
put the narrative discussion into perspective.\189\ In addition to
required information about an appropriate broad-based securities market
index's performance, a fund has the option to compare its performance
to other indexes, including more narrowly based indexes that reflect
the market sectors in which the fund invests.\190\ We continue to
believe the line graph presentation helps shareholders understand how
the fund has performed over a 10-year time horizon in comparison to an
appropriate broad-based securities market index and other relevant
indexes, as applicable.\191\ Because this presentation shows
performance in dollar terms, based on an initial $10,000 investment, we
believe the line graph may contribute to shareholders' understanding of
fund performance--because some individuals may find it easier to assess
dollar figures than percentages--and complements the percentage-based
presentation in the average annual total returns table.\192\ We also
believe the line graph helps illustrate the variability of a fund's
returns (e.g., whether the fund's returns have been volatile or
relatively consistent from year to year) and

therefore provides shareholders with some information about the risks
of their fund investment. Moreover, the line graph presentation may
help investors understand the general benefits of long-term investments
(e.g., compound interest). We recognize potential critiques that the
line graph may not show the variability of a fund's returns as clearly
as certain other presentations (such as the bar chart we require in
fund prospectuses that shows annual total returns as a percentage of an
investment).\193\ However, given the other benefits of the line graph--
particularly that it presents performance in dollar terms that may be
easier for some shareholders to assess--we are proposing to retain the
line graph presentation.
---------------------------------------------------------------------------

    \187\ See Item 27(b)(7)(ii)(A) of Form N-1A; proposed Item
27A(b)(2)(A).
    \188\ An ``appropriate broad-based securities market index'' is
one that is administered by an organization that is not an
affiliated person of the fund, its investment adviser, or principal
underwriter, unless the index is widely recognized and used. See
Instruction 5 to Item 27(b)(7)(ii) of current Form N-1A; Instruction
6 to proposed Item 27A(d)(2) of Form N-1A.
    \189\ See MDFP Adopting Release, supra footnote 180, at
paragraph accompanying n.17.
    \190\ See Instruction 6 to Item 27(b)(7)(ii) of Form N-1A;
Instruction 7 to proposed Item 27A(d)(2) of Form N-1A.
    \191\ Many investors view performance information as important
for purposes of monitoring a fund investment. See supra footnote 48
and accompanying text. With respect to the performance line graph in
particular, one study found that 55% of surveyed investors ranked
the line graph and table of fund's performance in the top three most
important categories of annual report information. Approximately 49%
of surveyed investors classified this information as ``absolutely
essential for any investor.'' See 2012 Report on Investor Testing of
Fund Annual Reports, supra footnote 26, at 49, 51.
    \192\ See infra Section II.B.2.c.iii (discussing total returns
table). To the extent that a fund chooses to provide tools to help
shareholders better understand online or mobile presentations of
annual reports, the ability to customize the investment amount and
investment time horizon could be areas that lend themselves to add-
on functionality that funds may wish to build into these
presentations. If a fund provides such tools, the default
presentation would be required to be the values that the proposed
Form N-1A requirements prescribe (e.g., an initial investment of
$10,000 would be the default presentation for the line graph,
although the tools would allow a shareholder to increase or reduce
this investment amount). See discussion at infra Section II.B.4 and
infra footnote 338 and accompanying text.
    \193\ See Item 4(b)(2)(ii) of Form N-1A (requiring a bar chart
in a fund's prospectus that shows a fund's annual total returns for
each of the last 10 calendar years (or the life of the fund, if
shorter). Because the prospectus bar chart shows the percentage of
returns for each year, it may more clearly show variations in a
fund's returns than the line graph, which shows the cumulative
performance of a $10,000 investment. For example, assume a fund
experienced returns of negative 10% in year 1 and year 9. The bar
chart would clearly show a negative 10% return in each of these
years. However, in the line graph presentation, the negative 10%
return in year 1 could appear as a much smaller change than a
negative 10% return in year 9 (e.g., a $1,000 decrease on a $10,000
investment in year 1 versus, for example, a $3,000 decrease in year
9 if the account value had increased to $30,000 in year 8).
---------------------------------------------------------------------------

