[Federal Register Volume 83, Number 112 (Monday, June 11, 2018)]
[Proposed Rules]
[Pages 26891-26912]
[FR Doc No: 2018-12408]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 232, 240, 270, and 274

[Release No. 33-10503; 34-83376; IC-33113; File No. S7-12-18]
RIN 3235-AM28

Request for Comment on Fund Retail Investor Experience and
Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
seeking public comment from individual investors and other interested
parties on enhancing disclosures by mutual funds, exchange-traded funds
(``ETFs''), and other types of investment funds to improve the investor
experience and to help investors make more informed investment
decisions. Specifically, we are seeking comment to learn how investors,
like you, use these disclosures and how you believe funds can improve
disclosures to help you make investment decisions. We are particularly
interested in your input on the delivery, design, and content of fund
disclosures. In addition to or in place of responses to questions in
this release, investors seeking to comment on the investor experience
and improving fund disclosure may want to submit a short Feedback Flier
on Improving Fund Disclosure.

DATES: Comments should be received on or before October 31, 2018.

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include
File Number S7-12-18 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-12-18. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. Commenters are encouraged to
identify the number of the specific question(s) to which they are
responding. The Commission will post all comments on the Commission's
website (https://www.sec.gov/rules/other.shtml). Comments are also
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. Investors
seeking to comment on the investor experience and improving fund
disclosure may want to submit a short Feedback Flier on Improving Fund
Disclosure, available at Appendix B.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this request for
comment. A notification of the inclusion in the comment file of any
such materials will be made available on the Commission's website. To
ensure direct electronic receipt of such notifications, sign up through
the ``Stay Connected'' option at www.sec.gov to receive notifications
by email.

FOR FURTHER INFORMATION CONTACT: Michael Kosoff, Senior Special
Counsel; or Angela Mokodean, Senior Counsel, at<PHONE_NUMBER>,
Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8626.

SUPPLEMENTARY INFORMATION: The Commission is seeking public comment
from individual investors and other interested parties on enhancing
investment company disclosures to improve the investor experience and
to help investors make more informed investment decisions.

Table of Contents

I. Introduction
II. Fund Disclosure
    A. Fund Disclosure and Other Fund Information
    B. Delivery of Fund Information
    1. Timing of Disclosure Delivery
    2. Method of Disclosure Delivery
    a. Investors' Use of the internet
    b. Form and Manner of Delivery
    c. Promoting Electronic Disclosures
    C. Design
    1. Plain Language
    2. Using Technology To Improve the Design of Fund Disclosures
    3. Use of Summaries and the Summary Prospectus
    4. Location and Order of Information
    5. Structuring Disclosures
    D. Content
    1. Strategies
    2. Risks
    3. Fees and Expenses
    4. Performance
    5. Management Discussion of Fund Performance
    6. Fund Advertising
    7. Other Types of Funds
    E. Opportunities for Ongoing Assessment of Disclosure
Effectiveness
III. General Request for Comment
Appendix A: Hypothetical Mutual Fund Summary Prospectus
Appendix B: Feedback Flier on Improving Fund Disclosure

I. Introduction

    Today the Commission is continuing its efforts to enhance the
information that is available to you, the investor, to help you make
informed investment decisions. We have previously taken steps to
improve the effectiveness of mutual fund, exchange-traded fund, and
other types of public investment fund (``fund'') disclosures.\1\ We are
now requesting comment from you and other interested parties on ways to
enhance fund disclosures, including the delivery, design, and content
of fund disclosures, to improve the investor experience and help
investors make more informed investment decisions.\2\
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    \1\ See, e.g., Enhanced Disclosure and New Prospectus Delivery
Option for Registered Open-End Management Investment Companies,
Securities Act Release No. 8998 (Jan. 13, 2009) [74 FR 4546, 4558
(Jan. 26, 2009)], available at https://www.sec.gov/rules/final/2009/33-8998.pdf (``Summary Prospectus Adopting Release'') (adopting an
improved disclosure framework for mutual funds that was intended to
address concerns that had been raised regarding the length,
complexity, and usefulness of mutual fund prospectuses and to make
use of technological advances to enhance the provision of
information to mutual fund investors).
    The Commission staff has also taken steps to improve fund
disclosures. See, e.g., Letter from Barry D. Miller, Associate
Director, Division of Investment Management, U.S. Securities and
Exchange Commission, to Karrie McMillan, General Counsel, Investment
Company Institute (Jul. 30, 2010), available at https://www.sec.gov/divisions/investment/guidance/ici073010.pdf.
    \2\ We are seeking your input to help inform our consideration
of whether to, for instance, propose future changes to fund
disclosures.
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    Our mission is to protect investors; maintain fair, orderly, and
efficient markets; and facilitate capital formation. Disclosure is the
backbone of the federal securities laws and is a principal tool we use
to fulfill our mission. Disclosure

can provide you with the information you need to evaluate investment
choices and make informed investment decisions. We recognize that
investors have different levels of knowledge and experience, and we
seek to promote disclosure that is inviting and usable by a broad
spectrum of investors.
    Fund disclosures are especially important because millions of
American investors invest in funds to help them reach important
financial goals, such as saving for retirement and their children's
educations. As of the end of 2017, more than 100 million individuals
representing nearly 60 million households owned funds.\3\ Given these
numbers,\4\ it is vital that investors obtain the information necessary
to help them decide how to invest their assets.
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    \3\ Investment Company Institute, 2018 Investment Company Fact
Book, at ii (2018), available at https://www.ici.org/pdf/2018_factbook.pdf.
    \4\ Funds managed 24 percent of household financial assets at
year-end 2017. Id. at 36.
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    Disclosures can take many forms, and funds provide disclosure on
paper as well as through electronic media. Regardless of the medium
used, an effective disclosure system should help investors:
     Find what they need;
     Understand what they find; and
     Use what they find to make informed investment decisions.
    A modern fund disclosure system should provide investors
streamlined and user-friendly information that is material to an
investment decision, while providing them the ability to access
additional, more in-depth information on-demand. We developed our
current disclosure requirements at a time when investors received
information primarily on paper. Some have criticized fund prospectuses
and other required disclosure documents for containing long narratives;
generic, redundant, and even at times irrelevant disclosures; legalese;
and extensive disclosure that may serve more to protect funds from
liability rather than to inform investors.
    As technology evolves, the Commission seeks to improve the fund
disclosure system to reflect the way investors currently seek, receive,
view, and digest information. Advances in technology have made
available new, innovative, and effective ways to improve the delivery,
design, and content of fund disclosures. Electronic-based disclosures
allow for more interactive, user-friendly design features tailored to
meet individual investors' needs and improve investor engagement.
Technology could also improve the content of fund disclosures by, for
example, allowing investors to customize certain fund disclosures, such
as fees and expenses, based on an investor's individual circumstances.
    This request for comment, as well as investor testing of disclosure
alternatives,\5\ are two key initiatives the Commission is using to
assess our current disclosure framework for funds. Through
modernization of current disclosure requirements, the Commission can
create a disclosure system that is better suited to meet the needs of
21st century investors. To that end, we are seeking your input on a
wide range of issues relevant to fund disclosures. We have tailored our
request to get information on your experience with the delivery,
design, and content of fund disclosures. In addition to the specific
issues highlighted for comment, we invite investors and other members
of the public to address any other matters you believe are relevant to
fund disclosure requirements.\6\
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    \5\ The Commission's Office of the Investor Advocate (``OIAD'')
currently is engaging in investor testing through its Policy
Oriented Stakeholder and Investor Testing for Innovative and
Effective Regulation (``POSITIER'') initiative. POSITIER seeks to
provide the Commission and its staff with data regarding investor
preferences, comprehension, and attitudes about investing. Under
this initiative, OIAD has launched a specific study program to
examine the topic of retail disclosure effectiveness. This study
program seeks to identify and test ways to increase investor
understanding of key investment features and, in turn, help improve
investment outcomes for individual investors. See SEC's Office of
the Investor Advocate to Hold Evidence Summit, Launch Investor
Research Initiative, Securities and Exchange Commission Press
Release, Mar. 2, 2017, available at https://www.sec.gov/news/pressrelease/2017-59.html.
    \6\ The Commission's Office of Investor Education and Advocacy
has published guidance on how you can write and submit a comment to
us. See Investor Bulletin: Suggestions for How Individual Investors
Can Comment on SEC Rulemaking (Dec. 12, 2017), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-suggestions-how-individual.
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    We have generally directed questions in this request for comment to
you, the investor. If you seek to comment on the investor experience
and improving fund disclosure, in addition to or in place of responses
to questions in this release, you may want to submit a short Feedback
Flier on Improving Fund Disclosure, available at Appendix B.\7\
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    \7\ The Commission determines that using this short-form
Feedback Flier document to obtain information from investors is in
the public interest and will protect investors and therefore is not
subject to the requirements of the Paperwork Reduction Act of 1995.
See Securities Act of 1933 (``Securities Act'') section 19(e) and
(f). Additionally, for the purpose of developing and considering any
potential rules relating to this Request for Comment, the agency may
gather information from and communicate with investors or other
members from the public. Id. section 19(e)(1) and (f).
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    We recognize that others have an interest in effective disclosure
and can provide valuable perspectives. Therefore, we welcome input on
these issues from all interested parties, including academics, literacy
and design experts, market observers, and fund advisers and boards of
directors, particularly comments pertaining to the following:
     How funds currently provide information;
     How investors currently access and use this information;
and
     The potential costs and benefits of alternative approaches
to our current fund disclosure framework.

