affect investment decisions? If we were to modify the fee presentation
in a way that might change a fund's fees, how should we inform
investors of the changed requirements or transition to the new
requirements in a way that minimizes investor confusion? For example,
if a fund's fee under current requirements is 0.50%, but under any new
requirements that same fund, operating in the same manner, might have a
fee of 0.75%. How can we help investors understand this change?
    228. Do investors need more information about how a fund's adviser
and its affiliates may receive compensation from a fund, either to
better understand fund costs or to understand potential conflicts of
interest? For example, some funds use securities lending agents that
are affiliated with the fund's investment adviser, which can result in
the adviser and its affiliates receiving compensation from a fund in a
way that the prospectus fee table does not reflect.\593\ As another
example, some funds use affiliated broker-dealers when transacting in
portfolio investments, which can result in the costs associated with
these transactions accruing to affiliated persons of the fund. However,
affiliated parties also could be less expensive or provide better
services than those provided by unaffiliated parties. If investors
would benefit from additional information about compensation that the
fund's adviser and its affiliates may receive from the fund, where
should this disclosure appear? Should it be quantitative or
qualitative? For instance, should funds disclose any revenue paid to
the fund's adviser or its affiliates that the fee table does not
reflect (e.g., outside of the management fee), as a percent of fund
assets or a percent of the fund's total expenses? If so, where should
this disclosure appear (e.g., in the prospectus fee table, a discussion
accompanying the table, or elsewhere)? Should a fund be permitted or
required to disclose why it selected an affiliated service provider
instead of an unaffiliated third party?
---------------------------------------------------------------------------

    \593\ See supra footnote 577.
---------------------------------------------------------------------------

    229. Do investors need additional information to help them compare
the fees and expenses of different classes of a fund, or other aspects
of a fund investment that differ between classes (e.g., fund
performance)? For instance, do investors need more information to help
them determine whether they are eligible to invest in a particular
class or to compare fees, performance, or other aspects of different
classes? If so, how should funds provide this information? How could we
help investors better understand class eligibility, particularly when a
prospectus (or shareholder report) could only cover a subset of a
fund's classes?
    230. Are there ways we could reduce complexities associated with
funds offering multiple share classes with different fee structures?
For example, should funds more clearly present their classes based on
investor eligibility? What are the challenges of such an approach?
    231. Are there ways we could facilitate an investor's ability to
calculate costs and compare different funds? For instance, are there
steps we could take to improve investors' familiarity with, or access
to, interactive calculators or fund comparison tools? \594\
---------------------------------------------------------------------------

    \594\ For example, FINRA's Fund Analyzer tool can help investors
compare the costs of different fund investments. This tool is
available at https://tools.finra.org/fund_analyzer/.
---------------------------------------------------------------------------

d. Proposed Simplified Example
    In addition, we propose to simplify the example in the fee summary.
We are proposing to modify the current narrative that precedes the
example slightly, to enhance clarity and brevity.\595\ We are also
proposing to decrease the number of time periods that the expense
example must show. While the current example shows expenses over 1, 3,
5, and 10-year periods, the proposed example would show costs over 1
year and 10 years (or 1 year and 3 years in the case of a new
fund).\596\ We believe that having fewer time periods would help to
simplify the example. At the same time, we believe that requiring a
fund to present expenses over 1 and 10 years would provide meaningful
disclosure regarding the effect of fees in both the short-term and
long-term.\597\ We understand that investors typically hold mutual fund
shares for a relatively long term. For example, one commenter estimated
that two-thirds of fund investors have owned their funds for at least
10 years, and 80% of fund investors have held their fund investments
for 5 years or more.\598\ The 10-year time frame is addressed to the
long-term nature of many fund investments. Investors wishing
information for the interim 3 and 5 year periods could find that
information in the full fee table.
---------------------------------------------------------------------------

    \595\ The current narrative states, ``This Example is intended
to help you compare the cost of investing in the Fund with the cost
of investing in other mutual funds.'' The proposed narrative states,
more simply, ``This example may help you understand the costs of
investing in the Fund.'' See supra Table 5.
     The assumptions in the proposed example relating to the amount
invested in the fund, investment return, and the fund's operating
expenses are substantively identical to those in the current form,
with slight changes designed to state them more simply. In addition,
the current form shows, first, expenses if the investor redeems
shares at the end of the period, and, second, expenses if the
investor does not redeem. The proposal reverses this order because
we believe that most investors treat these as long-term investments
and so are less likely to redeem their shares.
    \596\ Instruction 5(a) to Item 3 of proposed Form N-1A; see also
Item 3 of Form N-1A and Item 8A of proposed Form N-1A; supra Table
5.
    \597\ We are not proposing similar changes for the performance
presentation (average annual returns), see Items 4(b)(2) and
27(b)(7)(ii) of Form N-1A; Item 27A(d)(2) of proposed Form N-1A)
which, in addition, presents information over an interim period
(five years), because unlike the expense example where the fees
reflected are consistent over the period shown, performance
information changes from year-to-year, and we believe it is
important to illustrate this variability of returns over an interim
period.
    \598\ See Broadridge Comment Letter II.
---------------------------------------------------------------------------

    We considered proposing to incorporate elements of the proposed
shareholder report expense presentation into the prospectus in lieu of
simplifying the current fee example. As discussed above, the proposed
shareholder report expense presentation would disclose costs directly
deducted from the fund's assets alongside the fund's return, which in
turn would reflect direct costs as well as any performance expenses
associated with the fund's portfolio management

activities.\599\ While the shareholder report expense presentation
would not itemize these performance expenses, funds would be required
to discuss them qualitatively if material to the fund, in a footnote to
the expense presentation.\600\ In addition to helping investors
understand that a fund has performance expenses that are in addition to
a fund's direct costs, the proposed shareholder report presentation has
other benefits. For example, the shareholder report presents a fund's
fees alongside its performance to help shareholders understand how
costs and performance each affect the value of his or her investment.
---------------------------------------------------------------------------

    \599\ See supra Section II.B.2.b.
    \600\ See supra footnote 164 and accompanying text.
---------------------------------------------------------------------------

    However, unlike the shareholder report presentation, the prospectus
fee table, fee summary, and example reflect hypothetical future
expenses (i.e., forward-looking expenses). The prospectus fee
presentation--while also based on a fund's financial statements--
reflects sales loads, the expenses associated with the fund's
investments in other funds, material changes to fund expenses,
estimated expenses for new funds, and only certain fee waiver
arrangements. These additional fee elements make it difficult to import
a presentation similar to the backward-looking shareholder report
expense presentation into the prospectus. Also, a shareholder report-
type approach based on backward-looking information would be difficult
to implement for new funds with short or no performance history.
Moreover, because the proposed shareholder report presentation shows
expenses for the past fiscal year only, it would not illustrate the
long-term effect of fund fees for investors. Given these
considerations, we are not proposing to incorporate elements of the
proposed shareholder report presentation into the prospectus.
    We seek comment on the proposed simplified example, and
specifically on the following issues:
    232. Is the proposed simplified example presentation appropriate,
and would it be useful to investors? Would restricting the example to
including expense information for 1- and 10-year periods accomplish the
goal of streamlining the fee summary, while providing meaningful
disclosure? Should the simplified example include different time
periods, and if so, which ones? Is the proposal to require new funds to
present expense information for 1- and 3-year periods appropriate?
    233. Instead of providing an expense example in the prospectus that
shows estimated costs over set intervals of time based on an assumed 5%
annual return, should funds base their expense example on the fund's
actual historic performance? For example, should the expense example be
based on the fund's gross performance over the past 1, 5 and 10 years?
If so, how should funds that do not have a long-enough performance
history be treated? Would investors benefit from a presentation based
on actual rather than hypothetical investment returns? If not, why not?
    234. If we were to require using an assumed annual return, as is
the case today, would the assumed 5% annual return continue to be
appropriate? If not, what is a more appropriate assumption and why?
Should the assumption be different for different fund types? For
example, should a money market fund have a lower assumed investment
return than an equity fund? What are the benefits and drawbacks of
using a higher or lower assumed annual return?
    235. Instead of the current fee table example and the proposed
simplified example in the prospectus, should the examples more closely
resemble the expense presentation in the proposed shareholder report?
If so, how should the proposed annual report presentation be modified
to show the impact of transaction fees (such as purchase and exit
charges)? Should the presentation be based only on costs that are
directly deducted from fund assets, or all of the fees reflected in the
fee table (which may include AFFE)? How should the longer-term impact
of fees be reflected? For example, certain fund share classes may be
intended for investors with a short time horizon and have higher
ongoing annual expenses while other classes may be intended for longer-
term investors and have higher up-front charges but over the long run
may be less expensive. How should the proposed annual report
presentation be modified for use in the prospectus to help distinguish
the differences in share classes over both the short and long term? How
should new funds that do not have any performance history present an
example?
    236. Do the different presentations of fund fees and expenses in
prospectuses and shareholder reports currently contribute to investor
confusion? Would our proposed amendments to fee and expense
presentations in both documents increase, reduce, or have minimal
effect on the potential for investor confusion? How could we modify the
presentations to reduce the potential for investor confusion? For
instance, one difference is that the prospectus fee table may reflect
the costs associated with investments in other funds (i.e., AFFE) while
the annual report does not directly reflect these expenses. For
example, a fund of funds may show an expense ratio of 0.20% in its
annual report but reflect expenses of 1.00% in its prospectus fee table
because the prospectus presentation also reflects the costs associated
with investment in other funds. How can we address these differences to
minimize the potential for investor confusion?
e. Proposed Fee Summary Formatting Requirements
    We are proposing that a fund generally would not be permitted to
include footnotes and other extraneous disclosure in the fee summary.
We believe this is consistent with the goal of the proposed simplified
fee table, which is to streamline the presentation of fees and to
provide an easier-to-understand presentation with fewer data points and
a clearer picture of the total costs of investing in the fund. We are
proposing an exception if omitting a footnote would cause the
disclosure to be materially misleading such that the fees borne by
investors would be materially higher than presented in the fee
summary.\601\ For example, if a fund charges a ``fulcrum fee,'' by
which the advisory fee varies depending on the performance of the fund,
the fee in the current year could be greater than the fee reflected in
the fee summary.
---------------------------------------------------------------------------

    \601\ See proposed Instruction 1(c) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    We seek comment on the proposed fee summary formatting
requirements, and specifically on the following issues:
    237. Is it appropriate to limit the use of footnotes in the fee
summary, as proposed? Are there circumstances where footnotes would be
useful to investors that the proposed instruction would not permit?
f. New, Simplified Fee Terminology
    In addition to proposing to create the fee summary, we are also
proposing changes in some terminology that funds would use to describe
fees in the prospectus. These changes are designed to enhance the
presentation of fees and investors' understanding of these fees. The
changes we are proposing in the terminology used in the fee table would
flow through to the fee summary, as applicable. Plain language plays an
important role in investors' ability to use and understand fund
disclosures.\602\ The terminology changes we propose

are designed to be more consistent with everyday language and to
effectively communicate the nature of the fees the fund charges. Unless
otherwise discussed in this release, although we are proposing to
substitute some terms that would appear in Form N-1A and funds'
prospectuses, we intend the meaning of these terms to remain unchanged.
Below is a chart showing captions and terms that the current fee table
references, along with their replacements.\603\
---------------------------------------------------------------------------

    \602\ See Fund Investor Experience RFC, supra footnote 8, at
Section II.C.1.
    \603\ This chart shows proposed captions or terms for the fee
tables in Items 3 and 8A of proposed Form N-1A. These changes in
terminology flow through to other sections of the proposed form. See
Items 4, 12, 13, 17, 23, 26, 27A.