    We are proposing to retain the current requirement to present fund
performance in relation to an appropriate broad-based securities market
index because we continue to believe that performance disclosure
without relevant context showing market performance would not provide
the information that shareholders need to understand how their fund
performed. For example, performance disclosure without this type of
context would not give shareholders a sense of how their investments
might have performed had their money been invested elsewhere. However,
we request comment on this proposed requirement below.
    We also recognize potential critiques about the use of market
indexes in presenting performance information. These include critiques
that index licensing fees can be costly to funds (and, indirectly, to
fund investors) and that, depending on the index selected, comparing a
fund's performance against the index in some cases may be less
effective in helping shareholders understand the fund's performance and
risks. For example, because funds have discretion to choose an
appropriate broad-based securities market index, a fund may choose an
index that it is more likely to outperform to make it look like the
fund is doing better than the corresponding market (for instance, this
could occur if a bond fund selects a more conservative bond market
index). In addition, index providers can experience errors or other
difficulties in constructing, computing, or maintaining indexes. For
example, an index that includes companies in emerging and frontier
markets may experience data or computational errors if there is less
information publicly available about these companies due to differences
in regulatory, accounting, auditing, and financial recordkeeping
standards.\194\
---------------------------------------------------------------------------

    \194\ See SEC Chairman Jay Clayton, PCAOB Chairman William D.
Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of
Corporation Finance Director William Hinman, SEC Division of
Investment Management Director Dalia Blass, Emerging Market
Investments Entail Significant Disclosure, Financial Reporting and
Other Risks; Remedies are Limited (Apr. 21, 2020), available at
https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting.
---------------------------------------------------------------------------

    While we propose largely to maintain the current line graph
presentation and associated instructions, we are proposing three
revisions to the instructions associated with the line graph. First, we
propose to add a new instruction to clarify the scope of required
disclosure in an annual report that covers multiple classes.\195\ The
proposed instruction would require a fund to present performance
information for at least one class in the line graph (in addition to
the required information for an appropriate broad-based securities
market index). The proposed instruction provides funds with discretion
to determine which class or classes to present in the line graph,
subject to certain limitations that are consistent with existing
limitations on prospectus performance presentations.\196\
---------------------------------------------------------------------------

    \195\ See Instruction 13(a) to proposed Item 27A(d)(2).
    \196\ See current Instruction 3 to Item 4(b)(2) of Form N-1A
(allowing a fund to select which class to include (e.g., the oldest
class, the class with the greatest net assets) if the fund: (1)
Selects the class with 10 or more years of annual returns if other
classes have fewer than 10 years of annual returns; (2) selects the
class with the longest period of annual returns when the classes all
have fewer than 10 years of returns; and (3) if the fund provides
annual total returns for a class that is different from the class
selected for the most immediately preceding period, it explains in a
footnote the reasons for selecting a different class).
---------------------------------------------------------------------------

    Second, we propose to remove an instruction that allows the line
graph to cover periods longer than the past 10 fiscal years. We are
concerned that this current instruction may introduce variability that
reduces the benefits of the line graph. For example, as the time period
on the line graph lengthens, any volatility of the fund's returns may
become harder to identify because the scale of the line graph typically
would need to cover a wider range of account values (e.g., a scale of
$0 to $1,000,000 rather than $0 to $30,000) that reflects growth in the
account. This increase in scale generally would make any particular
increase or decrease in account value (e.g., an increase or decrease of
$3,000) harder to identify. Further, this current instruction may
result in performance presentations that could give rise to unrealistic
investor expectations. For funds in existence for a long period of time
(e.g., 40 years), a line graph that shows the performance of a $10,000
investment at the outset of the fund may not be particularly relevant
for the average shareholder, who likely has not been invested in the
fund for such an extended period of time. The line graph also could
show an ending account value that is substantially higher than the
value of an initial $10,000 investment at the end of a 10-year period
(e.g., an ending account value of $1,000,000 versus an ending account
value of $25,000). While we propose to limit the line graph
presentation to the fund's last 10 fiscal years, funds may include
similar presentations covering longer periods of time on their websites
or in other marketing materials.
    Third, we propose to clarify the definition of an appropriate
broad-based securities market index. Currently, both a fund's
prospectus and annual report must compare the fund's performance to an
``appropriate broad-based securities market index.'' \197\ The
Commission has described such an index as ``one that provides investors
with a performance indicator of the overall applicable stock or bond
markets, as applicable,'' while also stating that a fund would have
``considerable flexibility in selecting a broad-based index that it
believes best reflects the market(s) in which it invests.'' \198\ Our
staff has observed varying practices with respect to the benchmarks
funds use. Some funds, for example, disclose their performance against
a benchmark index that may not provide a performance indicator of ``the
overall applicable stock or bond markets,'' such as an index tied to a
particular sector, industry, geographic location, asset class, or
strategy (e.g.,

growth or value indexes).\199\ While indexes based on narrow segments
of the market may be useful for comparison purposes, we believe that
all funds should compare their performance to the overall market.
---------------------------------------------------------------------------

