satisfy shareholder report transmission requirements by making these
reports available online, these commenters stated that funds will no
longer have an incentive to innovate the manner in which they present
fund information online. For example, one commenter stated that
electronic delivery incentivized funds to provide hyperlinked
disclosures and interactive graphs, calculators and other materials
that permit individual investors to understand fund performance.\484\
---------------------------------------------------------------------------

    \483\ See, e.g., Mutual Fund Directors Forum Comment Letter;
SIFMA Comment Letter; TIAA Comment Letter.
    \484\ See Mutual Fund Directors Forum Comment Letter.
---------------------------------------------------------------------------

    Finally, commenters expressed the view that the proposed amendments
to rule 30e-3 would be contrary to investors' expressed preferences for
electronic delivery.\485\ Several fund commenters stated that investors
have demonstrated a behavioral preference for digital engagement,
noting that these funds have observed that most retail investors prefer
to engage on fund-related issues through the fund's digital
platform.\486\ These commenters believe that the preference for digital
engagement is best supported by the electronic delivery of fund
documents, including rule 30e-3's notice and website access approach
for delivering shareholder reports. The Commission received several
comments indicating that the vast majority of fund investors have not
indicated a preference for receiving paper copies of fund documents
following the adoption of rule 30e-3.\487\ One commenter discussed a
survey this commenter conducted, finding that only \1/2\ of one percent
of direct-at-fund accounts requested paper shareholder reports in
response to fund requests related to complying with rule 30e-3.\488\
Another commenter likewise noted that less than 0.5% of investors have
contacted the commenter to request the receipt of printed documents
under rule 30e-3.\489\ Similarly, another commenter stated that it has
received requests for delivery of paper fund documents from 0.1% of
shareholders who directly own shares in the fund.\490\
---------------------------------------------------------------------------

    \485\ See, e.g., Center for Capital Markets Competiveness
Comment Letter; Dechert Comment Letter; Comment Letter of State
Street Global Advisors (Jan. 4, 2021) (``State Street Comment
Letter''); Capital Group Comment Letter; ICI Comment Letter;
Vanguard Comment Letter.
    \486\ See, e.g., Vanguard Comment Letter; T. Rowe Price Comment
Letter.
    \487\ See, e.g., ICI Comment Letter; Vanguard Comment Letter.
    \488\ See ICI Comment Letter. These ICI survey respondents
manage approximately $18 trillion of mutual fund assets,
representing approximately 85 percent of industry mutual fund assets
at the end of June 2020. See Letter to Dalia Blass, Director,
Division of Investment Management, U.S. Securities and Exchange
Commission from the Investment Company Institute, (Sept. 10, 2020),
available at https://www.sec.gov/comments/265-33/26533-7964920-224992.pdf.
    \489\ See Vanguard Comment Letter; see also Capital Group
Comment Letter (``From our perspective, it is telling that following
the adoption of Rule 30e-3, only 0.40% of all of our funds'
shareholders opted in to receiving paper copies, signaling strong
investor support for accessing information online.'').
    \490\ See T. Rowe Price Comment Letter.
---------------------------------------------------------------------------

    After considering commenters' input, we are adopting the amendments
to rule 30e-3 substantially as proposed, with certain technical
changes. As noted in the proposal, the new approach to funds'
shareholder reports reflects the Commission's continuing efforts to
search for better ways of providing investors with the disclosure that
they

need. Rather than allowing fund managers to determine the transmission
method for shareholder reports, the final rule ensures that all
investors will receive the anticipated benefits of streamlined
shareholder reports. We continue to believe that the new disclosure
approach for shareholder reports represents a more-effective means of
improving investors' ability to access and use fund information, and of
preserving much of the expected cost savings to funds and investors
that funds would experience by choosing to rely on rule 30e-3.
Moreover, that investors will also receive annual prospectus updates
under the final rules because we are not taking final action on
proposed rule 498B does not diminish the centrality of fund shareholder
reports. Providing information in shareholder reports directly to
shareholders--as opposed to providing a notice of these reports'
availability--will best effectuate the goals of the streamlined
shareholder report.
    We acknowledge, as commenters discussed, that many funds have
already come into compliance with rule 30e-3 and have borne the costs
associated with that rule. We also understand, as commenters stated,
that investors may not be expecting to receive their shareholder
reports in their mailbox in light of receiving notices of the upcoming
transmission changes.\491\ We continue to believe, however, that
investors will benefit from receiving streamlined information delivered
directly to them, rather than receiving that information indirectly via
a rule 30e-3 notice with no substantive content and a hyperlink to the
streamlined disclosure itself. Instead of receiving a one-page notice
describing how investors may access their shareholder reports online,
investors will now receive a streamlined shareholder report that may
fit on a trifold self-mailer that is delivered directly to them.
Fundamentally, under both rule 30e-3 and these final rules (to the
extent an investor does not elect electronic delivery), a fund would
transmit to investors a short paper document in the mail that provides
a link to more information online. But under the final rules, this
short document will contain key information that investors can use to
monitor their fund investments, unlike a rule 30e-3 notice, which
contains no substantive content. Now that we are adopting streamlined
shareholder reports--as opposed to the lengthy and less reader-friendly
versions in place at the time the Commission adopted rule 30e-3--we
believe investors will benefit from receiving these reports directly,
rather than receiving them indirectly via a rule 30e-3 notice with a
hyperlink.
---------------------------------------------------------------------------

    \491\ Funds will not be required to notify investors of the
change in transmission method prior to the compliance date of the
amendments to rule 30e-3, but are permitted to at the fund's
discretion. Such a notice could, for example, be included along with
a fund's shareholder report, provided that it meets the prominence
requirements for materials that accompany the report. See
Instruction 12 to Item 27A(a) of amended Form N-1A.
---------------------------------------------------------------------------

    The final rules' approach reflects our continued understanding
based on commenter feedback on the proposal, responses to the fund
Investor Experience RFC, investor testing and surveys as discussed in
section I.A.3 above, and other disclosure reform initiatives that
shareholders strongly prefer layered disclosure, with summary
information provided to them directly and more detailed information
available elsewhere.\492\ In assessing investor preferences, we
understand--as commenters discussed--that few investors opted into
continuing to receive the current, lengthy fund shareholder reports in
paper after receiving 30e-3 notices. We do not, however, believe that
this can be taken as evidence that investors would prefer to receive a
rule 30e-3 notice instead of the new streamlined shareholder report,
given the relative salience of the new reports versus the current
reports, and the positive feedback the Commission has received about
the proposed reports and the disclosure principles underlying these
reports.\493\
---------------------------------------------------------------------------

    \492\ See Fund Investor Experience RFC and comments received in
response to the RFC, supra footnote 40; see also Consumer Federation
of America I Comment Letter; Proposing Release, supra footnote 8, at
section II.G; supra section I.A.2 (discussing the developments
supporting layered disclosure approach to fund shareholder reports).
    \493\ Investor inertia also may make it less likely for
investors to elect a change affirmatively with respect to the
regulatory disclosure they receive. See infra footnote 504
(discussing that investor inertia makes it less likely for investors
affirmatively to elect to change the default method of delivery of
fund materials).
---------------------------------------------------------------------------

    As discussed above, many commenters supported a regulatory approach
that would reflect investors' preferences around digital engagement
with fund regulatory materials. We agree that the Commission should
consider ways to streamline the information that is delivered in paper
to fund investors and enhance fund information that is presented
electronically. The new streamlined shareholder report shifts many of
the lengthier, more technical aspects of fund disclosure from the
shareholder report that is delivered directly to investors to be filed
on Form N-CSR and made available on a website. We also do not believe
that the final rules' approach with respect to rule 30e-3 will reduce
funds' incentives or ability to offer innovative online regulatory
disclosure. Many investors will review shareholder reports online,
whether by opting into e-delivery or via links provided in the
streamlined shareholder reports. And our final rules also encourage
funds to continue to innovate the electronic presentation of fund
information. Outside the scope of these amendments, funds have
incentives to present shareholder reports on their websites--for
example, because including more interactive, dynamic fund disclosure
may be popular with investors and therefore could produce reputational
benefits--which may also serve as a motivation for innovation.
    Along with comments about the proposed narrowing of the scope of
rule 30e-3, the Commission also received several comments requesting
clarification regarding how the proposed amendments to rule 30e-3 would
affect the shareholder report transmission requirements for variable
contract separate accounts that are registered as UITs.\494\ Rule 30e-2
requires these UITs to transmit the shareholder reports of the funds
that serve as these contracts' underlying investments--which are
registered on Form N-1A--to the UITs' investors.\495\ These UITs
currently may rely on rule 30e-3 to satisfy their shareholder report
transmission requirements under rule 30e-2.\496\
---------------------------------------------------------------------------

    \494\ See, e.g., Comment Letter of the Committee of Annuity
Insurers (Dec. 22, 2020) (``CAI Comment Letter''); ICI Comment
Letter; Comment Letter of the Insured Retirement Institute (Jan. 4,
2021) (``IRI Comment Letter''); Stradley Ronon Comment Letter.
    \495\ See rule 30e-2.
    \496\ Current rule 30e-3(a).
---------------------------------------------------------------------------

    Under the rules we are adopting and as was proposed, no shareholder
report transmission requirements for funds that are registered on Form
N-1A may be satisfied by relying on rule 30e-3.\497\ We understand that
the underlying funds of variable contract UITs are solely funds that
are registered on Form N-1A. Therefore, in effect, variable contract
UITs may no longer rely on rule 30e-3 to satisfy their shareholder
report transmission requirements with respect to underlying funds
registered on Form N-1A.\498\
---------------------------------------------------------------------------

    \497\ See amended rule 30e-3(h)(2) (defining ``fund'' as ``a
management company registered on Form N-2 . . . or Form N-3 . . .
and any separate series of the management company'').
    \498\ See, e.g., Proposing Release, supra footnote 8, at section
IV.I (Paperwork Reduction Act analysis for the proposed amendments
to rule 30e-3, where the Commission's estimates of the burden of the
proposed amendments do not exclude investment companies registered
on Form N-1A that serve as variable contracts' underlying
investments).

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

    The commenters who requested clarification on this aspect of the
proposal noted that the proposed rule text did not explicitly carve out
variable contract separate account UITs from rule 30e-3, because the
proposed amendments retained references to a fund being able to rely on
rule 30e-3 to satisfy shareholder report transmission requirements
under rule 30e-2.\499\ The proposed amendments effectively would not
permit UITs to satisfy shareholder report transmission obligations
under rule 30e-2, however, because the amendments would exclude all
Form N-1A-registered funds, including those that serve as variable
contracts' underlying investments, from the scope of rule 30e-3. To
clarify the scope of the amendments to rule 30e-3 and more clearly
effectuate the Commission's regulatory intent as reflected in the
proposed amendments, the amendments to rule 30e-3 that we are adopting
remove current references to shareholder report transmission
requirements under rule 30e-2.
---------------------------------------------------------------------------

    \499\ Current rule 30e-3(a) states that a company may satisfy
its obligation to transmit a report required by rule 30e-1 or rule
30e-2 to a shareholder or record if all of the conditions set forth
in paragraphs (b) through (e) of the rule are satisfied. The
proposed rule amendments did not amend this provision of the current
rule.
---------------------------------------------------------------------------

2. Alternative Transmission Methods for Shareholder Reports and Other
Regulatory Materials
    Related to the comments on the proposed amendments to rule 30e-3,
the Commission also received comments suggesting alternative methods of
transmitting shareholder reports. Many of these comments were framed in
terms of modernizing the Commission's guidance that governs electronic
delivery.\500\
---------------------------------------------------------------------------

    \500\ See, e.g., ICI Comment Letter; Dechert Comment Letter;
Federated Hermes Comment Letter.
---------------------------------------------------------------------------