II. Fund Disclosure

A. Fund Disclosure and Other Fund Information

    There is a wide variety of fund information available to investors,
including disclosure documents we require by regulation and materials
that funds and others prepare at their discretion, such as sales
materials. Together, these materials may be available in many forms,
such as print or electronically (including through social media), and
they may be static (such as a document) or interactive (such as a
calculator or fund comparison tool).
    Required Fund Disclosures. Required fund disclosures include the
following:
     Prospectus. A prospectus provides key information about a
fund to help investors make informed investment decisions. This
document (or a summary version known as a ``summary prospectus'') is
typically available at the time of purchase. Funds typically deliver
prospectuses or summary prospectuses to investors before or at the time
of confirmation of a purchase of fund shares and each year for as long
as they continue to own fund shares. Appendix A to this release
contains a hypothetical summary prospectus solely for illustrative
purposes. A summary prospectus generally includes a description of:
    [cir] The fund's investment objectives or goals;
    [cir] The fund's fees and expenses;
    [cir] Its principal strategies for achieving those investment
objectives or goals;
    [cir] The principal risks of investing in the fund;
    [cir] The fund's and a broad-based index's past performance;
    [cir] The fund's advisers and portfolio managers;
    [cir] How to purchase and sell fund shares;
    [cir] Tax information; and

    [cir] The compensation paid to intermediaries,\8\ such as your
financial professional and/or his or her firm.\9\
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    \8\ An intermediary is an entity (such as a broker-dealer or
bank) that you may use to purchase fund shares.
    \9\ A fund's full prospectus includes additional information.
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     Statement of additional information (``SAI''). The SAI
provides additional information that some investors may find useful,
but that we do not consider essential information for all investors.
The SAI largely expands on information that is contained in the
prospectus. It is available online or upon request.
     Shareholder reports. Shareholder reports include both
annual and semiannual reports, which describe how the fund has operated
and include the fund's holdings and financial statements. The annual
report also discusses the market conditions and investment strategies
that significantly affected the fund's performance during its last
fiscal year.
     Proxy statements. A proxy statement informs investors
about when and where a shareholder meeting is taking place, describes
the matters shareholders will vote on, and explains how to vote shares.
Funds send this document (or a brief notice describing basic details
about the meeting and how to access the full proxy materials) to
investors in advance of the shareholder meeting.
     Other information. Funds are required to make additional
information available on EDGAR \10\ that is not required to be
delivered to investors. This information includes a fund's holdings for
its first and third quarter-ends and its proxy voting record.
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    \10\ EDGAR is the SEC's Electronic Data Gathering Analysis and
Retrieval System. EDGAR contains the filings of all public companies
and certain individuals who are required to file documents with the
Commission. Information about paper filings since 1986 and complete
electronic filings since 1996 onward are available. EDGAR may be
accessed from the Commission's public website, www.sec.gov.
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Other Fund Information
     A fund may prepare advertising materials to inform
potential or current investors about the fund. Fund advertisements may
take many forms and can include materials in newspapers, magazines,
radio, television, mailings, fact sheets, fund commentaries,
newsletters, and on various web-based platforms (including mobile
devices, such as smartphones). Fund advertisements must comply with
certain regulatory requirements.\11\
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    \11\ See rule 482 under the Securities Act. Rule 482 is
discussed in detail in the section titled Fund Advertising, below.
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     Financial professionals, analysts, and the media may
produce other materials that provide information about funds, such as
research or analyst reports, tools or other services for researching
and comparing funds, fund ratings, and news articles.
     Investor.gov. The SEC's Office of Investor Education and
Advocacy maintains a website at www.Investor.gov that provides a
variety of publications to help you understand the various features and
risks of common investment products.
    Given the volume and complexity of fund information, the delivery,
design, and content of fund disclosures have significant effects on
investors' ability to access and use important information. One way to
assess the effectiveness of our disclosure regime is to examine how
investors use fund disclosures today.
Request for Comment
    1. How do you select funds for investment? What do you look at
before deciding on an investment? Do you look at fund disclosure
documents or other publications or websites? If so, which do you
primarily look at? Do you use online investment tools or other tools
before making an investment?
    2. What information do you want to know when you make an investment
and monitor an investment you own? What information do you not receive
that you would like to receive?
    3. Do you rely on any of the disclosure documents we describe
above, such as the fund summary prospectus, prospectus, shareholder
report, or statement of additional information to invest or continue to
hold an investment? If not, why not? If you do rely on any of the
disclosure documents, which parts do you rely on and why?
    4. Do you rely on certain disclosure when purchasing shares of a
fund and different disclosures when holding or selling shares? If so,
why?
    5. How well do current fund disclosures assist you in your
investment decision-making? What disclosures could funds improve? How
does technology help you make investment decisions?
    6. When making investment decisions, do you rely entirely,
partially, or not at all on the advice of a financial professional?
Does the assistance of a financial professional affect whether and how
you use fund disclosures?
    7. Are current fund disclosures understandable? Do you have access
to sufficient information, tools, and analysis to help you evaluate
potential investment choices and your current investments?
    8. How do you compare different investment choices? Are there types
of interactive comparison tools that you use? Are there other tools
that would be helpful but do not appear to exist?
    9. If the current tools available for comparing investment choices
are not helpful, have you seen tools or features that compare other
types of non-financial products (such as cars or cellphone plans) that
are helpful? If so, what are they, and why are those tools more
helpful?
    10. Should we provide prominent links on our website to tools you
can use to compare investment choices or products, such as FINRA's Fund
Analyzer, which is available at https://tools.finra.org/fund_analyzer/?
    11. Recent data indicates that approximately 21 percent of
Americans do not speak English in their homes.\12\ Is the current
disclosure regime effective for Americans whose primary language is not
English or who have limited English proficiency? If not, what
improvements do you recommend?
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    \12\ See Central Intelligence Agency, The World Factbook,
available at https://www.cia.gov/library/publications/resources/the-world-factbook/ (estimating that as of 2015, approximately 79
percent of Americans spoke English in the home).
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B. Delivery of Fund Information

    When and how investors receive information can be as important as
the content and design of disclosures. Today, there is a lot of
information about funds available online. The challenge is whether an
investor can easily find, access, and compare the information at a time
when the information is useful to the investor. Two important
considerations to the delivery of fund information are the following:
     When investors receive fund disclosure relative to their
investment decisions; and
     How investors receive fund disclosures, including the form
of disclosure (paper or electronic) and the manner of delivery (such as
whether an investor receives a copy of the disclosure or a notice that
the disclosure is available online or in paper on request).
    The Commission is seeking input with respect to all aspects of the
timing and delivery of information to fund investors with the goal of
improving the investor experience and helping investors make more
informed investment decisions.
1. Timing of Disclosure Delivery
    A well-functioning fund disclosure regime should provide material
information to investors. It should also

provide that information at a time when it can be useful to an
investor.\13\ Regulatory documents, such as a prospectus, are typically
available before an investment decision. Specifically, any summary
prospectus, prospectus, or SAI is available upon request from the fund
and may be available on a fund's website. You also can request these
documents from your financial professional. In addition, funds and
financial professionals typically make other materials available that
describe the fund, which may also help an investor make an investment
decision.
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    \13\ We recognized this principle when we adopted rule 159 under
the Securities Act in 2005. See Securities Offering Reform,
Securities Act Release No. 8591 (Jul. 19, 2005) [70 FR 44722, 44765
(Aug. 3, 2005)], available at https://www.sec.gov/rules/final/33-8591fr.pdf.
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    The federal securities laws do not require delivery of the
prospectus at the time you make an investment decision to purchase fund
shares. However, investors generally must receive a prospectus or
summary prospectus before or at the time they receive a document
confirming their purchase of fund shares.
    We are seeking input on whether investors are able to obtain the
information they need before investing and after investing.
Request for Comment
    12. What information (such as investment objectives, fees and
expenses, strategies, risks, and performance) is important to you
before you purchase fund shares? What information is important to you
after you have made an investment? If you rely on the advice of a
financial professional, would your conversations with him or her be
more helpful if you received the prospectus before or during your
discussion?
    13. What information do you receive at or before your purchase of
fund shares? Do you typically receive a prospectus (or summary
prospectus) at the time of or before your purchase of fund shares? Is
there sufficient information about funds available such that delivery
of a prospectus before you purchase fund shares is unnecessary? If so,
what information do you review?
    14. Fund advertisements must include language that tells investors
how to obtain a fund's prospectus or summary prospectus and that
advises investors to read the prospectus carefully before investing in
a fund. Below is an example.

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An investor should consider the investment objectives, risks, and
 charges and expenses of the Fund carefully before investing. The
 prospectus and summary prospectus contains this and other information
 about the Fund. You can get a free copy of the prospectus and summary
 prospectus by calling the Fund at (800) xxx-xxxx, by clicking here, or
 from your financial professional. You should read the prospectus and
 summary prospectus carefully before investing.
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Does this notice effectively inform you about how to obtain a
prospectus or summary prospectus and of the importance of reviewing a
prospectus before making an investment decision? If it is not
effective, how could we improve it?
    15. Do you ever seek out fund information on your own without the
help of a financial professional? If so, were you able to find the
information easily at the time you were looking for it? If not, what
were the problems?
    16. Securities regulators in certain other jurisdictions require
delivery to investors of a summary document describing the key features
of a fund at or before the purchase of fund shares. This type of
document generally is known as a ``point-of-sale'' disclosure. Should
we consider a similar point-of-sale disclosure requirement? \14\
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    \14\ We have considered other point-of-sale disclosure in the
past. See Confirmation Requirements and Point of Sale Disclosure
Requirements for Transactions in Certain Mutual Funds and Other
Securities, and Other Confirmation Requirement Amendments, and
Amendments to the Registration Form for Mutual Funds, Investment
Company Act Release No. 26341 (Jan. 29, 2004) [69 FR 6438 (Feb. 10,
2004)]; Point of Sale Disclosure Requirements and Confirmation
Requirements for Transactions in Mutual Funds, College Savings
Plans, and Certain Other Securities, and Amendments to the
Registration Form for Mutual Funds, Investment Company Act Release
No. 26778 (Feb. 28, 2005) [70 FR 10521 (Mar. 4, 2005)].
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2. Method of Disclosure Delivery
a. Investors' Use of the Internet
    Americans' preference for consuming information through electronic
media has grown substantially as the use of the internet has grown.\15\
By mid-2017, 95 percent of households owning mutual funds had some form
of internet access (up from 68 percent in 2000).\16\ While much fund
information is available in an electronic format, many of these
disclosures are an electronic rendering of paper documents (such as a
PDF). Technology, including email and web-based information, can speed
up the delivery of information and enhance disclosure.
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    \15\ See Amy Mitchell, Jeffrey Gottfried, Michael Barthel and
Elisa Shearer, The Modern News Consumer: News Attitudes and
Practices in the Digital Era, Pew Research Center, Jul. 7, 2016,
available at http://assets.pewresearch.org/wp-content/uploads/sites/13/2016/07/07104931/PJ_2016.07.07_Modern-News-Consumer_FINAL.pdf.
    \16\ See ICI Research Perspective: Ownership of Mutual Funds,
Shareholder Sentiment, and Use of the Internet, Investment Company
Institute, at 18 (Oct. 2017), available at https://www.ici.org/pdf/per23-07.pdf.
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    Because internet access and technology enable varied methods for
providing information and investor preferences may be changing in light
of advancing technology, we are seeking information about your current
use of the internet to communicate about and find information on fund
investments. This information will help us improve funds' ability to
get investors the information they need.
Request for Comment
    17. Do you use the internet to access your personal financial
information such as your investment accounts? How often do you do so?
Do you ever use the internet to research funds or to find information
about your current fund investments? If so, do you look for information
on a fund's website, on your financial professional's website, or
elsewhere? For example, do you use your brokerage firm's website for
fund research? When researching fund information online, do you prefer
to use a computer, tablet, smartphone, or a different device?
    18. If you do not use electronic media to receive or access
information about funds, what are your reasons (such as lack of access
to the internet, privacy concerns, preference for reading paper,
discomfort with technology, or lack of time or interest)?
    19. How do you prefer to receive communications about fund
investments (for example, mail delivery, email, website availability,
mobile applications, or a combination)? How do you currently receive
communications about your investments?
    20. Do you maintain an active email address on file with a fund in
which you are invested or with your financial professional? Why or why
not? Have you chosen to have your fund documents delivered by email?
Why or why not? Do you log in to your funds' or financial
professionals' website? If so, how often do you log in and what do you
look at?