    \197\ See Item 4(b)(2)(iii) and Instruction 5 to Item 27(b)(7)
of Form N-1A.
    \198\ In 1993, the Commission adopted rules requiring funds to
compare their performance to a ``broad-based index in order to
provide investors with a benchmark for evaluating fund performance
that affords a greater basis for comparability than a narrow index
would afford.'' See MDFP Adopting Release, supra footnote 180, at
paragraph preceding nn.19-20, and n.21 and accompanying paragraph.
    \199\ When the Commission adopted the requirement to compare a
fund's performance against an appropriate broad-based securities
market index, the Commission clarified, ``An index would not be
considered to be broad-based if it is composed of securities of
firms in a particular industry or group of related industries.'' See
id. at n.21.
---------------------------------------------------------------------------

    Therefore, we are proposing to include language that clarifies that
a ``broad-based index'' is one that represents the overall applicable
domestic or international equity or debt markets, as appropriate.\200\
This clarifying language would continue to provide a fund with
flexibility in selecting a broad-based index that the fund believes
best reflects the market(s) in which it invests. The form instructions
also would continue to encourage a fund to include narrower indexes
that reflect the market segments in which the fund invests in its
performance presentation along with its appropriate broad-based
securities market index.\201\ If a fund invests in both equity and debt
securities, such as a balanced fund, the fund may include more than one
appropriate broad-based securities market index. The fund may also
include a blended index--one that combines the performance of more than
one index, such as equity and debt indexes--as an additional index to
supplement the appropriate broad-based securities market index(es) that
the fund includes. The proposed amendments to the definition of an
appropriate broad-based securities market index would affect
performance presentations in fund prospectuses, as well as fund annual
reports.\202\
---------------------------------------------------------------------------

    \200\ See proposed Instruction 6 to proposed Item 27A(d)(2) of
Form N-1A.
    \201\ See proposed Instruction 7 to proposed Item 27A(d)(2) of
Form N-1A.
    \202\ See proposed Item 4(b)(2)(iii) of Form N-1A.
---------------------------------------------------------------------------

    We request comment on the proposed line graph presentation and on
the use of market indexes more generally in performance presentations,
including the following:
    45. Should we require the annual report to include the performance
line graph, as proposed? Why or why not? Should we modify the proposed
requirements for the line graph? For example, should the line graph
show returns in terms of percentages instead of dollar values? Are
there other presentations that would help shareholders better
understand a fund's performance over the past 10 years (or for the life
of the fund, if shorter) and the variability of its returns?
    46. We understand that the line graph can be difficult to read in
black and white and may not fully illustrate volatility in the early
years displayed in the graph.\203\ Are there other performance
presentations that could better address these issues than the proposed
approach and that would retain the benefits of the line graph
presentation to shareholders? For example, should we replace the line
graph with something similar to the bar chart required in fund
prospectuses, which may be easier to read in black and white? \204\
Would this alternative presentation better show year-to-year
volatility? Is the risk/return bar chart easy for shareholders to
understand, or do shareholders prefer the line graph presentation that
shows returns in terms of dollars rather than percentages? If we were
to replace the line graph with something similar to the risk/return bar
chart, should that alternative presentation present returns in terms of
dollars instead of percentages?
---------------------------------------------------------------------------

    \203\ See supra footnote 193.
    \204\ See Item 4(b)(2)(ii) of Form N-1A.
---------------------------------------------------------------------------