    Some commenters suggested an ``access equals delivery''
framework.\501\ Under this alternative, shareholder reports would be
deemed to be delivered if they were made available online without the
notice that rule 30e-3 currently requires. For example, one commenter
stated that the Commission should reevaluate shareholder report
disclosure and transmission requirements by first amending the format
and substance of shareholder reports, and then adopting an ``access
equals delivery'' standard for all fund disclosure documents.\502\
Several commenters similarly suggested that the Commission permit funds
to satisfy their transmission obligations, for both shareholder reports
and prospectus updates, by filing them with the Commission, posting
them on a website, and delivering them upon request to
shareholders.\503\ Commenters stated that investors have expressed a
preference for accessing fund disclosures electronically, however there
is inertia around shareholders affirmatively opting-in to electronic
delivery.\504\
---------------------------------------------------------------------------

    \501\ See, e.g., Dechert Comment Letter; Federated Hermes
Comment Letter; ICI Comment Letter; see also discussion at infra
footnotes 758-761 and accompanying text.
    \502\ See Federated Hermes Comment Letter.
    \503\ See, e.g., ICI Comment Letter; T. Rowe Price Comment
Letter; Charles Schwab Comment Letter; State Street Comment Letter;
Capital Group Comment Letter.
    \504\ See, e.g., T. Rowe Price Comment Letter; Charles Schwab
Comment Letter; Capital Group Comment Letter.
---------------------------------------------------------------------------

    Rather than adopting an ``access equals delivery'' approach as
discussed by commenters above, one commenter urged the Commission to
reevaluate electronic delivery of fund documents, but to take up this
issue in a separate rulemaking that takes a comprehensive review of the
potential for electronic delivery.\505\ This commenter asserted that
investor engagement is not necessarily supported by switching the
delivery of fund documents from paper to electronic, but instead
encouraged the Commission to examine how to leverage electronic
resources to enhance investor engagement as well as investor
understanding of fund disclosures.
---------------------------------------------------------------------------

    \505\ See CFA Institute Comment Letter.
---------------------------------------------------------------------------

    These commenters raise important considerations for any future
initiative on the delivery of fund regulatory materials, and the
Commission and staff are continuing to consider these issues.
Rescinding rule 30e-3 in its entirety or reconsidering the Commission's
electronic delivery regime for fund materials, however, merits further
consideration.
3. Alternatives for Satisfying Transmission Requirements for Semi-
Annual Reports
    Funds will continue to be required to comply with the current
requirements with regard to the frequency of transmitting shareholder
reports, which are statutorily mandated to be transmitted on a semi-
annual basis.\506\ The Commission requested comment on alternative
approaches to satisfy the statutory requirement to transmit semi-annual
reports.\507\ For example, the Commission stated that it considered
proposing to allow funds to satisfy the semi-annual report transmission
obligation by filing certain information on Form N-CSR and/or updating
certain information on a website and requested comment on these
approaches. We received feedback regarding these alternative approaches
from commenters that both supported the current transmission
requirements and those who preferred potential alternative approaches
to satisfy these requirements.
---------------------------------------------------------------------------

    \506\ See section 30(e) of the Investment Company Act.
    \507\ See Proposing Release, supra footnote 8, at section
II.C.3.b.
---------------------------------------------------------------------------

    Many commenters supported the alternatives that the Commission
discussed in the Proposing Release.\508\ Commenters also suggested
different permutations of these alternatives, as well as ancillary
requirements that could accompany these alternatives. For example, some
commenters suggested that funds should have to include disclosure in
the preceding annual report that the semi-annual report would be posted
to a fund's website no later than a particular date and clarify that
investors may obtain a paper copy of the report by contacting the
fund.\509\ Commenters cited a variety of reasons for favoring
alternatives where semi-annual report transmission could be satisfied
by Commission filing and/or website posting. For example, some
commenters stated that the purpose of requiring direct transmission of
the semi-annual report is not clear, opining that the content of the
semi-annual report is duplicative of information that some funds
already make available on fund websites, that the information funds
choose to post online is more timely, and that monthly or quarterly
fact sheets that are already made available online may be more
useful.\510\ Additionally, commenters cited cost savings for funds and
investors as a basis for eliminating the direct transmission
requirements for semi-annual reports.\511\
---------------------------------------------------------------------------

    \508\ See, e.g., ICI Comment Letter; Dechert Comment Letter;
Fidelity Comment Letter; Charles Schwab Comment Letter; Capital
Group Comment Letter; T. Rowe Price Comment Letter.
    \509\ See, e.g., ICI Comment Letter; T. Rowe Price Comment
Letter.
    \510\ See, e.g., Fidelity Comment Letter; Capital Group Comment
Letter.
    \511\ See, e.g., Capital Group Comment Letter; ICI Comment
Letter; T. Rowe Price Comment Letter.
---------------------------------------------------------------------------

    We also received comments supporting an approach that would
continue to require the direct transmission of semi-annual reports to
investors.\512\ One commenter stated that there is no evidence that
investors would see updated information posted on fund websites if it
were no longer delivered to them.\513\ Additionally, this

commenter cited a study indicating that current shareholders prefer a
twice-yearly delivery approach for shareholder reports.\514\ Another
commenter stated that elimination of the tailored shareholder report
for semi-annual reports would reduce investor disclosure delivery and
therefore reduce overall investor engagement and restrict
information.\515\
---------------------------------------------------------------------------

    \512\ See, e.g., CFA Institute Comment Letter; DFIN Comment
Letter.
    \513\ See CFA Institute Comment Letter.
    \514\ See supra footnote 48 and accompanying text (discussing
survey conducted by Broadridge); CFA Institute Comment Letter
(discussing Broadridge survey). Asked about current shareholder
reports, for example, more than 80% of survey respondents said the
current twice-yearly delivery is ``about right.'' Specifically, 44%
said they would prefer to receive the concise shareholder reports
twice a year, 42% said they would like to receive them quarterly,
and only 13% said they would like to receive them just once a year.
    \515\ See DFIN Comment Letter.
---------------------------------------------------------------------------

    After considering comments received, we are not adopting any of the
alternative transmission requirements discussed in the proposal or
suggested by commenters for semi-annual reports. Requiring investors to
access a website to ``pull'' regulatory disclosures for their
investments would place the burden on investors to seek out information
without providing them any contemporaneous notification that updated
disclosures are electronically available. The burden of accessing the
semi-annual report would remain with the investor if notification of
the date of the website publication of the semi-annual report is only
included in the annual report. The timeliness of the ``push'' of
information to the investor on a semi-annual basis is an important
element of our current disclosure framework. The information that will
be included in the semi-annual report has been streamlined to only
include the information that we believe will be most useful and salient
to investors in assessing and monitoring their fund investments. Thus,
with respect to a transmission process that requires investors ``pull''
regulatory documents, the final rules do not incorporate any of the
alternative approaches to semi-annual report transmission that
commenters discussed.

F. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)

    We are adopting, as proposed, amendments that would rescind rule
30e-1(d). This rule provision permits a fund to transmit a copy of its
prospectus or SAI in place of its shareholder report, if either or both
of the prospectus or SAI includes all of the information that would
otherwise be required to be contained in the shareholder report. We
continue to believe that the consolidation of a fund's prospectus, SAI,
and shareholder report disclosures into a single document is
inconsistent with the layered disclosure framework we are adopting
today, and we also understand that funds rarely rely on this rule
provision in practice.\516\ The Commission did not receive any comments
directly addressing this aspect of the proposal.
---------------------------------------------------------------------------

    \516\ See Proposing Release, supra footnote 8, at section
II.H.3.
---------------------------------------------------------------------------

G. Investment Company Advertising Rule Amendments

    We are adopting amendments to the Commission's investment company
advertising rules designed to promote transparent and balanced
presentations of fees and expenses in investment company
advertisements.\517\ These amendments will apply to all investment
companies that are subject to the Commission's advertising rules,
including mutual funds, ETFs, registered closed-end funds, and
BDCs.\518\ We are adopting the amendments addressing investment company
fee and expense presentations in advertisements largely as
proposed.\519\
---------------------------------------------------------------------------

    \517\ For purposes of this release, we generally refer to the
types of investment company communications covered by amended rules
482, 156, 433, and 34b-1 as ``advertisements,'' unless otherwise
noted. The Commission's recently adopted rule amendments relating to
investment adviser advertisements did not address investment company
advertising rules. See Investment Adviser Marketing, Investment
Advisers Act Release No. 5653 (Dec. 22, 2020) [86 FR 13024 (Mar. 5,
2021)] (``IA Marketing Release'').
    \518\ As a result, for purposes of this section II.G, the term
``fund'' is not limited to mutual funds and ETFs registered on Form
N-1A. Instead, we use this term more broadly in this section to
refer to any investment company that is subject to the Commission's
investment company advertising rules, including registered closed-
end funds and BDCs.
    \519\ We are not adopting the proposed modifications to the
disclosure legend that accompanies certain investment companies'
advertisements of performance data. The proposal would have required
the legend to state that past performance is ``not a good
predictor'' of future results instead of, as is currently required,
stating that past performance ``does not guarantee'' future results.
See proposed rule 482(b)(3)(i) under the Securities Act [17 CFR
230.482(b)(3)(i)]. While no commenters specifically addressed this
part of the proposal, we believe further consideration on amending
this required legend in the context of performance disclosure in
fund advertisements is merited, and we are not adopting this aspect
of the proposed amendments to rule 482 at this time.
---------------------------------------------------------------------------

1. Requirements for Standardized Fee and Expense Figures
    To promote more consistent and transparent presentations of
investment costs in investment company advertisements, we are adopting
amendments to rules 482, 433, and 34b-1 to require that investment
company advertisements providing fee or expense figures for the
investment company include certain standardized fee and expense
figures, and that these figures must adhere to certain prominence and
timeliness requirements.\520\
---------------------------------------------------------------------------

    \520\ See amended rule 482(i)(1) under the Securities Act [17
CFR 230.482(i)(1)]; see also amended rule 433 under the Securities
Act [17 CFR 230.433(c)(3)] and amended rule 34b-1 under the
Investment Company Act [17 CFR 270.34b-1(c)(1)].
---------------------------------------------------------------------------

a. Inclusion of Required Fee and Expense Figures
    The final amendments to rule 482 will require that investment
company advertisements providing fee and expense figures include: (1)
the maximum amount of any sales load, or any other nonrecurring fee;
and (2) the total annual expenses without any fee waiver or expense
reimbursement arrangement (collectively, the ``required fee and expense
figures'') based on the methods of computation for a prospectus that
the fund's Investment Company Act or Securities Act registration
statement form prescribes for those figures.\521\
---------------------------------------------------------------------------

    \521\ In an expense reimbursement arrangement, the adviser
reimburses the fund for expenses incurred. In a fee waiver
arrangement, the adviser agrees to waive a portion of its fee in
order to limit fund expenses.
---------------------------------------------------------------------------

    Because we believe these are important figures for assessing the
fees and expenses of fund investments, any advertisement presenting fee
and expenses figures must include these items. These requirements,
however, would apply only to investment company advertisements that
include fee and expense figures, and therefore an advertisement would
not need to include the required fee and expense figures if it only
included general, narrative information about fee and expense
considerations and did not include any numerical fee or expense
amounts.\522\ Similarly, if an investment company does not present
total annual expense figures in its prospectus, the final amendments
addressing the required fee and expense figures would be inapplicable.
For example, the registration statement forms for variable insurance
contract separate accounts do not require that total annual expense

figures be presented, and therefore, we understand that total annual
expense figures are not presented in variable insurance contract
prospectuses.\523\
---------------------------------------------------------------------------

    \522\ Similar to associated prospectus requirements, if an
advertisement covers only a subset of a fund's share classes, the
advertisement could provide the required fee and expense information
for those classes only. See, e.g., Instruction 1(e) to Item 3 of
current and amended Form N-1A. An advertisement might, for example,
only refer to the fund's fees and expenses in the context of the
disclosure required by amended rule 482(b)(1), which requires a
statement advising an investor to consider the investment
objectives, risks, and charges and expenses of the fund carefully
before investing. Further, amended rule 482(i) would not apply to
advertisements that provide the disclosure required by current rule
482(b)(3)(ii), but otherwise contain no other fee or expense
figures.
    \523\ See, e.g., CAI Comment Letter; IRI Comment Letter; Comment
Letter of Anonymous (Oct. 27, 2020) (``Anonymous Comment Letter'').
---------------------------------------------------------------------------