    21. Is there particular website content that you like to access,
such as blogs, videos, fund screeners, interactive calculators,
performance presentations, fact sheets, research reports, or social
media posts?
b. Form and Manner of Delivery
    Increasingly, investors are relying on electronic media to get
their news and information. We believe this includes information about
their investments. Investors' increasing use of electronic media may
change the way they like to receive information, including the form of
disclosure delivery (paper versus electronic) and the manner of
delivery (such as whether they receive full disclosure documents or
notices that disclosure is available online or in paper on request).
    Currently investors receive fund prospectuses and shareholder
reports (as well as other documents such as account statements and
confirmations) in paper through the mail unless they choose electronic
delivery.\17\ As discussed above, a fund typically delivers a copy of
the paper prospectus or summary prospectus to an investor before or at
the time of confirmation of a purchase of fund shares and each year
after that. A fund also may send investors a paper copy of a
``sticker''--that is, a supplement to a previously sent prospectus or
summary prospectus--to reflect certain changes that occur during the
year.
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    \17\ On June 5, 2018, we adopted amendments that will permit
funds to deliver to their investors a notice alerting them that the
fund's most recent annual or semiannual report is available online
at a specified website instead of delivering them a full report in
paper. See Optional Internet Availability of Investment Company
Shareholder Reports, Investment Company Act Release No. 33115 (Jun.
5, 2018).
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    Using electronic delivery more broadly could benefit funds and
their investors. For example, funds and their shareholders (who
ultimately bear the costs of sending paper documents) could potentially
save money if a fund has to print and mail fewer paper documents.
Electronic disclosure also could enhance design features that are
unavailable in paper documents, such as improved searchability, easy
reference to additional detail through hyperlinks, and the ability to
compare multiple funds simultaneously. These features could improve the
usefulness of fund disclosures for investors.
    While there are benefits associated with electronic disclosure,
there are potential concerns as well. Electronic delivery may vary in
effectiveness depending on investor preferences and needs. Some
investors may not be comfortable with using technology to access fund
disclosures. Further, a small subset of investors do not have access to
the internet, although the percentage of investors with internet access
continues to increase.\18\ Other investors may simply prefer to read
information on paper and may process that information better when read
on paper rather than electronically. Investors who do not want to or
who are unable to access electronic disclosure may be able to rely on a
financial professional to provide the relevant disclosure in paper.
However, to the extent these investors do not rely on a financial
professional to assist with their investments, they may have difficulty
accessing electronic fund disclosures.
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    \18\ See supra note 16 and accompanying text.
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    Different disclosure documents may arrive in different ways. For
example, an investor may receive a brief notice in the mail telling him
or her how to get proxy materials in paper or online, while he or she
would receive a full copy of a fund's prospectus or summary prospectus.
    In light of the technological advances made in recent years and the
increased reliance by investors on electronic media, we are seeking
comment on the form and manner of disclosure delivery.
Request for Comment
    22. Do you prefer to access some types of information (such as a
prospectus (or summary prospectus), shareholder reports, and proxy
statements) electronically and to receive other types in paper? If so,
which types of information do you wish to access electronically versus
receive in paper?
    23. Do you currently receive the right amount of fund information
in the mail? If you receive too much or too little information by mail,
have you found it difficult to tell your broker, investment adviser, or
fund that you want to receive more or less paper?
    24. Should we continue to require funds to deliver a paper copy of
their prospectuses or summary prospectuses unless you have chosen to
receive these documents electronically? Alternatively, should we permit
funds to email this information to you and not send paper copies
without having to ask you for permission first, if the fund has an
email address on file for you? Are there other means such as text
messages, notification via an app, or social media that funds should
use to effectively communicate information (or the availability of
information) to investors? Under an electronic delivery approach, how
should investors be able to request delivery of paper disclosures?
    25. Do you prefer to receive a prospectus or summary prospectus
directly, or would you prefer to receive a brief notice (such as a
postcard or an email containing a link to the document) informing you
that new or amended fund disclosure is available? Are you more likely
to read, retain, or act on a fund disclosure document if you receive it
directly by mail or electronic communication (such as email) rather
than simply being notified that it is available? If you prefer to
receive a brief notice, how frequently should you receive this notice,
and how should funds provide the notice (for example, paper, email,
text, or robocall)? Alternatively, would you prefer not to receive
communication from a fund and to find information independently about
the fund online at a time of your choosing? If yes, should we permit
this approach for all information, or should there be an exception for
certain types of fund information, such as tax information and proxy
materials? Are you more likely to read, retain, or act on a fund
disclosure document if you receive it directly by mail or electronic
communication (such as email)?
    26. Do you have different informational needs or interests for new
fund investments as opposed to your existing fund investments? For
example, would you like a fund to send you a copy of its prospectus or
summary prospectus when you first buy a fund's shares but prefer that
the fund not send you a copy of the prospectus in subsequent years,
except upon request? For your existing fund investments, would you like
to receive a copy of the prospectus or other notice only if the fund
has a material change (like a material change in its principal
investment strategy or a material increase in fees)? If so, should the
fund explain or highlight the material change(s) for you in some
manner?
c. Promoting Electronic Disclosures
    As discussed above and in section II.C.2, electronic delivery of
fund disclosures could have significant benefits for funds and
investors, such as cost savings and enhanced features improving the
usefulness of disclosures. We are seeking comment on what, if anything,
the Commission should do to encourage funds to deliver documents
electronically in an investor friendly manner, and to encourage
investors to take advantage of the benefits that electronic delivery
can provide, while minimizing the drawbacks.

Request for Comment
    27. How should funds more effectively use technology and
communication methods to help investors focus on important fund
information?
    28. Should we accommodate changes in the ways investors review
electronic documents, such as the increasing use of mobile devices? If
so, how? How likely are you to read fund disclosures on your mobile
device?
    29. What features in electronic disclosures (such as hyperlinks,
searchability, and the ability to save on your computer) do you find
most useful? How can more funds be encouraged to make these features
available? Are there any features that funds should be required to make
available?
    30. Are there steps funds could take to help overcome barriers to
electronic delivery in light of various concerns, such as privacy or
discomfort with technology? Are there ways that funds can make
electronic disclosures more user-friendly, especially for those averse
to using the internet in making investment decisions?
    31. Do cybersecurity issues make you reluctant to open an
attachment, click on a link, or log in to a fund website based on links
embedded in emails? How can funds make electronic access more secure,
and how can they make you feel safer when receiving documents or other
communications electronically? Are there protocols that the Commission
could require to help make electronic delivery safer for investors?
    32. Would you be more likely to access electronic information about
funds, or access such information more frequently, if we required funds
to disclose certain updated information online (for example, updated
performance)?

C. Design

    The design of information can influence an investment decision. For
this reason, the Commission has established requirements for certain
disclosure documents to help ensure that key information is presented
clearly, is easy to find, and facilitates comparisons between funds.
These requirements prescribe, for example, the order, content, form,
and timing of certain information.
    Technology can be a powerful tool to enhance the design of
disclosures and the investor experience of consuming them. As an
example, a glossary of terms and definitions may be necessary for a
paper-based document, but web-based disclosures could take advantage of
pop-ups, hovers, or other tools to provide definitions when the
investor needs them.
    The Commission is seeking input with respect to all aspects of the
way fund information is presented to investors and how to design
disclosures to improve the investor experience and help investors make
more informed investment decisions.
1. Plain Language
    Plain language disclosure makes information more accessible to
investors and promotes investor engagement in financial decision-
making. Currently, funds are required to follow a plain English rule to
make their prospectuses clear, concise, and understandable.\19\ More
detailed standards apply to certain sections of the prospectus, such as
the summary section and the description of risk factors. Under the
rule, funds generally must follow these plain English principles, among
others:
---------------------------------------------------------------------------

    \19\ See rule 421 under the Securities Act.
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     Short sentences;
     Descriptive headings;
     Understandable language (generally avoiding reliance on
glossaries, defined terms, and legal jargon or highly technical
business terms);
     Active voice; and
     Tabular presentations or bullet lists, particularly when
presenting complex material.
    Plain language plays an important role in investors' ability to use
fund disclosures. We are seeking comment on the effectiveness of our
current plain English framework and how to improve the readability and
usefulness of fund disclosures for investors.
Request for Comment
    33. Are required fund disclosures (such as a prospectus,
shareholder report, and proxy statements) easy to read?
    34. Should we do more to promote less technical writing in fund
disclosures? For example, should we:
     Replace technical terms, such as ``front-end load'' or
``12b-1 fees''? Alternatively, are these terms so well-established that
replacing them would confuse investors?
     Require certain fund disclosure documents or sections of
such documents to have specific readability scores? \20\
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    \20\ Other financial regulators have required that disclosures
describing financial products meet minimum readability standards.
See, e.g., NAIC Suitability in Annuity Transactions Model Regulation
(Model 275-1) (2003) (requiring that certain insurance policies have
a minimum score of 40 on the Flesch Reading Ease Test or equivalent
comparable test).
---------------------------------------------------------------------------