    47. Should we require the line graph to cover at least one class of
a fund when a single shareholder report covers multiple classes, as
proposed? Alternatively, should the graph be limited to one class or
required to cover more than one class? How can we make sure that the
line graph remains readable but provides sufficient information to help
shareholders understand fund performance and risks?
    48. Should we no longer allow funds to provide a line graph that
covers periods longer than 10 years in their annual reports, as
proposed? What are the benefits and drawbacks of permitting line graph
presentations that cover more than 10 years, if a fund's registration
statement has been effective for more than 10 years? If we were to
continue to permit the line graph to cover a period of time that is
longer than 10 years, should we limit the time period that the graph
may cover in any way (e.g., limit the time period to no more than 20
years)?
    49. Should we require funds to provide information in shareholder
reports about the performance of an appropriate broad-based securities
market index, as proposed? What are the advantages and disadvantages of
this information? Does information about an appropriate broad-based
securities market index's performance provide investors with a helpful
performance indicator of the overall relevant market? \205\ If so, do
these benefits justify the burdens, including costs to the fund (and
ultimately its shareholders) of paying one or more index providers to
allow the fund to include this information in the fund's disclosure? Is
cost a significant factor for funds when they determine which, and how
many, indexes to include in their shareholder reports? How are these
costs assessed (for example, are they assessed on a per-disclosure
basis or on some other basis)?
---------------------------------------------------------------------------

    \205\ See MDFP Adopting Release, supra footnote 180, at n.21 and
accompanying text.
---------------------------------------------------------------------------

    50. Should we modify the definition of ``appropriate broad-based
securities market index,'' as proposed? If not, why not? If so, is the
proposed definition appropriate, or should we modify it in any way? For
example, should we permit funds to use blended indexes only as
secondary indexes, as proposed (as an index could be ``broad-based''
only if it represents the overall applicable equity or debt markets),
or should we permit funds to use these indexes as primary appropriate
broad-based securities market indexes under certain circumstances? If
we were to permit this, what if any conditions would be appropriate to
ensure that the index remains ``broad-based''? For example, should
there be requirements limiting a fund to the number of indexes that
could be blended for this purpose (e.g., 2), or the types of indexes
that could be blended? Similarly, should we modify current requirements
that permit funds to use non-securities market indexes only as
secondary indexes, and not as appropriate broad-based securities market
indexes? Are there concerns with certain funds using blended indexes or
non-securities market indexes as secondary, rather than primary,
indexes, such as concerns about investor understanding or costs
associated with disclosing multiple indexes (e.g., index licensing
fees)? Do blended or non-securities market indexes provide an
appropriate point of comparison for an investor to evaluate his or her
fund's performance? If we were to allow blended indexes or non-
securities market indexes as a primary index, how could we tailor this
approach to make sure that investors receive a performance indicator of
the overall applicable market? \206\ Is the proposed definition clear?
For example, is it clear that an index composed of securities of firms
in a particular industry or group of related industries would not be
broad-based?
---------------------------------------------------------------------------

    \206\ See MDFP Adopting Release, supra footnote 180, at n.21 and
accompanying text.

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

    51. Are there other changes we should make to the definition of
appropriate broad-based securities market index, or to the framework
for providing index performance more generally? For example, are there
ways we could facilitate an investor's ability to understand the
relevance of an appropriate broad-based securities market index, while
maintaining funds' flexibility to select an appropriate and cost-
effective benchmark? \207\ As another example, are there ways we could
address concerns that some funds may choose an index for the purpose of
making the fund's performance look better? Are there other instructions
or guidance we could provide regarding the selection of an appropriate
broad-based securities market index?
---------------------------------------------------------------------------

    \207\ See, e.g., Fowler Comment Letter (``Compare to a market
measure I understand, and the asset class the fund holds.''); Ewing
Comment Letter (``Compare against a market measure I know, like the
S&P 500, not some obscure thing I never heard of.''); Frank W.
Comment Letter; see also ICI Comment Letter I (requesting that the
Commission be mindful of, and sensitive to, the fees and costs
associated with including index information in a fund's prospectus).
---------------------------------------------------------------------------

    52. We are proposing to amend the definition of appropriate broad-
based securities market index for purposes of Form N-1A. Should the
same amended definition apply to fund prospectuses and fund shareholder
reports, as proposed? If not, why not? Should we make corresponding
amendments to the definition of appropriate broad-based securities
market index in Form N-2 with respect to MDFP requirements for
registered closed-end funds? \208\ Why or why not?
---------------------------------------------------------------------------

    \208\ See Instruction 4.g(2)(F) to Item 24 of Form N-2, as
amended by Closed-End Fund Offering Reform Adopting Release, supra
footnote 128.
---------------------------------------------------------------------------

