on rule 30e-3 would experience transition costs associated with
removing statements in their shareholder reports and prospectuses
indicating that the fund would be transitioning to the rule 30e-3
framework for transmitting shareholder reports. Moreover, funds that
choose to take additional steps to inform their shareholders about the
modified approach to delivering shareholder reports under the proposal
would likely incur additional transition costs. We lack data to
quantify these costs because we do not have information about how many
funds would provide discretionary notices or other

information to their shareholders to explain the proposed changes to
shareholder report delivery.
3. Prospectus Disclosure Amendments
a. Summary of Economic Effects
    The proposal would simplify the initial prospectus disclosure to
investors in a layered approach where other information would continue
to be available online and delivered upon request, free of charge. The
proposal requires a new fee summary that includes bottom-line numbers
from the current prospectus fee table, and would appear in the summary
section of the prospectus (as well as in a summary prospectus if a fund
uses that form of prospectus).\813\ The fee summary would also express
the bottom-line numbers in dollar terms, in addition to the current
presentation of an amount in terms of fund net assets, and describe fee
and expense items in plain English.\814\ In addition, funds would
simplify their disclosures of principal risk, ranking them by
importance and highlighting those that are truly principal to the
particular fund.
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    \813\ For example, instead of listing different expense types
that comprise a fund's total annual operating expenses and then
providing the bottom-line total annual operating expenses, the fee
summary would only provide the bottom-line total.
    \814\ For example, a fund would describe a charge an investor
incurs when purchasing a fund's shares as a ``purchase charge''
instead of as a ``maximum sales charge (load) imposed on
purchases.''
---------------------------------------------------------------------------

    The following sections discuss the potential costs and benefits of
these proposed modifications to prospectus disclosures. In summary, the
benefits of the proposal would accrue through better use of the
prospectus disclosure materials by investors. The tailored disclosures
would enable investors to make more efficient use of their scarce time
and attention and, potentially, more informed investment decisions. The
costs of the proposal would accrue to fund shareholders through a
short-term, transition-related increase in fund expenses required to
prepare the new disclosures, and to fund investors in adapting to the
new style of prospectus disclosure.
b. Benefits to Investors
    The direct effect of the proposed amendments to fund prospectuses
would be to simplify the presentation of fee- and risk-related
information that funds deliver to investors. This would improve
investors' understanding of key information, and this improved
understanding could result in more efficient investment decisions.\815\
Also the proposed amendments may improve investor understanding with
respect to funds that invest 10% or less of total fund assets in
acquired funds by reducing emphasis on AFFE as a discrete category of
performance expenses where the fund does not invest significantly in
acquired funds and by improving consistency between the fund's
prospectus fee table disclosures and financial statement disclosures
under these circumstances, while also retaining investors' access to
information about the potential layering of fees through a fund's
investments in acquired funds.\816\
---------------------------------------------------------------------------

    \815\ Existing research notes that individuals exhibit limited
ability to absorb and process information. See Richard E. Nisbett &
Lee Ross, Human Inference: Strategies and Shortcomings of Social
Judgment (1980) (``Nisbett & Ross''); Hirshleifer and Teoh Study,
supra footnote 761.
    \816\ Some commenters have suggested that the disclosure of AFFE
in the fee table provides investors with the necessary information
to understand the potential layering of fees in a fund of funds
arrangements. See Kauff Laton Fund of Funds Comment Letter; Rand
Fund of Funds Comment Letter.
---------------------------------------------------------------------------

    The proposal would enable investors to locate and use key
information more easily, requiring less time and attention to process
key available information than under current rules. For example, rather
than listing different expense types that comprise a fund's total
annual operating expenses and then presenting the total annual figure,
the fee summary would only provide the total. This would make it easier
for retail investors to locate the total amount in the prospectus
quickly. Similarly, the proposal would shorten the principal risk
disclosure to focus on risks that are truly principal to the particular
fund; this would make information about those risks easier to locate
and use. We believe that making information easier to locate and use
can make the information easier to understand.
    In addition, the proposed amendments would result in disclosure
that is easier for investors to understand. By providing clearer
descriptions of certain fee and expense concepts, the proposal would
reduce the chance of retail investors misinterpreting this key
information. For example, a fund would describe a charge an investor
incurs when purchasing a fund's shares as a ``purchase charge'' instead
of as a ``maximum sales charge (load) imposed on purchases.'' Further,
by providing fee and expense information in dollar terms, the effect of
the fees and expenses may be more understandable to investors.\817\ In
addition, providing principal risks in order of importance would help
investors more readily identify and understand a fund's principal risks
relative to the baseline, where funds may order risks alphabetically or
in other ways that do not show a risk's relative importance.
---------------------------------------------------------------------------

    \817\ See supra footnotes 63 and 573.
---------------------------------------------------------------------------

    Providing more user-friendly and concise information in the
prospectus can lower the cost to the investor of gathering key
information needed to make choices among funds. The proposal may thus
enable investors more easily to evaluate and monitor fund investments
and make choices among competing funds than under the current
requirements. Some investors may read disclosures that they would not
otherwise have read. Others may consider the information they receive
more carefully. In each instance, the consequence may be choices among
investment alternatives that reflect a better alignment between the
circumstances of the investor and the available products. The ultimate
impact on investment outcomes depends on the extent to which investors
find the amended disclosure easier to access and use and the extent to
which they rely on the amended disclosure to inform their investment
decisions and actions. As discussed above, there is evidence to suggest
that consumers benefit from disclosure that highlights key
information.\818\
---------------------------------------------------------------------------

    \818\ See supra footnotes 774 to 778 and accompanying text.
---------------------------------------------------------------------------

    The proposal to allow funds with limited investments in acquired
funds to move the disclosure of AFFE into a footnote, and eliminate it
from the bottom-line total expense disclosure in the prospectus fee
table and fee summary, may benefit some investors by making it easier
for them to compare and choose among funds to meet their investment
objectives. That is, the proposal may enhance the salience of
disclosures in the prospectus fee table and fee summary that reflect
the fund's main investment strategy relative to the disclosure of its
AFFE. As the information on the AFFE amount would be retained in a
footnote, investors' access to AFFE information would not change under
the proposal. In addition, investors would continue to see a bottom-
line number that reflects AFFE where the fund substantially invests in
other funds such that the fund is, in essence, managed significantly at
the acquired fund level. Maintaining this requirement for these funds
is designed to prevent investors from being confused by expense ratios
that do not fully reflect the cost of the fund's investments.

c. Costs to Investors
    We understand that some investors may prefer the current level of
detail about a fund's fees or principal risks, and therefore, the
advantages associated with tailored disclosure, as described in this
section, may not apply to those investors. For example, if the fund
uses a summary prospectus, and an investor would prefer to see the
breakdown of fees and expenses among various line items (or wants
longer narrative discussions about principal risks), the proposal would
require the investor to take the additional step of finding the
statutory prospectus online or requesting a copy of it. The rule would
make it more difficult for the investor who prefers the more detailed
information to obtain and use that information than under the current
rule baseline. We recognize that, under these circumstances, the
proposal would impose some costs of inconvenience to these investors in
the form of requiring more time and attention to find the statutory
prospectus online or to request a copy of the statutory prospectus.
    For investors who prefer the current disclosure format and are
aware that a fund has moved the AFFE disclosure into a footnote, there
may be some inconvenience even without any change in access to
information. For example, the investor would need to take an extra step
of obtaining the AFFE amount from the footnote and combining it with
the expense information from the fee table to recover the same total
expense information that is disclosed currently. However, investors
would have access to the information necessary to recover this
information under the proposal.\819\
---------------------------------------------------------------------------

    \819\ For example, this could be done by simple addition (e.g.,
expense ratio of 0.50 + AFFE expense of 0.03 = total expenses of
0.53). The inputs to this addition would be readily available under
the proposal to all investors, including in XBRL format.
---------------------------------------------------------------------------

    We also recognize that some investors may not recognize that
certain funds' AFFE disclosures have moved into a footnote of the fee
table under the proposal. If an investor does not realize that the
expense disclosure in these funds' prospectus fee tables (i.e., funds
that have 10% or less of their total assets invested in acquired funds)
no longer includes these indirect fund expenses, such an investor could
under-estimate the expenses of these funds. Such underestimation could
lead to a distortion of some investors' choices relative to their
preferences and investment objectives. Relatedly, an investor may be
less able to compare funds under the proposal to the extent that any
funds continue to include AFFE amounts in their bottom line ongoing
annual expenses even though they are eligible to disclose their AFFE in
a footnote. Because reliance on the AFFE amendment would be optional,
investors may receive expense disclosures from the same types of funds
(i.e., those that have 10% or less of their total assets invested in
acquired funds) that treat AFFE differently. This could make it more
difficult for investors to compare these expenses between funds.
    The costs from any potential underestimation of AFFE would depend
on how many funds rely on the AFFE amendment. This number would depend,
in turn, on fund incentives and on whether funds believe that any
benefit from relying on the AFFE amendment would outweigh any costs
incurred in moving AFFE disclosure into a footnote. Funds that believe
that relying on the amendment would be beneficial by, for example,
providing a more consistent fee and expense presentation for investors,
may have a greater incentive to rely on the amendment than other funds.
In addition, some funds that are slightly above the 10% threshold may
have an incentive to reduce their investments in acquired funds to the
extent that they believe there would be sufficient benefit from
providing AFFE disclosure in a footnote. We believe that few funds
would do so. As discussed above, we estimate that approximately 88% of
the funds with more than 10% of their total assets invested in acquired
funds invest more than 20% of their total assets in acquired funds.
Based on this estimate, we would expect that any incentive to reduce
investments in acquired funds that is driven by the proposed AFFE
amendment would be limited to the other 12% of funds, which is 4% of
acquiring funds.\820\
---------------------------------------------------------------------------

    \820\ See supra footnote 714 and accompanying text.
---------------------------------------------------------------------------