     Add more sample language to Commission forms that funds
can use to introduce a given topic in their disclosures using basic,
understandable terms? \21\ Which parts of the prospectus would benefit
from additional explanation of the purpose of the disclosure?
---------------------------------------------------------------------------

    \21\ Commission forms and rules sometimes include sample
language that a fund must include, with modifications as warranted,
to introduce a subject and explain the relevance of related
disclosure. As an example, Item 3 of Form N-1A provides sample
language for a mutual fund to explain the relevance of its fee and
expense table, the example regarding the cost of investing in the
fund, and the fund's portfolio turnover.
---------------------------------------------------------------------------

     Encourage or require greater use of personal pronouns
(such as ``you'') in disclosures to speak directly to the reader?
    35. Would you prefer more use of visual presentations (such as
tables, charts, and graphs) in fund disclosures? Are there particular
types of fund information that you would prefer to receive as visual
presentations? Do you find the current visuals in fund disclosures
(such as graphs showing the performance history of a fund) useful, or
can they be too complex?
    36. Should we modify the format of prospectuses or other required
fund disclosures to make them more user-friendly? For example, should
certain summary or other disclosure be presented in a question-and-
answer (Q&A) format? \22\ If a Q&A format is used, should we
standardize the questions, or should funds have the flexibility to
develop different questions based on their facts and circumstances?
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    \22\ Funds sometimes include Q&As in proxy materials to help
investors understand the matters on which they are voting, and other
jurisdictions have required Q&A-based fund disclosure. See also
Canadian Securities Administrators National Instrument 81-101F3,
Contents of Fund Facts Document, available at http://ccmr-ocrmc.ca/wp-content/uploads/81-101_ni_f3_en.pdf.
---------------------------------------------------------------------------

    37. A fund's name is often the first piece of information you see
about a fund. If a fund name includes a particular type of investment,
industry, country, or geographic region, what conclusions do you draw
about how the fund invests? More generally, do you believe that a
fund's name conveys information about the fund's investments and
investment risks?
    38. The SEC's Office of Investor Education and Advocacy maintains a
website at www.Investor.gov that provides a variety of publications to
help you understand the various features and risks of common investment
products.\23\ Should we

require fund disclosure documents to include a link to that website or
its relevant publications to help investors make more informed
investment decisions? In the alternative, should we require an
investment education section within each prospectus that describes the
basic features and risks of the relevant investment type? Are there
additional ways the Commission could promote the overall financial
education of fund investors?
---------------------------------------------------------------------------

    \23\ See, e.g., Mutual Funds and ETFs: A Guide for Investors,
U.S. Securities and Exchange Commission, Office of Investor
Education and Advocacy, available at https://www.investor.gov/sites/default/files/mutual-funds.pdf.
---------------------------------------------------------------------------

2. Using Technology To Improve the Design of Fund Disclosures
    Recent technological developments could enable more interactive,
user-friendly disclosure that funds can tailor to individual investors'
needs. Among other things, technology could help investors do the
following:
     Find information of interest. For instance, while the
electronic version of a paper-based disclosure may currently include
hyperlinks in the table of contents section, funds could use other
technological tools to help an investor better navigate or filter the
disclosure to find and understand information of interest.
     Understand fund disclosures. Potential tools that funds
could use to make their disclosures more understandable include pop-ups
or hovers to provide plain language definitions or background on more
complex issues.
     Personalize fund disclosure based on individual needs and
circumstances. Funds or others could use technology to generate
personalized fund data or illustrations based on investor inputs, such
as fees and expenses on a specific investment size.
     Access more current information about funds. Technology
could allow a fund to make static disclosure more useful by
continuously updating information, such as fund performance.
    Given advances in technology, we are seeking comment on ways funds
could better use technology to make disclosure more useful and engaging
for individual investors.
Request for Comment
    39. How can we encourage or require funds to display fund
information in a more user-friendly manner? For example, are there ways
a fund could use web-based disclosure to present prospectus information
to make the information more accessible and useful to you than an
electronic rendering of a paper document (such as a PDF)?
    40. Should fund disclosures be more personalized to enhance your
understanding and engagement? If so, how? For example, should we
encourage or require funds to use tools in electronic disclosures to
help investors filter information to align with their areas of interest
or personalize information based on their individual circumstances?
    41. We require certain fund disclosures to include hyperlinks to
other pieces of information (such as a fund website or another fund
document). Should we require other technologies in addition to or in
lieu of hyperlinks to connect information (such as QR codes \24\)?
---------------------------------------------------------------------------

    \24\ A QR code is a two-dimensional barcode capable of encoding
information such as a website addresses, text information, or
contact information. These codes are becoming increasingly popular
in print materials and can be read using the camera on a smartphone.
These codes can provide an easier way for investors to get more
information about funds.
---------------------------------------------------------------------------

    42. Should interactive fee calculators and performance
presentations or other interactive tools supplement or replace certain
required fund disclosures? If so, how would these tools integrate into
the current disclosure regime?
    43. How important are design elements--such as larger font sizes,
greater use of white space, colors, or visuals, or the use of audio or
video disclosures--to investors?
    44. Assuming that more interactive and visually appealing
disclosures may be more costly and that you will ultimately pay those
costs, would you be willing to pay more for these enhanced features?
    45. What do investors want to see done to give funds the ability to
use technology creatively to effectively convey information to
investors?
3. Use of Summaries and the Summary Prospectus
    Concise, user-friendly disclosure assists investors in making their
investment decisions. To promote these principles, in January 2009, the
Commission amended the registration form used by mutual funds and ETFs
to provide investors with streamlined and user-friendly information
that is key to an investment decision.\25\ Specifically, the Commission
added a new summary section to mutual fund and ETF prospectuses and
allowed these funds to deliver a shorter summary prospectus to
investors, subject to certain conditions. The key information in the
summary section includes a fund's investment objectives and strategies,
risks, costs, and performance. Having this information in a
standardized order in all mutual fund and ETF prospectuses helps
investors compare multiple funds.
---------------------------------------------------------------------------

    \25\ See Summary Prospectus Adopting Release, supra note 1.
---------------------------------------------------------------------------

    A fund's summary prospectus includes the same key information that
the fund provides in the summary section of its prospectus. Appendix A
to this release contains a hypothetical summary prospectus solely for
illustrative purposes. A fund that uses a summary prospectus must
provide its prospectus, SAI, and recent shareholder reports on a
website and deliver these documents by paper or email upon an
investor's request. Under this layered approach to disclosure,
investors receive key information directly and have access to more
detailed information.
    We generally believe that investors benefit from clear and accurate
summary disclosure of key information. Specifically, summary
disclosure, along with access to more detailed information, can assist
investors in making more informed investment decisions. We are seeking
comment on the effectiveness of the summary prospectus for mutual funds
and ETFs and whether a similar summary disclosure framework might
improve other fund disclosures.
Request for Comment
    46. Should we do more to encourage or require shorter, ``summary''
disclosures, with additional information available online or upon
request? For example, should we require summary versions of other
required fund disclosures, such as shareholder reports?
    47. Do you use the summary prospectus in making investment
decisions? Does the summary prospectus contain the right amount and
type of information to assist you in making an investment decision?
Would other information, such as measures of leverage \26\ or
derivative exposure, help you make an informed investment decision? Are
there disclosure items currently required in the summary prospectus
that we should eliminate?
---------------------------------------------------------------------------

    \26\ Funds employing leverage typically seek to enhance returns
by borrowing money to make additional investments, or investing in
certain financial instruments that do not require full payment at
the time of entering into the trade. While leverage can enhance
positive returns, it also can magnify fund losses.
---------------------------------------------------------------------------

    48. Currently, we only permit funds to disclose certain pieces of
information in their summary prospectuses. Should the summary
prospectus also alert you to important imminent events, such as
impending liquidations, mergers, or large distributions that might have
a significant impact on your investment decisions?
    49. Do you think summary prospectuses are too short, too long, or

an appropriate length? The Commission intended each summary prospectus
to consist of three or four pages, but allows funds flexibility to set
the length.\27\ However, many summary prospectuses exceed this intended
length. Certain foreign jurisdictions have adopted summary disclosure
documents that include page limits. For example, Canada's Fund Facts
document cannot exceed four pages, and the European Union's Key
Investor Information Document (``KIID'') cannot exceed two pages.\28\
Should we limit the length of summary prospectuses, or should we
continue to provide funds with flexibility in this area?
---------------------------------------------------------------------------

    \27\ Id. at note 14. We have observed summary prospectuses of up
to 19 pages in length.
    \28\ A sample Canadian Fund Facts document is available at
http://www.osc.gov.on.ca/documents/en/Securities-Category8/ni_20130613_81-101_implementation-state-2-pos.pdf#page=51, and a
sample European KIID is available at https://www.esma.europa.eu/sites/default/files/library/2015/11/10_794.pdf#page=5.
---------------------------------------------------------------------------

    50. How can technology enhance the usefulness of summary disclosure
for investors? Should electronic versions of summary documents provide
the ability to more easily access additional, detailed information by
clicking on a piece of information? Should we encourage technology that
can aggregate fund information from multiple funds so an investor can
see a summary of his or her entire portfolio? If so, what is the best
way to encourage this type of technology? Would investors be willing to
pay for these technological enhancements?
4. Location and Order of Information
    Logical organization of information can help investors easily find
desired information at the appropriate level of detail. As previously
discussed, the current disclosure framework for most funds consists of
a prospectus (and a summary prospectus for most mutual funds and ETFs),
SAI, and annual and semiannual shareholder reports. The prospectus and
SAI generally describe how the fund will operate on an ongoing basis,
and the shareholder reports reflect how the fund operated in the past.
In addition, funds often make additional information available on their
websites.
    In certain contexts, such as in summary prospectuses, we require
funds to disclose required information in a standardized order. We also
require that certain information appear in a fund's prospectus as
opposed to its SAI. However, we currently allow funds to choose how to
order many individual items within a required disclosure document.
    Fund websites can also be a valuable tool for providing information
to investors in real-time. For example, performance information can
quickly become out-of-date, so referring investors to a website for
more current performance information may be preferred. Funds may also
have certain arrangements in place with financial professionals with
respect to the amount of sales charge imposed.\29\ Since the list of
financial professionals and the terms of the agreements may change
frequently, it may be more appropriate to disclose this information on
a website rather than in a fund prospectus.
---------------------------------------------------------------------------