    We designed the requirements for standardized fee and expense
figures to promote consistent fee and expense computations across
investment company advertisements, particularly within the same fund
category, and to facilitate investor comparisons. We are requiring
consistency with prospectus requirements because, like a fund's summary
or statutory prospectus, advertisements are often designed for
prospective investors and may influence an investment decision.
    The final amendments we are adopting to rules 34b-1 and 433
incorporate rule 482's requirements for required fee and expense
figures.\524\ These amendments will help ensure that the same fee and
expense-related requirements are applied consistently across registered
investment company and BDC advertisements and sales literature.\525\ As
a result, regardless of whether an advertisement is in the form of a
rule 482 advertisement or rule 34b-1 supplemental sales literature, or
whether a registered closed-end fund or BDC advertisement uses rule 482
or rule 433 for a free writing prospectus, the advertisement would be
subject to the same requirements regarding fee and expense
information.\526\
---------------------------------------------------------------------------

    \524\ See amended rule 34b-1(c). The amendments to rule 34b-1
will apply to any registered investment company or BDC
advertisement, pamphlet, circular, form letter, or other sales
literature addressed to or intended for distribution to prospective
investors in connection with a public offering (collectively,
``sales literature'') that includes fee and expense figures (and
where the investment company presents total annual expense figures
in its prospectus). The current provisions of rule 34b-1, which
largely relate to performance information, will continue to apply
only to sales literature that is required to be filed with the
Commission by section 24(b) of the Investment Company Act. See also
amended rule 433(c)(3).
    \525\ The amendments to rule 34b-1 apply, for example, to sales
literature that is excluded from the definition of ``prospectus'' in
section 2(a)(10) of the Securities Act and thus is not subject to
rule 482. See also supra section I.A.4 (discussing the scope of
communications that amended rules 482, 34b-1, and 433 address).
    \526\ See Proposing Release, supra footnote 8, at paragraphs
accompanying nn.679-681.
---------------------------------------------------------------------------

    The comments that the Commission received about the proposed
investment company advertising rule amendments were mixed. Some
commenters provided some general reactions supporting the proposed
advertising rule amendments, and others expressed concerns about the
proposed rules' scope. Commenters also addressed the interaction
between the proposed amendments and current FINRA requirements
regarding communications with the public, as those requirements address
fee and expense information in certain investment company
advertisements.
Comments Expressing General Support for Proposed Inclusion of Required
Fee and Expense Figures
    Several commenters stated that the proposed investment company
advertising rule amendments should help investors make more informed
investment decisions by more easily comparing costs among various
funds.\527\ Certain commenters also supported the application of those
proposed amendments to all types of registered investment companies and
BDCs.\528\
---------------------------------------------------------------------------

    \527\ See Better Markets Comment Letter; Consumer Federation of
America II Comment Letter; John Hancock Comment Letter.
    \528\ See Consumer Federation of America II Comment Letter; John
Hancock Comment Letter.
---------------------------------------------------------------------------

Comments Addressing FINRA's Communications Rules
    Some commenters expressed broad-based concerns about the scope of
the proposed amendments. While these commenters shared the investor
protection concerns that underlie the proposed advertising rule
amendments, they supported narrowing of the scope of the proposed
amendments, and also questioned the need for the proposed amendments in
light of FINRA's current requirements that address communications with
the public.\529\
---------------------------------------------------------------------------

    \529\ See supra footnote 60 and accompanying text; see also,
e.g., Fidelity Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    Some commenters discussed the similarities between the requirements
for standardized fee and expense figures in the proposed amendments and
the requirements that FINRA rule 2210(d)(5) imposes on fee and expense
presentations in retail communications and correspondence that present
non-money market fund performance data.\530\ Specifically, those
commenters discussed that, like the FINRA rule, the Commission's
proposed rules would require a fund whose advertisements include fee
and expense figures to include in such advertisements: (1) the fund's
maximum sales charge; and (2) the total annual fund operating expense
ratio, gross of any fee waivers or expense reimbursements (i.e.,
ongoing annual fees).\531\ Those commenters, nevertheless, recognized
that there were key differences in scope between the proposed
amendments to the investment company advertising rules and FINRA rule
2210(d)(5).\532\
---------------------------------------------------------------------------

    \530\ See Fidelity Comment Letter and ICI Comment Letter; see
also supra paragraph accompanying footnotes 59-60.
    \531\ FINRA rule 2210(d)(5). This provision only applies to
retail communications and correspondence that present non-money
market fund open-end management investment company performance data
as permitted by rule 482 and rule 34b-1.
    \532\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Commenters observed that the Commission's proposed amendments would
apply to all investment company advertisements that include fee and
expense figures, while FINRA's rule applies only to retail
communications and correspondence that present the performance of non-
money market funds.\533\ These commenters maintained that the proposed
advertising amendments' reach to institutional investors was neither
necessary nor warranted. One commenter stated that after ``careful
consideration and rulemaking,'' FINRA developed its rules governing
communications with the public by creating differing standards for
retail and institutional communications.\534\ Another commenter
asserted that FINRA has the more appropriate rule structure to govern
investment company advertising, and also argued that FINRA rule
2210(d)(5) provides greater flexibility for communications aimed at
institutions by distinguishing between sophisticated institutional
investors and retail investors who require greater protection.\535\ A
commenter also observed that FINRA rule 2210(d)(5) has been in effect
for many years and that the vast majority of advertisements concerning
fee information are filed with and reviewed by FINRA staff.\536\

The commenter suggested that, if FINRA and the Commission agree such an
approach would be appropriate, FINRA could expand coverage of its
communications rules in more tailored ways that would recognize the
``fundamental'' differences between retail communications and
institutional communications.\537\
---------------------------------------------------------------------------

    \533\ See Fidelity Comment Letter; ICI Comment Letter.
    \534\ Fidelity Comment Letter; FINRA Rule 2210(a)(3) defines an
institutional communication as any written (including electronic)
communication that is distributed or made available only to
institutional investors, but does not include a member's internal
communications. FINRA Rule 2210(a)(5) defines a retail communication
as a written communication (including electronic) that is
distributed or made available to more than 25 retail investors
within any 30-day calendar period. FINRA Rule 2210(a)(2) defines
correspondence as any written (including electronic) communication
that is distributed or made available to 25 or fewer retail
investors within any 30 calendar-day period.
    \535\ See ICI Comment Letter; see also Fidelity Comment Letter.
    \536\ Fidelity Comment Letter; see rule 24b-3 under the
Investment Company Act [17 CFR 270.24b-3] (deeming, in part, any
advertisement or other sales literature intended for distribution to
prospectus investors to be filed with the Commission for purposes of
section 24(b) of the Investment Company Act [15 U.S.C. 80a-24(b)]
upon filing with a national securities association that has rule
providing standards for the investment company advertising practices
of its members and has established and implemented procedures to
review that advertising).
    \537\ Fidelity Comment Letter.
---------------------------------------------------------------------------

    Apart from the suggestion to narrow the scope of the proposed
amendments to exclude institutional investors, commenters more
fundamentally questioned the need for the proposed amendments. One
commenter recommended that the Commission not adopt the proposed
advertising rules because ``the robust SEC advertising rules and FINRA
rule 2210 more than suffice to inform investors of the fees and costs
of investing.'' \538\
---------------------------------------------------------------------------

    \538\ ICI Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we are adopting the amendments as
proposed. We agree FINRA has an important investor protection role that
it accomplishes, in part, through its review and regulation of certain
communications of its member broker-dealers.\539\ For example, FINRA
rule 2210(d)(5) references the Commission's investment company
advertising rules, and the Commission's investment company advertising
rules recognize FINRA's review of investment company
advertisements.\540\ Nonetheless, FINRA rule 2210(d)(5)'s requirements
apply only to the disclosure of fees and expenses in retail
communications and correspondence that present performance data of
open-end funds that are not money market funds. By contrast, our
advertising rule amendments will address the disclosure of fees and
expenses in the advertisements not only for open-end funds that include
fee and expense figures, but also for closed-end funds and BDCs that
include these figures.\541\
---------------------------------------------------------------------------

    \539\ See, e.g., Fidelity Comment Letter and ICI Comment Letter.
    \540\ See, e.g., FINRA rule 2210(d)(5); amended rule 482 under
the Securities Act [17 CFR 230.482] and rule 24b-3 under the
Investment Company Act [17 CFR 270.24b-3]; see also, e.g., rule
497(i) under the Securities Act [17 CFR 230.497(i)] (providing, in
part, that an investment company advertisement deemed to be a
section 10(b) prospectus under rule 482 is considered to be filed
with the Commission upon the filing of that advertisement with
FINRA).
    \541\ See supra footnotes 522-523.
---------------------------------------------------------------------------

    Further, the Commission's investment company advertising rules are
based, in part, on the Commission's broad investor protection statutory
mandate to help ensure that an investor's evaluation of fund shares is
based on adequate and accurate information that is fairly
presented.\542\ That statutory mandate applies to all investors
regardless of the investor's level of investment sophistication,
regardless of the distribution channel (e.g., a broker-dealer does not
have to be involved in the communication), and regardless of the type
of registered investment company or BDC in which the investor invested.
For example, our current investment company advertising rules'
requirements with respect to performance disclosure do not distinguish
between retail and institutional investors, and it would be
inconsistent with our current approach to build in such a distinction
with regard to the presentation of fees and expenses in investment
company advertisements. Consistent with our statutory mandate,
therefore, the amendments to our advertising rules generally apply to
any registered investment company or BDC advertisement that presents
fee and expense figures. This enhanced standardization of fee and
expense presentations that will be promoted by the advertising
amendments may assist investors and other market participants in
comparing investment products, as the fees and expense presentation
requirements will not vary among the type of registered investment
company or BDC advertisement. In addition, the enhanced standardization
may assist institutional investors, including institutional investors
representing 401(k) retirement plans, with their understanding of the
fees and charges assessed by the funds in which their plans may invest.
---------------------------------------------------------------------------

    \542\ 15 U.S.C. 80a-1-1(b)(1).
---------------------------------------------------------------------------

    Furthermore, we disagree that our amendments are not necessary or
warranted, in light of existing FINRA rules. As discussed above, the
scope of the Commission's investment company advertising rules is
broader than FINRA rule 2210(d)(5), and the Commission's rules would
apply to issuer communications regardless of whether a broker-dealer is
involved in the communication. In addition, the advertising rule
amendments are not inconsistent with FINRA's rules. Under FINRA rules,
all member communications--whether correspondence, retail
communications, or institutional communications, and whether they apply
to registered investment companies or BDCs--must be fair and balanced
and not misleading.\543\ FINRA has similarly published regulatory
notices that provide guidance on fee-related discussion in
communications with the public that may mislead investors.\544\ Both
the Commission's investment company advertising rules, which address
consistency and clarity in investment company advertisements' fee and
expense presentations, and FINRA's communication rules, further the
goal of preventing misleading investment company fee and expense
presentations by promoting transparent presentations of investment
costs in investment company advertisements.\545\
---------------------------------------------------------------------------

    \543\ See, e.g., FINRA rule 2210(d)(1)(A); see supra footnote 60
(regarding the application of FINRA rule 2210 to BDCs).
    \544\ FINRA Regulatory Notice 13-23; NASD Notice to Members 06-
48 (discussing, in part, the requirement that certain mutual fund
performance sales materials disclose (1) the standardized
performance mandated by SEC rules and (2) to the extent applicable,
the maximum deferred sales charge or the maximum deferred sales
charge imposed on purchases and (3) the expense ratio, gross of any
fee waivers and expense reimbursements); NASD Regulatory &
Compliance Alert (Winter 2001) (interpreting NASD Rule 2210 (now,
FINRA Rule 2210) as requiring member communications that present
variable life insurance performance to prominently disclose the
significant impact that fees have on such performance); and NASD
Regulatory & Compliance Alert (Fall 1994) (alerting members that for
investment companies that have a front-end sales load, that all
advertisements and supplemental sales literature containing an
investment company ranking must disclose, in part, whether the
ranking takes sales charges into account).
    \545\ See, e.g., Morningstar Comment Letter (applauding the
Commission for better aligning the investment company advertising
rules with FINRA rules 2210 and 2241).
---------------------------------------------------------------------------

b. Requirements Addressing Prominence, Fee Waivers and Expense
Reimbursements, and Timeliness in Standardized Fee and Expense Figures
    The final amendments, like the proposed amendments, also
incorporate prominence requirements for fee and expense figures that
appear in investment company advertisements.\546\ The final amendments
will permit investment company advertisements to include other figures
regarding a fund's fees and expenses in addition to the required fee
and expense figures that the final rules prescribe. Those
advertisements, however, will have to present the required fee and
expense figures at least as prominently as any other included fee and
expense figures. For example, under the final amendments, an
advertisement could include a fund's fees and expenses net of certain
amounts, such as a fee waiver or expense reimbursement arrangement, as
we understand some fund advertisements do today. An advertisement,
however, could not present the net figure more prominently

than the required fee and expense figures.
---------------------------------------------------------------------------