    In addition, fund investors could bear the costs of the prospectus
amendments through the increased expenses that funds would incur to
implement the proposal. We discuss those expenses in the section on
``other costs,'' below.
d. Other Costs
    The proposed amendments would impose costs on funds (which they may
pass on to their shareholders) to amend their disclosure practices. For
example, the proposal would require funds to review their principal
risk disclosure and assess whether the risks they are currently
disclosing are principal to the fund under the proposed amendments.
Among other things, this may require fund groups to modify their
current practices for principal risk disclosure, including where they
use many of the same risk disclosures across various funds in the fund
group. Funds also would need to determine an appropriate method for
ordering a fund's principal risks by importance and implement this
approach. We estimate that the proposed amendments to principal risk
disclosure would result in initial aggregate costs of $75,055,680 and
$16,679,040 annually thereafter.\821\ In addition, funds would need to
modify their disclosure templates to revise the terms they currently
use in prospectus fee tables and to add fee summaries to their
disclosure, although the content of the fee summary would largely
consist of information that funds already disclose in their prospectus
fee tables. We estimate that the costs of the proposed amendments to
prospectus fee and expense disclosure would be $37,527,840 initially
and $8,339,520 annually thereafter.\822\
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    \821\ See infra Section IV.B. The estimated initial cost of the
proposed amendments to principal risk disclosure is based on the
following calculations: 18 hours x $336 (blended wage rate for
compliance attorney and senior programmer) = $6,048 per fund. 12,410
funds x $6,048 = $75,055,680. The estimated ongoing annual cost of
these proposed amendments is based on the following calculations: 4
hours x $336 (blended wage rate for compliance attorney and senior
programmer) = $1,344 per fund. 12,410 funds x $1,344 = $16,679,040.
    \822\ See infra Section IV.B. The estimated initial cost of the
proposed amendments to prospectus fee and expense disclosure is
based on the following calculations: 9 hours x $336 (blended wage
rate for compliance attorney and senior programmer) = $3,024 per
fund. 12,410 funds x $3,024 = $37,527,840. The estimated ongoing
annual cost of these proposed amendments is based on the following
calculations: 2 hours x $336 (blended wage rate for compliance
attorney and senior programmer) = $672 per fund. 12,410 funds x $672
= $8,339,520.
---------------------------------------------------------------------------

    Some of these costs would be incurred by funds that make limited
investments in other funds as a result of our proposal to allow such
funds to disclose AFFE in a footnote to the fee table and fee summary.
While only funds that invest 10% or less of their total assets in
acquired funds would be allowed to rely on this proposal, we believe
that these costs would also be incurred by funds with investments
slightly above 10% in other funds because such funds would likely spend
time considering whether they would qualify for the proposal.
Therefore, for purposes of our analysis, we assume that the bulk of the
costs associated with this proposal would be incurred by funds that
invest less than 20% of their total assets in other funds.\823\ These

funds would incur costs of (1) establishing and implementing procedures
they may choose to adopt to monitor the percent of the fund's acquired
fund investments relative to total assets; (2) calculating their
investments in acquired funds to determine whether they would be
permitted to modify their disclosure pursuant to the proposal; and (3)
updating their prospectus fee table to modify their AFFE disclosure if
they choose to present AFFE in accordance with the proposal, and they
are eligible to do so. We estimate that approximately 30%, or 3,723
open-end funds, have investments in other funds. Of those, we estimate
that approximately 70%, or 2,606 open-end funds, invest less than 20%
of their total assets in other funds (excluding money market
funds).\824\ Therefore, we estimate that the transition costs
associated with this proposed amendment would be $4,378,080.\825\
---------------------------------------------------------------------------

    \823\ We believe that funds that invest more than 20% of their
total assets in other funds would not choose to exert this effort
because it is unlikely that they would anticipate being able to rely
on the proposal.
    \824\ For funds that may be eligible for the proposed amendments
to AFFE disclosure, we believe that approximately 50% of the burden
hours they would incur to comply with all of the proposed fee
disclosure amendments would be allocated to complying with these
amendments.
    \825\ 5 hours x $336 (blended wage rate for compliance attorney
and senior programmer) = $1,680 per fund. 2,606 funds x $1,680 =
$4,378,080.
---------------------------------------------------------------------------

    We understand that changes in the prospectus also could affect data
aggregators that rely on the information in the prospectus fee table as
a basis for the services they provide to investors and other parties.
We have considered that changes in the prospectus can make it easier or
more difficult for them to provide this service. In this instance, the
proposal is unlikely to have an effect on data aggregators because the
full fee table would still be structured.\826\ We believe that the
information available to data aggregators about the current line items
would not change under the proposal accordingly.
---------------------------------------------------------------------------

    \826\ See supra Section II.H.1.i (discussing structured data
requirements for fund fee and expense disclosures and proposed
amendments to continue to require that funds provide the full fee
table in a structured data format).
---------------------------------------------------------------------------

4. Advertising Rule Amendments
a. Summary of Economic Effects
    The proposed advertising rule amendments would enhance the
transparency of the fees and expenses that are associated with
investing in a particular investment company. To obtain this
improvement in transparency, the proposal would require specific
changes to how mutual funds, ETFs, other registered investment
companies, and BDCs present information about fund fees and expenses in
fund advertisements. That is, the proposed amendments would require
that the fee and expense presentations prominently include timely
information about a fund's maximum sales load (or any other
nonrecurring fee) and gross total annual expenses, computed in a manner
that is consistent with relevant prospectus requirements. Further, if
an advertisement included an investment company's total annual expenses
net of a fee waiver or expense reimbursement amount in addition to the
required gross annual expense figure, the advertisement would need to
disclose the expected termination date of that arrangement. We also
propose to provide specific factors an investment company should
consider as part of its determination of whether representations in its
advertisements about the fees and expenses associated with an
investment in the fund could be materially misleading.
    Below we discuss the likely effects of the proposed amendments to
the advertising rules. We expect that the proposed amendments would
lower investor search costs and reduce the risk of a mismatch between
investor preferences and investor choice while also imposing certain
costs on investors and third parties who participate in the production
and delivery of fund advertising to investors. Additionally, we discuss
how the effects of the proposed amendments to the advertising rules may
vary across investors and funds according to the conditions of their
participation in the market for financial products.
b. Benefits to Investors
    The effect of the proposal would be to reduce the likelihood that
investors misinterpret investment company advertisements. For example,
the recent experience of the Commission is that funds sometimes market
themselves as ``zero expense'' or ``no expense'' funds based solely on
information in their prospectus fee tables. In some cases a fund's
prospectus fee table may show no transaction costs and no ongoing
charges only because the fund adviser, the adviser's affiliates, or
others are collecting fees elsewhere from these investors. In such
cases, an investor in a so-called ``zero expense'' fund may encounter
other investment costs, including intermediary costs (e.g., through
wrap account fees), securities lending costs (e.g., through revenue
sharing with a securities lending agent), or future costs associated
with the fund once an underlying fee waiver or expense reimbursement
arrangement expires. These additional costs and expenses can reduce the
value of a shareholder's investment in a fund. As a result, absent
appropriate explanations or limitations, referring to such a fund as a
``zero expense'' fund can materially mislead investors and cause them
to believe incorrectly that there are no expenses associated with
investing in the fund.
    More generally, the proposed rules would require more consistent
fee and expense presentations across investment company advertisements,
and thus facilitate investor comparisons of important fee and expense
figures. By reducing the chance of misleading information being
presented to investors--e.g., so that useful information faces less
competition for investor attention with other information--the proposal
may increase the salience of relevant fee and expense figures to
investors and reduce the chance of a mismatch between the investor's
preferences and their choice of investment product among the various
alternatives, thereby increasing the efficiency of investors'
investment decisions. The extent to which increasing the salience of
fee and expense information in advertisements benefits an investor
considering an investment in a fund depends on the importance of this
information contained in fund advertising materials relative to the
other information that is available to the investor for the purpose of
monitoring fund investments and choosing between the fund and other
financial products.
    To the extent that the advertising rule amendments reduce fund
incentives to understate or obscure their fees, they may enable
investors more easily to distinguish funds according to their actual
fees. In this instance, the indirect effect would be that funds with
lower (higher) fees would attract more (less) investor dollars and, in
anticipation, the higher-fee funds would have a greater incentive to
lower their fees than without the rule amendments. Thus, some funds may
put even more effort into lowering their fees and expenses than they
would do in the absence of the proposal, and otherwise find ways to
differentiate themselves to attract and retain investment business.
c. Costs to Investors
    Investment companies and third parties involved in preparing or
disseminating investment company advertisements may incur costs to
comply with the proposed advertising rule amendments. Investors could
bear the costs of these amendments through increased expenses that
funds would

incur to implement the proposal. We discuss those expenses below.\827\
---------------------------------------------------------------------------

    \827\ See infra Section III.C.4.d.
---------------------------------------------------------------------------

    In addition, if the cost of compliance with these proposed
amendments were significant, some advertisers might cease advertising
rather than incur the extra costs of compliance, which could affect
investors. Investors who rely on advertisements to make investment
decisions or compare funds might have less complete information for
these purposes. However, we believe this is unlikely because, as
discussed below, we do not anticipate that the compliance costs would
be significant in general or significant enough relative to the benefit
that most funds would expect from continuing to advertise.\828\
---------------------------------------------------------------------------

    \828\ See infra Section III.C.4.d.
---------------------------------------------------------------------------

d. Other Costs
    The cost of our proposal to amend the advertising rules would
include the direct cost of modifying advertising materials to bring
them into compliance with the proposed advertising rule amendments.
This may require internal review and approval of advertisements beyond
what occurs under the current rule, particularly where an advertisement
is not already required to present certain fee and expense figures
under existing FINRA rules. For example, while many investment company
advertisements are subject to timeliness requirements related to
performance, they currently are not subject to similar timeliness
requirements for fee and expense information. We expect some of these
costs to be borne in the first year after the rule adoption. That is,
they would be transition costs and not sustained beyond the first year.
We estimate that the transition costs associated with the proposed
advertising rule amendments would be $201,353,040.\829\ These costs
would be borne by funds (including their shareholders), intermediaries,
and other third parties who prepare investment company advertisements.
---------------------------------------------------------------------------

    \829\ See infra Sections IV.F through IV.H. We estimate there
are 39,951 investment company advertisements (or supplemental sales
literature) each year that would be subject to the proposed
amendments to rules 482, 34b-1, and 433. This includes 35,514
advertisements subject to rule 482, 337 supplemental sales
literature subject to rule 34b-1, and 4,100 advertisements by
registered closed-end funds or BDCs used in reliance on rule 433
instead of rule 482. For each of these rules, we estimate an initial
burden of 15 hours for relevant advertisements. The estimated
transition costs of the proposed advertising rule amendments is
based on the following calculation: 15 hours x $336 (blended wage
rate for compliance attorney and senior programmer) x 39,951
advertisements = $201,353,040.
---------------------------------------------------------------------------

    The overall costs of the proposed advertising rule amendments would
be greater for some types of fund advertisements than others. For
example, the proposed rule would require the fee and expense figures to
be calculated in the manner the registrant's Investment Company Act or
Securities Act registration form prescribes for a prospectus. This
proposed requirement could make it more burdensome to prepare
advertisements for some types of registrants, such as closed-end funds
that do not maintain updated prospectuses and, thus, may not currently
calculate current fees and expenses in the manner the proposed
amendments would require. As a result, it would be more costly to
prepare these advertisements (if they include fee and expense
information) because of the need to develop new procedures for annually
calculating these registrants' fees and expenses in accordance with
prospectus fee table requirements. In addition, the cost of compliance
would be greater for funds, intermediaries, or others that react to the
proposed advertising rule amendments by initiating or enhancing a
compliance program after previously having no such program or only a
very limited program in place. It would be smaller for those who
periodically obtain compliance advice and continually update their
advertising materials in response to changing market conditions or
changing investor demand. Overall, we estimate that the ongoing annual
costs of the proposed advertising rule amendments would be
$67,117,680.\830\
---------------------------------------------------------------------------