    \29\ Currently, funds are required to disclose intermediary
specific sales load variations in the prospectus. See Item 12(a) of
Form N-1A, Item 7(c) of Form N-3, and Item 6(c) of Form N-4.
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    Because of the importance of providing investors fund information
in a location where they can reasonably expect to find the information
they want, we are seeking comments on how to rationalize and improve
the requirements associated with the location and order of fund
information.
Request for Comment
    51. Does the current disclosure framework of a summary prospectus,
prospectus, SAI, and annual and semiannual reports provide you the
necessary information to make informed investment decisions? Should
funds provide additional information? Would a one-page sheet at the
beginning of each prospectus (or summary prospectus with key
information such as historical performance, fees, portfolio managers,
date of inception and whether the fund employs leverage to a
significant extent) be helpful to investors? If so, should this one-
page sheet be standardized?
    52. Is there information that is currently located in the summary
prospectus, prospectus, SAI, or annual report that would be more
appropriate in a different regulatory document or online?
    53. Are there any disclosure materials that you receive separately,
for example a summary prospectus or annual report, that you would
prefer to receive in a single, combined document? If you would prefer
to receive these disclosures as a single unified document, when should
it be delivered?
    54. Does the standardized order of information in a mutual fund or
ETF summary prospectus help you more easily locate specific information
or compare multiple funds? If so, would you find it helpful if
information appeared in a set order in any other fund disclosure
documents?
    55. Currently, a single prospectus, SAI, or shareholder report may
include information about many funds. Do you find these documents
difficult to navigate? Should we limit these documents to one fund per
document? Does your response depend if it imposes additional costs on
investors? Alternatively, should we require that all the information
about a single fund appear in one place in a multi-fund document?
    56. Currently, while funds' regulatory documents are freely
available through the Commission's EDGAR system, most funds include a
number of those regulatory documents (such as a prospectus and
shareholder report) on their websites. However, they often do not post
all of them (such as a fund's quarterly holdings and proxy voting
record). Do you typically obtain fund information through EDGAR,
through the fund's website, or through a different (such as a, third-
party) source--or some combination of these? Would it be useful to you
to be able to access all required fund disclosures in one centralized
location on a fund's website?
5. Structuring Disclosures
    Structuring disclosures can enhance investors' access to
information and improve the quality of available information. Even if
investors do not know what structured disclosure is, they benefit from
structured disclosure when they research and compare funds using
various online tools. Structured disclosure consists of disclosure
items that are machine-readable (meaning they can be understood by a
computer or other electronic device) because the disclosure text has
been labeled (sometimes referred to as ``tagged'') using an electronic
reporting language, such as eXtensible Markup Language (``XML'') or
eXtensible Business Reporting Language (``XBRL''). Tagging disclosures
allows investors and other market participants to more easily access,
share, and analyze fund information across different systems or
platforms. Figure 1 below illustrates the difference between disclosure
as you might see it (left image) and structured disclosure as a
computer sees it (right image). (To be clear, disclosure, to you, would
appear as the example on the left--whether it is structured or

unstructured. Structured disclosure adds the machine-readable
information in the example on the right--either in a separate data file
that a fund would submit to the Commission, or as a layer of
information invisibly embedded within an electronic document--so that
the disclosure can be easily read and processed by computers as data.)
[GRAPHIC] [TIFF OMITTED] TP11JN18.000

    Structured disclosure offers many benefits to investors and other
market participants because it enhances their ability to use technology
to process and synthesize information, allowing for more timely and in-
depth analysis of fund information. Structured disclosure can help
investors and other market participants to more easily retrieve,
aggregate, and analyze information from disclosures across funds and
time periods. For example, investors and other market participants can
analyze data points to observe trends (such as changes in fund fees
over time), examine portfolio data, create ratios, or perform other
analyses. Narrative disclosures also can be structured and analyzed to,
for example, examine how different funds are describing a portfolio
strategy or conduct comparisons against peers. For these reasons,
countries around the world, including the United States, are
increasingly using structured disclosure for reporting. In addition,
unlike other data sources, this data comes directly from information
filed with the Commission, which may improve the quality of the data.
    Currently, mutual funds and ETFs are required to submit interactive
data files (formatted using XBRL) containing their risk/return summary
information, which includes objectives, fees, principal strategies,
principal risks, and performance disclosures.\30\ Money market funds
also electronically file a monthly report on Form N-MFP that contains
detailed information about fund holdings in the XML format. Other funds
will also be required to provide portfolio-level data to the Commission
on a monthly basis and census-type information to the Commission on an
annual basis in the XML format.\31\
---------------------------------------------------------------------------

    \30\ See General Instruction C.3.g(i), (iv) to Form N-1A.
    \31\ See Investment Company Reporting Modernization, Investment
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18,
2016)]; Investment Company Reporting Modernization, Investment
Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14,
2017)].
---------------------------------------------------------------------------

    Because of the benefits that structuring disclosures can provide,
we are seeking comment on whether and how to improve our current
structured disclosure reporting regime to increase the usefulness of
structured disclosure.
Request for Comment
    57. How are you currently using fund data (such as fees, holdings,
or performance-related data)? Which data, in particular, are you using
and how do you access the data? Do you obtain the data from fund or
third party websites, or directly from the Commission's website?
    58. We currently provide risk/return summary information (that is,
objectives, fees, principal strategies, principal risks, and
performance disclosures) extracted from mutual fund XBRL filings on our
website for download.\32\ Should we provide other fund industry and
fund-specific census-type and portfolio information data sets on our
website for download? If so, what additional information should we
provide, and how would you use that information?
---------------------------------------------------------------------------

    \32\ See https://www.sec.gov/dera/data/mutual-fund-prospectus-risk-return-summary-data-sets.
---------------------------------------------------------------------------

    59. Is there additional mutual fund or ETF information that we
should require in a structured disclosure format? If so, what
information?
    60. Are there other formats for structuring disclosures that would
make disclosures more accessible or useful to you and other data users?
Are other standards, besides XBRL and XML, becoming more widely used or
otherwise superior to these formats in

allowing you and other data users to easily retrieve, aggregate, and
analyze fund data? If so, what are those standards? What would be the
advantages and drawbacks of these formats to investors, funds, and
other data users, compared to XBRL or XML?
    61. To what extent is the information currently provided in a
structured disclosure format readily available through other sources,
such as third-party data aggregators (like Morningstar and Lipper)? If
you use third parties, do you pay for the information? Do you access
structured disclosure directly from EDGAR or from fund websites for a
significant number of funds without using third-party data aggregators?
Has the availability of structured disclosure reduced your dependence
on, or the costs associated with, using data aggregators?

D. Content

    The content of fund disclosures should provide the basis for an
investment decision. For this reason, the Commission has established
requirements to help ensure that funds' presentations of certain key
information (such as objectives, fees, strategies, and risks) is clear,
is not misleading, and facilitates comparisons between funds. We are
seeking input with respect to the content of fund disclosures to
improve the investor experience, which could lead to more informed
investment decisions.
1. Strategies
    A fund's investment strategies tell you how the fund intends to
achieve its investment objective. They indicate the approach the fund's
adviser takes in deciding which investments to buy or sell. A fund's
principal investment strategies refer to the strategies that the fund
expects to have the greatest anticipated importance in achieving its
objectives and that the fund anticipates will have a significant effect
on its risks and returns. Principal strategy disclosure must also
discuss the type(s) of investments in which the fund will principally
invest. For example, a fund may employ a strategy to invest in multiple
asset classes (such as equities and bonds), invest a large amount of
assets in a particular industry, or invest in a specific geographic
region.
    To effectively select and invest in funds to meet their financial
objectives, it is important for investors to understand how a fund is
investing. However, the staff has observed significant variations in
funds' approaches to principal strategy disclosure that may impact
investors' ability to effectively use this information. This disclosure
sometimes includes lengthy and highly technical descriptions of fund
strategies that can make it difficult for investors to identify and
understand how the fund will invest. For example, several mutual funds
in Morningstar's Large-Cap Value category describe their principal
strategies in under 100 words in the summary section of the prospectus,
while other funds in the same category use more than 1,000 words. Some
of the longest principal strategies disclosure the staff has observed
exceed 5,000 words. While we recognize that some principal investment
strategies are more complex, we believe that streamlined, plain English
disclosures could enhance the investor experience and contribute to
more informed investment decisions.
    Several factors may be contributing to lengthy, complex, and hard
to understand disclosure regarding principal investment strategies.
These include the following:
     Disclosing information about certain investment types the
fund is not likely to use.
     Including an extensive discussion of principal strategies
and risks in the summary prospectus for a mutual fund or ETF since
there is no page limit or limit to the number of strategies or risks a
fund may disclose in its summary prospectus.
     Discussing both principal and non-principal strategies in
the same section of the prospectus (although this is not permitted in
the summary section of mutual fund and ETF prospectuses or the summary
prospectuses).
     The strategy itself is complex.
    In addition, it may be difficult for retail investors to understand
strategy disclosure when such disclosure: (1) Involves certain complex
financial transactions, particularly when described using highly
technical language; or (2) assumes its readers have a high degree of
financial knowledge.
    We are seeking input on the current framework for disclosing
principal investment strategies and how we could improve this framework
to help you better understand how funds invest.
Request for Comment
    62. Understanding how a fund will invest your money is important to
making an investment decision. Do fund prospectuses and other
disclosures adequately describe a fund's strategies? How can funds
improve these disclosures?
    63. Do you learn about a fund's strategies by looking at a fund's
name, its fund category, its prospectus (or summary prospectus), or
other materials (such as website disclosure or third-party resources)?
    64. Should we address the length and complexity of principal
strategies disclosure, and if so, how? Should we establish additional
guidelines--such as specific thresholds to determine which strategies
are considered ``principal'' (such as if a stated percentage of the
fund's assets are devoted to a strategy, it is deemed to be (or
presumed to be) a principal strategy)--or impose limits on the length
of principal strategies disclosure in a summary section? If so, what
would be an appropriate threshold, or limitation on length? Should
funds disclose strategies in order of importance or in some other
standardized way to help you better understand the key strategies of
the fund?
    65. Would visual presentations of strategies better help you
understand a fund's disclosure, and if so, how? Can graphs, tables, or
other visual tools adequately describe strategies? For example, would
inclusion of a graphic representation of a fund's holdings improve a
fund's principal strategies disclosure? Would the effectiveness of
visual presentations depend on the medium in which they are viewed
(such as paper, electronic, or mobile device)?
    66. Some funds employ a ``go anywhere'' strategy. Under this
approach, a fund's manager may invest in a broad array of asset
classes, and can target what the manager believes are the best
investments, rather than be limited to a particular investment focus.
Are there better ways to promote understanding of ``go anywhere''
funds' strategies? Are there ways to highlight the distinctions between
``go anywhere'' funds across different fund complexes?
    67. Funds may use leverage to magnify returns (both positively and
negatively). Leverage can come from a fund borrowing money to make
additional investments or through the use of certain financial
instruments, such as derivatives. Some funds try to specify their level
of leverage (such as to produce twice the returns on an index), while
others reserve more discretion with respect to their use of leverage.
However, many investors do not adequately understand the impact of
leverage on their investments. Do you believe that funds adequately
explain the use and effects of leverage on their portfolios? For
instance, do funds make clear that leverage can result in higher
returns but also come with the risk of more severe losses? If not, how
can we improve the disclosure?
    68. Are there certain fund types--whether defined by structure, by
type of investment, or by investment strategy