    53. Should funds have discretion to provide information in
shareholder reports about the performance of more narrowly based
indexes that reflect the market sectors in which the fund invests, as
proposed? Is the information these indexes provide helpful to
shareholders, or does additional index performance information make the
disclosure more difficult for shareholders to understand?
    54. Should index providers be required to meet certain governance,
due diligence, or other similar standards if an index's performance
will be included in fund disclosure? Why or why not? If we imposed any
such requirement, how would funds expect to determine whether those
standards have been met?
    55. Are there alternative measures that we should permit or require
funds to use to provide investors with comparative information about
market performance, instead of an appropriate broad-based securities
market index or more narrowly based indexes that reflect the market
sectors in which the fund invests? If so, what alternative measures
(e.g., the rate of inflation or a risk free rate), and why are those
measures appropriate and preferable to the use of indexes? \209\
---------------------------------------------------------------------------

    \209\ For example, some market participants consider the 10-year
U.S. Treasury note rate as a risk-free rate.
---------------------------------------------------------------------------

iii. Performance Table
    We are proposing to retain the current requirement that funds'
annual reports include a table presenting average annual total returns
for the past 1-, 5-, and 10-year periods, although we are proposing
amendments to require three pieces of additional information.
Specifically, the proposal would require that the table include: (1)
The average annual total returns of an appropriate broad-based
securities market index; (2) the fund's average annual total returns
without sales charges (in addition to current disclosure that shows
returns reflecting applicable sales charges); and (3) average annual
total returns for each class that the report covers, in each case for
the past 1-, 5-, and 10-year periods.\210\ The average annual total
returns table is designed to assist shareholders in comparing the
performance of different funds.\211\ We also believe that the table
complements the line graph to help shareholders evaluate a fund's
performance and risks.
---------------------------------------------------------------------------

    \210\ See Item 27(b)(7)(ii)(B) of Form N-1A; proposed Item
27A(d)(2)(ii) of Form N-1A. Item 27(b)(7)(ii)(B) of Form N-1A
currently requires the following:
    ``In a table placed within or next to the graph, provide the
Fund's average annual total returns for the 1-, 5-, and 10-year
periods as of the end of the last day of the most recent fiscal year
(or for the life of the Fund, if shorter), but only for periods
subsequent to the effective date of the Fund's registration
statement. Average annual total returns should be computed in
accordance with Item 26(b)(1).''
    \211\ See MDFP Adopting Release, supra footnote 180, at
paragraph accompanying n.26. We recognize, however, that the table
has certain limitations with respect to fund comparisons because it
reflects fiscal year data and funds can have different fiscal year
periods.
---------------------------------------------------------------------------

    The amendments we are proposing to the average annual total returns
table are designed, in part, to better conform the table to a similar
presentation that funds include in their prospectuses. Like the current
prospectus disclosure regarding average annual total returns, we
propose to require funds to include in the shareholder report table
information about the average annual total returns of an appropriate
broad-based securities market index.\212\ A fund would provide the
index's returns for the same periods as its own returns (e.g., 1-, 5-,
and 10-year periods). We understand that many funds already provide
this information in their annual reports. We believe that requiring all
funds to provide this information would help shareholders better
understand a fund's performance and risks in the context of the broader
market.\213\ We also believe that proposing this change would be
beneficial because fund shareholders may no longer receive annual
prospectus updates as a result of our proposed amendments to the
prospectus delivery framework for existing fund shareholders.\214\
Consistent with the current prospectus performance presentation, the
proposed amendments would permit funds to include returns information
for one or more other relevant indexes, such as a more narrowly based
index that reflects the market sectors in which the fund invests.\215\
We are proposing to permit funds to include more than one index in the
table because we understand that in some cases this approach may help
shareholders understand how the fund's performance compared to, for
example, performance of both the broader market and the market sector
in which the fund invests. These proposed amendments are designed to
help shareholders more easily evaluate a fund's performance and risks
relative to the market and to better align the information in the table
with the current line graph presentation so a shareholder has
contextual information to help assess both year-over-year returns and
average annual returns over set periods. At the same time, we recognize
concerns about the use of indexes in performance presentations, and we
are seeking comment on our proposed approach.\216\
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    \212\ See Item 4(b)(2)(iii) of Form N-1A (requiring that a
fund's prospectus include a table showing its average annual total
returns for 1-, 5-, and 10-calendar year periods, along with the
returns of an appropriate broad-based securities market index for
the same periods). The proposed amendments to the performance table
would use the same amended definition of an appropriate broad-based
securities market index as the proposed line graph presentation. See
supra paragraph accompanying footnote 197.
    \213\ See 1998 Form N-1A Prospectus Amendments, supra footnote
151, at text accompanying n.69 (discussing the purpose of the
required prospectus disclosure regarding the average annual total
returns of an appropriate broad-based securities market index).
    \214\ See infra Section II.E.
    \215\ See Instruction 2(b) to Item 4(b)(2) of current Form N-1A;
Instruction 2(b) to proposed Item 4(b)(2) of Form N-1A (amending the
cross reference to the description of other more narrowly based
indexes from Instruction 6 to current Item 27(b)(7) to Instruction 7
to proposed Item 27A(d)(2)); Instruction 7 to proposed Item
27A(d)(2) of Form N-1A.
    \216\ See supra Section II.B.2.c.ii.