    \830\ See infra Sections IV.F through IV.H; see also supra
footnote 829. The estimated annual costs of the proposed advertising
rule amendments is based on the following calculation: 5 hour x $336
(blended wage rate for compliance attorney and senior programmer) x
39,951 advertisements = $67,117,680.
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R. Effects on Efficiency, Competition, and Capital Formation

    This section describes the effects we expect the proposed rule to
have on efficiency, competition, and capital formation. Key to this
analysis are the concepts of efficiency in the use of investor time and
attention and in the use of fund resources from the real economy to
meet disclosure delivery obligations. We regard changes and amendments
that reduce these costs as increasing economic efficiency, with changes
and amendments that increase these costs having the opposite effect.
Also key is the concept of ``information asymmetry''--in this case, the
lack of information that investors may have about funds and other
investment products--and the difficulties that some investors may face
in using the information that is available to them in reducing that
information asymmetry.
    Efficiency. The proposed rules and amendments would enable
investors to use their time and attention more efficiently. To
investors, the costs of investing in a fund are more than just the
dollar cost, and include the value of an individual's time and
attention that is spent gaining an understanding of the fund and its
fees, expenses, risks, and other characteristics, both before and after
the initial fund investment. Further, for those investors who do not
gain a full understanding of the fund and its risks, there could be a
cost stemming from a potential mismatch between the investor's goals
and the fund risk profile and fee structure. Depending on the size of
an individual's position in a fund, certain of these additional costs
could be considerable in comparison to the monetary costs associated
with the investment and could discourage investors from gathering
information about different investment alternatives and evaluating
existing investments even in circumstances where reviewing prospectuses
and available shareholder reports could be beneficial.
    The overall efficiency gains from the effect the proposal and
amendments have on how investors allocate their time and attention
would depend on the extent to which individual investors find it easy
to transition from the current framework to the new framework and find
disclosure and other materials under the new framework genuinely easier
to use. Some individuals may prefer the current framework. Their time
and attention may be used less efficiently under the proposed rules,
which would require them to go to the trouble of requesting their
preferred materials rather than receiving them automatically as would
occur in the current framework, and these investors would indeed not
find the new framework preferable to current practice. However, despite
these potential limitations, we expect the efficiency gain and cost
reduction from changes in the use of investor time and attention
resulting from the proposed rule to be positive, because the proposed
disclosure framework is specifically designed to make the disclosures
easier for retail investors to use while continuing to provide access
to more detailed information for the market professionals and other
investors who wish to access them, as discussed in Section
III.C.2.b.\831\
---------------------------------------------------------------------------

    \831\ These provisions would thus not have efficiency effects
for financial professionals and other investors who currently rely
on more detailed information online that will continue to be
accessible.

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

    While not the primary source of efficiency gain, changes in the
delivery of disclosures to shareholders under the proposed rules would
cause a decline in the real-resource costs of delivering disclosures to
investors. This could be an efficiency gain from the proposal.
Specifically, by effectively consolidating two deliveries--the annual
report and the annual prospectus update--into a single delivery of a
concise annual report, the proposal would promote efficiency by
reducing the cost of printing and delivering disclosures to retail
shareholders. Here, efficiency gains would depend on the preferences of
individual shareholders, who would have the option of requesting that
the two disclosures instead continue to be sent separately. They also
would depend on the preferences of funds. We discuss these efficiency
gains from reduced delivery costs as benefits of the proposal in
Section III.C.2.d.\832\
---------------------------------------------------------------------------

    \832\ For example, as discussed above, greater investor
understanding of a fund, including its fees and risks, could lead to
a better match between investor goals and investor choice among
alternative funds and other investment opportunities. In other
words, investment efficiency could increase.
---------------------------------------------------------------------------

    In addition, efficiency gains may arise from the proposed
improvements to prospectus disclosure about fund fees. For example,
investors may find it easier to compare the fees and expenses of funds
under the proposal. The proposal may therefore contribute to the
efficient use of those investors' time and attention, and lead to more
efficient matches between investor preferences and the available
investments. To the extent the proposed amendments would affect funds'
investment behavior, it could result in funds investing in acquired
funds where the adviser believes this would contribute to the fund's
investment objective and would be in the interest of shareholders. This
could result in the fund allocating its investments more efficiently
because it would reduce a potential impediment to investments in
acquired funds, even while it may result in other funds reducing their
investments in acquired funds for the purpose of moving or staying
below the proposed eligibility threshold. We discuss the efficiency
gains from changes in the prospectus fee table as benefits of the
proposal in Section III.C.3.b.
    In addition, the proposal may affect economic efficiency through
changes in disclosure content. The proposed amendments to the content
of shareholder report disclosure and the presentation of advertising
materials would increase the consistency of the presentation of their
contents across funds (and, in the advertising rule change, across a
wider range of investment opportunities) and thereby promote their
comparability. This may make it easier for investors to make
comparisons across funds, and between funds and other investment
products. As a result, investors may face lower information asymmetry
and lower search costs in choosing among funds, and among investment
opportunities more generally. In addition, investors and other market
participants may be more easily able to monitor their fund and other
investments. Finally, investors may be more likely to react to actual
differences in fund fees, expenses, principal risks, and other fund
characteristics than under the current framework to the extent that
those differences are more easily identified. Thus, the proposed rules
and amendments that reduce information asymmetry and search costs may
reduce barriers that funds and intermediaries face in supplying
investment opportunities to investors, and that investors may face in
comparing and evaluating the suitability of the investments initially
and, as fund shareholders, over the period of the investment.\833\ The
proposed advertising amendments would have similar effects, by
deterring potentially misleading statements by funds.
---------------------------------------------------------------------------

    \833\ As noted above, there may be investors who would prefer
the disclosure framework that is now in place and who would under
the proposed framework need to take extra steps to continue to use
the disclosures that they use in making investment decisions
currently. To the extent this occurs, the proposal could lead to
additional costs and reduced efficiency for such investors in their
evaluation of fund investments.
---------------------------------------------------------------------------

    These increases in efficiency and related cost reductions could
manifest as a higher likelihood that investors make use of the
disclosures that funds provide through their prospectus and shareholder
reports, and thus lead to investment decisions that are informationally
efficient. First, it may increase the likelihood that investors choose
a mix and level of fund investments that are consistent with their
overall financial preferences and objectives--a level that may be
higher or lower than would occur presently. The proposal may help
promote investment in funds by investors who would benefit from them.
Second, an increase in the informational efficiency of investor
decisions could make it more likely that those investors who choose to
invest in funds make choices that are consistent with their preferences
and needs and reject those that are not. Third, making it easier for
investors to use the information that is disclosed under the rule
provisions that require concise, tailored prospectus and shareholder
report disclosures could facilitate more efficient investor allocation
of assets across funds. These effects on efficiency would be limited,
however, to the extent that investors rely on third parties for advice
in selecting among financial products, where that third party uses more
information than the proposed shareholder reports and amended
prospectus disclosure.\834\
---------------------------------------------------------------------------

    \834\ For example, one investor survey found that 24% of
surveyed mutual fund investors agreed with the statement, ``I rely
on a financial adviser or broker to look at these sorts of [fund]
documents.'' See ICI Investor Survey, supra footnote 36, at 20.
Within subsets of the surveyed investors, 57% of mutual fund
investors aged 65 and older, and 58% of mutual fund investors with
household incomes less than $50,000, agreed with this statement. See
id. at nn.19 and 20. A third party adviser, for example, may prefer
to access all information that is available about a fund online
rather than rely solely on the prospectus and shareholder report
information that is the subject of the proposal. Such an adviser
would not change its information or advice under the proposal. Funds
would not anticipate such a change, and there would be a lesser
effect on competition among funds accordingly.
---------------------------------------------------------------------------

    Competition. The proposed rules and amendments that affect
information asymmetry between investors and funds may, by reducing
investor search costs, affect competition. For example, the proposed
rules and amendments make changes to shareholder reports, prospectus
disclosures, and fund advertisements that would enable investors to
compare fees and expenses and other information more easily across
funds, and between funds and other financial products, could affect
competition among funds by making it easier for lower-fee funds to
distinguish themselves from other funds. This could lead investors to
shift their assets from higher-fee funds to lower-fee funds. It also
could lead funds, in anticipation of this, to lower their fees or
otherwise take steps to draw investor flows away from competing funds
or avoid outflows to competing funds under the modified disclosure
framework. It could lead funds to exit that are not as easily able to
compete on the basis of fees and expenses as a result of the modified
disclosure framework, and other funds to enter and compete for investor
assets more efficiently than would currently occur. The effect on
competition among funds may be limited, however, to the extent that
investors rely on third parties who are not affected by the rule for
advice in selecting among financial products.\835\
---------------------------------------------------------------------------

    \835\ See also supra footnote 834.