    \546\ See amended rules 482(i)(1) and 433(c)(3) under the
Securities Act; Proposing Release, supra footnote 8, at section
II.I; see also amended rules 156 and 34b-1(c)(1)(i) under the
Investment Company Act.
---------------------------------------------------------------------------

    One commenter addressed the proposed prominence requirements. That
commenter supported allowing investment company advertisements to
include other figures regarding a fund's fees and expenses as long as
the advertisement presents the required fee and expense figures at
least as prominently as any other included fee and expense
figures.\547\
---------------------------------------------------------------------------

    \547\ Consumer Federation of America II Comment Letter.
---------------------------------------------------------------------------

    We are adopting the prominence requirements for investment company
fee and expense figures in advertisements, as proposed. The Commission
continues to believe this requirement will protect investors by
ensuring that standard fee and expense figures are prominently featured
in the advertisement so the investor can understand better how other
fee and expense presentations, including a presentation of the fund's
net expenses, may relate to the investor's investment costs.
    In addition, the final amendments require advertisements that
include a fund's total annual expenses net of fee waiver or expense
reimbursement arrangement amounts also to include the expected
termination date of the arrangement.\548\ We received no comments on
this requirement, and we are adopting it as proposed. We believe this
requirement will help investors better understand how a fee waiver or
expense reimbursement arrangement may affect their investment costs by
providing information about how long the arrangement will likely be in
place (including that it may be terminated at any time).\549\
---------------------------------------------------------------------------

    \548\ See amended rule 482(i)(2); Proposing Release, supra
footnote 8, at section II.1.
    \549\ This also is similar to information that funds generally
must include in their prospectuses when including total annual
expenses net of a fee waiver or expense reimbursement arrangement.
See Instruction 3(e) to Item 3 of current and amended Form N-1A;
Instruction 4(b) to Item 3 of current and amended Form N-1A;
Instruction 15(e) to Item 4 of Form N-3; Instruction 17 to Item 4 of
Form N-4.
---------------------------------------------------------------------------

    Finally, as proposed, the final amendments include a timeliness
requirement for fee and expense information in investment company
advertisements.\550\ The timeliness requirement applies to fee and
expense figures as well as to relevant narrative information. Fee and
expense information will need to be as of the date of the fund's most
recent prospectus or, if the fund no longer has an effective
registration statement under the Securities Act, as of its most recent
annual report.\551\ A fund will, however, be able to provide more
current information, if available. The Commission received two comments
about the proposed timeliness requirement, and each commenter supported
the proposed requirement so funds could not use stale or outdated
information in their advertisements.\552\
---------------------------------------------------------------------------

    \550\ See amended rule 482(j); Proposing Release, supra footnote
8, at section II.I.
    \551\ In the case of a new fund that does not yet have an
effective registration statement, fee and expense information will
need to be as of the date of the fund's most recent prospectus filed
with the Commission. See amended rule 482(j).
    \552\ Consumer Federation of America II Comment Letter; John
Hancock Comment Letter.
---------------------------------------------------------------------------

    We are adopting the timeliness requirement, as proposed. The
Commission continues to believe it is appropriate to include a
timeliness requirement designed to protect investors by preventing
investment company advertisements from including stale, outdated
information about a fund's fees and expenses. The final amendments will
require, for instance, a registered open-end fund maintaining an
effective Securities Act registration statement on Form N-1A to provide
its maximum sales load (or other nonrecurring fee) and gross total
annual expenses, as of the date of the fund's most recent prospectus.
As another example, a registered closed-end fund including fee and
expense figures in a rule 482 advertisement, which presents total
annual expense figures in its prospectus but does not maintain an
effective Securities Act registration statement, will need to provide
its gross total annual expenses, as of the date of the fund's most
recent annual report.\553\ Each example demonstrates how the final
amendments protect investors by helping to ensure that a fund presents
fee and expense figures in its advertisements that are reasonably
current, which in turn helps to ensure that these figures are not
misleading.
---------------------------------------------------------------------------

    \553\ Under these circumstances, the registered closed-end fund
will not have a maximum sales load to report in its advertisement
because it does not have an effective Securities Act registration
statement and cannot presently sell the fund's securities. The
registered closed-end fund's gross total annual expenses will be
computed using the method in Item 3 of Form N-2.
---------------------------------------------------------------------------

2. Materially Misleading Statements About Fees and Expenses in
Investment Company Sales Literature
    The final amendments to rule 156 address statements and
representations about a fund's fees and expenses that could be
materially misleading.\554\ Specifically, the final amendments provide
that representations about fees or expenses associated with an
investment in a fund could be misleading because of statements or
omissions involving a material fact, including situations where
portrayals of the fees and expenses associated with an investment in
the fund omit explanations, qualifications, limitations, or other
statements necessary or appropriate to make the portrayals not
misleading. We are adopting these amendments as proposed.\555\
---------------------------------------------------------------------------

    \554\ Amended rule 156(b)(4).
    \555\ See Proposing Release, supra footnote 8, at section II.I.
---------------------------------------------------------------------------

    Some commenters stated they share the Commission's expressed
concern about funds that market themselves as ``zero expense'' or ``no
expense funds'' without mentioning other costs investors would incur
when investing in the fund.\556\ These commenters expressed support for
the proposed amendments to rule 156. Another commenter, however,
suggested that the proposed amendments were ``unnecessary'' in light of
FINRA rule 2210(d)(1)(A), which requires that communications be based
on the principles of fair dealing and good faith and prohibits
omissions of any material fact that, in light of the context of the
material presented, would cause the communication to be
misleading.\557\ This commenter asserted that the proposed amendments
would require funds to include even more fee and expense information in
their sales literature than in their prospectuses (e.g., securities
lending costs). Alternatively, the commenter suggested that if the
Commission were to adopt the proposed amendments, it should provide
guidance that the amendments would not (1) preclude a fund from
omitting non-material information relating to fees and expenses from
sales literature; or (2) require that sales literature include
disclosures that funds do not presently include their prospectus fee
table presentations.\558\
---------------------------------------------------------------------------

    \556\ Consumer Federation of America II Comment Letter; CFA
Institute Comment Letter.
    \557\ ICI Comment Letter.
    \558\ Id.; see also infra paragraph accompanying footnote 561.
---------------------------------------------------------------------------

    We agree rule 156 broadly prohibits the use of materially
misleading sales literature in connection with the offer or sale of
security issued by an investment company, and FINRA rule 2210(d)(1)(A)
requires that communications be based on the principles of fair dealing
and good faith and not be misleading. The amendments to rule 156,
however, are designed to protect investors by specifically addressing
practices that could lead to materially misleading representations
about fees and charges. As funds are increasingly marketed on the basis
of costs, we remain concerned that investment companies and

intermediaries may, in some cases, be incentivized to understate or
obscure the costs associated with a fund investment.\559\ Rule 156
addresses the types of information in investment company sales
literature that could be misleading for purposes of the federal
securities laws, including section 17(a) of the Securities Act and
section 10(b) of the Exchange Act and rule 10b-5 thereunder. The
amendments to rule 156 will specify certain pertinent factors that
could be considered to determine whether or not a particular
representation is materially misleading, and are designed to address,
for example, the Commission's concerns about funds that market
themselves as ``zero expense'' or ``no expense funds'' without
mentioning other costs investors would incur when investing in the
fund.
---------------------------------------------------------------------------

    \559\ See Proposing Release, supra footnote 8, at section II.I.
---------------------------------------------------------------------------

    The additional factors are designed to assist investment companies
and their intermediaries, including FINRA members, when they consider
whether a presentation of fee and expense information in investment
company sales literature is materially misleading under Commission
rules. The factors also could assist such intermediaries when they
consider whether a presentation of fee and expense information in
investment company sales literature is materially misleading under any
other principles-based rule regarding investment company sales
literature to which such intermediaries may be subject, such as FINRA
rule 2210(d)(1)(A).
    Consistent with the current framework in rule 156, whether a
particular description, representation, illustration, or other
statement involving a fund's fees and expenses is materially misleading
depends on evaluation of the context in which it is made.\560\ Under
the amendments to rule 156 that we are adopting, a fund could,
therefore, determine not to include certain information regarding fees
and charges from sales literature if, based on an evaluation of the
context of the fees and charges presentation, the omission of that
information would not be materially misleading.\561\ In such cases, a
fund may determine not to include in its sales literature expenses that
do not appear in the fund's prospectus fee table, such as expenses
related to its securities lending activities or other non-material
information regarding fees and expenses.
---------------------------------------------------------------------------

    \560\ See amended rule 156(b).
    \561\ See supra footnotes 557-558 and accompanying text.
---------------------------------------------------------------------------

    In addition, like current rule 156, the final amendments will apply
to all investment company sales literature, regardless of whether the
investment company's prospectus contains total annual expense
figures.\562\ We are not limiting the scope of the amendments to rule
156 to a subset of investment companies because our concerns regarding
materially misleading statements about fees and expenses are not
limited to certain types of investment companies. For example,
depending on the facts and circumstances, it may be materially
misleading for a variable contract advertisement to provide the current
range of fees and charges that could be assessed without also
indicating the maximum range of those fees and charges that may be
assessed. Our investment company advertising rule amendments are
designed to work together to promote balanced and transparent
presentations of fees and expense information in all investment company
sales literature.
---------------------------------------------------------------------------

    \562\ See amended rule 156(b).
---------------------------------------------------------------------------

3. Additional Suggested Amendments to Investment Company Advertising
Rules
    Some commenters suggested expansion of the proposed amendments to
address other topics. One commenter recommended that the Commission
expand the proposed amendments to require that the use of third-party
ratings in an investment company advertisement not be misleading and be
current.\563\ That commenter suggested that the fund should specify the
information on which the rating is based and that the rating should be
representative of the fund and share class being advertised. In
addition, the commenter recommended that the Commission address the
illustration of synthetic performance before fund inception. The
commenter stated that new funds seeking to illustrate synthetic
performance should only be able to do so when these funds are related
in specific ways to another registered fund.\564\ Another commenter
similarly requested, without discussion, that the Commission codify
staff guidance regarding predecessor fund performance.\565\ Further, a
commenter suggested that the Commission require a single, all-inclusive
number showing all the fees that an investor could expect to pay. That
commenter, however, recognized that such a ``bottom-line'' number may
not be feasible.\566\ Finally, a different commenter suggested that the
Commission amend the proposal to address AFFE disclosure in investment
company advertisements.\567\ These suggestions were generally beyond
the scope of this rulemaking, which is focused on the presentation of
fund fees and expenses in investment company advertisements. Because we
continue to consider changes to open-end funds' prospectus fee table,
including the proposed changes to AFFE disclosure, we are not
addressing the commenter's suggestion regarding AFFE in investment
company advertisements at this time.\568\
---------------------------------------------------------------------------

    \563\ See Morningstar Comment Letter (suggesting further
integration between the SEC's advertising rules and FINRA rule 2241,
which addresses research analysts and research reports).
    \564\ Morningstar Comment Letter.
    \565\ Ubiquity Comment Letter.
    \566\ CFA Institute Comment Letter.
    \567\ Cornell Law School Comment Letter.
    \568\ See supra section I.B.2.
---------------------------------------------------------------------------