                                 Table 6
------------------------------------------------------------------------
Current caption or term, and Form N-  Proposed caption or term, and Form
            1A location                         N-1A location
------------------------------------------------------------------------
Shareholder Fees (Item 3)..........  Transaction Fees (Items 3 and 8A).
Annual Fund Operating Expenses       Ongoing Annual Fees (Items 3 and
 (Item 3).                            8A).
Maximum Sales Charge (Load) Imposed  Purchase Charge (Items 3 and 8A).
 on Purchases (Item 3).
Maximum Deferred Sales Charge        Exit Charge (Items 3 and 8A).
 (Load) (Item 3).
Redemption Fee (Item 3)............  Early Exit Fee (Items 3 and 8A).
Total Annual Fund Operating          Ongoing Annual Fees (Items 3 and
 Expenses (Item 3).                   8A).
Distribution [and/or Service] (12b-  Selling Fees (Item 8A).
 1) Fees (Item 3).
Fee Waiver [and/or Expense           Temporary Discount (Items 3 and
 Reimbursement] (Item 3).             8A).
Total Annual Fund Operating          [Total] Ongoing Annual Fees with
 Expenses After Fee Waiver [and/or    Temporary Discount (Items 3 and
 Expense Reimbursement] (Item 3).     8A).
------------------------------------------------------------------------

    We seek comment on the proposed fee terminology, and specifically
on the following issues:
    238. Are the proposed changes to the current terminology helpful?
Are there other terms currently used in the form that could be
simplified? Would our proposed changes in terminology contribute to
more understandable disclosure?
g. Acquired Fund Fees and Expenses
    We are also proposing to modify the current prospectus fee table
requirements by refining the scope of funds that must disclose AFFE as
a component of bottom-line annual fund operating expenses.
Specifically, the amendments we are proposing would permit funds that
invest 10% or less of their total assets in acquired funds to omit the
AFFE line item in the fee table and instead disclose the amount of the
fund's AFFE in a footnote to the fee table and fee summary. Funds that
invest more than 10% of their total assets in acquired funds would
continue to present AFFE as a line item in the prospectus fee table and
include AFFE in the bottom-line expense figure, as they do today.
    Currently, any fund that invests in acquired funds--which include
investments in other investment companies and in private funds that
would be investment companies but for sections 3(c)(1) or 3(c)(7) of
the Investment Company Act--must disclose the amount of fees and
expenses the fund indirectly incurs from these investments in the
fund's fee table.\604\ This disclosure generally appears as a separate
AFFE line item in the fee table, although a fund may reflect AFFE in
the ``other expenses'' fee table line item (without separately
identifying the AFFE amount) if AFFE does not exceed 0.01 percent, or
one basis point, of the fund's average net assets.\605\ As a result,
regardless of the size of a fund's investments in acquired funds, AFFE
currently is a component of the line items that, summed together,
produce the fund's bottom-line annual fund operating expenses (which we
propose to rename to ``total ongoing annual fees'') in its fee table.
AFFE disclosure is designed to provide investors with a better
understanding of the costs of investing in a fund that invests in other
funds, which have their own expenses that may be as high as--or higher
than--the acquiring fund's expenses.\606\ As recognized above, AFFE is
a performance expense that is not an operating cost reflected in a
fund's statement of operations. Instead, it is an indirect expense paid
by the fund to generate performance.\607\
---------------------------------------------------------------------------

    \604\ The AFFE amount is composed of the following types of fees
and expenses attributable to the fund's investment in acquired funds
over the relevant period: Each acquired fund's total annual
operating expense ratio, any transaction fees the fund paid to
acquire or dispose of shares in any acquired fund (e.g., sales loads
or redemption fees), and incentive allocations where the fund
allocates capital to the adviser of the acquired fund (or its
affiliate) based on a percentage of the fund's income, capital
gains, and/or appreciation in the acquired fund. Form N-1A provides
calculation instructions for determining the AFFE amount. See
Instruction 3(f) to Item 3 of current Form N-1A.
    \605\ See id.
    \606\ See Fund of Funds Investments, Investment Company Act
Release No. 27399 (June 20, 2006) [71 FR 36640 (June 27, 2006)], at
text accompanying n.67.
    \607\ See supra Section II.H.1.c.
---------------------------------------------------------------------------

    Some commenters on the Fund Investor Experience RFC and on the
Commission's 2018 proposal related to fund of funds arrangements have
expressed certain concerns about current AFFE disclosure
requirements.\608\ For example, several commenters have suggested that
fee table disclosure should focus on a fund's operating expenses and
should not incorporate AFFE.\609\ Some of these commenters have
expressed concern that combining operating expenses with indirect AFFE
costs may confuse investors by over-emphasizing AFFE costs and that
combining expenses in this way does not align with a fund's financial
statements.\610\ Several commenters have also expressed particular
concern about treating BDCs as acquired fund investments and have
recommended excluding BDC investments from AFFE.\611\ One of these

commenters suggested that the Commission remove AFFE from the
prospectus fee table and require funds to disclose AFFE amounts in an
accompanying footnote to address these concerns.\612\ On the other
hand, other commenters have expressed general support for AFFE
disclosure.\613\ Two commenters stated that AFFE disclosure provides
investors with necessary information to understand the layering of fees
in a fund of funds arrangement and to compare similar funds.\614\
---------------------------------------------------------------------------

    \608\ See Fund of Funds Arrangements, Investment Company Act
Release No. 33329 (Dec. 19, 2018) [84 FR 1286 (Feb. 1, 2019)]
(``Fund of Funds Proposing Release''), at nn.176-179 and
accompanying text. Comments on the Fund of Funds Proposing Release
cited in this release are available at https://www.sec.gov/comments/s7-27-18/s72718.htm.
    \609\ See, e.g., Comment Letter of Investment Company Institute
(Apr. 30, 2019) on File No. S7-27-18; Comment Letter of PIMCO (May
1, 2019) on File No. S7-27-18; Comment Letter of Invesco Ltd. (Apr.
30, 2019) on File No. S7-27-18 (``Invesco Fund of Funds Comment
Letter''); Comment Letter of Chapman and Cutler LLP (May 2, 2019) on
File No. S7-27-18 (``Chapman and Cutler Fund of Funds Comment
Letter''); Comment Letter of SIFMA Asset Management Group (May 2,
2019) on File No. S7-27-18.
    \610\ See, e.g., Chapman and Cutler Fund of Funds Comment
Letter; Invesco Fund of Funds Comment Letter.
    \611\ See, e.g., Comment Letter of Small Business Investor
Alliance (Apr. 30, 2019) on File No. S7-27-18 (stating that AFFE
disclosure distorts an acquiring fund's expense ratio and has
disproportionately harmed BDCs because this disclosure requirement
has led to funds no longer investing in BDCs and several index
providers dropping BDCs from their indexes); Comment Letter of TPG
Specialty Lending, Inc. (May 2, 2019) on File No. S7-27-18; Comment
Letter of Coalition for Business Development (May 2, 2019) on File
No. S7-27-18; Comment Letter of Alternative Credit Council (May 2,
2019) on File No. S7-27-18 (stating that AFFE disclosure overstates
the costs of a fund investing in a BDC because it essentially
requires double-counting of a BDC's operating expenses and that
because AFFE disclosure has effectively resulted in funds no longer
investing in BDCs, it has restricted the market for BDCs, limited
institutional ownership of BDCs, and reduced investor choice); ICI
Comment Letter I.
    \612\ See Comment Letter of Dechert LLP (May 2, 2019) on File
No. S7-27-18.
    \613\ See, e.g., Comment Letter of Anonymous (Dec. 28, 2018) on
File No. S7-27-18; Comment Letter of Kauff Laton Miller LLP (May 13,
2019) on File No. S7-27-18 (``Kauff Laton Fund of Funds Comment
Letter''); Comment Letter of Law Office of William Coudert Rand on
File No. S7-27-18 (May 14, 2019) (``Rand Fund of Funds Comment
Letter'').
    \614\ See Kauff Laton Fund of Funds Comment Letter; Rand Fund of
Funds Comment Letter.
---------------------------------------------------------------------------

    We agree that AFFE information is valuable and can help investors
to understand the layered fees and expenses associated with a fund of
funds arrangement and to compare similar funds. We believe this
information is particularly important when a fund substantially invests
in other funds such that the fund is, in essence, managed significantly
at the acquired fund level. At the same time, we are sensitive to the
concern that requiring every fund to include AFFE in its fee table as a
component of the fund's ongoing annual fees reduces consistency with
the fund's financial statements and may in some cases magnify the
presentation of AFFE by requiring fee table disclosure of this discrete
category of performance expenses even though the fund does not invest
significantly in acquired funds and may incur other indirect costs that
are not reflected in the fee table. We understand these factors may
contribute to investor confusion.
    As a result of these considerations, we are proposing to permit
funds that invest 10% or less of their total assets in acquired funds
to omit the AFFE line item in the fee table that is a component of the
fund's bottom line ongoing annual fees, and instead disclose the amount
of the fund's AFFE in footnotes to the fee table and fee summary. The
proposed amendments are designed to maintain the benefits of
transparent AFFE disclosure for investors and to provide more
consistent disclosure of information related to indirect costs. Where a
fund invests in other funds to a limited extent--10% or less of its
total assets (consistent with statutory limits on funds' investments in
other funds)--the fees and expenses of the acquired funds may more
closely resemble other indirect costs, such as transaction costs, and
these types of indirect costs each would not be reflected in the
prospectus fee table.\615\ Specifically, the proposal would provide for
more consistent treatment with other indirect costs by removing AFFE as
a line item that represents a component of the bottom line ongoing
annual fees figure in such a fund's fee table and fee summary, while
retaining information about the amount of AFFE in footnotes
accompanying the fee table and fee summary.
---------------------------------------------------------------------------

    \615\ See section 12(d)(1)(A)(iii) of the Investment Company Act
[15 U.S.C. 80a-12(d)(1)(A)(iii) (10% limit on total assets of an
acquiring fund that may be invested in all acquired funds); see also
supra paragraph accompanying footnote 577 (discussing indirect costs
that the prospectus fee table does not reflect). Congress
established the 10% limit in part based on a concern about the
potential for excessive fees when one fund invests in another. See
Fund of Funds Proposing Release, supra footnote 608, at n.14 and
accompanying text. While funds may under certain circumstances
invest more than 10% of their total assets in acquired funds under
other statutory provisions, Commission rules, or exemptive orders,
we are proposing to use the 10% figure from section 12(d)(1)(A)(iii)
as a threshold for determining when a fund's investments in acquired
funds is a significant component of its investment strategy such
that fee table disclosure of AFFE is needed.
---------------------------------------------------------------------------

    Conversely, under the proposal, a fund that invests more than 10%
of its total assets in acquired funds would continue to be required to
disclose AFFE as a line item in its prospectus fee table and would
continue to reflect this amount in its bottom line ongoing annual fees.
We believe it is appropriate to retain the current AFFE disclosure
requirement for this category of funds because, when investing in
acquired funds is a significant component of a fund's investment
strategy, AFFE can represent a significant part of the fund's ongoing
annual fees and is more akin to an ongoing operating expense the fund
would incur if it were managing the acquired fund's underlying
portfolio investments directly. For example, we understand that certain
funds, such as certain target date funds, have no, or very low,
management fees at the acquiring fund level, with the majority of fees
borne at the acquired fund level. For these funds, a fee table with no
AFFE line item has the potential to confuse investors in that it could
show 0 or close to 0 ongoing annual fees.
    To determine whether a fund may omit AFFE from its prospectus fee
table, the proposal would use a 10% threshold based on the average of
the fund's investments in acquired funds (excluding money market funds)
divided by the fund's total assets.\616\ To calculate the 10%
threshold, a fund would:
---------------------------------------------------------------------------