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

    As discussed above, the proposed clarification of the term
``appropriate broad-based securities market index'' in the management's
discussion of fund performance section of the shareholder report could
result in additional costs to funds in the form of index-licensing
fees. The amount of these costs would depend, among other things, on
market competition among index providers. If the proposed clarification
were to result in a sufficient reduction in the number of index
providers producing indexes that are ``appropriate broad-based
securities market indexes'' or increased demand by funds to license
indexes from a sufficiently small number of competing suppliers, index-
licensing fees could increase.
    The proposed amendments to prospectus disclosure requirements could
have similar competitive effects as enhanced fee and expense
disclosures. If these proposed amendments have the intended effect of
making the disclosure of principal risks more usable for investors and
cause each fund to highlight those risks that are truly principal to
the particular fund, they may also induce funds to compete more
intensively on the basis of risk exposures. For example, some funds may
choose to hedge certain risks, such as foreign currency risks, or
otherwise manage risks, in an effort to offer investors a narrower set
of risk exposures.
    Finally, we noted earlier in Section III.C.4.c that certain funds
may respond to the proposed amendments to the advertising rule by
limiting their advertising. Reduced advertising could affect the way in
which funds compete for investor assets, causing funds to focus
competition more narrowly on dimensions that are disclosed in
prospectuses, such as fees, expenses, and principal risks. At the same
time, if investors respond to fewer fund advertisements by making fewer
comparisons between funds or searching less intensively for funds that
match their preferences, the proposed amendments to the advertising
rule could blunt competition between funds.
    Capital Formation. The proposed rules and amendments could lead to
an increase in capital formation. First, to the extent they increase
the efficiency of exchange in markets for funds and other financial
products, the proposed rules and amendments could lead to changes in
fund investment in these products. Greater investment in ETFs, mutual
funds, and other products, for example, could lead to increased demand
for their underlying securities. The increased demand for those
securities could, in turn, facilitate capital formation. Diminished
investment could have the opposite effect, although we do not have any
reason to believe that the proposal would decrease capital formation.
In addition, changes in the prospectus fee disclosure could affect the
willingness of index providers to include funds in their indexes or of
funds to invest in other funds, as some commenters have indicated.\836\
If the proposed amendments increase fund investments in certain other
funds, they could in turn result in additional capital formation for
the particular types of companies in which the acquired funds
invest.\837\ For example, to the extent the proposal would result in
funds investing more in BDCs, the proposal could enable BDCs to make
additional investments in small- and mid-sized companies.\838\
---------------------------------------------------------------------------

    \836\ See supra footnote 611 (discussing comments on the effects
of AFFE disclosure on BDC investments).
    \837\ As an example, to the extent BDCs were excluded from
indexes as a result of concerns about the effect of BDC investments
on funds' fee tables as a result of AFFE disclosure, as commenters
have suggested, the proposal may result in BDCs being included in
indexes again. This may occur particularly where BDCs and other
funds would represent less than 10% of an index, which would permit
funds tracking the index to rely on the proposed AFFE amendments.
See id.
    \838\ Of the funds that invest in acquired funds, we estimate
that approximately 11% currently invest in BDCs. This is based on
staff's analysis of Form N-PORT filings received through early June
2020.
---------------------------------------------------------------------------

    We further note that, to the extent that increased or decreased
investment in these financial products reflects substitution from other
investment vehicles, the effect on capital formation would be
attenuated because this would reduce the net change in the overall
amount of investment in the capital markets.
    The proposed rules that would lower the cost of delivering
disclosures to fund shareholders could have a positive effect on fund
performance and attract new investors or additional capital from
existing investors. If so, the rule could promote capital formation
benefits. We are unable to estimate precisely the magnitude of capital
formation effects that may result from our projected cost savings under
the rule because the magnitude of such effects may be affected by the
extent of pass-through cost savings and by other factors that affect
the flow of investor capital into mutual funds and ETFs, including
other components of fund returns, overall market returns, and returns
on investments other than funds. To the extent that any proposed rule
or amendment would increase the delivery cost, we would anticipate the
opposite effect.
    The proposed rule changes and amendments are designed to make
shareholder reports and prospectus disclosures easier for shareholders
to use and to help investors better understand fees and expenses
through fund prospectuses or advertisements. To the extent that it
becomes easier for investors to use fund disclosure or to understand
investment fees and expenses, the effect may improve retail investors'
understanding about, and confidence in, the market for funds and other
investment products, which may increase participation in this market by
investors that previously avoided it. Such additional entry by new
investors could increase the level of total capital across markets and
increase the demand for new investment products and securities, which
could lower the cost of capital for operating companies, precipitate
capital formation in aggregate across the economy, and facilitate
economic growth. These effects on capital formation would be limited,
however, to the extent that investors rely on third parties who are not
affected by the rule for advice in selecting among financial products.
\839\ Overall, we do not have reason to believe that the proposed rules
or amendments would have significant effects on capital formation.
---------------------------------------------------------------------------

    \839\ See also supra footnote 834.
---------------------------------------------------------------------------

S. Reasonable Alternatives

1. More or Less Frequent Disclosure
    The proposal would maintain a fund's obligation to deliver an
annual and a semi-annual report to shareholders. Alternatively, we
could consider increasing or reducing the frequency of reports that
funds would be required to deliver to shareholders.
    As one alternative, the Commission could propose to increase the
required frequency of delivery of reports to shareholders beyond what
occurs under the current disclosure framework. For example, the
Commission could require funds to deliver shareholder reports on a
quarterly basis, rather than on a semi-annual basis as would continue
to be the case under the proposal. To the extent shareholders review
these additional reports, receiving the reports more frequently could
keep shareholders better informed about their fund investments and
could enhance shareholders' familiarity and comfort with reviewing
shareholder report disclosures, since they would encounter such
disclosures more frequently. As a result, investors may make more
informed investment decisions. However, increasing the frequency of

reports would require greater allocation of fund resources to preparing
and delivering shareholder reports, which would increase fund (and
shareholder) costs. In addition, receiving more frequent shareholder
reports would place greater demands on shareholder time and attention
compared to the proposal, which could decrease the likelihood that
shareholders review the reports and rely on them to inform their
investment decisions.\840\
---------------------------------------------------------------------------

    \840\ Existing research notes that individuals exhibit limited
ability to absorb and process information. See supra Section
III.C.1; Nisbett & Ross, supra footnote 815; Hirshleifer and Teoh
Study, supra footnote 761.
---------------------------------------------------------------------------

    The Commission could also propose alternatives to transmitting the
semi-annual report, such as permitting the requirement to transmit
semi-annual reports to be satisfied by a fund filing certain
information on Form N-CSR or by making information available on a
website (either semi-annually or more frequently). Relative to the
proposal, funds would benefit from cost savings associated with no
longer being required to deliver the semi-annual report. Funds also
could experience lower costs associated with preparing disclosures,
particularly if the information they were required to provide on
websites largely replicated information that many funds already provide
online in monthly or quarterly fact sheets.\841\ Shareholders could
benefit from these cost savings to the extent funds pass them through.
However, shareholders who prefer to receive information more frequently
than annually, as they currently do, would incur costs associated with
the reduced frequency of delivery, such as costs of locating
information online instead of in the delivered semi-annual report. In
addition, to the extent this was an optional framework (e.g., funds
could either provide certain information online or deliver semi-annual
reports), the alternative framework may lead to shareholders in some
funds receiving less direct information than those in other funds.
---------------------------------------------------------------------------

    \841\ See generally supra text following footnote 23.
---------------------------------------------------------------------------

2. More or Less Information in Shareholder Reports
    The proposal would make the disclosures that funds send to
shareholders more concise, without materially changing the overall
amount or scope of information that funds provide to their shareholders
(either in shareholder reports or separately online). Instead, the
Commission could propose to require more (or less) information in fund
shareholder reports and less (or more) information online or upon
request only, relative to the proposed amendments. We could further
propose to reduce the overall amount of disclosure funds are required
to prepare and provide, e.g., by no longer requiring funds to provide
disclosure regarding the basis for the board's approval of investment
advisory contracts.
    The benefits of requiring more information to be included in
shareholder reports (with less information online or upon request only)
are that fewer investors may need to take any additional steps needed
to access the information online, which would reduce burdens on those
investors. However, this alternative also has certain costs. For
example, requiring more information in shareholder reports may reduce
the likelihood that shareholders review the reports because they may be
more likely to feel overwhelmed by the length of the reports.
Shareholder reports that include more information than the proposed
content may also make it harder for shareholders to find key
information within the report. Moreover, increasing the length of
shareholder reports by requiring additional content could also increase
delivery costs for funds (which could also be passed on to
shareholders), particularly with respect to printing and mailing costs.
    As another alternative, we could further limit the content of
shareholder reports. This alternative could result in shareholder
reports that are easier for shareholders to review and could reduce
costs associated with the preparation and delivery of shareholder
reports. However, this alternative may reduce the utility of
shareholder reports for many if not most shareholders if the reports do
not include the key information those shareholders tend to use to
monitor their fund investments or make portfolio decisions. If, as part
of this alternative, we required funds to provide the information
removed from shareholder reports to shareholders upon request or
online, those shareholders would face the burden of requesting the
information or locating it online. If we instead removed certain
disclosure requirements entirely, the costs to funds of preparing
disclosure would decline. This approach would, however, reduce access
to information for all market participants, which may result in less
informed monitoring or investment decisions by shareholders or by the
market professionals they rely on for investment advice.
3. Retaining Rule 30e-3 Flexibility for Open-End Funds Registered on
Form N-1A
    The Commission is proposing to exclude funds registered on Form N-
1A from current rule 30e-3. Under the proposal, affected funds would be
required to deliver concise shareholder reports directly to
shareholders in order to meet their delivery obligations. Funds would
not have the flexibility to instead deliver a paper notice with
information about the online location of the shareholder report, as is
the case under current rule 30e-3.
    As an alternative, the Commission could continue to permit these
funds to rely on rule 30e-3 to satisfy their shareholder report
delivery obligations. This alternative would provide optionality to
funds to determine their preferred method for delivering shareholder
reports where shareholders have not expressed a clear preference for
electronic delivery or paper delivery of the report and could reduce
costs for some funds compared to the proposal, such as for those funds
that have already begun to prepare to rely on rule 30e-3. It also could
reduce the potential for shareholder confusion where funds have
notified shareholders of their intent to rely on rule 30e-3 and of the
associated upcoming changes to shareholder report delivery. However,
given that we do not expect the proposed shareholder reports to be much
longer than a paper notice under rule 30e-3, we do not believe that
excluding relevant funds from rule 30e-3 as proposed would
significantly increase the costs of delivering shareholder reports
relative to the baseline.\842\ For instance, the proposed amendments
may reduce processing fees associated with delivering shareholder
reports through intermediaries and should not significantly increase
printing and mailing costs. Moreover, we believe that delivering a
concise shareholder report to shareholders directly may help them more
efficiently monitor their fund investments. This is because
shareholders who would otherwise receive paper notices under rule 30e-3
could avoid the additional step of finding the report online.
---------------------------------------------------------------------------

    \842\ See supra footnote 134 and accompanying text (discussing
our belief that the proposed shareholder reports could be trifold
self-mailers).
---------------------------------------------------------------------------