H. Inline XBRL Data Tagging

    In a change from the proposal, we are adopting requirements for
funds to tag the shareholder report contents in a structured, machine-
readable data language, which will make shareholder report disclosure
more readily available and easily accessible for aggregation,
comparison, filtering, and other analysis. Specifically, our final
rules require funds to tag the disclosures in Inline XBRL in accordance
with rule 405 of Regulation S-T and the EDGAR Filer Manual.\569\ The
use of Inline XBRL will allow retail investors and other market
participants to use automated analytical tools to extract the
information sought wherever it may be located within a filing.\570\
---------------------------------------------------------------------------

    \569\ See General Instruction C.4 to Form N-CSR; General
Instructions C.3.(g)(iii) and (iv) to Form N-1A; 17 CFR
232.405(b)(2)(i).
    \570\ The Commission has an open source Inline XBRL Viewer that
allows the user to make an Inline XBRL data human-readable and
allows filers to more readily filter and identify errors. Anyone
with a recent standard internet browser can view any Inline XBRL
filing on EDGAR at no cost. More information about the Commission's
Inline XBRL Viewer is available at https://www.sec.gov/structureddata/osd-inline-xbrl.html. Studies suggest XBRL
requirements increase the information content of prices, reduce the
informational advantages held by insiders over public investors,
heighten the relevance, understandability, and comparability of
financial information for non-professional investors, and enhance
the reports and recommendations published by financial analysts,
thereby indirectly benefitting retail investors for whom such
analysts represent a significant source of investment information.
See Proposing Release, supra footnote 8, at n.852.
---------------------------------------------------------------------------

    Funds are currently subject to structured data requirements for
certain aspects of their disclosure and reporting. In 2009, the
Commission adopted rules requiring operating company financial
statements and mutual fund risk/return summaries to

be submitted in XBRL entirely within an exhibit to a filing.\571\ In
2018, the Commission adopted modifications to these requirements by
requiring issuers to use Inline XBRL to reduce the time and effort
associated with preparing XBRL filings and improve the quality and
usability of XBRL data for investors.\572\ The Commission has also
adopted requirements for most registered investment companies to file
monthly reporting of portfolio securities on a quarterly basis, in a
structured data language.\573\ Much of this information is publicly
available as structured data on the Commission's website at
www.sec.gov.
---------------------------------------------------------------------------

    \571\ Interactive Data to Improve Financial Reporting,
Securities Act Release No. 9002 (Jan. 30, 2009) [74 FR 6776 (Feb.
10, 2009)] as corrected by Securities Act Release No. 9002A (Apr. 1,
2009) [74 FR 15666 (Apr. 7, 2009)]; Interactive Data for Mutual Fund
Risk/Return Summary, Investment Company Act Release No. 28617 (Feb.
11, 2009) [74 FR 7748] (Feb. 19, 2009)]).
    \572\ Inline XBRL Filing of Tagged Data, Investment Company Act
Release No. 33139 (June 28, 2018) [83 FR 40846, 40847 (Aug. 16,
2018)]. Inline XBRL allows filers to embed XBRL data directly into
an HTML document, eliminating the need to tag a copy of the
information in a separate XBRL exhibit. Id. at 40851.
    \573\ See Investment Company Reporting Modernization Final
Rules, supra footnote 9; see also Amendments to the Timing
Requirements for Filing Reports on Form N-PORT, Investment Company
Act Release No. 33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)].
Money market funds must report portfolio information on Form N-MFP.
See MMF Release, supra footnote 346.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission specifically discussed the
alternative of requiring information filed on Form N-CSR to be tagged
in Inline XBRL format and requested comment on this option.\574\ The
Commission discussed the potential benefits of tagging some or all of
Form N-CSR--including the streamlined shareholder report--in Inline
XBRL. The Commission stated such a requirement could, for example,
benefit investors by enabling efficient retrieval, aggregation and
analysis of information of information in Form N-CSR and by
facilitating comparisons across funds and time periods. While an Inline
XBRL tagging requirement was not proposed, the Commission sought
comment on whether some or all of Form N-CSR should be tagged using
Inline XBRL or some other structured machine-readable format and
whether certain parts of the tailored shareholder report should be
tagged.
---------------------------------------------------------------------------

    \574\ See Proposing Release, supra footnote 8, at sections
III.E.8. and III.E.9; see also Proposing Release, supra footnote 8,
at section II.B.2.B (requesting comment on whether the funds should
be required to submit interactive data files to the Commission using
XBRL containing their expense examples in fund annual reports).
---------------------------------------------------------------------------

    Commenters who addressed this discussion generally supported
tagging all or certain parts of the information filed on Form N-CSR
using a structured data language.\575\ Some commenters advocated an
expansive tagging approach, either expressly or implicitly supporting
all of the shareholder report contents, as well as all of the Form N-
CSR disclosure items, to be tagged.\576\ One commenter observed if
information in the streamlined shareholder report were tagged, fund
companies, broker-dealers, and others could create personalized and
interactive experiences by, for example, using the tagged data to
populate email templates with information that is ``ingested'' from
filings made with the Commission.\577\ Another commenter requested
specific sections of funds' shareholder reports to be tagged, such as
performance information.\578\ In addition, some commenters addressed
the particular structured machine-readable data language to be used to
tag some or all of the information filed on Form N-CSR, specifically
supporting the use of Inline XBRL.\579\
---------------------------------------------------------------------------

    \575\ See, e.g., Better Markets Comment Letter; Broadridge
Comment Letter; Consumer Federation of America II Comment Letter;
Morningstar Comment Letter; Comment Letter of XBRL US (Jan. 4, 2021)
(``XBRL US Comment Letter'').
    \576\ See, e.g., Better Markets Comment Letter; Consumer
Federation of America II Comment Letter; Morningstar Comment Letter;
XBRL US Comment Letter.
    \577\ Broadridge Comment Letter.
    \578\ Morningstar Comment Letter.
    \579\ See, e.g., Broadridge Comment Letter, Morningstar Comment
Letter, and XBRL US Comment Letter. But see Abdullah Comment Letter
(suggesting that the Commission make Inline XBRL tagged data
available in a more user-friendly format, and stating that the
Commission's existing tagged data filings on EDGAR are difficult to
use).
---------------------------------------------------------------------------

    After considering these comments, we are requiring the contents of
the shareholder report to be tagged using Inline XBRL. We believe the
information in these reports is particularly salient to funds' largely
retail shareholder base, and the benefits of tagging this information
likewise will be beneficial in helping these investors, as well as
other market participants, understand funds' performance and
operations. The final rules, however, only will require that the
streamlined shareholder reports--and not other information that funds
file on Form N-CSR--to be tagged. Consistent with our objective of
including in the shareholder report the information we believe is
particularly important for retail shareholders to assess and monitor
their fund investments on an ongoing basis, we believe that tagging
this information in Inline XBRL format will provide a tool that helps
these investors (through third parties that analyze tagged information)
monitor their investments.\580\
---------------------------------------------------------------------------

    \580\ See, e.g., ICI Comment Letter (in the context of its
discussion of the proposed delivery upon request requirements for
Form N-CSR, stating that the ICI believes ``much of information in
Form N-CSR is of little or no interest to shareholders (e.g., audit
fees paid, Sarbanes-Oxley certifications, etc.)).''
---------------------------------------------------------------------------

    While tagging other information filed on Form N-CSR also could be a
useful tool for other fund investors and other market participants, we
believe a broader tagging requirement merits further consideration.
Form N-CSR is used by both open and closed-end management investment
companies and some variable annuity separate accounts to file
shareholder reports, as well as other information, with the Commission.
Broader requirements to tag other content filed on Form N-CSR, could
include further consideration of content filed by closed-end management
investment companies and some variable annuity separate accounts that
are not subject to our tailored shareholder report disclosure
requirements.
    In addition, we believe the use of Inline XBRL will promote the
benefits of tagging information in the streamlined shareholder report
more effectively than requiring a non-machine readable data language
such as ASCII or HTML. The Inline XBRL tagging requirements will enable
automated extraction and analysis of data in the shareholder reports
for retail investors and other market participants who seek to access
information about funds, both directly and through information that
intermediaries such as data aggregators and financial analysts provide.
Providing a standardized, structured data framework could facilitate
more efficient investor large-scale analysis and comparisons across
funds and across time periods.
    An Inline XBRL requirement will facilitate other analytical
benefits, such as the ability to compare/redline specific disclosures
in a shareholder report automatically against the same disclosures in
other periods, and to perform targeted assessments of specific
narrative disclosures within the shareholder report rather than
performing such assessments on an entire unstructured document. For
retail investors and other market participants, requiring funds to tag
their shareholder reports in a structured data language will both
increase the availability, and reduce the cost, of collecting and
analyzing such information, potentially increasing transparency and
mitigating the potential informational costs as compared to
unstructured disclosure.

Further, for filers, Inline XBRL can enhance the efficiency of review,
yield time and costs savings, and potentially enhance the quality of
data compared to other machine-readable standards, as certain errors
would be easier to correct because the data is also human readable.
    This aspect of our final rules is in keeping with the Commission's
ongoing efforts to implement reporting and disclosure reforms that take
advantage of the benefits of advanced technology to modernize the fund
reporting and disclosure regime and, among other things, to help
investors and other market participants better assess different funds.
The use of Inline XBRL to tag the streamlined shareholder reports also
furthers the Commission's goal of making information more readily
accessible and user-friendly in an electronic format to retail
investors as well as promoting investor engagement online.

I. Technical and Conforming Amendments

    We are adopting the proposed technical amendments to Form N-
1A.\581\ Specifically, the Commission proposed to update the current
SAI requirement to provide the age and length of service for a fund's
officers and directors to allow funds to instead disclose for each
officer and director the birth year and the year their service
began.\582\ The Commission also proposed a similar instruction for the
length of service for portfolio managers that must be disclosed in the
prospectus to permit a fund to disclose the year the portfolio
manager's service began.\583\ The Commission stated that permitting a
fund to use a static date rather than updating this information
annually will reduce a burden on funds, while providing investors
equivalent information, and we continue to believe this. The Commission
also has observed that some funds already disclose each officer's and
director's year of birth and the date the services of the officers,
directors and portfolio managers began. No commenters addressed these
proposed amendments, and we are adopting them as proposed.\584\
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    \581\ In addition to the proposed technical amendments discussed
in this section, the Commission proposed certain conforming
amendments relating to proposed rule 498B and the proposed
amendments to funds' prospectus fee disclosure. See Proposing
Release, supra footnote 8, at paragraphs accompanying nn.693-695. As
we are not adopting these aspects of the proposal at this time, we
are also not adopting the related proposed conforming amendments.
The Commission also proposed conforming amendments to withdraw
previously-adopted amendments to Form N-1A and rule 498 that became
effective on January 1, 2021. Those proposed amendments related to
rule 30e-3 legends that were required to be included in funds'
summary and statutory prospectuses. We are not adopting those
amendments because the requirement to include such legends in funds'
summary and statutory prospectuses expired on January 1, 2022. See
Rule 30e-3 Adopting Release, supra footnote 20, at amendatory
instructions 5, 6, and 16.
    \582\ See Proposing Release, supra footnote 8; see also Item
17(a)(1) of proposed Form N-1A.
    \583\ See Proposing Release, supra footnote 8; see also Item
5(b) of proposed Form N-1A.
    \584\ See Item 17(a)(1) and Item 5(b) of amended Form N-1A.
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    We are also adopting conforming edits to rule 30a-2 under the
Investment Company Act to reflect numbering revisions to Form N-CSR are
a result of the final rules we are adopting.