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    We further propose to modify the average annual total returns table
to require funds to separately provide the average annual total returns
with and without sales charges, as applicable.\217\ Currently, the
table is only required to include average annual total returns that
reflect sales charges.\218\ We believe comparative information about
average annual total returns with and without sales charges may help
shareholders better understand the impact of sales charges on the
returns of their investments. We also believe that additional
information about average annual total returns without sales charges
may help shareholders better compare the fund's returns to that of a
relevant index.\219\
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    \217\ See proposed Item 27A(d)(2)(ii) of Form N-1A. One
commenter on the Fund Investor Experience RFC prepared a mock
summary shareholder report that included average annual total
returns shown with and without sales charges, as applicable. See ICI
Comment Letter I. Under the proposal, a fund that does not impose
sales charges would only provide a single set of average annual
total returns figures (i.e., returns without sales charges).
    \218\ See Item 27(b)(7)(ii)(B) of Form N-1A (requiring average
annual total returns computed in accordance with Item 26(b)(1),
which reflects sales charges in the calculation of returns). In
connection with the proposed amendment, we propose to add a new
computation instruction to explain that funds should calculate
average annual total returns without sales charges in accordance
with Item 26(b)(1) of Form N-1A, except the fund should not deduct
sales charges as otherwise described in the instructions to that
item. To provide a fund's 1-year annual total return without sales
charges, a fund would use the same 1-year total return figure
reflected in its most recent audited financial highlights. See
Instruction 5 to proposed Item 27A(d)(2) of Form N-1A.
    \219\ Further, the proposed requirement to present the fund's
annual total return without sales charges for the last fiscal year
would align with audited information shareholders currently receive
in the financial highlights section of shareholder reports. See Item
27(b)(2) of Form N-1A; Instruction 3 to Item 13(a) of Form N-1A. We
understand that some shareholders review financial highlights
information when assessing and monitoring their fund investments.
See, e.g., supra footnote 52.
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    We also propose to add a new instruction for the average annual
total returns table to require a fund to provide average annual total
returns information for each class the shareholder report covers.\220\
This is consistent with the prospectus average annual total returns
table, which must reflect average annual total returns for every class
a prospectus covers.\221\ We believe it is important for shareholders
to receive performance information that directly relates to the class
in which they invest. Because each class can have different expenses
that affect the class's returns, performance information for each class
would allow a shareholder to understand the performance of his or her
investment better and to compare performance among the classes the
report covers.\222\ While the proposed shareholder report expense
disclosure would include class-specific performance information for the
reporting period, the average annual total returns table would provide
class-specific performance information over a longer time period.
Further, although the line graph in the annual report similarly
provides longer-term performance information, it is not currently
required to include information for each class (nor are we proposing to
require this, because we recognize that additional lines in the graph
for each class may make the graph difficult to read). Additionally,
under the proposal, shareholders generally may not receive annual
prospectus updates, which include class-specific returns, and would
instead receive prompt notices of certain material changes that
generally would not include this information. As a result of these
considerations, we believe the average annual total returns table in
the shareholder report should include information for each class the
report includes.
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    \220\ See Instruction 13(b) to proposed Item 27A(d)(2) of Form
N-1A.
    \221\ See Instruction 3(c)(i) to Item 4(b)(2) of Form N-1A.
    \222\ See 1998 Form N-1A Prospectus Amendments, supra footnote
213, at text accompanying n.66.
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    Currently, funds must include a statement accompanying the line
graph and table to the effect that past performance does not predict
future performance, and that the line graph and table presentations do
not reflect taxes that a shareholder would pay on fund distributions or
redemptions.\223\ We propose to simplify the statement about past
performance. Specifically, under the proposed amendments, a fund would
be required to include a statement to the effect that the fund's past
performance is not a good predictor of how the fund will perform in the
future.\224\ We propose to require funds to use text features to make
this statement noticeable and prominent through, for example, graphics,
larger font size, or different colors or font styles.\225\ Under the
proposal, funds would continue to be required to state that the
disclosed performance information does not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the
redemption of fund shares to alert investors to these tax
consequences.\226\
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    \223\ See Item 27(b)(7)(ii)(B) of Form N-1A.
    \224\ See proposed Item 27A(d)(2)(iii)(A) of Form N-1A. We also
propose to make a conforming change to similar language that must
appear in the prospectus. See proposed amendments to Item 4(b)(2) of
Form N-1A.
    \225\ See proposed Item 27A(d)(2)(iii)(A) of Form N-1A.
    \226\ See proposed Item 27A(d)(2)(iii)(B) of Form N-1A.
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    Additionally, we propose to add a new instruction allowing funds to
add brief additional disclosure that would contextualize the line graph
and average annual returns table they include in their shareholder
reports. Specifically, the proposed instruction provides that if a
material change occurred to the fund during the relevant performance
period, such as a change in investment adviser or a change to the
fund's investment strategies, the fund may include a brief legend or
footnote to describe the material change and when it occurred.\227\ We
believe this additional disclosure could help shareholders understand
potential changes in fund performance related to material fund changes
that have occurred during the relevant performance period.\228\ Under
the proposal, funds would have discretion to determine when to disclose
information about a prior material change to a fund in connection with
its performance presentation. We are proposing a discretionary
approach, instead of requiring funds to include this disclosure for all
material changes, because we recognize that some material changes to a
fund may not affect a fund's performance, or may have only an
insignificant effect on performance. Although a fund generally would be
able to use discretion to determine when to disclose a prior material
change in connection with its performance presentation, a fund would
need to disclose information about such a change if, absent that
disclosure, the fund's performance presentation would otherwise be
misleading.\229\
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    \227\ See Instruction 14 to proposed Item 27A(d)(2). In
addition, consistent with current Form N-1A requirements, if a fund
uses an index in a shareholder report that is different from the
index used for the immediately preceding reporting period, the later
report would need to explain the reason(s) for the change and
disclose the returns of both the new and former indexes. See
Instruction 7 to Item 27(b)(7)(ii) of Form N-1A; Instruction 8 to
proposed Item 27A(d)(2) of Form N-1A.
    \228\ See Blanchard Comment Letter (suggesting that identifying
fund changes that may have changed a fund's performance would
improve current fund performance presentations).
    \229\ See, e.g., rule 8b-20 under the Investment Company Act [17
CFR 270.8b-20].
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    While we believe it is beneficial for shareholders to receive
information about a fund's performance in the annual report each year,
we understand that funds provide more current, ongoing performance
information through other mechanisms, such as their websites. We are
proposing to require funds that provide updated performance