    In addition, we recognize that if a fund could rely on both rule
30e-3 and proposed rule 498B, shareholders may no longer directly
receive substantive disclosure about a fund investment, beyond notices
of material changes under proposed rule 498B. This could

result in shareholders being less informed, compared to the proposal.
If, instead, funds were provided the option to rely on either rule 30e-
3 or proposed rule 498B, a shareholder in a fund that chooses to rely
on rule 30e-3 instead of proposed rule 498B would receive direct
disclosure that may be less well-suited to his or her needs than a
shareholder of a fund that relies on proposed rule 498B (or on neither
rule), given that prospectus disclosure is designed more for the needs
of new or prospective investors than for the needs of existing
shareholders.
4. Limiting the Advertising Rule Amendments to ETFs and Mutual Funds
    The proposed advertising rule amendments would apply to all
registered investment companies and BDCs. The scope of entities
affected by these amendments would therefore be broader than under the
proposed rule and other proposed amendments, which apply only to open-
end funds, such as mutual funds, and to ETFs. As an alternative, we
could also limit the scope of the proposed amendments to the
advertising rules to apply only to open-end funds.
    Under this alternative, the advertising rule amendments would apply
to a narrower class of entities than is proposed. The effect would be
to reduce both the cost and benefits of the proposed advertising
amendments that are discussed in Section III.C.4, as these costs and
benefits would accrue only to shareholders and issuers of the narrowed
class of entities, and would no longer accrue to shareholders and
issuers of any entities that would be excluded under the alternative.
In addition, the alternative could lead to a disparity in the quality
of the information that is available to market participants about funds
that would be covered by the advertising rule amendments under the
alternative and the entities that would be outside its scope. This
could lead to reduced comparability and distortions in investor choice
across registered investment companies and BDCs, relative to the
approach the Commission is proposing, which would apply the standards
across all of these entities evenly.
5. Amending Prospectus Fee, Expense, and Principal Risk Disclosure in a
Different Manner
    The proposed prospectus fee summary disclosure would require funds
to provide certain fee and expense information both as a percent of a
fund investment and in dollar figures based on a $10,000 investment,
while the presentation of those numbers in the full fee table would
remain only in percentage figures. Alternatively, we could require
funds to express fees and expenses in the fee summary as a percent of a
fund investment only, similar to the current fee table presentation.
This alternative would streamline the fee summary and could make it
more visually appealing by reducing the amount of detail. It also could
marginally reduce costs of preparing disclosures for funds. However, as
discussed above, a fee summary that excludes dollar-based figures may
be more difficult for some investors to understand.\843\
---------------------------------------------------------------------------

    \843\ See supra footnotes 63 and 573.
---------------------------------------------------------------------------

    The proposed amendments are designed to promote more concise
principal risk disclosure in the summary section of the statutory
prospectus (or in summary prospectuses for funds that use summary
prospectuses), but the proposal does not limit the number of principal
risks a fund may disclose. As an alternative, we could limit the number
of principal risks a fund may disclose (e.g., only 25 principal risks).
This would streamline principal risk disclosure in a way that may make
it easier for investors to digest and understand the most central risks
of a fund investment. At the same time, this approach could potentially
result in a fund understating its principal risks in some instances,
which could mislead investors about the risks associated with an
investment in the fund.
    The proposed rule would provide that a principal risk is one that
would place more than 10% of the fund's assets at risk (or it is
reasonably likely that it would place more than 10% of the fund's
assets at risk in the future). Alternatively, we could establish
different numerical thresholds in the proposed instruction. For
example, we could provide a lower percentage threshold of 5% or a
higher percentage threshold of 15% for determining whether a risk is
principal. Compared to the proposed approach, a higher percentage
threshold would result in funds disclosing fewer principal risks and
reduce the costs to funds of providing these disclosures, while a lower
percentage threshold would result in funds disclosing more principal
risks and increase the costs to funds of providing these disclosures.
Fewer principal risks being disclosed could lead to disclosure that is
overall more concise and that may require less time and resources for
investors to understand, while more principal risks being disclosed
could lead to disclosure that is overall less concise and that may
require more time and resources for investors to understand. At the
same time, decreasing the number of principal risks a fund discloses
may increase the potential for an investor to be misled about the risks
of investing in a particular fund, while increasing the number of
principal risks a fund discloses may decrease the potential for an
investor to be misled.
    As another alternative, we could provide a qualitative standard or
a ``materiality'' standard for funds to determine whether a risk is
principal instead of a numerical-based standard. These alternatives may
allow funds to tailor and adapt their principal risk disclosure better
to different facts and circumstances, which could lead to more accurate
identification of a fund's principal risks and may better account for
non-investment related risks, such as cybersecurity risks and new fund
risks. However, these alternatives may be less effective than the
proposed approach in promoting more concise and focused principal risk
disclosure. These alternatives also could lead to greater variation in
principal risk disclosure across funds than the proposed approach,
which may make it more difficult for investors to compare funds
effectively when making investment decisions. In addition, it may be
more costly for funds to evaluate whether a principal risk is material
compared to evaluating whether the principal risk meets the proposed
quantitative standard.
6. Amending Shareholder Report Requirements for Variable Insurance
Contracts or Registered Closed-End Funds
    The proposed shareholder report amendments apply only to funds
registered on Form N-1A. The proposed amendments to shareholder reports
do not apply to other registered management investment companies that
transmit annual and semi-annual reports under rule 30e-1.\844\
Alternatively, we could extend the shareholder report disclosure
amendments to other registered management investment companies,
including closed-end funds that register on Form N-2 and variable
annuity separate accounts that register on Form N-3. Like shareholders
in open-end

funds registered on Form N-1A, shareholders in these other funds could
benefit from more concise shareholder reports. However, the Commission
has recently amended the disclosures that shareholders in these funds
receive. For example, the recently adopted changes to closed-end fund
disclosures include multiple changes to these funds' shareholder report
disclosure.\845\ Similarly, while the recently adopted changes to the
variable insurance contract disclosure framework are focused more on
prospectus disclosure and not shareholder report disclosure, we
anticipate that these amendments would significantly change investors'
experience with variable contract disclosure.\846\ Because we lack
information about shareholders' experiences with these new disclosure
requirements, we would like to assess the impact of these changes prior
to proposing additional disclosure changes for variable contracts or
closed-end funds.
---------------------------------------------------------------------------

    \844\ Although all registered management investment companies
are subject to rule 30e-1, the information a registered management
investment company must include in its shareholder report is
specified in the relevant Investment Company Act registration
statement form (i.e., Forms N-1A, N-2, or Form N-3).
    \845\ See supra footnote 129.
    \846\ See Variable Contract Summary Prospectus Adopting Release,
supra footnote 27.
---------------------------------------------------------------------------

7. Requiring Funds to Comply With Proposed Rule 498B
    Proposed rule 498B allows funds the option to deliver a notice of
material changes to shareholders in lieu of delivering annual
prospectus updates and prospectus stickers. Instead of providing funds
with the option to rely on proposed rule 498B, we could require all
affected funds to comply with the proposed rule.\847\
---------------------------------------------------------------------------

    \847\ Under the proposed rule 498B, investors would continue to
receive a prospectus in connection with their initial fund
investment, as they do today. Thereafter, a shareholder would no
longer receive annual prospectus updates, in light of the fact that
the shareholder would be receiving tailored shareholder reports
(which would include, in the annual report, a summary of material
changes that occurred over the prior year), and timely notifications
to shareholders pursuant to proposed rule 498B regarding material
fund changes as they occur.
---------------------------------------------------------------------------

    This alternative would have the benefit of creating a more
consistent disclosure framework across funds and would result in fund
shareholders generally receiving the same types of information from all
funds. Under the proposal, prospectus delivery practices of funds would
vary across funds depending on whether they choose to rely on rule
498B. We believe that the funds that choose not to rely on the rule
would generally continue to deliver the annual prospectus update, while
the funds that rely on rule 498B would not deliver the annual
prospectus update and would instead provide to fund shareholders timely
notification of material changes. Under this alternative, all fund
shareholders would receive prompt notices of material changes to a fund
and would not receive separate annual prospectus updates directly. This
may benefit the shareholders of funds that otherwise would decline to
rely on rule 498B, to the extent that delivery of the more concise
materials may allow them to make better-informed investment decisions.
    However, this alternative may impose burdens on funds that would
not otherwise choose to rely on the proposed rule. For example, funds
that do not currently use summary prospectuses, including some smaller
funds, may determine that the benefits of proposed rule 498B do not
justify its costs since the rule would require funds to provide summary
and statutory prospectuses and other information online. As a result,
the alternative approach may impose greater costs on those funds,
including some smaller funds, than on other funds. In addition, under
the proposed amendments, all fund shareholders would receive
information in the annual report about material fund changes. This
uniform annual report disclosure would promote more consistent
information for fund shareholders and thus facilitate better-informed
investment decisions. In addition, we believe this proposed requirement
would not lead to increased costs because of the optional nature of
rule 498B for two reasons. First, funds currently tend to disclose more
material changes in the annual prospectus update, and disclosure of
these changes would generally appear in the proposed annual report for
all funds. Second, for material changes that funds disclose through
prospectus stickers, we expect that funds that do not rely on proposed
rule 498B would continue to deliver prospectus stickers to notify
shareholders of material changes.
8. Requiring Form N-CSR To Be Tagged in Inline XBRL Format
    The proposal would not change the format requirement for Form N-
CSR, which is not required to be filed in a structured machine-readable
format.\848\ Alternatively, we could require management investment
companies (including open-end funds, registered closed-end funds, and
some variable annuity separate accounts) to tag some or all of Form N-
CSR in the structured machine-readable Inline XBRL format.\849\ This
requirement could include numerical detail tagging of the financial
statements that would be included in Form N-CSR, as is currently
required for operating company financial statements.\850\ The
requirement could also include text block tagging for narrative
disclosures (such as the discussion of prior-year performance that is
proposed to be included in the annual report for open-end funds and
would thus be filed as part of Form N-CSR), as is currently required
for principal risk disclosures in open-end fund prospectuses.\851\
---------------------------------------------------------------------------

    \848\ The Instructions to Form N-CSR do not prescribe a format
requirement for submission of the Form. As an EDGAR Form without a
separate prescribed format, Form N-CSR is typically submitted in
HTML (.htm) format. See Vol. 2, Sec. 5.1 of the EDGAR Filer Manual
(Ver. 53, Jan. 2020).
    \849\ Such a requirement would be implemented by revising 17 CFR
part 232 [Regulation S-T] and adding an Instruction to Form N-CSR
which cites to Regulation S-T. In conjunction with the EDGAR Filer
Manual, Regulation S-T governs the electronic submission of
documents filed with the Commission. Modifying a structured format
requirement for a Commission filing or series of filings can
generally be accomplished through changes to Regulation S-T, and
would not require dispersed changes to the various rules and forms
that would be impacted by the format modification.
    \850\ Under the proposal, open-end funds would be required to
file financial statements on Form N-CSR under proposed Item 7(a) of
that Form. See supra Section II.D.1(a). Closed-end funds and
variable annuity separate accounts that are management investment
companies would still be required to include financial statements in
their shareholder reports, which are filed on Form N-CSR under Item
1 of that Form.
    \851\ Under the proposal, open-end funds would include a
discussion of prior year performance pursuant to Item 27A(d) of Form
N-1A. See supra Section II.B.2(c). In addition, registered closed-
end funds will be required to include a similar discussion in their
shareholder reports as of August 1, 2021. See Closed-End Fund
Offering Reform Adopting Release, supra footnote 128, at Sections
II.I.2 and II.J.
---------------------------------------------------------------------------