J. Compliance Date

    We are adopting a transition period after the effective date of the
amendments as proposed in order to allow funds adequate time to adjust
their shareholder report disclosure and transmission practices, as the
final rules will require. We received comments on this aspect of the
proposal and after consideration of commenters' views, we continue to
believe the 18-month transition period provides an appropriate amount
of time for funds to comply with the new framework.
    Certain commenters requested that we instead adopt a 24-month
transition period to allow funds additional time to adjust their
practices.\585\ We continue to believe that the transition period we
are adopting strikes the appropriate balance between allowing funds
time to adjust their practices and allowing investors and shareholders
to benefit from the new disclosure framework. We believe an 18-month
transition period is adequate for these purposes. The transition period
we are adopting is generally consistent with the transition periods
associated with other disclosure- or advertising-based amendments the
Commission has recently adopted.\586\
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    \585\ See, e.g., ICI Comment Letter; Vanguard Comment Letter;
Federated Hermes Comment Letter; John Hancock Comment Letter.
    \586\ See, e.g., Derivatives Adopting Release, supra footnote
282, at section II.L; Good Faith Determinations of Fair Value,
Investment Company Act Release No. 34128 (Dec. 3, 2020) [86 FR 748
(Feb. 10, 2021)], at section II.G.
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    A summary of the transition periods for the various aspects of the
framework follows.
     Shareholder reports and related requirements. All
shareholder reports for funds registered on Form N-1A will have to
comply with Item 27A of Form N-1A if they are transmitted to
shareholders 18 months or more after the effective date. These funds
also will have to comply with the amendments to rule 30e-1 and Form N-
CSR no later than 18 months after the effective date by, among other
things, meeting the website availability requirements for the new Form
N-CSR items. Funds' registration statements and post-effective
amendments to registration statements filed 18 months or more after the
effective date that are required to include an appropriate broad-based
securities market index must include an index that is consistent with
the final rules' new definition of a ``broad-based'' index.
     Rule 30e-3 amendments. The amendments to the scope of rule
30e-3 are effective 18 months after the effective date in order to
provide time for funds relying on rule 30e-3 to transition to the
proposed disclosure framework.
     Amended advertising rules. There will be a transition
period of 18 months after the effective date for investment company
advertisements to comply with the amendments to rules 482, 433, and
34b-1. We have not provided an additional compliance period for the
amendments to rule 156 after the amended rule is effective.
     Inline XBRL data tagging. There will be a transition
period of 18 months after the effective date for funds to comply with
the Inline XBRL data tagging amendments to rule 405 of Regulation S-T,
Form N-1A, and Form N-CSR.
     Technical amendments. Funds' registration statements and
post-effective amendments to registration statements filed following
the effective date must reflect the requirements of Item 5(b) and
17(a)(1) of amended Form N-1A.

III. Other Matters

    Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules as a ``major rule''
as defined by 5 U.S.C. 804(2). If any of the provisions of these rules,
or the application thereof to any person or circumstance, is held to be
invalid, such invalidity shall not affect other provisions or
application of such provisions to other persons or circumstances that
can be given effect without the invalid provision or application.

IV. Economic Analysis

A. Introduction

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 3(f) of the Exchange Act, section 2(b) of the
Securities Act, and section 2(c) of the Investment Company Act state
that when the Commission is engaging in rulemaking under such

titles and is required to consider or determine whether the action is
necessary or appropriate in (or, with respect to the Investment Company
Act, consistent with) the public interest, the Commission shall
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors. Further,
section 23(a)(2) of the Exchange Act requires the Commission to
consider, among other matters, the impact such rules will have on
competition and states that the Commission shall not adopt any rule
that will impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The following
analysis considers, in detail, the potential economic effects that may
result from the rule amendments, including the benefits and costs to
investors and other market participants as well as the broader
implications of the rule amendments for efficiency, competition, and
capital formation.
    The rule amendments will affect the provision of information by
funds to investors. Under the rule amendments, funds will provide
shareholders with more concise and visually engaging shareholder
reports that highlight key information, including fund expenses,
performance, and holdings.\587\ The rule amendments will also affect
how funds transmit shareholder reports. Under the rule amendments,
funds registered on Form N-1A will not be permitted to send notices
regarding the online availability of shareholder reports in reliance on
rule 30e-3. Instead, funds will transmit the more concise shareholder
report in full.\588\ Through a layered disclosure approach, additional
information that may be of more relevance to market professionals and
some shareholders, such as fund financial statements, will be available
online and delivered in paper or electronic format upon request, free
of charge.\589\ Accessibility-related requirements will help ensure
that investors can easily reach and navigate the information that
appears online.\590\
---------------------------------------------------------------------------

    \587\ See supra sections II.A and II.B.
    \588\ See supra section II.E.
    \589\ See supra section II.C.
    \590\ See supra section II.C.2.b.
---------------------------------------------------------------------------

    Also under the rule amendments, funds will prepare and transmit to
each shareholder a separate shareholder report for each fund series and
class. Many mutual funds and ETFs are organized as single registrants
with several series (sometimes referred to as portfolios).\591\
Currently, fund registrants may prepare a single shareholder report
that covers multiple series and this contributes to the length and
complexity of shareholder reports.\592\ This rule amendment will enable
shareholders to receive information that is more concise and salient
using a consistent approach across funds in requiring that funds
transmit a report to each investor that contains only information on
the series and class of the fund in which the shareholder is
invested.\593\
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    \591\ See Proposing Release, supra footnote 8, at nn.108-110 and
accompanying text (noting that each series has its own investment
objectives, policies and restrictions and that the Federal
securities laws and Commission rules often treat each series as a
separate fund).
    \592\ See id. at text accompanying n.111 (providing examples of
how the current presentation of multiple series within a single
shareholder report may confuse shareholders); see also supra text
accompanying footnotes 8 and 29.
    \593\ See Instruction 4 to Item 27A(a) of amended Form N-1A. As
proposed, fund registrants could continue to include multiple
shareholder reports that cover different series in a single Form N-
CSR report filed on EDGAR under the final rules.
---------------------------------------------------------------------------

    In addition, under the rule amendments, funds will tag their
shareholder reports in the structured (i.e., machine-readable) Inline
XBRL data language. Currently, funds are not required to tag their
shareholder reports in Inline XBRL or any other structured data
language. This rule amendment will facilitate analysis of the
disclosures included on funds' streamlined shareholder reports,
providing informational benefits to investors.
    Finally, to improve fee and expense information that is available
to investors more generally, we are adopting amendments to the
investment company advertising rules to require that investors receive
more transparent and consistent fee and expense information.\594\ These
rule amendments will affect all registered investment company and BDC
advertisements and are not limited to open-end fund advertisements.
---------------------------------------------------------------------------

    \594\ See supra section II.G.
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    We expect the rule amendments to benefit investors by permitting
them to make more efficient use of their time and attention, and by
facilitating informed investment decisions and choice among financial
products. We expect some funds to experience lower costs of delivering
materials under the rule amendments, which may be passed on to
investors as a further benefit of the rule amendments, while other
funds may experience increased costs of delivery and other aspects of
the rule amendments, which will be a cost of the rule amendments to the
shareholders of those funds.

B. Economic Baseline and Affected Parties

1. Descriptive Industry Statistics
    The rule amendments will affect funds and investors who receive
fund disclosure and fund advertising under the current rules.\595\
Approximately 108.1 million individuals own shares of registered
investment companies, representing 62.2 million (or 47.9%) of U.S.
households. An estimated 102.6 million individuals own shares of mutual
funds in particular, representing 59.0 million (or 45%) of U.S.
households.\596\ Changes in technology have led to changes in how
investors obtain and use information from shareholder reports.\597\ In
2021, approximately 95% of households owning mutual funds had internet
access, while only 68% of these households had internet access in
2000.\598\
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    \595\ The vast majority (88%) of mutual fund shares are
estimated to be held through retail accounts. See 2022 ICI Fact
Book, supra footnote 37. Based on staff analysis of Form 13F data,
the mean institutional holding is estimated to be approximately 50%
for exchange-traded funds. We calculated ``institutional holding''
as the sum of shares held by institutions (as reported on Form 13F
filings) divided by shares outstanding (as reported in CRSP). Year-
end 2021 Form 13F filings were used to estimate institutional
ownership. We note that there are long-standing questions around the
reliability of data obtained from Form 13F filings.] See Covered
Investment Fund Research Reports, Investment Company Act Release No.
33311 (Nov. 30, 2018) [83 FR 64180, 64199 (Dec. 13, 2018), at n.223;
see also Reporting Threshold for Institutional Investment Managers,
Exchange Act Release No. 89290 (July 10, 2020) [85 FR 46016] (July
31, 2020), at n.63 (proposing certain technical amendments to Form
13F that the Commission believes may reduce filer mistakes and data
inaccuracies).
    \596\ See 2022 ICI Fact Book, supra footnote 37. Among mutual
fund-owning households, 66% held funds outside employer-sponsored
retirement accounts, with 19% owning funds only outside such plans.
    \597\ See supra section I.A.1.
    \598\ See 2022 ICI Fact Book, supra footnote 37, at Figure 7.16.
---------------------------------------------------------------------------

    Based on staff analysis of Form N-CEN filings, we estimate that, as
of December 2021, the number of funds that will be affected by the
amendments to the disclosure and transmission requirements for
shareholder reports is 11,840, including 9,396 mutual funds and 2,444
ETFs that register on Form N-1A.\599\ As of December 2021, the 9,396
mutual funds (i.e., series, or classes of series, of trusts registered
on Form N-1A) had average total net assets of $26.3 trillion and 29,046
authorized share classes.\600\ The 2,444 ETFs (i.e., series,

or classes of series, of trusts registered on Form N-1A) had average
total net assets of $5.1 trillion and 2,577 authorized share classes as
of December 2021.
---------------------------------------------------------------------------

    \599\ These estimates are based on staff analysis of Form N-CEN
filings received through December 2021.
    \600\ The estimate of the number of authorized share classes is
based on responses to Form N-CEN, Item C.2.a., and includes non-ETF
share classes of multi-class ETFs. We estimate that the average
number of classes per open-end fund series was 2.68 with a median of
2 and a maximum of 23 classes per series, based on staff analysis of
March 2022 Form N-CEN data, with two thirds (66%) of the open-end
fund series having more than one class.
---------------------------------------------------------------------------

    The scope of the final advertising rule amendments is broader than
that of the other elements of this rulemaking. The advertising rule
amendments will apply to other registered investment companies and to
BDCs, in addition to mutual funds and ETFs. As of December 2021, there
were 1,338 other registered investment companies, including 656
registered closed-end funds, 20 funds that could file registration
statements or amendments to registration statements on Form N-3, and
662 UITs.\601\ As of December 2021, there were 103 BDCs with $209.4
billion in total assets.\602\ The rule amendments will also affect
financial intermediaries and other third parties that are involved in
the distribution and use of shareholder reports and fund advertising.
We understand that most fund investors are not direct shareholders of
record, but instead engage an investment professional and hold their
fund investments as beneficial owners through accounts with
intermediaries such as broker-dealers.\603\ As a result, intermediaries
commonly distribute fund materials to beneficial owners, including
shareholder reports and advertising materials. In the case of broker-
dealers, self-regulatory organization (``SRO'') rules provide that
broker-dealer member firms are required to distribute annual reports,
as well as ``interim reports,'' to beneficial owners on behalf of
issuers, so long as an issuer (i.e., the fund) provides satisfactory
assurance that the broker-dealer will be reimbursed for expenses (as
defined in SRO rules) incurred by the broker-dealer for distributing
the materials.\604\ Based on information reported on Form BD, we
estimate that 1,366 broker-dealers sell mutual funds' shares and may
deliver shareholder reports and advertising materials that will be
affected by the rule amendments.
---------------------------------------------------------------------------

    \601\ We estimate that all registered investment companies would
be affected by the advertising rule amendments. Based on staff
analysis of Form N-CEN filings received as of December 2021, this
includes all mutual funds and ETFs; 656 closed-end funds registered
on Form N-2, with average total net assets of $356 billion; 20
variable annuity separate accounts registered as management
investment companies on Form N-3, with total assets of $277.6
billion; and 662 UITs, with total assets of $2.7 trillion (including
5 ETFs that are registered as UITs with total assets of $724
billion).
    \602\ To estimate the number of BDCs, we use data from Form 10-K
and Form 10-Q filings as of the fourth quarter of 2021. Our
estimates exclude BDCs that may be delinquent, wholly owned
subsidiaries of other BDCs, and BDCs in master-feeder structures.
    \603\ By one estimate, approximately 75% of accounts are held
through brokers and other intermediaries, excluding positions held
in employer-sponsored plans. See Rule 30e-3 Adopting Release, supra
footnote 20, at n.275.
    \604\ See, e.g., NYSE rule 465(2); NYSE rules 451(a)(1) and (2);
FINRA rule 2251(e)(1)(C); FINRA rule 2251.01.
---------------------------------------------------------------------------