(such as open-end or closed-end, or fixed income or equity)--for which
we should require more or less detailed strategies disclosure? If so,
what are those types of funds and what disclosures should we add or
subtract?
2. Risks
    All investments in funds involve risk of financial loss. The reward
for taking on investment risk is the potential for a greater investment
return. When evaluating funds for investment, it is important to
determine if the fund satisfies your investment objective and matches
your risk tolerance, as well as the risks in your overall portfolio. A
fund's risks vary considerably with the nature of its investments.
    We require funds to highlight the principal risks associated with
an investment in the fund. Principal risks include, for example, those
risks that are reasonably likely to adversely affect the fund's net
asset value, yield, and total return. For example, a fund investing in
stocks of companies with small market capitalization would discuss
market risk as a general risk of holding stocks, as well as the
specific risks associated with investing in small capitalization
companies (that is, that these stocks may be more volatile and have
returns that vary, sometimes significantly, from the overall stock
markets).
    However, the sometimes lengthy and highly technical descriptions of
fund risks can make it difficult for investors to identify and
understand the key risks of a fund. For example, as with principal
investment strategies, investors may find it difficult to identify and
understand the principal risks of investing in a fund because
prospectuses may (1) disclose risks associated with strategies the fund
has yet to undertake, (2) include overly long discussions of risks, or
(3) discuss both principal and non-principal risks in certain non-
summary sections of the prospectus. In addition, some funds disclose a
wide variety of principal risks that have little potential impact on
the fund. Currently, funds are not required to disclose risks in a
particular order (such as by order of importance) or to try to quantify
their risks in any way.
    To effectively select and invest in funds to meet their financial
objectives, it is important that investors understand the principal
risks associated with a fund. As with strategy disclosure, however, the
staff has observed significant variations in funds' approaches to
principal risk disclosure that may impact investors' ability to
effectively use this information. For example, some mutual funds in
Morningstar's Large-Cap Value category describe just a few principal
risks in less than 200 words in the summary section of the prospectus,
while other funds in the same category list 20 or more principal risks
using more than 2,500 words in its summary section of the prospectus.
Some of the longest principal risks disclosures the staff has observed
exceed 7,000 words. While we recognize that some principal investment
strategies give rise to more complex or varied risks than others and
that certain funds or fund complexes may present different risks (such
as risks associated with a new adviser), we believe refinements to
principal risk disclosure would contribute to the investor experience
and to more informed investment decisions.
    We are seeking input on the current framework for disclosing risks
and how we could improve this framework to help you better understand
the key risks associated with your fund investments.
Request for Comment
    69. Do fund prospectuses and other disclosures adequately describe
the level of risk associated with a fund? How can funds improve these
disclosures?
    70. How do you learn about a fund's risks? What information is most
useful to you in evaluating a fund's risks, and what do you want to
know? Are there any metrics (such as standard deviation) that you
consider?
    71. Should we establish additional guidelines--such as specific
thresholds to determine which risks are considered ``principal,'' page
limits, or limits on the number of principal risks a fund may
disclose--to further standardize principal risk disclosure? If so, what
would be an appropriate threshold, page limit, or numeric limit on the
number of items disclosed?
    72. Would visual presentations of risks better help you understand
a fund's risks? Can risks be adequately described using graphs, tables,
or other visual tools? For example, would a standardized risk measure
or risk rating be useful to understand a fund's risk? Both the Fund
Facts document required by Canadian securities regulators and the KIID
required by the European Union require funds to quantify their level of
risk.\33\ The Canadian form requires that a fund rank its risk level on
a 5-point scale (Low, Low to Medium, Medium, Medium to High, and High).
The European form requires that a fund rank its risk level on a 7-point
scale. Should we also require a risk rating? If so, what type of scale
should we use (for instance, a 10-point scale or low/medium/high risk)?
What inputs should determine a fund's rating on the scale? Should the
fund's rating on the scale be chosen at the fund manager's discretion,
or should a standardized metric be used? Are there other presentations
of risks that you think may be useful to investors?
---------------------------------------------------------------------------

    \33\ A sample Canadian Fund Facts document is available at
http://www.osc.gov.on.ca/documents/en/Securities-Category8/ni_20130613_81-101_implementation-state-2-pos.pdf#page=51, and a
sample European KIID is available at https://www.esma.europa.eu/sites/default/files/library/2015/11/10_794.pdf#page=5.
---------------------------------------------------------------------------

    73. Many funds list their principal risks in a way that does not
reflect the relative importance of each risk to a fund, such as listing
risks in alphabetical order. Would ranking risks in order of importance
better help you understand the key risks of the fund? How should a fund
determine the importance of a particular risk factor? For example, how
should a fund weigh the likelihood and magnitude of a particular risk
in determining a ranking? For instance, which would have a higher
ranking: A common event that can subject a fund to small losses, or
rare occurrences that could lead to significant losses? If we require a
ranking, how often should funds be required to reassess the ranking?
    74. Would it be helpful if funds disclosed one or more quantitative
measures of risk (such as historic volatility, standard deviation,
Sharpe ratio)? \34\ If yes, which risk measures should be disclosed?
---------------------------------------------------------------------------

    \34\ Although we previously inquired about quantitative
measures, we are asking for responses to similar questions in this
area to learn current investor preferences in this area. See
Improving Descriptions of Risk by Mutual Funds and Other Investment
Companies, Investment Company Act Release No. 20974 (Mar. 29, 1995)
[60 FR 17172 (Apr. 4, 1995)].
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3. Fees and Expenses
    When considering investing in a fund, fees and expenses are an
important factor investors should consider. Even seemingly small
differences in fees and expenses can significantly affect a fund's
investment returns over time. Funds must disclose information about
fees and expenses in a standardized format to help investors compare
that information across funds. Typically, the information appears in
two sections: A fee table, which shows shareholder transaction fees and
annual fund operating expenses, and an expense example.
     Shareholder transaction fees are charges that investors
pay directly. They typically appear as a percentage of the amount
invested including (1) sales charges (also known as ``loads''), which
generally pay investment professionals

compensation for selling a fund to an investor; and (2) other
applicable fees related to redemptions, exchanges, and account
minimums. Some shareholder transaction fees appear as a dollar amount
in the fee table.
     Annual fund operating expenses are charges that an
investor pays indirectly because these charges are paid out of fund
assets. Annual fund operating expenses appear as a percentage of net
assets and generally include (1) ``management fees,'' which are paid to
the fund's investment adviser for deciding which investments the fund
buys and sells and for providing other related services; (2) ``Rule
12b-1 fees,'' which pay for marketing and selling fund shares; and (3)
``other expenses,'' which represent various categories, such as
auditing, legal, custodial, transfer agency fees, and interest expense.
     The expense example is a hypothetical calculation that
shows the estimated expenses that an investor will pay for investing in
a fund over different time periods. The expense example appears in
dollar amounts, based on a hypothetical investment of $10,000, and
assumes a 5 percent annual return over the course of 1, 3, 5, and 10
years.\35\
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    \35\ If a fund imposes a fee or other charge when an investor
sells (redeems) his or her shares, the fund must disclose two
expense examples. The first example shows the estimated expenses of
investing in the fund if the investor continues to hold his or her
shares throughout the 1, 3, 5, and 10 year periods. The second
example shows an investor's estimated investment expense if he or
she sells (redeems) shares at the end of the 1, 3, 5, or 10 year
periods.
---------------------------------------------------------------------------

    We are seeking comment on how to improve the disclosure
requirements associated with fees and expenses to promote more informed
investment decisions.
Request for Comment
    75. Fund fees and expenses are a key consideration in an investment
decision because fees and expenses can significantly affect a fund's
investment returns over time. Do funds disclose fund fees and expenses
in an effective manner? How could funds improve the disclosure of fund
fees and expenses? Would fund fees and expenses be more readily
understandable if they were presented as dollar amounts or expressed as
a percentage? Would it be helpful if the actual fees and expenses
associated with your investment in the fund were included in other fund
documents, such as your account statements? \36\
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    \36\ The Commission's Investor Advisory Committee (``IAC'') has
recommended that the Commission explore ways to improve mutual fund
cost disclosures, with the goal of enhancing investors'
understanding of the actual costs they bear when investing in mutual
funds and the impact of those costs on total accumulations over the
life of their investment. The IAC has suggested that, in the short
term, the best way to make investors more aware of costs is through
standardized disclosure of actual dollar amount costs on customer
account statements. The IAC was established to advise the Commission
on, among other things, regulatory priorities, fee structures, the
effectiveness of disclosure, and initiatives to protect investor
interests and to promote investor confidence. See Recommendation of
the Investor as Purchaser Subcommittee Regarding Mutual Fund Cost
Disclosure (Apr. 14, 2016), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-041416-recommendation-investor-as-purchaser.
---------------------------------------------------------------------------