    Compared to the baseline (under which Form N-CSR is not required to
be submitted in a structured machine-readable format), an Inline XBRL
tagging requirement for Form N-CSR could benefit investors by enabling
efficient retrieval, aggregation, and analysis of the information in
Form N-CSR and by facilitating comparisons of that information across
investment companies and time periods. There are studies suggesting
that XBRL requirements increase the information content of prices,
reduce the informational advantages held by insiders over public
investors, heighten the relevance, understandability, and comparability
of financial information for non-professional investors, and enhance
the reports and recommendations published by financial analysts,
thereby indirectly benefitting retail investors for whom such analysts
represent a significant source of investment information.\852\
---------------------------------------------------------------------------

    \852\ See, e.g., Yuyun Huang, Yuan George Shan, & Joey Wenling
Yang, Effects of Information Processing Costs on Price
Informativeness: Evidence from XBRL Mandate (SSRN, 2019) available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3324198 ; Yu
Cong, Jia Hao, & Lin Zou, The Impact of XBRL Reporting on Market
Efficiency, 28 J. INFO. SYS. 181 (2014); Huang, Yuyun, Jerry T.
Parwada, Yuan George Shan, and Joey (Wenling) Yang, Insider
Profitability and Public Information: Evidence from the XBRL Mandate
(SSRN, 2019) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455105; Jacqueline Birt, Kala Muthusamy, &
Poonam Bir (2017), XBRL and the Qualitative Characteristics of
Useful Financial Information, 30 ACCT. RES. J 107 (2017); Chunhui
Liu, Tawei Wang, & Lee J. Yao, XBRL's Impact on Analyst Forecast
Behavior: An Empirical Study, 33 J. ACCT. & PUB. POL'Y 69 (2014);
Andrew J. Felo, Joung W. Kim, & Jee-Hae Lim, Can XBRL Detailed
Tagging of Footnotes Improve Financial Analysts' Information
Environment?, 28 INT'L J. ACCT. INFO. SYS. 45 (2018); Karam Kim,
Doojin Ryu, & Heejin Yang, Investor Sentiment, Stock Returns, and
Analyst Recommendation Changes, 48(2) INV. ANALYSTS J. 89 (2019);
Alastair Lawrence, James Ryans, & Estelle Sun, Investor Demand for
Sell-Side Research, 92 ACCT. REV. (2017). However, note that the
studies listed here which assessed the impact of XBRL were based on
operating company financial statement data, not mutual fund risk/
return summary data.

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

    Requiring Inline XBRL tagging of Form N-CSR would impose additional
filing preparation costs on management investment companies compared to
the baseline. Currently, management investment companies are not
required to tag their Form N-CSR filings in the Inline XBRL format. As
such, this alternative would impose on management investment companies
the incremental costs of tagging Form N-CSR disclosures, whether
implemented using internal staff or external service providers. Such
costs would be partially mitigated by the fact that management
investment companies will be subject to Inline XBRL tagging
requirements in other filings, independent of this proposal.\853\
Consequently, the alternative of tagging Form N-CSR would not impose on
management investment companies the Inline XBRL implementation costs
that are often associated with being subject to an Inline XBRL
requirement for the first time (such as the cost of training in-house
staff to prepare filings in Inline XBRL, and the cost to license Inline
XBRL filing preparation software from vendors).
---------------------------------------------------------------------------

    \853\ In 2009, the Commission adopted rules requiring mutual
fund risk/return summaries to be submitted in an XBRL format
entirely within an exhibit to a filing. See Interactive Data to
Improve Financial Reporting, Release No. 33-9002 (Jan. 30, 2009) [74
FR 6776 (Feb. 10, 2009)] as corrected by Release No. 33-9002A (Apr.
1, 2009) [74 FR 15666 (Apr. 7, 2009)]. In 2018, the Commission
refined the requirement to provide information in an XBRL format by
requiring that, for fiscal periods ending on or after September 17,
2020 (for fund groups with at least $1 billion in assets under
management) and September 17, 2021 (for all other fund groups),
mutual fund filers submit this information using the Inline XBRL
format, which embeds the tagged information in the document itself,
rather than in an exhibit. See Inline XBRL Filing of Tagged Data,
Release No. 33-10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
     In 2020, the Commission adopted rules requiring certain closed-
end fund prospectus disclosures to be tagged in Inline XBRL format
for filings submitted on or after August 1, 2022 (for short-form
eligible closed-end funds) and February 1, 2023 (for all other
closed-end funds). See Closed-End Fund Offering Reform Adopting
Release, supra footnote 128, at Sections II.I.1 and II.J. Also in
2020, the Commission adopted rules requiring certain variable
insurance account prospectus disclosures to be tagged in Inline XBRL
format for filings submitted on or after January 1, 2023. See
Variable Contract Summary Prospectus Adopting Release, supra
footnote 27.
---------------------------------------------------------------------------

    However, as noted above, the primary objective of the proposed
disclosure framework is to promote shareholder reports that assist
existing shareholders in monitoring their fund investments, leaving
information that is more useful for new and prospective investors to
compare funds and make investment decisions to be retained in the fund
prospectus.\854\ Because facilitating fund comparisons is one of the
chief benefits of the Inline XBRL format, Inline XBRL requirements are
likely more beneficial to investors in the context of prospectus
disclosures rather than disclosures in periodic reports such as Form N-
CSR. As such, the Commission has determined not to propose an Inline
XBRL tagging requirement for Form N-CSR.
---------------------------------------------------------------------------

    \854\ See supra Section II.A.2.
---------------------------------------------------------------------------

9. Modifying the AFFE Amendment
    The proposal would allow some funds to disclose AFFE, the fees and
expenses associated with acquired fund investments, in a footnote to
the fee table and fee summary instead of reflecting the AFFE in the
bottom line annual expenses in the fee table (as funds do today). Funds
with investments in acquired funds that are limited to 10 percent or
less of their total assets would be eligible to disclose AFFE in a
footnote. Moving the AFFE information to a footnote to the fee table
would enable the eligible funds to provide disclosures that investors
may find easier to use in comparing the fees and expenses of funds with
comparable investment strategies.
    As alternatives, we could consider allowing more funds to move the
AFFE disclosure into a footnote to the fee table by increasing the
proposed eligibility threshold above 10%, such as to 50% or some other
level, or by allowing all funds to move the AFFE disclosure into a
footnote to the fee table, which may improve the salience of the
expenses of the acquiring fund to investors. On the other hand, some
funds may follow an investment strategy that leads them to incur
significant expenses at a lower fund level, even where the fund does
not have a majority of its assets invested in acquired funds. For those
funds, moving the AFFE expenses into a footnote to the fee table may
provide for expense disclosures that are less closely related to the
expenses associated with the top-level fund's investment strategy. For
example, some funds (such as certain target date funds) follow an
investment strategy in which the acquiring fund has very low, or no,
management fees. For those funds, a fee table that does not include the
AFFE amount may confuse investors as to the expenses associated with
investment in the fund.\855\ Therefore, we are proposing to limit
eligibility for the proposed AFFE amendment to the more limited share
of funds with 10% or less invested in acquired funds.
---------------------------------------------------------------------------

    \855\ See supra footnote 816 (discussing some commenters' views
on the importance of AFFE disclosure).
---------------------------------------------------------------------------

    As another alternative, we could consider requiring all eligible
funds to rely on the proposed AFFE amendments. This could make it
easier for investors to compare similar funds because funds with
acquired fund investments below the 10% threshold would all disclose
AFFE in a footnote. It also could reduce investor uncertainty about how
a fund is disclosing AFFE information. On the other hand, allowing
funds to opt into reliance on the amendment would enable funds that
have relatively low, or negative, net benefit from migrating to the
footnote-based approach to opt out. Moreover, a mandatory approach
could require funds that maintain acquired fund investments close to
the 10% threshold to move AFFE disclosure back-and-forth between the
fee table and an associated footnote over time, which could contribute
to investor confusion.\856\ Therefore, we are proposing to allow
voluntary reliance on the proposed AFFE amendments.
---------------------------------------------------------------------------

    \856\ See supra paragraph accompanying footnote 621.
---------------------------------------------------------------------------

T. Request for Comment

    We seek comment on the economic analysis, including whether the
analysis has: (1) Identified all benefits and costs, including all
effects on efficiency, competition, and capital formation; (2) given
due consideration to each benefit and cost, including each effect on
efficiency, competition, and capital formation; and (3) identified and
considered reasonable alternatives to the proposed rules. We request
and encourage any interested person to submit comments regarding the
proposed rules, our analysis of the potential effects of the proposed
rules, and other matters that may have an effect on the proposed rules.
We request that commenters identify sources of data

and information as well as provide data and information to assist us in
analyzing the economic consequences of the proposed rules and proposed
amendments. We also are interested in comments on the qualitative
benefits and costs we have identified and any benefits and costs we may
have overlooked. In addition to our general request for comments on the
economic analysis associated with the proposed rules and proposed
amendments, we request specific comment on the following aspects of the
proposal:
    275. What effect would the proposal have on funds' delivery costs?
Is our assessment correct that funds could use a trifold self-mailer,
or a similar approach, to deliver a proposed shareholder report by
mail? Why or why not? What alternatives to a trifold self-mailer might
funds consider for delivering the proposed shareholder reports in paper
to relevant shareholders? How would the planned mailing device affect
the estimated benefits and costs of the proposal? Please provide
quantitative information, if available.
    276. We request comment on the costs to funds of the proposed
requirement to prepare separate shareholder reports for each fund
series. How would this requirement affect the cost to funds of
preparing shareholder reports? Please answer this question separately
for the transition cost and the ongoing costs of complying with this
proposed requirement. Also please provide information on the additional
costs to funds and other parties of delivering separate reports for
separate fund series to shareholders, beyond any costs of report
preparation.
    277. We request comment on the costs of the Commission's proposed
clarification of the term ``appropriate broad-based securities market
index'' for funds that are required to present their performance in
relation to an ``appropriate broad-based securities market index'' in
the management's discussion of fund performance section of the
shareholder report. Would this proposed clarification result in
increased index-licensing fees? To what extent would competition among
index providers limit or otherwise affect these fees?
    278. What fraction of shareholders currently request electronic
delivery of fund disclosure? \857\ Would the proposal cause an increase
or decrease in this fraction relative to what would occur without the
proposal? If so, explain and indicate the likely change. Provide
supporting quantitative evidence, if available.
---------------------------------------------------------------------------

    \857\ We understand that the Commission estimated that fifteen
percent of investors in variable contracts have requested electronic
delivery. See Variable Contract Summary Prospectus Adopting Release,
supra footnote 27, at n.1030 and accompanying text. There are
sufficient differences between the market for investment in variable
contracts and the market for investment in ETFs and mutual funds,
that we believe the variable contract estimate is not a suitable
indicator for the analysis of the present rule proposal.
---------------------------------------------------------------------------