2. Fund Shareholder Reports
    Funds provide information about their past operations and
activities to investors through periodic shareholder reports. Funds
transmit shareholder reports to ongoing shareholders twice-annually.
Thus, shareholders receive both a semi-annual and an annual report from
the fund. Shareholder reports provide information about a fund's
performance (in the case of an annual report), expenses, holdings, and
other matters (e.g., statements about the fund's liquidity management
program, the basis for approval of an investment advisory contract, and
the availability of additional information about the fund). The reports
also include financial statements, which include audited financials (in
the case of the annual report).
    Many mutual funds and ETFs are organized as single registrants with
several series (sometimes referred to as portfolios).\605\ Currently,
fund registrants may prepare a single shareholder report that covers
multiple series, as well as multiple share classes of each series.
---------------------------------------------------------------------------

    \605\ See supra section I.A.1.
---------------------------------------------------------------------------

    Shareholder reports can be quite long.\606\ The average length of a
shareholder report exceeds 100 pages.\607\ Based on staff analysis of
shareholder reports available on fund websites, we estimate that the
average annual report length is 134 pages and the average semi-annual
report length is 116 pages, or 87% of the average length of a fund's
annual report.\608\
---------------------------------------------------------------------------

    \606\ See supra section I.A.2.
    \607\ Under the current rules, funds are required to include the
full financial statements and financial highlights in the
shareholder report. This contributes to shareholder reports' length
and limits the ability of funds to provide concise mailings. See
Proposing Release, supra footnote 8 at n.16 and accompanying text.
    \608\ See supra footnote 34 and accompanying text.
---------------------------------------------------------------------------

    Funds must transmit the shareholder reports to shareholders and
file them on EDGAR using Form N-CSR. In addition, funds often provide
their shareholder reports on their websites. Commission rules affect
the extent to which funds publish shareholder reports on public
websites. All funds that rely on rule 498 to deliver summary
prospectuses are required to make their shareholder reports available
online at the website address identified at the beginning of the
summary prospectus. We estimate that approximately 90% of funds
currently provide their shareholder reports on their websites.\609\
Under the current rules, the information in the Edgar N-CSR filings
that is not in the fund shareholder report need not be delivered or
otherwise made available to investors online.
---------------------------------------------------------------------------

    \609\ We base this estimate on the number of filings pursuant to
rule 497(k) (``Summary prospectus filing requirements'') under the
Investment Company Act [17 CFR 230.497(k)] filed from May 2021 to
May 2022. In addition, a fund relying on rule 30e-3 is required to
make its shareholder reports publicly accessible on a website. In
the case of rule 30e-3, the shareholder report must be available at
the website address specified in the notice the fund would send to
shareholders under the rule. Funds that rely on rule 30e-3 are also
required to make their complete portfolio holdings for each quarter
available online. See also T. Rowe Price Comment Letter (expressing
the view that retirement plan participants, specifically older
participants, overwhelmingly prefer to engage electronically with
their funds and presenting survey evidence in which the preference
was held by 88 percent of Baby Boomers as well as 93 percent of
Millennials) and Fidelity Comment Letter (``elements currently
required (and that would continue to be required under the Proposal)
are routinely available to shareholders on fund websites.
Information related to performance, expenses, and graphical holdings
are all updated frequently on the internet, providing more timely
information to shareholders when making an investment decision'').
---------------------------------------------------------------------------

    Our staff has observed varying practices with respect to the use of
benchmarks by funds in disclosing their performance in the prospectus
and annual reports. Some funds include the performance of a single
benchmark index in their performance disclosure, while others include
the performance of more than one benchmark index in this
disclosure.\610\ Index providers generally charge fees for the right to
present the performance of benchmark indexes (the required appropriate
broad-based securities market index, as well as any additional
index(es) a fund chooses to include) in their disclosure documents.
These fees are not generally disclosed to the public.\611\
---------------------------------------------------------------------------

    \610\ The staff of the Office of the Investor Advocate also has
observed these varying practices with respect to the use of
benchmarks by funds. See OIAD Benchmark Study, supra footnote 53.
    \611\ Current rules do not require that funds disclose the
licensing fees that they pay to index providers separately from
other fund expenses. A 2021 study ``collect[s] the first data on the
licensing fees between index providers and ETF sponsors by reading
all ETF filings on [EDGAR]'' and found that the fees are disclosed
by ETF sponsors on a voluntary basis and that only about 10% of the
ETFs in the study disclose their licensing fees. The study presents
a ``first analysis of ETF index licensing fees,'' and despite ``this
limitation and possible selection bias,'' estimates that index-
tracking ETFs pay an index fee equal to one-third of their
management fee and that ``estimated licensing fees were 4.4 bps of
an ETF's AUM on average'' in 2019 (and, for example, State Street
``pays 3 bps of the ETF assets plus a flat fee of $600,000 per year
to S&P Dow Jones'' and Invesco QQQ Trust paying ``9 bps . . . in the
form of licensing fees to the index provider (NASDAQ), who owns the
underlying NASDAQ-100 index''). See An, et al., Index Providers:
Whales Behind the Scenes of ETFs (Jan. 28, 2022), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3855836. Because
the funds in the study are equity funds and may include a
disproportionate share of index-tracking funds (as the examples
indicate), the licensing fee data it includes may not be
representative of licensing fees that funds pay solely for purposes
of performance disclosure. See Index Industry Association Comment
Letter (stating that index providers typically charge
proportionately low fees for the merely comparative uses of an
index, such as publication of charts and graphs in a fund's
shareholder reports).

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

    Funds are not currently required to structure their shareholder
reports in Inline XBRL or any other structured, machine-readable data
language. However, funds are subject to Inline XBRL tagging
requirements for other Commission filings--specifically, for the risk/
return summary disclosure in their prospectuses.\612\
---------------------------------------------------------------------------

    \612\ See General Instruction C.3.(g) to current and amended
Form N-1A; rule 405(b)(2)(i) of Regulation S-T (17 CFR
232.405(b)(2)(i)).
---------------------------------------------------------------------------

3. Transmission of Shareholder Reports
    Under Commission rules and guidance, transmission of shareholder
reports occurs by paper or email, depending on the investor's expressed
preference. The Commission has provided guidance permitting electronic
delivery of required disclosure materials under certain
circumstances.\613\ Under this guidance, funds can transmit shareholder
reports electronically in lieu of paper if they satisfy certain
conditions relating to investor notice, access, and evidence of
delivery. Funds (or intermediaries) acting consistently with this
guidance typically obtain an investor's informed consent to electronic
delivery to satisfy the ``evidence of delivery'' condition. Fund
investors that have elected electronic delivery typically receive an
email that contains a link or a notice with a link to where the
materials are available online. One commenter on the proposal projected
a rate of digital delivery of 80%-85% in 2023 for all mutual fund and
ETF positions held in street name.\614\ One commenter estimated that
the vast majority (96 percent) of fund-company respondents to a survey
offer e-deliver of investor materials.\615\ The estimated proportion of
shareholders who elect to receive fund disclosure by email has
increased over time and varies among funds. By one earlier estimate
provided as a comment to the Fund Investor Experience RFC, the average
enrollment rate for electronic delivery was 19.35% for direct-held
positions (i.e., shares purchased directly through an account with the
fund) and 55% for beneficial positions (i.e., shares purchased through
an account with an intermediary).\616\ Based on a 2020 survey of fund
companies, one commenter on the proposal estimated that e-delivery of
shareholder reports and prospectuses to direct held accounts comprises
approximately 34% of all deliveries to those accounts.\617\ One
commenter on the proposal estimated that 24 percent of respondents on a
survey reported a positive spike in requests for e-delivery from
direct-at-fund accounts since the beginning of the COVID-19.\618\
---------------------------------------------------------------------------

    \613\ See Electronic Media 1995 Release, supra footnote 27
(providing Commission views on the use of electronic media to
deliver information to investors, with a focus on electronic
delivery of prospectuses, annual reports, and proxy solicitation
materials); Electronic Media 1996 Release, supra footnote 27;
Electronic Media 2000 Release, supra footnote 27.
    \614\ See Broadridge Comment Letter. This commenter estimated
that 73% of the shareholder reports and prospectuses were digital at
the time of the comment (inclusive of householding, e-delivery, and
account consolidations) and that this was more than twice the level
of digital delivery found among direct-held accounts.
    \615\ See ICI Comment Letter.
    \616\ See Proposing Release, supra footnote 8, at n.734 and
accompanying text.
    \617\ See Broadridge Comment Letter (citing evidence from a 2020
ICI survey).
    \618\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Funds are not permitted to provide electronic delivery unless the
fund shareholder has requested (and thus opted into) electronic
delivery.\619\ Commenters on the proposal have argued that the
enrollment rate for electronic delivery would be higher if funds were
permitted to provide electronic delivery as the default and
shareholders were permitted to opt into paper delivery on request.\620\
---------------------------------------------------------------------------

    \619\ With respect to the transmission mechanism, fund
shareholders currently receive shareholder reports in paper or
electronically, depending on their preferences. See supra section
I.A.1.
    \620\ See, e.g., T. Rowe Price Comment Letter (inertia around
shareholder requests for e-delivery when the default for electronic
delivery is opt-in rather than opt-out) and Broadridge Comment
Letter (``If the delivery default were switched from paper to
electronic, we estimate that mutual fund companies would save
between $30 million and $40 million by transmitting streamlined
shareholder reports and annual summary prospectuses electronically,
instead of by mail. This estimate assumes that a change in the
default would raise the level of digital delivery from between 80%
and 85% in 2023 to 90% instead (for all mutual fund and ETF
positions held in street name).''); see also ICI Comment Letter;
SIFMA Comment Letter; Charles Schwab Comment Letter; Federated
Hermes Comment Letter; TIAA Comment Letter.
---------------------------------------------------------------------------

    Starting in 2021, certain investment companies have been permitted
under rule 30e-3 to send a short notice that a semi-annual or annual
report is available online to shareholders instead of transmitting the
shareholder report, in order to satisfy semi-annual report transmission
requirements under rules 30e-1 and 30e-2.\621\ For example, funds have
been permitted to send a short paper notice instead of transmitting the
shareholder report in paper. Rule 30e-3 does not modify the
transmission method for shareholders who request receiving the reports
in paper or who have elected to receive the reports in electronic
form.\622\ Funds that intended to rely on rule 30e-3 before 2022 were
required to provide a notice to shareholders of this intent in their
prospectuses and shareholder reports. Under rule 30e-3, what
shareholders see when they access a shareholder report does not vary in
substance or length according to whether they access the report online
or by requesting a paper copy.\623\ The funds that rely on rule 30e-3
to transmit their shareholder reports are required to make their
shareholder reports available online (at the website address specified
in the notice the fund sends to shareholders under the rule) and to
make their complete portfolio holdings for each quarter available
online. Transmission of the report is generally less costly for funds
that choose to rely on rule 30e-3 than if they had not chosen to rely
on rule 30e-3 because printing and mailing costs are lower for a short
paper notice as opposed to a full-length report.\624\ However, to
implement the requirements of rule 30e-3, funds incurred costs to make
adjustments to their shareholder report transmission practices.\625\ We
estimate that 89% percent of funds registered on Form N-1A currently
rely on rule 30e-3, and that the same percentage of UITs

currently rely on rule 30e-3 to satisfy shareholder report transmission
obligations under rule 30e-2.\626\
---------------------------------------------------------------------------