    \616\ See proposed Instruction 4(f)(ii) to proposed Item 8A of
Form N-1A. We are also proposing to remove the language in current
Instruction 3(f)(i) to Item 3 of Form N-1A that provides, ``In the
event the fees and expenses incurred indirectly by the Fund as a
result of investment in shares of one or more Acquired Funds do not
exceed 0.01 percent (one basis point) of average net assets of the
Fund, the Fund may include these fees and expenses under the
subcaption `Other Expenses' in lieu of this disclosure
requirement.'' We believe that our proposal to permit funds that
hold limited acquired fund investments to disclose AFFE in a
footnote instead of the fee table would result in funds never, or
very rarely, qualifying to disclose AFFE under the ``other
expenses'' line item under this instruction.
---------------------------------------------------------------------------

     Divide the fund's investments in acquired funds (excluding
money market funds) by the fund's total assets at the end of each of
the 12 months that make up the prior fiscal year. This will produce 12
data items (or fewer if the fund has not been in operation for a full
fiscal year).
     Calculate the average of the 12 data items. If this figure
is 10% or less, the fund may omit AFFE from its prospectus fee table
and instead include the prescribed footnote.
    The 10% threshold is based on an average of month-end holdings,
rather than holdings as of the end of the fiscal year or another single
date, to smooth fluctuations, such as those related to market events
and investor flows. It also would help mitigate any gaming concerns by
limiting funds' ability to reduce their investments in other funds to
stay below the 10% threshold only on a given date. The month-end
calculation is also aligned with Form N-PORT requirements for month-end
portfolio data, which may reduce the need for funds to collect new data
under the proposal and facilitate verifications that a fund may
disclose AFFE in a footnote.\617\ We also propose to omit all money
market fund investments from the 10% calculation.\618\ We understand

that funds, including funds that invest significantly in other funds,
typically invest in money market funds for cash management purposes
rather than to pursue the fund's investment objective through an
investment in another fund.\619\
---------------------------------------------------------------------------

    \617\ Because a new fund would not have this monthly data, a new
fund should base the 10% threshold on assumptions of the percent of
acquired funds in which the new fund expects to invest. See proposed
Instruction 4(f)(vii) to proposed Item 8A of Form N-1A. Currently,
new funds make similar assumptions about expected acquired fund
investments for purposes of disclosing the amount of AFFE. See
Instruction 3(f)(vi) to Item 3 of current Form N-1A.
    \618\ The Commission previously has determined that money market
funds, which did not exist in 1940, do not raise the concerns
underlying section 12(d)(1) of the Investment Company Act and has
permitted funds to invest an unlimited amount of their uninvested
cash in money market funds rather than directly in short-term
instruments. See 17 CFR 270.12d1-1 (rule 12d1-1).
    This proposed instruction does not change the current treatment
of money market funds with respect to the calculation of AFFE.
    \619\ Some funds, such as target date funds, may hold money
market funds consistent with stated asset allocation objectives
(particularly when they reach or pass their stated target date).
However, these same funds tend to invest significantly in other
funds as well, making them ineligible to move AFFE disclosure to a
footnote under the proposal.
---------------------------------------------------------------------------

    While the calculation of the 10% threshold would be based on
monthly data, the proposal would not require a fund to assess whether
it may disclose AFFE in a footnote to the fee table on a monthly basis
or to update its prospectus fee table based solely on such monthly
assessments. Instead, a fund would assess whether it is below the 10%
threshold when it otherwise must update its prospectus fee table (e.g.,
at the time of its annual prospectus update) based on information as of
its prior fiscal year.\620\ However, if there is a material change to
the amount a fund invests in other funds (such as due to a change to
the fund's strategies) or its AFFE, we would expect the fund to update
its prospectus to reflect the change just as it would for any other
material changes to its annual ongoing fees.\621\ We propose to permit,
rather than require, a fund with limited acquired fund investments to
disclose AFFE in a footnote to limit burdens on funds that would prefer
to consistently disclose AFFE in the fee table instead of monitoring
the amount of acquired fund investments to determine eligibility for
the footnote-based approach. Moreover, we recognize that a fund that
tends to maintain acquired fund investments close to the 10% threshold
may prefer to disclose AFFE in the fee table each year instead of
moving the disclosure back and forth between the footnote and the fee
table, which could lead to investor confusion.
---------------------------------------------------------------------------

    \620\ This is consistent with the calculation of ongoing annual
fees which is also based on amounts incurred during the fund's most
recent fiscal year. See proposed Instruction 4(d) to Item 3 of Form
N-1A and proposed Instruction 4(d) to proposed Item 8A of Form N-1A.
    \621\ See proposed Instruction 4(d)(ii) to Item 3 of Form N-1A
and proposed Instruction 4(d)(ii) to proposed Item 8A of Form N-1A.
---------------------------------------------------------------------------

    The footnote that a fund eligible to use the new AFFE presentation
would be permitted to use would have to include: (1) The amount of the
fund's AFFE, and (2) a statement that the fund's total ongoing annual
fees in the table and fee summary would be higher if these fees and
expenses were included.\622\ We believe this requirement would provide
investors with AFFE information they could use to compare funds and
would help them understand the relevance of a fund's AFFE amount. The
footnote to the fee table would be tagged using XBRL, so the AFFE
amount would continue to be available not only to investors viewing the
prospectus and summary prospectus, but also to data aggregators and
other market participants.\623\
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    \622\ See proposed Instruction 4(d) to Item 3 and proposed
Instruction 4(f)(ii) to proposed Item 8A of Form N-1A.
    \623\ See infra Section II.H.1.i (discussing structured data
requirements for the prospectus fee table).
---------------------------------------------------------------------------

    In addition to amending the scope of funds that must disclose AFFE
in the prospectus fee table and fee summary, we are proposing two
technical amendments to AFFE disclosure requirements. First, we propose
to correct the manner in which a fund that has been in operation for
less than a full year calculates AFFE. Specifically, rather than
calculating this figure using the number of days in the fund's fiscal
year, we propose to require such a fund to use the number of days since
the date the fund made its first investment.\624\ We believe this would
result in a more accurate calculation for new funds. For example, if a
fund made its first investment six months ago and owned other funds for
that entire period, the current AFFE calculation would provide a figure
that is half of the actual fees attributable to the underlying funds.
This is because the numerator would be based on the six-month holding
period (e.g., 182 days) and the denominator would be based on the full
fiscal year (i.e., 365 or 366 days). Under our proposed revision, both
the numerator and denominator would be based on the same period of
time. We understand that some new funds already use the number of days
since the fund made its first investment in the denominator.
---------------------------------------------------------------------------

    \624\ See Instruction 4(f)(ii) to proposed Item 8A of Form N-1A.
---------------------------------------------------------------------------

    Second, we propose to amend an optional footnote instruction. This
instruction permits a fund to explain that the total ongoing annual
fees in the fee table do not correlate to the ratio of expenses to
average net assets provided in the fund's financial highlights.\625\ We
propose to amend this instruction to permit funds to explain that the
total ongoing annual fees in the fee table do not correlate to the
expense presentation in the fund's shareholder reports.\626\ We believe
the shareholder report would be a better point of comparison under the
proposal because shareholders would receive the shareholder report
directly, while a fund's financial highlights would be available online
and delivered upon request.
---------------------------------------------------------------------------

    \625\ See Instruction 3(f)(vii) to Item 3 of current Form N-1A.
    \626\ See Instruction 4(f)(viii) to proposed Item 8A of Form N-
1A. Under the proposal, funds could still refer to the financial
highlights in this optional footnote if they chose to do so.
     See also discussion at supra footnote 430 and accompanying text
(stating that Item 13 of Form N-1A requires a fund to include
financial highlights information in its prospectus, and discussing
funds' ability to incorporate this information into the prospectus
by reference so long as the fund delivers the shareholder report
with the prospectus (i.e., for new shareholders)).
---------------------------------------------------------------------------

    We request comment on the proposed amendments to AFFE disclosure,
including the following:
    239. Should we amend AFFE disclosure requirements to allow funds
that invest 10% or less of total assets in acquired funds to omit the
AFFE amount from the fee table and instead disclose the amount of a
fund's AFFE in a footnote to the fee summary and fee table, as
proposed? If not, why not? Instead of permitting funds with limited
acquired fund investments to disclose the amount of a fund's AFFE in a
footnote, should we require all such funds to disclose AFFE in a
footnote? Would a mandatory approach reduce, increase, or have no
effect on the potential for investor confusion relative to the proposed
approach? Should we permit or require all funds, regardless of the
magnitude of their acquired fund investments, to include AFFE in a
footnote?
    240. Should we modify the proposed method for determining whether a
fund may disclose AFFE in a footnote instead of in its bottom line
ongoing annual fees in the fee table and fee summary? If so, how?
Should we modify the 10% threshold? For example, instead of requiring a
fund to measure the monthly average of its investments in acquired
funds (excluding money market funds) during the prior fiscal year,
should we base the 10% calculation on the amount of acquired fund
investments as of the end of the fiscal year, at the time of acquiring
a security issued by an acquired fund, at the time the fund amends its
prospectus, or on some other basis? What are the advantages and
disadvantages of these different approaches? Is it appropriate to
exclude money market funds from the 10% threshold? If not, why not?
Should we reduce or increase the 10% threshold? For example, should the
threshold be 5%, 25%, or 50% of total assets? Alternatively, instead of
using a

threshold based on the percent of assets invested in acquired funds,
should we use a different approach? Please explain.
    241. Are there any gaming concerns associated with the proposed
approach to AFFE disclosure that may potentially harm investors? For
example, are there concerns that funds would hold large investments in
acquired funds, but engineer their investments so that they are below
the proposed 10% threshold at the time of calculation? If so, how would
this harm investors, and how could we modify the proposed approach to
mitigate gaming concerns?
    242. Should we, as proposed, instruct new funds to base the 10%
threshold on assumptions of the percent of acquired funds in which the
new fund expects to invest? If not, what would be a more appropriate
approach for new funds, and why?
    243. Should the proposed footnote to the fee table and fee summary
provide different or additional information than the amount of the
fund's AFFE and a statement that the fund's total ongoing annual fees
in the table and fee summary would be higher if these fees and expenses
were included? If so, what information should the footnote provide?
Should we require funds to provide quantitative or qualitative
information about other performance costs, including securities lending
costs and transaction costs of the fund buying and selling portfolio
investments, in the same or similar footnotes (for example, taking an
approach that is the same as or similar to the approach we are
proposing for the shareholder report expense presentation)? Why or why
not?
    244. Should we amend the scope of acquired fund investments that
AFFE reflects? Instead of requiring a fund to include fees and expenses
from any investment in an investment company or a company that would be
an investment company but for section 3(c)(1) or (c)(7) of the
Investment Company Act, should we broaden or narrow the scope? For
example, we understand that currently funds do not treat investments in
the following vehicles that may rely on the exclusion in section
3(c)(7) as acquired fund investments: Structured finance vehicles,
collateralized debt obligations, or other entities not traditionally
considered pooled investment vehicles. Should some or all of these
investment types be treated as acquired fund investments for purposes
of AFFE disclosure requirements? Are there other categories of
investments that AFFE should or should not include?
    245. Instead of permitting funds that invest 10% or less of their
total assets in acquired funds to omit the AFFE amount in the fee table
and replace it with a footnote, should we permit or require all funds
to exclude 10% of their total assets in acquired funds from the AFFE
calculation in order to treat all funds consistently?
    246. As another alternative, should we permit a fund to disclose
AFFE in a footnote to the fee table, instead of in the fee table
itself, if the amount of the fund's AFFE is below a certain threshold?
If so, what threshold should we use for determining when a fund's AFFE
is sufficiently small, relative to its other expenses, such that the
fund does not need to include AFFE in the fee table? For example,
should we permit a fund to disclose AFFE in a footnote to the fee table
if the amount of its AFFE was less than a specific percentage of its
annual ongoing fees (excluding AFFE) or average net assets? If so, what
specific threshold should we use, and why? Would this approach improve
the utility of the disclosure for investors? How would this approach
affect the consistency of the fee table disclosure, relative to the
proposed approach? For example, would it result in AFFE amounts moving
in and out of the fund's ongoing annual fee figure at a greater or
lesser frequency than the proposal?
    247. Commenters have expressed particular concern about AFFE
disclosure's impact on BDC investments.\627\ Would our proposed
amendments address these concerns? Why or why not? If not, how could we
address these concerns? Should we, as some commenters suggested, allow
funds to exclude fees and expenses from BDC investments in AFFE
disclosure? If so, why should BDC fees and expenses be excluded when
other types of acquired funds that may have similar strategies, nature
of expenses, and portfolio holdings are included?
---------------------------------------------------------------------------