    279. The proposal would affect financial intermediaries and other
third parties that are involved in the distribution and use of the
prospectus and shareholder reports, such as broker-dealers and third-
party information providers. For each type of intermediary or third
party, we are requesting comment on how many would be affected by the
rule, the characteristics of those affected, and the consequences for
retail investors. Please provide quantitative information, if
available.
    280. The effect of changes in disclosure under the proposal would
be limited to the extent that retail investors rely on third parties
for information and advice in selecting among financial products, where
those third parties use more information than the proposed shareholder
reports and amended prospectus disclosure. We are requesting comment on
how many, or what fraction, of retail investors rely on advice from
such third parties in choosing among funds or in monitoring fund
investments. We are also requesting comment on whether the presence of
third parties whose advice is unaffected by the proposal would reduce
the impact of the proposal. Please explain and provide empirical facts
to support your response.
    281. How frequently do funds currently deliver prospectus stickers
to shareholders on average? Do funds typically deliver prospectus
stickers separately, or together with other materials (e.g., semi-
annual reports)? What effects would proposed rule 498B, including the
requirement to deliver prompt notices of certain material changes, have
on funds' delivery costs?
    282. Are our estimates of the compliance costs associated with the
proposed amendments reasonable?
    283. Is our assessment of the relative costs and benefits of the
proposal to exclude open-end funds registered on Form N-1A from the
scope of rule 30e-3 correct? Please provide qualitative or other
information about the expected costs of delivering rule 30e-3 notices
or complying with that rule more generally in light of funds'
additional experience with the rule after its adoption. How do these
costs compare to the expected costs of preparing and delivering the
proposed shareholder reports?
    284. We seek information that would help us quantify or otherwise
qualitatively assess the benefits of the proposed rule, particularly
the benefits for retail investors. Please provide any data, studies, or
other evidence that would allow us to quantify some or all of the
benefits.
    285. The proposal is designed to conserve the time and attention of
retail investors, and other market participants, in using the
disclosures that funds provide through prospectuses and shareholder
reports. We do not, however, have reliable estimates of the value to
investors of being able to use their time more efficiently under the
proposal or being able to make more informed investment decisions. We
are requesting comment on the effects of the proposal on the use of
investor time and attention, the ability of investors to make informed
investment decisions, and on the proposal's likely effects on welfare
of retail investors. Please provide explanations to support your
comments. Please also provide examples, where appropriate, and
supporting evidence from analysis of quantitative data, where
available.
    286. The proposal is designed to increase the use of disclosures by
retail investors. We seek comment on whether the benefit in terms of
investor comprehension of the disclosures is likely to vary according
to the disclosure format and, in particular, according to whether
delivery occurs in the form of digital media. What is the empirical
evidence? Please explain and provide documentation of any quantitative
evidence that includes an explanation of the data sources and analysis
methods.
    287. We seek comment on whether, and to what extent, funds that
have the option would choose to rely on the AFFE amendments that we are
proposing. For example, for purposes of the economic analysis, we have
assumed that all funds that are eligible for the AFFE amendment would
choose to move their AFFE disclosure to a footnote of the fee table, if
allowed to do so. It is possible that not all such funds would rely on
the amendment, however.\858\ Are there conditions under which a fund
that could move AFFE out of the fee table would choose not to do so?
Please explain. Also please provide data or examples to support your
answer.
---------------------------------------------------------------------------

    \858\ See supra paragraph accompanying footnote 621 (recognizing
that funds that tend to hold acquired fund investments near the 10%
threshold may prefer to consistently disclose AFFE in the fee table
to avoid moving the disclosure back-and-forth between a footnote and
the table).

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

    288. The effects on investors of fund reliance on the proposed AFFE
amendments would depend on how many funds rely on the AFFE amendment,
and under what conditions. For example, we estimate that only funds
with investments in acquired funds of less than 20% of total assets
would likely spend time considering whether they would qualify for the
AFFE amendment. We are requesting comment on the effects of the
proposed amendment on funds and investors.
    289. The effects on investors of the proposed change in the AFFE
disclosure would depend on whether, and under what conditions,
investors currently rely on the fund AFFE disclosure information. We
are requesting comment on how investors and other market participants
use the AFFE information that is disclosed currently. What is the
evidence that investors and others rely on AFFE disclosures in making
choices among funds? What is the evidence that the proposed changes
would cause any difference in the way this information is used or the
ease of its use by investors or other market participants? Please
explain and provide supporting cites (or other background
documentation).
    290. We are requesting comments on whether there are any
disparities between the likely effects of the advertising rule
amendments on different financial products or investments that could
lead to differences in the effects of the proposed advertising rule
amendments across products. We specifically seek comments on
differences in the effects of the proposed advertising rule amendments
between ETFs or mutual funds, on the one hand, and other types of
registered investment companies, on the other.
    291. We are not proposing to require Form N-CSR to be submitted in
a structured machine-readable format. Should we require funds to submit
some or all of Form N-CSR in a structured machine-readable format such
as the Inline XBRL format? What would be the benefits and costs of such
a requirement? Would any resulting benefits accrue to all types of
investors (e.g., retail investors and institutional investors)? Are
there any particular disclosures which investors would benefit most
from having access to in structured machine-readable format? Should a
structured machine-readable format other than Inline XBRL, such as a
custom XML format, be required for Form N-CSR?
    292. Form N-CSR currently requires funds to disclose their name and
Investment Company Act file number on the Form N-CSR cover page. Unlike
the Investment Company Act file number, which is a Commission-specific
identifier, the Legal Entity Identifier (``LEI'') is used by numerous
domestic and international regulatory regimes and could facilitate
collection of information about a fund beyond the information disclosed
in Commission filings.\859\ Should we require a fund that has an LEI to
disclose its LEI on the Form N-CSR cover page? What would be the costs
and benefits of such an approach for investors and for funds? If the
approach would provide informational benefits for investors, would
retail investors realize such benefits? By making additional
information available outside of the shareholder reports, would the
added LEI requirement contribute to the layered disclosure framework
discussed above?
---------------------------------------------------------------------------

    \859\ The LEI is also used by private market participants for
risk management and operational efficiency purposes. See the LEI
ROC's list of LEI uses at https://www.leiroc.org/lei/uses.htm.
---------------------------------------------------------------------------

    293. Form N-CSR currently requires funds that disclose divested
securities under Item 6.b of the Form to include the Committee on
Uniform Securities Identification Procedures (``CUSIP'') number for
each divested security listed. Should we consider omitting Form N-CSR's
requirement to provide a CUSIP number for each divested security? Why
or why not? Should we permit funds to provide, in lieu of a CUSIP
number, other identifiers such as a Financial Instrument Global
Identifier (FIGI) for each security? Why or why not? Would permitting
voluntary use of an alternate identifier have a beneficial effect for
investors, funds, or users of the data?

IV. Paperwork Reduction Act Analysis

U. Introduction

    Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\860\ We are submitting the proposed
collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\861\ The titles for
the existing collections of information are: (1) ``Form N-1A,
Registration Statement under the Securities Act and under the
Investment Company Act for Open-End Management Investment Companies''
(OMB Control No. 3235-0307); \862\ (2) ``Rule 30e-1 under the
Investment Company Act, Reports to Stockholders of Management
Companies'' (OMB Control No. 3235-0025) (3) ``Form N-CSR, Certified
Shareholder Report under the Exchange Act and under the Investment
Company Act for Registered Management Investment Companies''(OMB
Control No. 3235-0570); (4) ``Rule 30e-3 under the Investment Company
Act, internet Availability of Reports to Shareholders'' (OMB Control
No. 3235-0758); (5) ``Rule 31a-2, Records to be Preserved by Registered
Investment Companies, Certain Majority-Owned Subsidiaries thereof, and
other Persons Having Transactions with Registered Investment
Companies'' (OMB Control No. 3235-0179); (6) ``Rule 498 under the
Securities Act of 1933, Summary Prospectuses for Open-End Management
Investment Companies'' (OMB Control No. 3235-0648); (7) ``Rule 34b-1
under the Investment Company Act, Sales Literature Deemed to be
Misleading'' (OMB Control No. 3235-0346); (8) ``Rule 433 under the
Securities Act of 1933'' (OMB Control No. 3235-0617); and (9) ``Rule
482 under the Securities Act of 1933 Advertising by an Investment
Company as Satisfying Requirements of Section 10'' (OMB Control No.
3235-0565). We are also submitting a new collection of information for
proposed rule 498B under the Securities Act to allow funds to rely on a
new layered disclosure framework for prospectus delivery to existing
shareholders, subject to certain conditions. The title for this new
collection of information would be ``Delivery of Prospectuses to
Existing Shareholders of Open-End Management Investment Companies.''
---------------------------------------------------------------------------

    \860\ 44 U.S.C. 3501 through 3521.
    \861\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \862\ In addition to the amendments discussed below, we also are
proposing amendments to Schedule 14A and Form N-14 to update certain
cross references to the fee table in Form N-1A.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number.
    We discuss below the collection of information burdens associated
with proposed amendments to Form N-1A, rule 30e-1 under the Investment
Company Act, and Form N-CSR. We also discuss proposed rule 498B and
proposed amendments to rule 482 under the Securities Act, rule 34b-1
under the Investment Company Act, rule 433 under the Securities Act,
and rule 30e-3 under the Investment Company Act. The Commission also
intends to use two Feedback Fliers to obtain information from investors
and funds about the

proposed rule.\863\ The Feedback Fliers are included in this proposal
as Appendix B and Appendix C hereto.
---------------------------------------------------------------------------

    \863\ The Commission has determined that this usage 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 section 19(e) and (f) of the Securities Act. Additionally, for
the purpose of developing and considering any potential rules
relating to this rulemaking, the agency may gather from and
communicate with investors or other members from the public. See
section 19(e)(1) and (f) of the Securities Act.
---------------------------------------------------------------------------

V. Form N-1A

    In our most recent Paperwork Reduction Act submission for Form N-
1A, we estimated for Form N-1A a total hour burden of 1,662,190 hours,
and the total annual external cost burden is $131,338,208.\864\
Compliance with the disclosure requirements of Form N-1A is mandatory,
and the responses to the disclosure requirements will not be kept
confidential.
---------------------------------------------------------------------------

    \864\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2020.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to Form N-1A.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP05NO20.010

W. Proposed New Shareholder Report Requirements Under Rule 30e-1

    We have previously estimated that it takes a total of 1,028,658
hours, and involves a total external cost burden of $147,750,391, to
comply with the collection of information associated with rule 30e-
1.\865\ Compliance with the disclosure requirements of rule 30e-1 is
mandatory. Responses to the disclosure requirements are not kept
confidential.
---------------------------------------------------------------------------