    \621\ For a discussion of UITs that currently may rely on rule
30e-3 to satisfy their shareholder report transmission requirements
under rule 30e-2, and how the final rules address these UITs, see
supra footnotes 495-499 and accompanying paragraphs.
    \622\ Rule 30e-3 requires the fund to deliver shareholder
reports in paper to those shareholders who expressly opt in to paper
delivery. For funds that rely on rule 30e-3, other shareholders who
have not consented to electronic delivery receive a link to the
shareholder report in a paper notice from the fund.
    \623\ See supra section IV.B.2.
    \624\ Shareholders of funds that rely on rule 30e-3 may request
paper copies of the full report, which has the effect of reducing
the cost savings to funds associated with rule 30e-3.
    \625\ See, e.g., Vanguard Comment Letter; ICI Comment Letter;
John Hancock Comment Letter see also supra footnote 479 and related
text (discussing costs for funds to convert their current
shareholder report transmission processes to comply with rule 30e-
3).
    \626\ Our estimate reflects the percent of open-end funds
registered on Form N-1A that included a statement notifying
investors of their intent to rely on rule 30e-3 in annual or semi-
annual reports filed on Form N-CSR in 2020. See also Proposing
Release, supra footnote 8 at n.738 (stating that, in a June 2019
survey, the ICI found that 97 percent of member funds responding to
the survey planned to rely on rule 30e-3). We apply this same
percentage to estimate the number of UITs that rely on rule 30e-3 to
satisfy their obligations under rule 30e-2, as the Commission has
historically taken a similar estimation approach, and we have no
reason to believe this estimation approach is inappropriate. See
Rule 30e-3 Adopting Release, supra footnote 20, at section III.
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    A summary of the transmission scenarios that would occur without
the rule amendments (in the baseline), along with typical transmission
outcomes for semi-annual and annual shareholder reports (``reports''),
appears in table 6 below. As indicated, the baseline transmission
outcomes vary across funds and shareholders, according to their
expressed preferences and circumstances:

         Table 6--Transmission Scenarios for Shareholder Reports Without the Rule Amendments (Baseline)
----------------------------------------------------------------------------------------------------------------
                                      Shareholder requests      Shareholder requests      Shareholder makes no
    Fund relies on rule 30e-3?        electronic delivery          paper delivery           delivery election
----------------------------------------------------------------------------------------------------------------
Yes..............................  Email (with link to 100+   Paper mail (100+ page)    Paper notice (1 page)
                                    page report)               report                    with link to 100+ page
                                                                                report
No...............................  Email (with link to 100+   N/A\1\                    Paper mail (100+ page)
                                    page report)                                         report
----------------------------------------------------------------------------------------------------------------
Notes: 1. ``N/A'' reflects the fact that, if a fund does not rely on rule 30e-3, paper delivery of the full
  (semi-annual or annual) shareholder report is the default delivery mechanism. If the fund relies on rule 30e-
  3, however, delivery of a paper notice with a link to the online location of the shareholder report becomes
  the default, as the table indicates. As discussed above, we estimate that the report lengths for the semi-
  annual and annual reports are 116 and 134 pages, respectively.

4. Investor Use of Fund Disclosure
    The Proposing Release discussed evidence that was available to the
Commission at the time of the proposal showing that investors generally
prefer concise, layered disclosure and supporting the conclusion that
investors view funds' existing shareholder reports as too lengthy and
complicated.\627\ The feedback on investors' preferences that the
Commission received in response to the Proposing Release was consistent
with the Commission's understanding of investors' preferences that the
Proposing Release described regarding the length, format, and content
of the proposed streamlined annual report.\628\
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    \627\ See supra section I.A.3 (Evidence of Investor Preferences
Regarding Fund Disclosure). This feedback generally showed that
retail investors prefer concise, layered disclosure and feel
overwhelmed by the volume of information they currently receive,
with some individual investors specifically addressing and
supporting a more concise, summary shareholder report. See Proposing
Release, supra footnote 8, at nn.28-30 and accompanying text.
    \628\ See supra footnotes 47-51 and accompanying text; see also,
e.g., CFA Institute Comment Letter; Fidelity Comment Letter; Mutual
Fund Directors Forum Comment Letter; SIFMA Comment Letter; TIAA
Comment Letter; FS Investments Comment Letter.
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5. Fund Advertisements
    The Commission rules on investment company advertising apply to all
registered investment companies and BDCs. These rules largely focus on
how certain types of funds present their performance in advertisements.
While investment company advertising rules limit how a fund may present
its performance to promote comparability and prevent potentially
misleading advertisements, these rules generally do not similarly
prescribe the presentation of fees and expenses in advertisements.\629\
This focus reflects the Commission's understanding that investors use
information about performance to choose among funds and concern that,
absent requirements to standardize how funds present performance in
advertisements, investors may be susceptible to basing their investment
decisions on information that is inaccurate or creates an inaccurate
impression of the fund's performance.\630\
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    \629\ See supra section I.A.4.
    \630\ See Mutual Fund Sales Literature Interpretive Rule,
Investment Company Act Release No. 10915 (Oct. 26, 1979) [44 FR
64070 (Nov. 6, 1979)] (``Rule 156 Adopting Release''); Investment
Company Sales Literature Interpretive Rule, Investment Company Act
Release No. 10621 (Mar. 8, 1979) [44 FR 16935 (Mar. 20, 1979)], at
paragraph accompanying n.5.
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    In addition to the Commission rules regarding the presentation of
performance information, FINRA rules that govern member broker-dealers'
communications with the public provide an important source of
advertising requirements and guidance for investment companies.\631\ As
discussed in section I.A.4, FINRA rule 2210(d)(5), the specific
requirements of the FINRA rules for the presentation of fee and expense
information in non-money market open-end funds' communications with the
public, do not apply to closed-end fund or BDC advertisements or to
non-money market fund open-end investment company advertisements to
institutional investors. FINRA rules do not apply to investment company
advertisements where a broker-dealer is not involved in disseminating
the particular communication.\632\
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    \631\ FINRA rule 2210, ``Communications with the Public,''
includes both general and specific standards for communications with
the public, and requires non-money market fund open-end funds'
communications with the public that include performance information
to include certain specified fee and expense information, as
discussed in supra sections I.A.4 and II.G.1. See also, e.g.,
Fidelity Comment Letter and ICI Comment Letter (discussing the scope
of FINRA rule 2210).
    \632\ See paragraphs accompanying supra footnotes 530, 539-542.
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C. Benefits and Costs

    Where possible, we have attempted to quantify the benefits, costs,
and effects on efficiency, competition, and capital formation expected
to result from the rule amendments. We are providing both a qualitative
assessment and quantified estimates of the potential economic effects
of the rule amendments where feasible. As explained in more detail
below, because we do not have, and in certain cases do not believe we
can reasonably obtain, reliable quantitative evidence to use as a basis
for our analysis, we are unable to quantify certain economic effects.
For example, because the rule amendments will provide fund investors
with more tailored, concise disclosures than they currently receive, it
is possible that readership of the fund disclosures will

increase. We do not have reliable quantitative estimates of the extent
to which the use of more concise disclosure will enhance readership
compared to the baseline scenario in which funds continue to transmit
the materials that investors now receive.
    Similarly, changes in the format and content of the annual and
semi-annual reports under the rule amendments may reduce the amount of
time and effort that shareholders allocate to monitoring their fund
investments and making portfolio decisions (that is, whether to buy
additional shares, or to continue to hold or sell a fund investment).
We also do not have reliable quantitative estimates of the extent to
which the transmission of the more concise, tailored reports will
reduce the amount of time and effort investors allocate to monitoring
their fund investments or to making portfolio decisions, or the value
of that time and effort to investors. Nor do we have such estimates for
the baseline conditions, without the rule amendments. The Commission
did not receive public comment regarding the specific estimates of
benefits and costs in the Proposing Release, although it did receive
comments suggesting that certain aspects of the shareholder report
requirements would be more burdensome than the Commission estimated at
the proposal. We have adjusted the proposal's annual estimated costs to
reflect such comments and changes from the proposal (for example,
requiring class-specific shareholder reports), as well as to reflect
updated estimates of the number of affected funds and the wage
rates.\633\ In addition, in those circumstances in which we do not have
quantitative evidence, we have provided a qualitative analysis of the
economic impact of the rule amendments relative to the baseline
environment. Our inability to quantify these costs, benefits, or other
effects does not imply these effects are less significant from an
economic perspective.
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    \633\ See infra footnote 724; see also infra section V for
details on the adjustments to the cost estimates that we have made
though adjustments to the PRA cost estimates, which are expressed as
changes from the estimates in the Proposing Release in the estimated
burden hours (and related costs) associated with relevant rule
amendments.
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1. Broad Economic Considerations
    The economic analysis of the benefits and costs of the rule
amendments is based on broad economic considerations regarding fund
disclosure and fund advertising.
a. Fund Disclosure
    The rule amendments will provide fund shareholders with more
concise and more readily usable disclosures that are consistent across
funds and that highlight information that is key to retail shareholders
for the purpose of monitoring fund investments and informing portfolio
decisions, while providing layered access to other information that
shareholders now receive that may be of more relevance to market
professionals and some fund shareholders.
    Under the new approach, funds will provide shareholders with annual
and semi-annual reports that highlight key information, including fund
expenses, performance, and portfolio holdings in a format that is
consistent across funds.\634\ Funds will tag their shareholder reports
in Inline XBRL and will have flexibility to make electronic versions of
their shareholder reports more user-friendly and interactive. Funds
will be required to make other information, such as the schedule of
investments and other financial statement elements, available to
shareholders online and to deliver the information free of charge in
paper or electronically upon request in addition to providing it on a
semi-annual basis with the Commission on Form N-CSR. Shareholder
reports will contain cover page legends directing investors to websites
containing this information. Accessibility-related requirements that we
are adopting will help ensure that investors can easily reach and
navigate the information that appears online. The new shareholder
report will replace the notice that some shareholders currently receive
from open-end funds in reliance on rule 30e-3.
---------------------------------------------------------------------------

    \634\ As discussed in section II.A, supra, the final rule
amendments incorporate certain changes from the proposal to address
commenters' feedback. These changes are discussed in more detail
above. However, the final rules' layered disclosure approach mirrors
the layered disclosure approach that the proposal incorporated, and
(except as noted in section II.D supra) the content items that would
appear in the proposed shareholder report cover the same topics as
the contents that the final rules require.
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    In addition, under the new approach, funds will be required to
provide a separate shareholder report for each series and share class
of a fund. This is a change from the proposal, which would not have
required a separate shareholder report for each share class of a fund.
The effect is to provide shareholders with information that is more
concise and narrowly tailored to their specific investments in the
funds and to reduce the complexity of the disclosures that shareholders
receive. For example, shareholders who hold more than one class of a
fund will receive separate reports, instead of a single report,
although the reports may be provided in a single mailing or delivery
under the final rule.\635\
---------------------------------------------------------------------------

    \635\ See Instruction 12 to Item 27A(a) of amended Form N-1A.
---------------------------------------------------------------------------

    Under the rule amendments, funds also will provide investors with
disclosures that better enable them to make performance comparisons
among funds and between funds and other investments.
    The economic analysis of the effects of these amendments is based
in part on the comments and evidence the Commission received in
response to the Proposing Release and the Fund Investor Experience RFC
and the investor testing and surveys that are discussed in section
I.A.3 above.\636\ It is also based in part on the evidence from
academic studies that have documented potential benefits of providing
more concise and tailored disclosure.
---------------------------------------------------------------------------

    \636\ For more discussion of the comments on the Proposing
Release, see supra sections II.A-II.G.
---------------------------------------------------------------------------

    Recent academic studies have produced findings and conclusions that
are consistent with our belief that investors will benefit from more
concise and tailored disclosures under the rule amendments. Some of
these studies were the subject of comments on the Proposing Release.
For example, one commenter identified a study consistent with the
conclusion that ``high-fee funds attempt to obfuscate their high
fees.'' \637\ Another commenter identified a study of fee disclosure
reforms in Australia concluding that ``salient fee disclosure has a
material impact on investors' decisions.'' \638\
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    \637\ See Wharton Comment Letter (citing paper by Ed deHaan, et.
al, Obfuscation in Mutual Funds 72 J. Acct. & Econ. No. 2/3 (Mar.
13, 2020, revised Jul. 12, 2021), available at https://ssrn.com/abstract=3540215; see also Bruce I. Carlin, Strategic Price
Complexity in Retail Financial Markets, 91 J. Fin. Econ., 278-287
(March 2009).
    \638\ See Comment Letter of Kingsley Fong (Jan. 4, 2021) (citing