    \627\ See supra footnote 611.
---------------------------------------------------------------------------

    248. Should we amend AFFE disclosure requirements in Forms N-2, N-
3, N-4, and N-6 for other types of investment companies? If so, should
we modify these requirements in the same manner as the proposed
amendments to Form N-1A, or are there changes we should make to
recognize differences between registrant types?
    249. As proposed, should we remove the current instruction allowing
funds to disclose AFFE under the ``other expenses'' line item of the
fee table if the fund's AFFE does not exceed 0.01 percent of average
net assets? If not, under what circumstances would this instruction be
useful?
    250. Would the proposed amendments to AFFE disclosure result in any
unintended consequences for investors, funds, or other market
participants? Please explain.
    251. As proposed, should we modify the AFFE calculation for funds
that have been in operation for less than a year to use the number of
days since the date the fund made its first investment instead of the
number of days in the fund's fiscal year? Is there a different approach
we should use to improve the accuracy of the AFFE calculation for these
funds? Should we similarly amend the AFFE instructions in Forms N-2 and
N-3?
    252. As proposed, should we permit funds that disclose AFFE in
their fee tables to include a footnote distinguishing the fund's
ongoing annual fees from its shareholder report expense presentation?
Consistent with the proposal, should funds continue to be able to refer
to differences between the prospectus fee table and financial
highlights in this optional footnote as well? If not, why not?
h. Portfolio Turnover
    In addition, we propose to include portfolio turnover disclosure in
both the fee summary and the full fee table and to modify the narrative
that accompanies the portfolio turnover rate to enhance clarity and
provide for more concise disclosure.\628\ We believe that this
disclosure helps investors understand the effect of portfolio turnover,
and the resulting transaction costs, on fund expenses and performance.
However, we believe the current disclosure is too lengthy, and that
this length does not contribute to (and may detract from) investor
understanding. Therefore, we propose to reduce the length of the
prescribed disclosure without changing its meaning. We believe this
change will make the portfolio turnover disclosure more inviting and
usable by investors. We are including this disclosure in both the fee
summary and the fee table because we continue to believe this
information is necessary to understand the full context of fund fees
and should therefore accompany any prospectus fee presentation. Below
is a chart showing the current disclosure, along with its replacement.
---------------------------------------------------------------------------

    \628\ See proposed Items 3 and 8A of Form N-1A.

------------------------------------------------------------------------
  Current disclosure and Form N-1A    Proposed disclosure and Form N-1A
              location                             location
------------------------------------------------------------------------
Portfolio Turnover.................  Portfolio Turnover.
The Fund pays transaction costs,     Portfolio turnover measures how
 such as commissions, when it buys    often a fund buys and sells its
 and sells securities (or ``turns     investments. A higher portfolio
 over'' its portfolio). A higher      turnover rate may indicate higher
 portfolio turnover rate may          transaction costs and may result
 indicate higher transaction costs    in higher taxes. The Fund's annual
 and may result in higher taxes       portfolio turnover rate is __%.
 when Fund shares are held in a      (Items 3 and 8A).
 taxable account. These costs,
 which are not reflected in annual
 fund operating expenses or in the
 example, affect the Fund's
 performance. During the most
 recent fiscal year, the Fund's
 portfolio turnover rate was % of
 the average value of its portfolio.
(Item 3)...........................
------------------------------------------------------------------------

    We seek comment on the proposed approach to portfolio turnover
disclosure, and specifically on the following issues:
    253. Are the proposed changes to the portfolio turnover disclosure
helpful? If not, what improvements, if any, would commenters recommend?
i. Structured Data Requirements
    Finally, we are proposing minor amendments to the Form N-1A General
Instructions regarding the requirements for funds to submit interactive
data files (formatted XBRL) containing their risk/return summary
information, which includes objectives, fees, principal strategies,
principal risks, and performance disclosures.\629\ Because, as
discussed above, we are proposing to move the current full fee table
from Item 3 of Form N-1A to new Item 8A of Form N-1A, we are proposing
a conforming change requiring funds to tag the data elements in Item 8A
instead of in Item 3 (as they currently do). We continue to believe
that market participants should have access to the full fee table in
structured data format. We are not proposing to require that funds tag
the proposed fee summary in addition to the full fee table because the
fee summary is derived from the full fee table, so requiring funds to
tag both presentations would be redundant.
---------------------------------------------------------------------------

    \629\ See General Instruction C.3.g(i), (iv) to Form N-1A
(requiring funds to submit an Interactive Data File for any
registration statement or post-effective amendment thereto on Form
N-1A that includes or amends information provided in response to
Items 2, 3, or 4); see also General Instruction C.3.g to proposed
Form N-1A.
---------------------------------------------------------------------------

    We seek comment on the proposed amendments to the Form N-1A General
Instructions regarding funds' structured data requirements, and
specifically on the following issues:
    254. Are the proposed amendments to the Form N-1A General
Instructions regarding the use of structured data appropriate? Given
that the full fee table in the fund's statutory prospectus would
continue to be tagged, and the information included in the summary fee
table would be the same as that in the statutory fee table, would it
also be necessary to require a fund to tag the summary fee table? If
so, why?
    255. Funds must submit their prospectus fee tables in a structured
format, but other fee information generally is not in a structured
format. Is there any other fee-related information in fund disclosure,
including in financial statements, that funds should submit in a
structured format (such as in Form N-CEN)? If so, what are these items
and what are the benefits of structured disclosure for these items?
2. Improved Prospectus Risk Disclosures
    We are proposing to revise the current provisions and instructions
in Form N-1A requiring that a fund disclose in its prospectus the
principal risks of investing in the fund.\630\ Funds' prospectus
disclosure requirements are designed to help promote informed
investment decisions by providing investors with information that is
easy to use and readily accessible. The revisions and additions we are
proposing are designed to further improve fund prospectus risk
disclosure by making this disclosure clearer and more specifically
tailored to a fund.
---------------------------------------------------------------------------

    \630\ See Item 4(b)(1)(i) of Form N-1A; proposed Item 4(b)(1)(i)
of Form N-1A; proposed Item 9(c) of Form N-1A.
---------------------------------------------------------------------------

    Items 4 and 9 of Form N-1A address disclosure of the principal
risks of investing in the fund. Both of these items are designed to
provide user-friendly, clear and succinct disclosures. Item 4 requires
that the fund summarize the principal risks in the summary section of
the statutory prospectus (or the summary prospectus, to the extent the
fund is relying on rule 498).\631\ The information that a fund
currently provides in response to Item 4 must be based on the
information that the fund provides in response to Item 9(c) of Form N-
1A, which requires that the registrant disclose the principal risks of
the fund. Item 9 was designed to allow for fuller information about
fund risks, but still requires that a fund only disclose principal
risks.
---------------------------------------------------------------------------

    \631\ For purposes of the discussion in this section, the term
``summary prospectus'' refers both to the summary section of the
statutory prospectus, as well as a summary prospectus prepared by a
fund in reliance on rule 498. See supra footnote 6.
---------------------------------------------------------------------------

    We believe that some funds are providing risk information in their
prospectuses and summary prospectuses that is often long, but does not
achieve the policy goals of these current disclosure requirements.\632\
This length may not contribute to (and may sometimes detract from)
investors' understanding of the principal risks of an investment in a
particular fund. Because of its length, this disclosure also may not be
user-friendly, particularly to retail investors. Commission staff has
recently published its observations regarding some of the issues that
the staff has observed with respect to funds' risk disclosures.\633\
The staff document would be withdrawn if the Commission's proposal is
adopted. The amendments that we are proposing are designed to respond
to the issues that we have observed in some funds' prospectus risk
disclosure and to promulgate additional requirements that we believe
would be beneficial to funds and investors.
---------------------------------------------------------------------------

    \632\ For example, researchers have found that investment
company risk disclosure in the summary prospectus has nearly doubled
in length since 2010. These researchers state that the principal
risk section accounted for 31% of the disclosure in 2010 and
steadily climbed to 48% in 2018 (with more than double the average
word count from 2010). Anne M. Tucker and Yusan Xia, Investing in
the Dark: Investing Company Disclosure Qualities, Content and
Compliance, 27-28 (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3436952.
    \633\ See ADI 2019-08, supra footnote 67. This document
encourages funds to order their risks by importance and better
tailor their principal risk disclosure.
---------------------------------------------------------------------------

    We are proposing to add to the General Instructions to Form N-1A a
provision that would preclude a fund from disclosing non-principal
risks in the prospectus.\634\ While Items 4 and 9 of Form N-1A
currently specify that funds describe ``principal risks,'' there is not
a requirement that risk disclosure appearing in the statutory
prospectus be

limited to the fund's principal risks.\635\ We believe that including
this disclosure in the prospectus may overwhelm other important
information. The proposed provision is designed to streamline risk
disclosure in the prospectus, focus on essential information, and
clarify current form requirements that emphasize the disclosure of
``principal'' risks. Funds would remain free to disclose non-principal
risks in the SAI.
---------------------------------------------------------------------------

    \634\ See General Instruction C.3.(a) to proposed Form N-1A.
    \635\ See ADI 2019-08, supra footnote 67. The Form N-1A General
Instructions currently prohibit the disclosure of non-principal
risks in the summary prospectus (or summary section of the statutory
prospectus), but no instructions currently prohibit this disclosure
from appearing in other parts of the statutory prospectus. See
General Instruction C.3.(b) to Form N-1A (``A Fund may include,
except in response to Items 2 through 8, information in the
prospectus or the SAI that is not otherwise required.'').
---------------------------------------------------------------------------

    We are proposing several new requirements for principal risk
disclosure that appears in the summary prospectus. First, we are
proposing to insert the term ``briefly'' before the current requirement
that the fund summarize the principal risks.\636\ This proposed change
is designed to address the concern that, for some funds, principal risk
disclosure in the summary prospectus is overly lengthy. We have
observed significant variations in funds' approaches to principal risk
disclosures in the summary. For example, some funds describe just a few
principal risks in less than 200 words, while other funds in the same
category list 20 or more principal risks using more than 2,500 words.
Some of the longest disclosures the staff has seen in the summary
section exceed 7,000 words. Indeed, the staff has observed that some
funds simply repeat risk information that appears later in the
statutory prospectus instead of summarizing it.\637\ The proposed
change is designed to emphasize that principal risk disclosure that
appears in the summary prospectus should be concise and succinct, with
more detailed risk information to appear later in the statutory
prospectus.
---------------------------------------------------------------------------

    \636\ See Item 4(b)(1)(i) of proposed Form N-1A. In both the
current item and the proposed item, the summary of principal risks
is based on information that the fund provides in response to Item
(9).
    \637\ See Fund Investor Experience RFC, supra footnote 8, at
Section II.D.2.
---------------------------------------------------------------------------