    76. Investors may make better investment decisions if they are
alerted to the need to focus on certain information. Should we require
a fund to add a statement to its prospectus that emphasizes the
importance of understanding fees and expenses? What should this
statement be?
    77. Annual fund operating expenses currently appear as separate
line items, such as management fees, rule 12b-1 fees, and other
expenses, that add up to a final line item reflecting total annual fund
operating expenses. Is the current format useful, or would you prefer
to have a simpler presentation that, for example, includes only a
single line item for total annual fund operating expenses or a
graphical representation of fees like a fee meter (which is a graphic
that shows how a fund's fees compares to other funds)?
    78. Do you believe it would be helpful to include a ``fees and
expenses benchmark'' that could help you compare the fees of the fund
to fees of similar funds and understand the relative size of a fund's
fees? For example, would it be helpful to include a benchmark or fee
meter that would rank fees and expenses as low, medium, or high? If so,
how should we define ``similar funds''?
    79. A fund's transaction costs (such as the costs of buying and
selling a fund's investments and certain foreign taxes) can be
significant.\37\ Such costs may exceed a fund's total annual operating
expenses and negatively affect a fund's performance. A fund must
disclose its portfolio turnover rate (that is, the percent of the
portfolio the fund typically trades in one year), which is an
indication of one type of transaction cost (for instance, a high
portfolio turnover may indicate higher transaction costs).\38\ Do you
find the current presentation of portfolio turnover to be useful to
understanding transaction costs incurred by the fund? Do you want to
see additional information about these costs? If so, which information?
Is there a more effective format for communicating transaction costs to
investors? If so, which format?
---------------------------------------------------------------------------

    \37\ See, e.g., Concept Release: Request for Comments on
Measures to Improve Disclosure of Mutual Fund Transaction Costs,
Investment Company Act Release No. 26313 (Dec. 18, 2003) [68 FR
74819 (Dec. 24, 2003)].
    \38\ Item 3 of Form N-1A.
---------------------------------------------------------------------------

    80. A portion of the transaction costs for an equity fund often
pays for research provided by third-party broker-dealers that is used
by the adviser in making investment decisions. These costs do not
appear in the fee table or expense example. What disclosure, if any,
should funds provide about these costs (known as ``soft dollars'')?
\39\
---------------------------------------------------------------------------

    \39\ We have considered enhancing fund soft dollar disclosure
requirements in the past. See, e.g., Commission Guidance Regarding
the Duties and Responsibilities of Investment Company Boards of
Directors With Respect to Investment Adviser Portfolio Trading
Practices, Investment Company Act Release No. 28346 (Jul. 30, 2008)
[73 FR 45646 (Aug. 6, 2008)], available at https://www.sec.gov/rules/proposed/2008/34-58264.pdf.
---------------------------------------------------------------------------

    81. The expense example disclosed in a fund's prospectus should
help investors quickly compare the cost of investing in a fund with the
cost of investing in other funds. The example presents expenses based
on certain assumptions, such as a fixed investment amount and rate of
return over specified periods. Do you find the expense example useful
and easy to understand? Are the assumptions in the calculation
appropriate? How could we improve the expense example? Are you able to
determine your own costs of investing in a fund based on the expense
example, or would you prefer to receive a customized calculation of
your specific expenses from the fund? Would you like to (or do you
currently) use an online tool to calculate a personalized expense
amount based on your actual investment in a fund?
    82. A fund's fee table discloses costs charged by the fund but not
external costs charged by your financial professional. Do you currently
have sufficient information about external costs to understand the true
cost of your investment? Would it be useful for you to see the total
amount you pay annually for investing in a fund, including external
costs? Because external costs are shareholder specific and the fund
does not have access to this information, what would be the most
effective method of communicating this information?
4. Performance
    When considering whether to invest in a fund, investors may
consider the fund's investment performance. However, consideration of a
fund's performance has certain limitations. In particular, past
performance cannot

predict future performance. Therefore, fund prospectuses are required
to state that a fund's past performance is not necessarily an
indication of how the fund will perform in the future. Any top
performing fund in a given year can easily underperform the following
year.
    Investors should consider performance information in light of a
number of other factors, including the following:
     The fund's fees and expenses, which reduce the fund's
overall investment return;
     The investor's age, income, other investments, or debt,
all of which may affect his or her financial situation and risk
tolerance;
     The performance of the asset classes the fund invests in
and its benchmark; and
     Market and economic conditions. While a particular
investment return might be above average during a period of economic
downturn, that same return could be below average during a period of
generally favorable economic conditions.
    Notwithstanding the limitations of performance information, it
can--if used wisely--contribute to a more informed investment decision.
For example, one potential use of performance information is that it
can tell an investor how volatile (or stable) a fund has been over a
period of time. Generally, the more volatile a fund, the greater the
investment risk.
    In an effort to balance the limitations of fund performance
information with its potential usefulness and investor demand for this
information, we have established standards for how funds present their
performance in fund prospectuses. Under these standards, the prospectus
is generally required to include:
     A bar chart displaying the fund's performance for each of
the past 10 years (or since the fund's creation if the fund has less
than 10 years of performance history);
     A table comparing the fund's performance for the last 1-,
5-, and 10-year periods to a broad-based securities market index; and
     The fund's performance for its best and worst calendar
quarters.
    We are soliciting comment on how to improve the presentation of
fund performance so investors can make more informed investment
decisions.
Request for Comment
    83. How do you consider performance information when making an
investment decision? For example, do you use it to evaluate the risk of
a fund, or do you use it for some other purpose, such as to assess the
skill of the investment manager? How could funds improve the
presentation of performance information? Should past performance
information be emphasized or de-emphasized in fund disclosures? Should
short-term performance periods (such as 1-year) be de-emphasized and
longer-term performance periods be emphasized?
    84. A mutual fund or ETF's performance presentation in the Risk/
Return Summary section of its prospectus and fund advertisements must
include a statement to the effect that the fund's past performance is
not necessarily an indication of how the fund will perform in the
future.\40\ Is this performance disclaimer sufficiently clear to
investors, or can it be improved?
---------------------------------------------------------------------------

    \40\ Item 4(b)(2)(i) of Form N-1A.
---------------------------------------------------------------------------

    85. A mutual fund or ETF's performance presentation in the Risk/
Return Summary section of its prospectus and fund advertisements must
also explain that performance information shows how the fund's returns
have varied. Is it clear that the performance information is included
to show variability of returns, rather than any indication that the
fund will perform similarly in the future? How can we improve this
disclosure to reflect the risks of relying too heavily on past
performance?
    86. The performance table in the Risk/Return Summary must show the
returns of an appropriate broad-based securities market index in
addition to the performance of the fund.\41\ Should funds disclose how
they determined that their benchmark is an appropriate broad-based
benchmark? Should we require new funds that do not yet have past
performance to disclose their intended benchmark performance index?
---------------------------------------------------------------------------

    \41\ Item 4(b)(2)(iii) of Form N-1A.
---------------------------------------------------------------------------

    87. Beyond the required comparison of fund performance to that of
an appropriate broad-based securities market index, are there other
performance comparisons that you would find useful, such as a
comparison between the fund's performance and that of a peer group of
funds? For example, should a small-cap fund be required to compare its
performance to an index comprised of small-cap funds or to all funds
with a similar investment strategy? If we take such an approach, how
should the Commission define ``peer group'' to help ensure meaningful
comparisons?
    88. The Risk/Return Summary requires average annual total returns
for 1-, 5-, and 10-year periods before taxes as well as after-taxes on
distributions and after-taxes on distributions and redemption.\42\ Do
you find the after-tax information helpful?
---------------------------------------------------------------------------

    \42\ Item 4(b)(iii) of Form N-1A.
---------------------------------------------------------------------------

    89. Under certain circumstances, our staff has not objected to a
fund including in its performance record or otherwise disclosing the
performance of an unregistered predecessor account of the fund (such as
a hedge fund that converted to a mutual fund) or other similarly
managed accounts of the adviser or portfolio manager.\43\ Is this
information helpful to investors, or do you find it to be of limited
relevance or confusing?
---------------------------------------------------------------------------

    \43\ With respect to certain commodity funds, this disclosure
may be required. See CFTC Regulation 4.25(c).
---------------------------------------------------------------------------

    90. Should the Commission take steps to encourage or require more
funds to include interactive performance presentations on their
websites? Which of these features or presentations are most helpful for
you in understanding performance information? Are there features or
presentations that are confusing?
    91. The investment decisions and trading strategies of a fund's
portfolio manager(s) often drive fund performance. Is information about
the identity, experience, and background of fund portfolio managers
important to you when considering an investment? Is the current
information about fund portfolio managers sufficient? If not, why not?
If a fund is managed by a team of managers, should the fund disclose
information about each of the team members?
5. Management Discussion of Fund Performance
    To understand a fund's performance over the prior year, it is
useful for an investor to receive information about relevant factors
that affected the fund's performance. Management's Discussion of Fund
Performance (``MDFP'') is a section of a mutual fund or ETF's annual
report in which fund managers discuss the factors, such as market
conditions and investment strategies, that materially affected the
fund's performance during its most recently completed fiscal year.
Unlike the prospectus, which focuses on how a fund intends to invest,
the MDFP describes how the fund actually invested in the prior year and
why it performed as it did.
    In this discussion, management usually identifies which holdings of
the fund contributed to or detracted significantly from the fund's
performance. A required line graph compares the fund's performance
during

the last 10 years (or for the life of the fund, if shorter) of a
hypothetical $10,000 initial investment against an appropriate broad-
based securities market index (such as the S&P 500). In addition, the
fund must include a table with the fund's average annual returns for
the most recent 1-, 5-, and 10-year periods.\44\ Many funds also
voluntarily provide additional information, such as a fund president's
letter to shareholders, interviews with portfolio managers, market
commentary, and other similar information that is intended to assist
investors in understanding fund performance and market conditions. Some
funds include specific portfolio statistics, such as top ten holdings,
geographic and sector exposures, and summary statistics with respect to
debt yields and maturities.
---------------------------------------------------------------------------

    \44\ See Item 27(b)(7)(ii) of Form N-1A.
---------------------------------------------------------------------------