information through widely accessible mechanisms, such as fund
websites, to include a statement in the shareholder report directing
shareholders to where they can find this information.\230\ If a fund
were to include such a statement, it also would be required to provide
a means of facilitating access to the updated performance information,
including, for example, a hyperlink to where the information may be
found if the shareholder report is provided electronically or a URL
address or QR code if the shareholder report is delivered in paper
format.\231\
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    \230\ See Instruction 15 to proposed Item 27A(d)(2).
    \231\ See Instruction 9 to proposed Item 27A(a); see also infra
footnotes 342 and 343 and accompanying paragraph. Consistent with
this instruction, a fund could provide a direct link to the updated
performance information or a link to a central site that provides a
direct link to the fund's updated performance information.
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    We request comment on the proposed average annual total returns
table and associated amendments, including the following:
    56. Should the annual report include the average annual total
returns table, as proposed? Why or why not? Should we modify the
proposed requirements for the table? If so, how?
    57. Should we require funds to include the average annual total
returns of an appropriate broad-based securities market index and allow
funds to include the returns of additional indexes in the average
annual total returns table, as proposed, and as funds currently do in
their prospectuses? Should we make any changes to this aspect of the
proposal? Please explain.
    58. Should we require funds to include the average annual total
returns of each class that the annual report covers, as proposed, and
as funds currently do in their prospectuses? Should we modify this
aspect of the proposal? For example, should we only require average
annual total returns for one class or for a set number of classes? If
so, should we provide funds with flexibility for determining which
class to disclose in the average annual total returns table, similar to