    We are proposing an additional new instruction to the summary
prospectus principal risk disclosure requirement stating that funds
should describe principal risks in order of importance, with the most
significant risks appearing first.\638\ We believe that this
presentation would highlight for investors the risks that they should
consider most carefully. We have observed that it is currently common
for funds to describe their principal risks in alphabetical order.\639\
However, we believe that this approach could obscure the importance of
key risks, especially when a fund discloses many principal risks. For
example, a real estate fund that describes principal risks
alphabetically may describe a number of less-relevant risks before
describing the key risks of real estate investments. In some extreme
cases, this presentation format could result in a fund's key risks
being obscured to such an extent that it could render the disclosure
potentially misleading. We understand that there are different ways of
determining the relative significance of principal risks. The proposed
new instruction therefore specifies that a fund may use any reasonable
means of determining the significance of risks. For example, a fund
could take an approach to ordering its principal risks in a way that
considers the likelihood and possible severity of any loss resulting
from each risk. This proposed new instruction would include an explicit
statement that a fund should not describe principal risks in
alphabetical order.
---------------------------------------------------------------------------

    \638\ See Instruction 2 to Item 4(b)(1) of proposed Form N-1A.
    \639\ See ADI 2019-08, supra footnote 67.
---------------------------------------------------------------------------

    Finally, we are proposing an additional instruction to the summary
prospectus principal risk disclosure requirement that instructs a fund
to, where appropriate, tailor its risk disclosures to how the fund
operates rather than rely on generic, standard risk disclosures.\640\
We have observed that some prospectuses for funds within a fund group
commonly include generic, standardized risk disclosures for every fund
in the group. Such standardized disclosure may be appropriate under
certain circumstances. For example, ``market risk,'' could be a
principal risk for all funds in a complex. However, there are other
circumstances in which generic, across-the-board risk disclosures for
all funds in a fund complex may not be appropriate. For example, we do
not believe it would be appropriate for a fund to include credit risk
disclosure that discusses the heightened risks associated with below-
investment-grade or distressed securities when the fund does not hold,
or expect to hold, these types of investments.
---------------------------------------------------------------------------

    \640\ See Instruction 3 to Item 4(b)(1) of proposed Form N-1A.
---------------------------------------------------------------------------

    We are also proposing amendments that would affect funds' principal
risk disclosures in the statutory prospectus, as well as the summary
prospectus. Specifically, we are proposing to add three new
instructions relating to Form N-1A Item 9(c), which requires a fund to
disclose the principal risks of investing in the fund in its statutory
prospectus.\641\ Because Item 4 of Form N-1A requires a fund to
summarize the principal risks of investing in the fund, based on the
information the fund provides in response to Item 9(c), the proposed
new instructions to Item 9(c) would also affect the disclosure that a
fund provides in the summary prospectus in response to Item 4.
---------------------------------------------------------------------------

    \641\ See Instructions 1 through 3 to Item 9(c) of proposed Form
N-1A.
---------------------------------------------------------------------------

    Proposed Instruction 1 states that in determining whether a risk is
a principal risk, a fund should consider both whether the risk would
place more than 10% of the fund's assets at risk (``10% standard'') and
whether it is reasonably likely that a risk will meet this 10% standard
in the future. Today, funds may be using varying standards to determine
whether a risk is a principal risk. This makes it difficult for an
investor to compare risks among funds. This proposed instruction is
designed to clarify the meaning of the term ``principal risk'' by
providing quantitative guidance as to what a fund should consider when
it determines whether a risk is a principal risk. For example, a fund
that invests 10% or more of its assets in a particular sector, such as
financial services or consumer staples, could determine that it should
disclose a ``principal risk'' relating to its investments in that
sector. A fund also could determine that it should disclose a
``principal risk'' in some circumstances when the fund uses less than
10% of its assets to make investments, when those investments may
subject the fund to risk of loss of more than 10% of its assets, for
example, a fund that engages in short sales or derivatives trading.
    The ``reasonably likely'' language is designed to reflect that a
risk may not be a principal risk when first disclosed but may become a
principal risk over time, due to changing conditions or the fund
changing its strategies.\642\ For example, interest rate risk for a
fixed income fund could increase depending on government action that
affects interest rates. As another example, a fund investing in U.S.
equities may change its strategy to include foreign investments and
thus may introduce foreign investment risk. Therefore, if the fund
considers it reasonably likely that a risk will become a principal risk
in the future, it should consider whether to

include it in the prospectus to help ensure that when it becomes a
principal risk, investors will be informed. On the other hand, the
proposed ``reasonably likely'' language reflects our view that risks
that are not likely to become principal risks should be excluded from a
fund's principal risk disclosure, consistent with the purpose of
streamlining the prospectus.
---------------------------------------------------------------------------

    \642\ The ``reasonably likely'' standard is a standard already
used to describe principal risks in Items 4(b)(1)(i) and 9(c) of
Form N-1A.
---------------------------------------------------------------------------

    Proposed Instruction 2 is addressed to a fund investing in other
funds (an ``acquiring fund'' and an ``acquired fund,'' respectively),
commonly known as a ``fund of funds.'' \643\ We have observed that many
acquiring funds disclose all of the principal risks of each of their
acquired funds as part of their principal risk disclosure. In some
cases, acquiring funds list over 70 principal risks. The proposed
instruction states that, in the case of acquiring funds, risks should
be included only if they are principal risks of the acquiring fund, and
that a principal risk of an acquired fund should not be included unless
it is a principal risk of the acquiring fund. In the case of an
acquiring fund, disclosing the risks of acquired funds could obscure
information relating to principal risks of the acquiring fund. We
believe that the key consideration for an investor relates to the
principal risks of the fund in which the investor is actually buying
shares, i.e., the acquiring fund, and the proposed instruction is
therefore designed to help an investor focus on principal risks that
are most applicable to his or her investment. A principal risk of an
acquired fund might be a principal risk of the acquiring fund when, for
example, the acquiring fund invests a substantial portion of its assets
in an acquired fund (or the risk is shared by multiple acquired
funds).\644\
---------------------------------------------------------------------------

    \643\ While the Commission recently proposed rules relating to
fund of funds arrangements, this proposal did not address risk
disclosure by funds investing in other funds. See Fund of Funds
Proposing Release, supra footnote 608.
    \644\ For example, if a particular risk of the acquired funds in
the aggregate places more than 10% of the acquiring fund's assets at
risk, that risk is a principal risk of the acquiring fund. See also
Instruction 1 to Item 9(c) of proposed Form N-1A.
---------------------------------------------------------------------------

    Proposed Instruction 3 is addressed to funds whose strategy
provides the freedom to invest in different types of assets at the
manager's discretion. This could occur if, for example, the manager has
discretion to change the fund's strategy. These funds are commonly
known as ``go anywhere'' funds. This instruction would provide that, if
the fund's strategy permits the manager discretion to invest in
different types of assets, such fund must disclose that an investor may
not know--and has no way to know--how the fund will invest in the
future and the associated risks. This proposed instruction would make
that principal risk explicit in the fund's disclosure.
    We seek comment on the proposed amendments to prospectus disclosure
requirements regarding funds' principal risks, and specifically on the
following issues:
    256. Is the proposed amendment in the General Instructions to Form
N-1A to preclude disclosure of non-principal risks in the statutory
prospectus appropriate? Would the proposed amendment further the goal
of streamlining risk disclosure in the prospectus and focusing on
essential information? Should the proposed amendment to the General
Instructions instead use another standard in precluding the disclosure
of certain less-central risks in the fund's prospectus, such as
prohibiting the disclosure of ``non-material'' risks? If so, what
should this alternative standard be and how should we define it?
    257. Is the proposed amendment to Form N-1A Item 4(b)(1)(i), which
specifies that a fund should ``briefly'' summarize principal risks,
appropriate? Would this proposed amendment help emphasize the
Commission's goal of making the principal risk disclosure in the
summary prospectus concise and succinct?
    258. Is the proposed new instruction to Item 4(b)(1)(i), providing
that a fund in a complex should describe principal risks in order of
importance, appropriate? Is it helpful to expressly provide in the
proposed instruction that a fund may use any reasonable means to
determine the significance of the risk? Should the proposed instruction
be more prescriptive as to how a fund should determine the significance
of risk, and if so, what method for determining risks' significance
should the instruction specify (for example, should the proposed
instruction specify ways in which a fund could--or must--quantify
likelihood and severity of risk, and if so what methods for
quantification should the instruction specify)? Should additional
guidance be provided? Is it appropriate to expressly state in the
proposed instruction that a fund should not list its principal risks in
alphabetical order? Are there circumstances where an alphabetical order
presentation may be appropriate and if so which ones?
    259. Should the number of principal risks that funds disclose in
the summary prospectus be subject to any limits? Should we require a
minimum number of risks to be disclosed? For example, would five be
sufficient? Should we impose a maximum number of risks that may be
disclosed in the summary? For example, would more than twenty-five be
too many?
    260. Is the proposed new instruction to Item 4(b)(1)(i), providing
that a fund should tailor its risk disclosure to how each particular
fund in the complex operates, appropriate? Does this proposed
instruction provide adequate guidance as to tailoring risk disclosure?
Should additional guidance be provided?
    261. With regard to Form N-1A Item 9(c), is the proposed new
instruction on the factors a fund should consider in determining
whether a risk is a principal risk useful and appropriate? Would it
give investors adequate information regarding the risks they should
consider in determining whether to purchase shares of the fund? Is the
proposed standard for considering whether a risk is a principal risk--
that the risk is one that would place more than 10% of the fund's
assets at risk (or it is reasonably likely that it would place more
than 10% of the fund's assets at risk in the future)--appropriate?
Should the proposed 10% be more or less? For example, should the
standard be 5% or 20% of the fund's assets at risk? If so, why? Should
there be a numerical standard associated with the instruction for
determining whether a risk is a principal risk, and if so, what
quantitative or other criteria should inform this standard? Is the
applicability of the 10% standard to the fund's assets appropriate?
Would a 10% standard help achieve the goal of providing user-friendly,
clear and succinct disclosures? If not, why not? Is the ``assets at
risk'' standard clear and appropriate? If not, why not? Would the
proposed instruction providing that a fund should consider whether it
is ``reasonably likely'' that a risk will become a principal risk in
the future give adequate notice of future risks? Is this provision
sufficiently clear? Is the term ``reasonably likely'' clear? Should we
provide guidance or a definition regarding this term? Are there other
means of determining principal risks that would be more effective?
Should there be guidance regarding consideration of non-investment
related risks, such as cybersecurity risk and new fund risk, as
principal risks?
    262. Is the proposed instruction that addresses risk disclosure in
fund-of-funds arrangements appropriate? Would this proposed instruction
be effective in promoting the policy goal of helping investors focus on
the principal risks of the fund in which the investor is purchasing
shares?