    The MDFP can be an important communications tool that helps
investors understand fund performance, the strategies the fund has
used, and the risks it has taken on. This can help investors make
decisions about whether to buy, sell, or continue to hold fund shares.
While most funds meet the basic requirements of the MDFP, the staff has
observed diversity in practice in the level of fund-specific detail or
insight management provides and the degree to which funds use generic
or boilerplate language that does not change much from year to year.
    As the MDFP is important to help investors understand performance,
we are seeking comments on how to improve the MDFP requirements to
enhance the investor experience and promote more informed investment
decisions.
Request for Comment
    92. How do you use the MDFP, and what parts of it do you consider
helpful? Is there any additional information that you would like to
have to better understand your fund's performance? Are there more
effective ways to present or supplement MDFP, for example, by linking
the section to an online video presentation?
    93. A fund must disclose its MDFP over the past year in its annual
report. Would it be useful to you if funds also included MDFP in their
semiannual reports?
    94. Does MDFP disclosure adequately describe how a fund has
performed over the prior period? Do funds adequately explain market
conditions and trends and how they relate to the fund's performance
during the relevant period? Do fund MDFP disclosures adequately explain
the investments and strategies that significantly contributed to or
detracted from the fund's performance? Would additional graphics or
narrative discussion of fund holdings be helpful to investors? If so,
what kind of information would be useful? If not, why not? Are there
any best practices in MDFP disclosure that we should encourage or
require?
    95. Should the MDFP requirements include a standardized format,
such as a Q&A format? If so, what standardized sections or information
should be included? What are the advantages and disadvantages of
including more standardized information?
    96. The MDFP requirements are currently the same for all mutual
funds (other than money-market funds) and ETFs. Should there be special
requirements for different types of funds (such as a target date fund
comparing its actual holdings to how it expected to invest at a given
time))?
6. Fund Advertising
    Investors often rely on advertising materials made available by a
fund to make investment decisions. This information may take many forms
and can include materials in newspapers, magazines, radio, television,
direct mail advertisements, fact sheets, newsletters, and on various
web-based platforms. The Commission has adopted special advertising
rules for funds; the most important of these is rule 482 under the
Securities Act.
    Rule 482 contains requirements for fund advertisements that are
intended to provide investors information that is balanced and
informative, particularly in the area of investment performance. For
example, a fund is required to include in its advertisements the
following:
     Disclosure advising investors to consider the fund's
investment objectives, risks, charges and expenses, and other
information described in the fund's prospectus, and highlighting the
availability of the fund's prospectus.
     If performance data is provided for mutual funds, ETFs, or
certain variable insurance products, certain standardized performance
information, information about any sales loads or other nonrecurring
fees, and a legend warning that past performance does not guarantee
future results.\45\
---------------------------------------------------------------------------

    \45\ Funds that include performance information in their
advertisements must make updated performance information available
and provide a toll-free number or web address for obtaining updated
performance information. See rule 482(b)(3)(i) under the Securities
Act. Further, to the extent a fund provides updated performance
information, it must include in its prospectus information about how
investors can obtain updated performance information. See Item
4(b)(2)(i) of Form N-1A.
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     If the fund is a money market fund, a cautionary statement
disclosing the particular risks associated with investing in a money
market fund.
    The rule also sets forth specific requirements regarding (1) the
prominence of certain disclosures, (2) advertisements that make tax
representations, (3) advertisements used before the effectiveness of
the fund's registration statement, and (4) the timeliness of
performance data.
    Because fund advertisements (including information on fund
websites) are so commonplace and are a principal source of information
for fund investors, we are seeking comments on how to improve the
requirements associated with fund advertisements to enhance the
investor experience and promote more informed investment decisions.
Request for Comment
    97. Have you ever made an investment decision or looked more
closely at a fund based on an advertisement? If so, what type of
advertisement was it (such as radio, TV, internet, or print)? What
aspects of the advertisement motivated you to invest in or look more
closely at a fund?
    98. In some countries, funds are required to state whether you are
reading an advertisement or a prospectus. For example, the European
Union's KIID includes standardized language explaining that it is not
marketing material and that it is required by law to help you
understand the nature and the risks of investing in the fund.\46\ Are
you able to distinguish a fund advertisement from a document required
by law (such as a summary prospectus or shareholder report)? Do you
think it is necessary for you to know the difference? Do you rely more
on one type of document over another?
---------------------------------------------------------------------------

    \46\ See Article 4 of Commission Regulation (EU) 583/2010,
available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:176:0001:0015:en:PDF.
---------------------------------------------------------------------------

    99. Many funds have fund fact sheets, which are short documents
(typically one or two pages) that include select information about the
fund. Do you think fund fact sheets are more readable than SEC-required
disclosure documents, such as summary prospectuses? If so, why? Do you
think that fund fact sheets provide sufficient information for you to
make an investment decision?
    100. Do you think fund advertisements provide a clear discussion of
the potential risks and returns of an investment in a fund?

    101. Have you observed any fund advertisements that you believe are
misleading or otherwise problematic? If so, why do you believe they
were misleading or otherwise problematic? Should certain fund
advertisements be required to include warnings analogous to those in
advertisements for pharmaceuticals or prescription medications?
    102. Do the advertising rules effectively operate with respect to
newer advertising media, such as websites, smartphone applications, and
email? For instance, should there be special requirements, such as
embedded hyperlinks in web-based advertisements to the fund prospectus?
Are there special issues we should consider about how you access and
view information? For example, a printed disclaimer at the bottom of a
video may be effective on a 50-inch TV or on a computer monitor, but
may be less effective on a 5-inch mobile device. In addition to
performance data, are there other types of information that we should
standardize in advertisements? For instance, should we require fee
information in an advertisement to be consistent with the figures shown
in the fee table section of the fund's prospectus?
    103. Rule 482 includes special disclosure requirements for certain
funds such as money market funds. Are there other types of funds for
which special disclosures should be required in fund advertisements?
7. Other Types of Funds
    In addition to mutual funds and ETFs, there are other types of
funds available to investors to help them achieve their investment
goals. The most common of these funds include the following:
     Closed-End Funds. Invests the money raised in its offering
in stocks, bonds, and/or other investments. Closed-end funds typically
sell a fixed number of shares in traditional underwritten offerings.
Closed-end fund shares are not redeemable (that is shares cannot be
returned to the fund for their net asset value); instead, investors
sell closed-end fund shares in secondary market transactions, usually
on a securities exchange, or to the fund if it offers to repurchase
shares.
     Business Development Companies. Closed-end funds that
primarily invests in small and developing businesses and that generally
makes available significant managerial assistance to such businesses.
     Unit Investment Trusts. Invests the money raised from many
investors in its one-time public offering in a generally fixed
portfolio of stocks, bonds, or other investments.
     Variable Insurance Products. Offers investors insurance
benefits (such as protection against outliving your assets) coupled
with the ability to participate in the securities markets (through
investments in mutual funds) while deferring taxes on gains until the
assets are withdrawn.
    Because of the unique nature of these types of funds, they are
subject to different disclosure requirements. We are seeking input on
how to appropriately tailor disclosure requirements to these types of
funds.
Request for Comment
    104. Different types of funds are subject to different disclosure
requirements and file on different disclosure forms. Are there
disclosure requirements that we should standardize across the various
types of funds (such as fees, performance presentations, and MDFP)? If
so, please identify them.
    105. Are the various disclosure forms well-tailored to the types of
funds that must use the forms? If not, how can we improve the forms?
Should we eliminate or consolidate some forms that funds no longer use
or use infrequently?
    106. Should we permit funds other than mutual funds and ETFs, such
as closed-end funds, to use a summary prospectus? \47\ If so, what
information should we include in a summary prospectus for such funds?
---------------------------------------------------------------------------

    \47\ As noted in the Commission's Spring 2018 Regulatory
Flexibility Act agenda, the Commission also may consider a rule
proposal designed to provide variable annuity investors with more
user-friendly disclosure and to improve and streamline the delivery
of information about variable annuities through increased use of the
internet and other electronic means of delivery. See https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tPub=true&agencyCd=3235&Image58.x=58&Image58.y.
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    107. Should we expand the MDFP requirement, which currently applies
to mutual funds and ETFs, to cover other types of funds (such as
closed-end funds)?
    108. Closed-end funds are not required to show performance
information in their prospectuses in the same chart and table format
required for mutual funds and ETFs. Should the Commission require that
closed-end funds present performance information in the same format as
mutual funds and ETFs? Are there other types of performance metrics for
evaluating closed-end fund performance that may be useful to investors?

E. Opportunities for Ongoing Assessment of Disclosure Effectiveness

    Capital markets are evolving continuously in response to technology
and innovation. While these developments present regulatory challenges,
they also allow us to explore ways to improve fund disclosure
effectiveness. We are seeking comments on opportunities the Commission
should consider in order for it to assess disclosure effectiveness on
an ongoing basis to improve the investor experience and promote more
informed investment decisions.
Request for Comment
    109. We seek to engage directly with America's investors on fund
disclosure matters. Do you have suggestions for other ways we can
increase our direct engagement with investors, like you, on key topics?
For example, should we expand our use of investor testing, focus
groups, surveys, online chats, and town halls? If so, in which forum
would you be most likely to participate?
    16. Should we conduct pilot programs to test potential disclosure
alternatives suggested by fund professionals and/or investor advocacy
groups?
    110. Should we consider the use of committees or roundtables as
formats to engage investors and market participants on fund disclosure
matters? For example, should we establish an advisory committee on fund
disclosure, or are there existing committees under which the function
should be performed, such as our Investor Advisory Committee? Should we
sponsor annual roundtables on fund disclosure matters with
representatives from the asset management profession, other financial
professionals, academics, and investor advocacy groups? Where should
those roundtables be held (in Washington, DC, or other locations)?
    111. Are there any other approaches we should consider to assess
the effectiveness of fund disclosure?

III. General Request for Comment

    In addition to the specific issues highlighted for comment, we
invite investors and other members of the public to address any other
matters that they believe are relevant to improving fund disclosure
requirements or improving the investor experience and contributing to
more informed investment decisions.

    By the Commission.

    Dated: June 5, 2018.
Brent J. Fields,
Secretary.
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[FR Doc. 2018-12408 Filed 6-8-18; 8:45 am]
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