    263. Is the proposed instruction addressing the principal risks of
``go-anywhere'' funds appropriate? Would this instruction effectively
convey the uncertainty of the fund's investments and the associated
principal risks? If not, what amendments would improve the instruction?
    264. Are there other changes we can make to risk disclosure to make
this information more investor-friendly, clear and succinct?
    265. The Commission recently adopted amendments to rule 8b-16(b)
under the Investment Company Act, which would require registered
closed-end funds that rely on this rule to include--among other
things--new disclosure about their principal risks in their annual
reports.\645\ Should we extend any of the proposed amendments to open-
end funds' prospectus risk disclosure to closed-end fund prospectus
disclosures or the new annual report risk disclosures required for
certain closed-end funds? If so, how should we amend the risk
disclosure requirements for these closed-end funds?
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    \645\ See Closed-End Fund Offering Reform Adopting Release,
supra footnote 128, at Section II.I.5; see also supra footnote 132
and accompanying text.
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3. Prospectuses and SAIs Transmitted Under Rule 30e-1(d)
    We are proposing to rescind rule 30e-1(d), which permits a fund to
transmit a copy of its prospectus or SAI in place of its shareholder
report, if it includes all of the information that would otherwise be
required to be contained in the shareholder report.\646\ Shareholder
report and prospectus disclosures have historically served different
purposes, with each catering to the different informational needs of
prospective fund investors and current shareholders.\647\ We understand
that funds very rarely rely on rule 30e-1(d) to transmit a prospectus
or SAI in place of a shareholder report. Additionally, we believe that
allowing funds to consolidate their prospectus, SAI and shareholder
report disclosures into a single document would result in shareholders
receiving long, complex, and overlapping fund disclosures which could
cause shareholder confusion and fatigue. This result would not be
consistent with the goals of this rulemaking proposal.
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    \646\ See rule 30e-1(d). When the Commission initially adopted
rule 30e-1(d), it allowed a fund to send a copy of its prospectus or
SAI, or both, instead of a shareholder report, so long as such
prospectus or SAI included certain financial information and
information about director's compensation. See Standardized
Financial Statement Requirements in Management Investment Company
Registration Statements and Reports to Shareholders, Investment
Company Act Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19,
1980)]. However, when the Commission expanded the required
shareholder report disclosures, it simultaneously amended rule 30e-
1(d) to limit a fund's ability to use a prospectus or SAI in place
of a shareholder report by requiring that a fund include in such a
prospectus or SAI all the information that would otherwise be
required in the shareholder report. See Role of Independent
Directors of Investment Companies, Investment Company Act Release
No. 24082 (Oct. 14, 1999) [64 FR 59826 (Nov. 3, 1999)].
    \647\ See supra Section II.A.2 (discussing the differences
between shareholder report and prospectus disclosures and noting
that the shareholder report provides information to a fund's current
shareholders about the fund's operations and performance during the
past fiscal period, while the prospectus acts as the principal
selling document for investors to inform investment decisions and
facilitate fund comparisons).
---------------------------------------------------------------------------

    We seek comment on our proposal to rescind rule 30e-1(d):
    266. Do funds currently rely on rule 30e-1(d)? If so, which funds,
and why?
    267. Would investors benefit from receiving in the fund's
prospectus or SAI the disclosure that would otherwise have to appear in
the shareholder report? Would this cause investor confusion and/or
overwhelm investors? If so, is there any way to preserve the ability of
funds to rely on rule 30e-1(d) while mitigating these potential
negative effects?

L. Investment Company Advertising Rule Amendments

    As part of our proposed improvements to fund fee and expense
information for investors, we are proposing to amend the Commission's
investment company advertising rules (for purposes of this release,
Securities Act rules 482, 156, and 433 and Investment Company Act rule
34b-1) to promote transparent and balanced presentations of fees and
expenses in investment company advertisements.\648\ As investment
companies increasingly compete and market themselves on the basis of
costs, we are concerned that investment company advertisements may
mislead investors by creating an inaccurate impression of the costs
associated with an investment.\649\ The proposed advertising rule
amendments would generally apply to all investment companies, including
mutual funds, ETFs, registered closed-end funds, and BDCs.\650\ Under
the proposed amendments, investment company fee and expense
presentations in advertisements would have to include timely and
prominent information about a fund's maximum sales load (or any other
nonrecurring fee) and gross total annual expenses, based on the methods
of computation that the company's Investment Company Act or Securities
Act registration statement form prescribes for a prospectus.\651\ We
also are proposing to amend rule 156 to provide factors an investment
company should consider to determine whether representations in its
advertisements about the fees and expenses associated with an
investment in the fund could be misleading.\652\
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    \648\ For purposes of this release, we generally refer to the
types of investment company communications covered by rules 482,
156, 433, and 34b-1 as ``advertisements,'' unless otherwise noted.
Although the Commission recently proposed rule amendments relating
to investment adviser advertisements, that proposal did not address
investment company advertising rules. See Investment Adviser
Advertisements; Compensation for Solicitations, Investment Advisers
Act Release No. 5407 (Nov. 4, 2019) [84 FR 67518 (Dec. 10, 2019)].
    \649\ See supra Section I.C.
    \650\ As a result, for purposes of this Section II.I, 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.
    \651\ See proposed rule 482(i) and (j); proposed rule 34b-1(c);
proposed rule 433(c).
    \652\ See proposed rule 156(b)(4).
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    Investment company advertisements, including advertisements
regarding registered investment companies and BDCs, typically are
prospectuses for purposes of the Securities Act.\653\ These
advertisements are typically subject to rule 482, which provides a
framework in which investment company advertisements are deemed to be
``omitting prospectuses'' that may include information the substance of
which is not included in a fund's statutory or summary prospectus.\654\
Rule 482 establishes certain content, legend, and filing requirements
for investment company advertisements. Many of the rule's content
requirements focus on advertisements that include performance data of
certain types of funds, including mutual funds, ETFs, certain separate
accounts, and money market funds.\655\ For example, the rule

provides a standardized formula for these funds to calculate
performance data included in their advertisements.\656\ Instead of
relying on rule 482, registered closed-end funds and BDCs may use free
writing prospectuses in accordance with rule 433 and certain other
Commission rules for advertising purposes.\657\ Because both rule 482
advertisements and free writing prospectuses are treated as
prospectuses under section 10(b) of the Securities Act, they are
subject to liability under section 12(a)(2) of the Securities Act--
which imposes liability for materially false or misleading statements
in a prospectus or oral communications--as well as the antifraud
provisions of the Federal securities laws.\658\
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    \653\ See section 2(a)(10) of the Securities Act (defining the
term ``prospectus'' to mean any prospectus, notice, circular,
advertisement, letter, or communication, written or by radio or
television, which offers any security for sale or confirms the sale
of any security, subject to certain exceptions, including an
exception for a communication that generally was accompanied or
preceded by a statutory prospectus).
    \654\ See section 10(b) of the Securities Act; rule 482(a) under
the Securities Act (stating that the rule applies to an
advertisement or other sales material with respect to securities of
a registered investment company or BDC that is selling or proposing
to sell its securities pursuant to a registration statement that has
been filed under the Securities Act, unless the advertisement is
excepted from the definition of prospectus by section 2(a)(10) of
the Securities Act or rule 498(d), or is a summary prospectus under
rule 498).
    \655\ See rule 482(b)(3), (d), (e), and (g).
    \656\ See rule 482(d) and (e).
    \657\ See Closed-End Fund Offering Reform Adopting Release,
supra footnote 128, at Section II.F.1; 17 CFR 230.164 [rule 164
under the Securities Act] and rule 433 under the Securities Act [17
CFR 230.164 and 17 CFR 230.433].
    \658\ See, e.g., section 12(a)(2) of the Securities Act [77l];
section 17(a) of the Securities Act [15 U.S.C. 77q]; section 10(b)
of the Exchange Act [15 U.S.C. 78j]; section 34(b) of the Investment
Company Act [15 U.S.C. 80a-33]; section 206 of the Investment
Advisers Act of 1940 [15 U.S.C. 80b-6].
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    Rule 34b-1 applies to supplemental sales literature (i.e., sales
literature that is preceded or accompanied by a prospectus) by any
registered open-end company, registered unit investment trust, or
registered face-amount certificate company.\659\ Rule 34b-1 includes
many of the same requirements as rule 482, including the same
performance-related requirements.\660\ The Commission adopted rule 34b-
1 to ensure that performance claims in supplemental sales literature
would not be misleading and to promote comparability and uniformity
among supplemental sales literature and rule 482 advertisements.\661\
Supplemental sales literature is subject to the general antifraud
provisions of the Federal securities laws.
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    \659\ See rule 34b-1 under the Investment Company Act; section
24(b) of the Investment Company Act.
    \660\ See rule 34b-1(b)(1)-(2) under the Investment Company Act.
    \661\ See Advertising by Investment Companies, Investment
Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868 (Feb. 10,
1988)], at Section III; Advertising by Investment Companies;
Proposed Rules and Amendments to Rules, Forms, and Guidelines,
Investment Company Act Release No. 15315 (Sept. 17, 1986) [51 FR
34384 (Sept. 26, 1986)], at nn.77 and 78 and accompanying text.
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    Rule 156 states that whether or not a particular description,
representation, illustration, or other statement involving a material
fact is misleading depends on evaluation of the context in which it is
made. The rule discusses several pertinent factors that should be
weighed in considering whether a particular statement involving a
material fact is or might be misleading in investment company sales
literature, including rule 482 advertisements and supplemental sales
literature.\662\ Rule 156 applies to sales literature used by any
person to offer to sell or induce the sale of securities of any
investment company, including registered investment companies and
BDCs.\663\
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    \662\ 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'').
    \663\ For purposes of rule 156, investment company sales
literature includes any communication (whether in writing, by radio,
or by television) used by any person to offer to sell or induce the
sale of securities of any investment company. See rule 156(c) [17
CFR 230.156(c)]. Communications between issuers, underwriters and
dealers are included in this definition of sales literature if such
communications, or the information contained therein, can be
reasonably expected to be communicated to prospective investors in
the offer or sale of securities or are designed to be employed in
either written or oral form in the offer or sale of securities.
---------------------------------------------------------------------------

    Currently, the investment company advertising rules largely focus
on performance-related information.\664\ Among other things, the
performance-related provisions of these rules are designed to: (1)
Address concerns that investors would be unable to compare fund
performance when funds use different calculation methods in their
advertisements; \665\ and (2) highlight areas that, based on the
Commission's experience with investment company advertisements, have
been particularly susceptible to misleading statements.\666\ The
investment company advertising rules do not presently require
information about an investment company's fees and expenses or limit
how fee and expense information is presented, with one exception. Under
the current rules, if an advertisement provides performance data of an
open-end management investment company or a separate account registered
as a unit investment trust offering variable annuity contracts, it also
must include the maximum amount of the fund's sales load (i.e.,
purchase charge or exit charge) or any other nonrecurring fee that it
charges.\667\
---------------------------------------------------------------------------

    \664\ Rule 433 does not include performance-related requirements
for registered closed-end fund or BDC free writing prospectuses.
Currently, most rule 482 content requirements, including the
performance-related requirements, do not apply to registered closed-
end funds and BDCs.
    \665\ See Rule 156 Adopting Release, supra footnote 662, at
Section I.2.
    \666\ See Rule 156 Adopting Release, supra footnote 662;
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.
    \667\ See rule 482(b)(3)(ii); rule 34b-1(b)(1)(i).
---------------------------------------------------------------------------

    Separately, FINRA rule 2210 requires fee and expense information in
certain non-money market fund open-end management investment company
advertisements that provide performance information.\668\ This
includes: (1) The fund's maximum sales charge (i.e., purchase charge or
exit charge); and (2) the total annual fund operating expense ratio,
gross of any fee waivers or expense reimbursements (i.e., ongoing
annual fees). Under FINRA's rule, a fund's standardized performance
information, sales charge, and total annual fund operating expense
ratio (gross of any fee waiver or expense reimbursement) must be set
forth prominently.
---------------------------------------------------------------------------

    \668\ 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 data as permitted
by rule 482 and rule 34b-1.
---------------------------------------------------------------------------

    To promote more consistent and transparent presentations of
investment costs in investment company advertisements, we are proposing
to amend rules 482, 433, and 34b-1 to require that investment company
advertisements providing fee or expense figures for the company include
certain standardized fee and expense figures.\669\ The proposed
amendments would apply to advertisements of any registered investment
company or BDC. We are not proposing to limit the scope of the proposed
amendments to a subset of investment companies because we believe
investors in any registered investment company or BDC would benefit
from advertisements that provide consistent, standardized fee and
expense information that is generally aligned with prospectus fee and
expense information.
---------------------------------------------------------------------------

    \669\ See proposed rule 482(i)(1).
---------------------------------------------------------------------------

    With respect to rule 482, we are proposing to amend the rule to
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'').\670\ Because we believe that
these are important figures for assessing the fees and expenses of a
fund investment, the proposal would require any advertisement
presenting fee and expense figures to include these items. This
proposed requirement would only apply if an investment company
advertisement includes fee or 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.\671\
---------------------------------------------------------------------------

    \670\ 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.
    \671\ This might be the case if, for example, the advertisement
only refers to the fund's fees and expenses in the context of the
disclosure required by 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.
---------------------------------------------------------------------------

    The proposed required fee and expense figures would be based on the
methods of computation that the fund's Investment Company Act or
Securities Act registration statement form prescribes for a prospectus.
This proposed requirement is designed to promote consistent fee and
expense computations across investment company advertisements,
particularly within the same fund category, and to facilitate investor
comparisons. We are proposing to require 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. Further, 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.\672\
---------------------------------------------------------------------------

    \672\ See, e.g., Instruction 1(d)(ii) to Item 3 of current Form
N-1A; Instruction 1(e) to proposed Item 3 of Form N-1A; Instruction
1(d)(ii) to proposed Item 8A of Form N-1A.
---------------------------------------------------------------------------

    While investment company advertisements could include other figures
regarding a fund's fees and expenses, the advertisement would 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
proposed 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. However, an advertisement could not present the net figure more
prominently than the required fee and expense figures. In addition to
meeting the proposed content and presentation requirements,
advertisements that include a fund's total annual expenses net of fee
waiver or expense reimbursement arrangement amounts would also need to
include the expected termination date of the arrangement.\673\ We
believe this proposed requirement would 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 would likely be in place (including that it may be
terminated at any time).\674\
---------------------------------------------------------------------------

    \673\ See proposed rule 482(i)(2).
    \674\ 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 Form N-1A; Instruction 4(b) to
proposed Item 3 of Form N-1A; Instruction 4(e) to proposed Item 8A
of Form N-1A; Instruction 15(f) to Item 4 of Form N-3; Instruction
17 to Item 4 of Form N-4.
---------------------------------------------------------------------------

    The proposed amendments would also include timeliness requirements
for fee and expense information in investment company
advertisements.\675\ The proposed timeliness requirement would apply to
fee and expense information and, thus, it would apply to fee and
expense figures as well as relevant narrative information. Under the
proposal, fee and expense information would 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.\676\ A fund would, however, be able to
provide more current information, if available. The proposed timeliness
requirement is designed to prevent investment company advertisements
from including stale, outdated information about a fund's fees and
expenses. For instance, a registered open-end fund that maintains an
effective Securities Act registration statement on Form N-1A would need
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.\677\ As another example, a registered closed-end fund that
includes fee and expense figures in a rule 482 advertisement and that
does not maintain an effective Securities Act registration statement
would need to provide its gross total annual expenses, as of the date
of the fund's most recent annual report.\678\
---------------------------------------------------------------------------

    \675\ See proposed rule 482(j).
    \676\ In the case of a new fund that does not yet have an
effective registration statement, fee and expense information would
need to be as of the date of the fund's most recent prospectus filed
with the Commission.
    \677\ The registered open-end fund's maximum sales load (or
other nonrecurring fee) and gross total annual expenses would be
computed using the method in proposed Item 8A of Form N-1A. Proposed
Item 3 of Form N-1A also requires these figures in a fund's
prospectus, but proposed Item 8A contains more complete
computational instructions for these figures.
    \678\ Under these circumstances, the registered closed-end fund
would 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 would be
computed using the method in Item 3 of Form N-2.
---------------------------------------------------------------------------

    We also are proposing to amend rules 34b-1 and 433 so that those
rules incorporate rule 482's proposed content, presentation, and
timeliness requirements for fees and expenses. This would help ensure
that the same fee and expense-related requirements are applied
consistently across all registered investment company and BDC
advertisements and sales literature. The proposed amendments to rule
34b-1 would provide that any sales literature of a registered
investment company or BDC would have omitted to state a fact necessary
in order to make the statements therein not materially misleading
unless the sales literature meets rule 482's proposed content,
presentation, and timeliness requirements for investment company fees
and expenses.\679\ That is, sales literature that would not otherwise
be subject to rule 482 would have to meet rule 482's fee and expense
requirements. The proposed amendments to rule 34b-1 would, for example,
apply 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.\680\ Additionally, we propose to

amend rule 433, which establishes conditions for the use of post-filing
free writing prospectuses, to require a registered closed-end fund or
BDC free writing prospectus to comply with the proposed content,
presentation, and timeliness requirements of proposed rule 482, as
applicable, if the free writing prospectus includes fee and expense
information.\681\ As a result, regardless of whether a registered
closed-end fund or BDC advertisement uses rule 482 or rule 433, the
advertisement would be subject to the same requirements regarding fee
and expense information. While the proposed amendments to rules 482,
34b-1, and 433 are similar to requirements that currently apply to a
subset of fund advertisements under FINRA rule 2210 (i.e., certain non-
money market fund open-end management investment company advertisements
that provide performance information), our proposed amendments would
apply more broadly to all investment company advertisements and
supplemental sales literature.
---------------------------------------------------------------------------

    \679\ See proposed rule 34b-1(c). The proposed amendments would
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''). The current provisions of rule 34b-1, which largely
relate to performance information, would 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.
    \680\ Like the current scope of rules 34b-1 and 482, the
proposed fee and expense requirements in these rules and in rule 433
would not apply to any quarterly, semi-annual, or annual shareholder
report under section 30 of the Investment Company Act. We also
propose to provide similar treatment to other reports pursuant to
section 13 of section 15(d) of the Exchange Act (e.g., Form 10-K,
10-Q, and 8-K reports filed by BDCs). See proposed rule 34b-1(c)(2).
    Consistent with the current provision in rule 34b-1, the
amendments are designed to provide that shareholder reports and
similar periodic reports that might otherwise constitute sales
literature or advertisements under the rules are not covered by the
proposed amendments to rules 482, 34b-1, and 433 because those
reports serve to inform shareholders of recent developments relating
to their investment. See 1988 Advertising Rules Release, supra
footnote 88, at n.40 and accompanying text (explaining that the
current provision is necessary because of the breadth of the
definition of ``sales literature''). We believe the proposed
expansion of this provision to cover fee and expense information in
fund advertisements is warranted because, among other things: (1)
Investors are likely to understand that the fee and expense
information in an annual or other periodic report is only as current
as the report; and (2) the proposed content requirements for funds'
annual and semi-annual reports are designed to independently
recognize the types of fee and expense information a fund
shareholder may need.
    \681\ See proposed rule 433(c)(3).
---------------------------------------------------------------------------

    In addition, we are proposing to amend rule 156 to address
statements and representations about a fund's fees and expenses that
could be materially misleading. Specifically, we would provide that,
when considering whether a particular statement involving a material
fact is or might be misleading, weight should be given to
representations about the fees or expenses associated with an
investment in the fund that could be misleading because of statements
or omissions involving a material fact. As funds are increasingly
marketed on the basis of costs, we are concerned that investment
companies and intermediaries may in some cases understate or obscure
the costs associated with a fund investment. The new proposed factor in
rule 156 would provide that representations about the fees or expenses
associated with an investment in the fund could be misleading because
of statements or omissions involving a material fact, including
situations where portrayals of such fees and expenses omit
explanations, qualifications, limitations, or other statements
necessary or appropriate to make the portrayals not misleading.\682\
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.\683\ In addition, like
current rule 156, the proposed amendments would apply to all investment
company sales literature.\684\ We are not proposing to limit the scope
of these amendments 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.
---------------------------------------------------------------------------

    \682\ See proposed rule 156(b)(4).
    \683\ See rule 156(b).
    \684\ See rule 156(c) (defining ``sales literature'' for
purposes of the rule).
---------------------------------------------------------------------------

    The proposed amendments to rule 156 are designed to address
concerns that investment company advertisements may present a fund's
fees and expenses in a way that materially misleads an investor to
believe that the costs associated with a fund investment are lower than
the actual investment costs. For example, we understand that it has
become increasingly common for funds to market themselves, or attempt
to market themselves, as ``zero expense'' or ``no expense'' funds based
solely on information in their prospectus fee tables and without also
disclosing that investors or the fund may incur other costs. However,
in some cases a fund's prospectus fee table shows no transaction fees
and no ongoing charges only because its adviser, the adviser's
affiliates, or others are collecting fees elsewhere from these
investors.\685\ For instance, an investor in a so-called ``zero
expense'' fund may encounter other investment costs that can
effectively reduce the value of his or her investment in a fund. For
example, an investor may incur intermediary costs, such as wrap fees
that an investor pays to the sponsor of a wrap fee program (which may
be the fund's adviser or its affiliates) for investment advice,
brokerage services, administrative expenses, or other fees and
expenses. As another example, if a fund engages in securities lending,
it generally pays certain fees or compensation to a securities lending
agent (which may be affiliated with the fund's adviser), including
through revenue sharing arrangements. Additionally, a fund may appear
to be a ``zero expense'' fund because its adviser is waiving fees or
reimbursing expenses for a period of time, but the fund will incur fees
and expenses once that arrangement expires. In these and other cases
where an investor may encounter other investment costs, we are
concerned that, absent appropriate explanations or limitations,
investors in these cases may believe incorrectly that there are no
expenses associated with investing in the fund.
---------------------------------------------------------------------------

    \685\ In addition to considering whether statements in fund
sales literature about fees and expenses associated with a fund
investment are materially misleading, a fund should also consider
whether the fee table in its prospectus may be materially misleading
unless the fund includes additional material information as may be
necessary to make the information and statements expressly required
to be in the registration statement, in light of the circumstances
under which they are made, not misleading. See rule 8b-20 under the
Investment Company Act [17 CFR 270.8b-20].
---------------------------------------------------------------------------

    Similar issues can arise with respect to investment company
advertisements that advertise low investment costs, based solely on a
fund's prospectus fee table, and that do not reflect or recognize other
categories of costs that may, for instance, be supplementing or
replacing a more traditional management fee (e.g., intermediary costs,
securities lending costs). As another example, an advertisement might
be materially misleading if it presents one component of a fund's total
operating expenses, such as the fund's management fee, without stating
that there are other costs associated with a fund investment or
providing the total operating expense figure.
    Under certain circumstances, statements in advertisements about a
fund's fees and expenses that would be materially misleading on their
own may not be misleading if the advertisement includes appropriate
explanations, qualifications, limitations, or other statements. To use
this approach effectively to avoid materially misleading statements, we
believe it would be appropriate for funds to avoid using lengthy and
technical disclaimers in small font sizes.
    These proposed content-related restrictions in rules 482, 433, and
34b-1 and the proposed amendments to rule 156 are designed to work
together to promote balanced and transparent presentations of fee and
expense information in investment company sales literature. We request
comment on the proposed amendments to the Commission's investment
company advertising rules, including the following:
    268. Should the advertising rule amendments apply to all investment
companies, as proposed? If not, what types of investment companies
should the amendments cover? Are there fee and expense-related issues
that are specific to certain types of investment company advertisements
that we should take into account?
    269. Should we amend rule 482 to require that an advertisement
providing fee or expense figures for an investment company also include
the maximum sales load (or any other nonrecurring

fee) and the total annual expenses without any fee waiver or expense
reimbursement arrangement, as proposed? If not, why not? Should we
require investment company advertisements to include other fee and
expense information, such as the fund's management fee? If so, what
information should we require, and why? Should we, for example, require
the same fee and expense information as the fund's prospectus fee table
(or, in the case of mutual funds and ETFs, the proposed fee summary)?
    270. As proposed, should we require that investment company
advertisements present the required fee and expense figures using the
methods of computation that the fund's Investment Company Act or
Securities Act registration statement form prescribes for a prospectus?
Should we allow some or all funds to use different computational
methods? As another example, should registered closed-end funds that do
not maintain an effective registration statement be able to show
expense figures from their shareholder reports (e.g., financial
highlights expense ratios) rather than computing total annual expenses
in the manner required for a prospectus fee table? Why or why not? Are
the shareholder report figures, which represent backward-looking
information for the last fiscal year and do not include AFFE,
appropriate for advertising materials absent other information? Instead
should the required expense figure reflect estimated expenses for the
current fiscal year and AFFE (as required in prospectus fee tables)? If
we permit different computational methods among investment company
advertisements, are there other ways we could promote more consistent
fee and expense presentations and facilitate investor comparisons?
    271. Beyond the required fee and expense figures, should we require
an investment company advertisement to present any other fees or
expenses the advertisement may include using the same computational
method identified in a Commission form or rule, such as the relevant
Investment Company Act or Securities Act registration statement form
(e.g., for a prospectus or shareholder report), where available? If so,
should this apply to particular fee or expense figures, or should it
apply to all fee and expense figures that have identified computations
in Commission forms or rules? Do funds already use standardized
computational methods in advertisements that include fee information
(e.g., for administrative ease or due to antifraud concerns)?
    272. Should we require an investment company advertisement to
present the required fee and expense figures at least as prominently as
any other fee and expense figures, as proposed? If not, why not? Are
there circumstances in which it would be appropriate for an
advertisement to present a different fee or expense figure more
prominently than the required fee and expense figures? Please explain.
    273. Beyond the proposed prominence requirements, should we impose
other presentation standards for fee and expense information in fund
advertisements? For example, should we require advertisements to
present fee and expense information in a format that aligns with the
fee table (or fee summary) presentation the fund's registration form
requires for prospectuses?
    274. Should we require investment company advertisements to use
specified terms to describe the required fee and expense figures? For
example, should we require advertisements to use the same terms as
those prescribed for prospectus fee tables in the fund's registration
form? Alternatively, should we require all fund advertisements to use
consistent, plain English terminology (such as ``ongoing annual
fees'')?
    275. As proposed, should we allow investment company advertisements
to include other fee and expense figures, beyond the required fee and
expense figures? If not, why not? Alternatively, should we require
advertisements that include fee and expense figures to include only
figures that appear in the fee table of the fund's prospectus (or,
additionally, in the fund's shareholder reports)? If so, how should we
address the fact that these presentations do not reflect all potential
investment costs, including intermediary costs, transaction costs, and
securities lending costs? Should we, for instance, require that a
legend or footnote accompany the presentation to explain that it may
not reflect all costs associated with an investment?
    276. As proposed, should we require an investment company
advertisement to include the expected termination date of a fee waiver
or expense reimbursement arrangement if the advertisement provides a
fund's total annual expenses net of fee waiver or expense reimbursement
arrangements? Is there other information we should require about a fee
waiver or expense reimbursement arrangement, such as who can terminate
the arrangement? Should we permit an advertisement to reflect any fee
waiver or expense reimbursement arrangement, or should the arrangement
have to meet certain conditions to appear in an advertisement? For
example, should we allow such arrangements to appear in investment
company advertisements only if they can appear in a fund's prospectus
fee table (e.g., in the case of a registered open-end fund registered
on Form N-1A, if the fee waiver or expense reimbursement arrangement
would be in place for at least 1 year from the effective date of the
fund's registration statement)? As another alternative, because
prospectus-related requirements currently vary among different types of
funds, should we require an arrangement to be in place for the same
period of time for any fund that wishes to disclose its total annual
expenses net of a fee waiver or expense reimbursement in an
advertisement? If so, what period of time (e.g., 1 year), and how
should we measure it (e.g., from the date the advertisement is first
submitted for publication, published, or used; from the effective date
of the fund's registration statement; or from the date of the fund's
most recent annual report)? What are the advantages and disadvantages
of any such approach? Are there other conditions that should determine
when a fund may include fee waiver or expense reimbursement amounts in
investment company advertisements and if so, what should these be?
    277. Should we, as proposed, include timeliness requirements in
rule 482 for fee and expense information in an investment company
advertisement? Should fee and expense information be as of the fund's
most recent prospectus or, if the fund no longer has an effective
Securities Act registration statement, as of its most recent annual
report, as proposed? If not, what baselines should we use to measure
the timeliness of fee and expense information? Should the baseline
differ among different types of funds, or is there a single baseline
that would work for all funds? Should we allow advertisements to
include fees and expenses that are more current than the fund's most
recent prospectus (or as of the fund's most recent annual report), as
proposed? Alternatively, should we require a fund with a current
prospectus to always present the same fees and expenses in its
advertisements as those shown in its current prospectus? Should the
proposed timeliness requirement apply to any fee and expense
information, as proposed, or should it apply more narrowly to
particular subsets of fee and expense information (e.g., fee and
expense figures)?
    278. Should rule 34b-1 include the same fee and expense-related
requirements as rule 482, as proposed?

If not, why should different fee-related requirements apply to rule 482
advertisements and rule 34b-1 sales literature? What fee and expense-
related requirements should rule 34b-1 include?
    279. As proposed, given the breadth of the definition of ``sales
literature'' in proposed rule 34b-1, should we amend rule 34b-1 to
provide that the proposed fee and expense-related requirements for
investment company advertisements in rules 34b-1, 482, and 433 do not
apply to shareholder reports under section 30 of the Investment Company
Act or to other reports pursuant to section 13 or 15(d) of the Exchange
Act? \686\ If not, why not? Are there circumstances in which the
proposed fee and expense-related content or timeliness requirements
should apply to these reports?
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    \686\ See supra footnote 680.
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    280. As proposed, should we amend rule 433 to require registered
closed-end fund or BDC free writing prospectuses that include fee and
expense information to comply with applicable fee and expense-related
requirements in rule 482? If not, why should we treat free writing
prospectuses differently from rule 482 advertisements? Are there other
amendments we should make to the free writing prospectus rules to more
effectively implement the proposed requirements? For example, should we
amend Securities Act rule 164 to provide that an immaterial or
unintentional failure to comply with the proposed fee and expense
requirements would not result in a violation of section 5(b)(1) of the
Securities Act or the loss of the ability to rely on the free writing
prospectus rules, similar to the provision that currently applies to
the legend condition in rule 433? \687\ If so, why should we treat the
substantive requirements regarding fee and expense information in the
same manner as the required legend? Are the proposed amendments to rule
34b-1--which 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--sufficiently broad such that the proposed amendments to rule
433 would not be necessary?
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    \687\ See rule 164(c) under the Securities Act [17 CFR
230.164(c)].
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    281. Should we amend Securities Act rule 163 to apply fee and
expense-related requirements to free writing prospectuses that a
registered closed-end fund or BDC that is a well-known seasoned issuer
may use before filing a Securities Act registration statement? If so,
what requirements should apply to these pre-filing communications?
Should we require such a fund to compute the required fee and expense
figures in the manner required for a prospectus fee table before the
fund has filed a registration statement? What are the advantages and
disadvantages of such an approach?
    282. Should the content requirements of rule 482, rule 34b-1, and
rule 433 apply differently based on the audience for the advertisement
(e.g., retail versus institutional investors)? \688\ For example, after
filing a registration statement, do new funds or existing funds that
are planning to conduct a new offering of securities need flexibility
to rely on rule 482, rule 34b-1, or rule 433 to communicate with
certain parties, such as intermediaries or institutional investors,
about potential fee or expense amounts to determine the appropriate fee
structure for a new fund or security? If so, why would a fund need to
rely on rule 482, rule 34b-1, or rule 433 for these purposes instead of
the Commission's new rule allowing test-the-water communications with
certain institutional investors? \689\ If the content requirement
should differ based on the audience, how should they differ, and what
is the basis for these differences? How should we define the different
categories of investors?
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    \688\ See, e.g., Investment Adviser Advertisements; Compensation
for Solicitations, Investment Advisers Act Release No. 5407 (Nov. 4,
2019) [84 FR 67518 (Dec. 10, 2019)], at Section II.A.5; FINRA rule
2210.
    \689\ Securities Act rule 163B allows funds to engage in test-
the-waters communications with qualified institutional buyers and
institutional accredited investors to determine whether such
investors might have an interest in a contemplated registered
securities offering. These communications may occur either before or
after a fund has filed a Securities Act registration statement. See
17 CFR 230.163B; Solicitations of Interest Prior to a Registered
Public Offering, Securities Act Release No. 10699 (Sep. 25, 2019)
[84 FR 53011 (Oct. 4, 2019)].
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    283. Should the amendments to rule 482, rule 34b-1, and rule 433
apply equally to new and existing funds? If not, why not? For example,
do any of the proposed amendments present particular challenges for a
new fund that has filed a registration statement but that does not have
an effective registration statement? If so, what are those challenges,
and how could we address them?
    284. Should we amend rule 156 to address statements and
representations about a fund's fees and expenses that could be
materially misleading, as proposed? If not, why not? Are the proposed
amendments overly broad or overly narrow? What impact would the
proposed amendments have on current investment company marketing
practices? Should the proposed amendments be requirements rather than a
factor for consideration?
    285. Is the proposed factor in rule 156 appropriately tailored to
address potential materially misleading statements or representations
regarding a fund's fees and expenses? \690\ If not, how could we modify
the proposed factor to address potential materially misleading
statements or representations without negatively affecting a fund's
ability to provide the types of fee and expense information that
investors want in fund advertisements?
---------------------------------------------------------------------------

    \690\ See proposed rule 156(b)(4).
---------------------------------------------------------------------------

    286. Should we provide additional factors an investment company
should consider to avoid potentially materially misleading statements
regarding a fund's fees and expenses? If so, what factors and why? For
instance, are there circumstances in which a fund might include
statements in its advertisements that suggest or imply present or
future levels of fees and expenses that would not be justified under
the circumstances and that might be materially misleading to investors?
Could this potentially occur, for example, if a fund that has
performance fees or fulcrum fees advertises its current fees and
expenses in a manner that suggests or implies that the fund's fees and
expenses would remain the same in the future, even though the fund's
fee and expenses could be significantly higher if the fund's future
performance triggers the performance fee or fulcrum fee? What are the
advantages or disadvantages of including a new factor in rule 156
related to statements that suggest or imply present or future levels of
fees and expenses that would not be justified under the circumstances?
Would the proposed amendments to rule 156 already appropriately address
this concern?
    287. Should we provide additional guidance on the types of
explanations, qualifications, limitations, or other statements that
funds that have zero-expenses (or close to zero expenses) based solely
on information in their prospectus fee tables could include in their
advertisements to address concerns about materially misleading
statements or provide standardized statements for advertisements or
prospectuses? For example, should such a statement provide that the
fund, its adviser, or its affiliates may receive compensation from the
fund that is not disclosed? Should the statement instead provide that
there are other costs that will reduce the value of an investment

in the fund? Are there other statements that would explain the issue
more clearly to investors or that would be more accurate for different
types of funds? Would standardized language be appropriate for
different types of funds with zero expenses (or close to zero expenses)
based solely on information in their prospectus fee tables, or should
funds have discretion to tailor the language to address a particular
fund's facts and circumstances? Would guidance of the type that this
request for comment describes be appropriate for other scenarios
related to the presentation of fees and expenses in fund
advertisements, and if so, what other types of scenarios should the
guidance address?
    288. Would the proposed amendments to the investment company
advertising rules create unintended incentives or results, such as an
incentive for funds to no longer include fee and expense information in
fund advertisements? If so, how could we reduce the impact of those
unintended incentives or results while still promoting more balanced
and transparent presentations of fund fees and expenses in
advertisements?

M. Technical and Conforming Amendments

    We are proposing technical and conforming amendments to various
rules and forms. As discussed above, our proposal would revise rule
30e-3 to exclude investment companies registered on Form N-1A from the