    \865\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2019.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to rule 30e-1.
[GRAPHIC] [TIFF OMITTED] TP05NO20.011

BILLING CODE 8011-01-C

X. Form N-CSR

    In our most recent Paperwork Reduction Act submission for Form N-
CSR, we estimated the annual compliance burden to comply with the
collection of information requirement of

Form N-CSR is 179,443 burden hours with an internal cost burden of
$57,723,571, and an external cost burden estimate of $3,129,984.\866\
Compliance with the disclosure requirements of Form N-CSR is mandatory,
and the responses to the disclosure requirements will not be kept
confidential.
---------------------------------------------------------------------------

    \866\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual
burden estimates associated with the proposed amendments to Form N-CSR.
[GRAPHIC] [TIFF OMITTED] TP05NO20.012

Y. Proposed Rule 498B

    Proposed rule 498B would address shareholders' continued receipt of
annual prospectus updates in the years following their initial
investment in a fund and uses layered disclosure concepts to tailor
funds' required disclosures to the informational needs of different
types of investors.\867\ Under the proposed rule, investors would
continue to receive a prospectus in connection with their initial fund
investment, as they do today. Thereafter, a shareholder would no longer
receive annual prospectus updates, in light of the fact that the
shareholder would be receiving tailored shareholder reports (which
would include, in the annual report, a summary of material changes that
occurred over the prior year), and timely notifications to shareholders
pursuant to proposed rule 498B regarding material fund changes as they
occur. Reliance on the rule is voluntary; however, compliance with the
rule's conditions is mandatory for funds relying on the rule. Responses
to the information collections would not be kept confidential.
---------------------------------------------------------------------------

    \867\ See supra section II.F.
---------------------------------------------------------------------------

    Because a fund's reliance on proposed rule 498B would be voluntary,
the percentage of funds that would choose to rely on the rule is
uncertain. We generally anticipate that the proposed rule would provide
costs savings to funds, and so we assume that the vast majority of
funds would rely on rule 498B to satisfy their prospectus delivery
obligations.\868\ For purposes of this estimate, we assume that funds
that currently rely on rule 498 generally would rely on proposed rule
498B. We believe this assumption is appropriate because funds that rely
on rule 498 are funds that have already chosen to rely on a rule that
provides an alternative means of satisfying prospectus delivery
obligations, and because certain of the conditions of proposed rule
498B overlap with similar conditions to rely on rule 498.\869\
Therefore, we assume that these funds would experience some
efficiencies in coming into compliance with proposed rule 498B. Based
on

these assumptions, we estimate that 90% of mutual funds and ETFs would
choose to rely on rule 498B.\870\
---------------------------------------------------------------------------

    \868\ See supra section III.C.2.d (discussing the anticipated
cost savings associated with rule 498B).
    \869\ For example, the set of documents that funds relying on
498B must post online would be identical to the set of documents
that are publicly accessible online for funds currently relying on
rule 498. Therefore, for funds currently relying on 498, there would
be no added burden to comply with this requirement.
    \870\ We estimate that 93% of funds use summary prospectuses.
See supra footnote 12. Funds that use summary prospectuses under
rule 498 already meet several of the conditions of proposed rule
498B, which we believe would lead most of these funds to rely on
proposed rule 498B due to the lower compliance costs of relying on
the new rule. As a result, and to simplify our calculations, we
estimate that 90% of funds would rely on proposed rule 498B.
---------------------------------------------------------------------------

    The table below summarizes the proposed estimates for internal and
external burdens associated with this new requirement under rule 498B:
[GRAPHIC] [TIFF OMITTED] TP05NO20.013

Z. Rule 482

    In our most recent Paperwork Reduction Act submission for rule 482,
we estimated the annual burden to comply with rule 482's information
collection requirements to be 278,161 hours, with a time cost of
$76,702,895, and with no annual external cost burden.\871\ Compliance
with the requirements of rule 482 is mandatory, and responses to the
information

collections would not be kept confidential.
---------------------------------------------------------------------------

    \871\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2017.
---------------------------------------------------------------------------

    We estimate that 36,994 responses to rule 482 are filed
annually.\872\ We estimate that approximately 96% of the rule 482
responses provide fee and expense figures in qualifying advertisements
and would, therefore, be required to comply with the proposed
amendments regarding such information (for example, ensuring that the
fee and expense figures are presented in accordance with the prominence
and timeliness requirements in the proposed amendments to rule 482).
Similarly, we estimate that 96% of the responses to rule 482 provide
advertisements that include information regarding a fund's total annual
expenses and would, therefore, have to comply with the proposed
amendments regarding such information.
---------------------------------------------------------------------------

    \872\ In 2019, there were 41,003 responses to rule 482 filed
with FINRA and 262 responses filed with the Commission in 2019. Of
those, 4,271 were responses from closed-end funds and BDCs. We
assume that, moving forward, closed-end funds and BDCs will choose
to use free writing prospectuses under rule 433. Therefore, we
excluded closed-end funds or BDCs from the total responses to rule
482.
---------------------------------------------------------------------------

    The table below summarizes the proposed estimates for internal
burdens associated with this new requirement under rule 482:
[GRAPHIC] [TIFF OMITTED] TP05NO20.014

AA. Rule 34b-1

    To apply the same fee and expense-related requirements consistently
across all registered investment company and BDC advertisements and
supplemental sales literature, we are proposing to amend rules 34b-1 in
a manner that mirrors our proposed amendments to rule 482.\873\
---------------------------------------------------------------------------

    \873\ See supra Section II.I.
---------------------------------------------------------------------------

    We estimate that 351 responses to rule 34b-1 are filed
annually.\874\ We estimate that approximately 96% of the rule 34b-1
responses provide fee and expense figures in qualifying advertisements
and would, therefore, be required to comply with the proposed
amendments regarding such information. Similarly, we estimate that 96%
of the responses to rule 34b-1 provide advertisements that include
information regarding a fund's total annual expenses and would,
therefore, have to comply with the proposed amendments regarding such
information.
---------------------------------------------------------------------------

    \874\ The estimated number of responses filed with the
Commission in 2019.

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

    In our most recent Paperwork Reduction Act submission for rule 34b-
1, we estimated the annual compliance burden to comply with the
collection of information requirement in rule 34b-1 is 26,008 hours,
with an internal cost burden of $7.3 million.\875\ There is no annual
external cost burden attributed to rule 34b-1. Compliance with the
requirements of rule 34b-1 is mandatory and the responses to the
information collections would not be kept confidential. The table below
summarizes the proposed estimates for internal burdens associated with
this new requirement under rule 34b-1.
---------------------------------------------------------------------------

    \875\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2018.
[GRAPHIC] [TIFF OMITTED] TP05NO20.015

BB. Rule 433

    We are proposing to amend rule 433 to require a registered closed-
end fund or BDC free writing prospectus to comply with the proposed
content, presentation, and timeliness requirements of proposed rule
482, as applicable, if the free writing prospectus includes fee and
expense information.\876\ As a result, regardless of whether a
registered closed-end fund or BDC advertisement uses rule 482 or rule
433, the advertisement would be subject to the same requirements
regarding fee

and expense information.\877\ Compliance with the requirements of rule
433 is mandatory and the responses to the information collections would
not be kept confidential.
---------------------------------------------------------------------------

    \876\ See supra Section II.I.
    \877\ See supra footnote 872 (noting that, for purposes of the
PRA for rule 482, we excluded responses from closed-end funds and
BDC).
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for rule 433,
we estimated the annual compliance burden to comply with the collection
of information requirement rule 433 is 6,391 hours, at a time cost of
$7,668,800, and an external cost burden estimate of $7,669,017.\878\ As
part of that rulemaking, we also estimated that there will be 791
closed-end funds and BDCs filing approximately 4,271 free writing
prospectuses.
---------------------------------------------------------------------------

    \878\ This estimate is based on the last time the rule's
information collection was submitted in 2020. See Securities
Offering Reform for Closed-End Investment Companies, Investment
Company Act Release No. 33836 (Apr. 8, 2020).
---------------------------------------------------------------------------

    We estimate that approximately 96% of the 4,271 responses provide
fee and expense figures in free writing prospectuses and would,
therefore, be required to comply with the proposed amendments regarding
such information. Similarly, we estimate that 96% of these responses
would include information regarding a fund's total annual expenses and
would, therefore, have to comply with the proposed amendments regarding
such information.
    The table below summarizes the proposed estimates for internal
burdens associated with this new requirement under rule 433:
[GRAPHIC] [TIFF OMITTED] TP05NO20.016

CC. Rule 30e-3

    We are proposing to amend the scope of rule 30e-3 to exclude
investment companies registered on Form N-1A.\879\ Because our proposed
amendment would decrease the number of funds that would be able to rely
on rule 30e-3, we are updating the PRA analysis for rule 30e-3 to
account for any burden

decrease that would result from this decrease in respondents. We are
not updating the rule 30e-3 PRA analysis in any other respect. Reliance
on the rule is voluntary; however, compliance with the rule's
conditions is mandatory for funds relying on the rule. Responses to the
information collections would not be kept confidential.
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    \879\ See supra section II.G.
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    Under current PRA estimates for rule 30e-3, we estimated that
complying with the information collection requirements of rule 30e-3
would impose an average total annual hour burden of about 8,866 hours
and an external cost burden estimate of $76,038 on funds that choose to
rely on rule 30e-3.\880\ Of those costs, we estimated that 24,459.4
hours, at a time cost of $8,674,306, and an external cost of
$69,965,020, were attributed to the compliance costs of open-end funds
registered on Form N-1A. The table below summarizes these revisions to
the estimated annual responses, burden hours, and burden-hour costs
based on the proposed amendment to the scope of rule 30e-3.
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    \880\ This estimate is based on the last time the rule's
information collection was submitted in connection with the adoption
of rule 30e-3 in 2019.
[GRAPHIC] [TIFF OMITTED] TP05NO20.017

DD. Rule 498

    Rule 498 under the Securities Act permits funds to satisfy their
prospectus delivery obligations under the Securities Act by sending or
giving investors the fund's summary prospectus and providing the
statutory prospectus on a website. Reliance on the rule is voluntary;
however, compliance with the rule's conditions is mandatory for funds
relying on the rule. Responses to the information collections would not
be kept confidential.
    We are proposing to amend the scope of rule 30e-3 to exclude
investment companies registered on Form N-1A. Because our proposed
amendments would decrease the number of funds that would be able to
rely on rule 30e-3, we are updating the PRA analysis for rule 498 to
account for that change. We are not updating the rule 498 PRA analysis
in any other respect.
    Under current PRA estimates for rule 498, we estimated that
complying with the information collection requirements of rule 498
would impose an average total annual hour burden of about 20,327 burden
hours, at a time cost of $5.8 million, and an annual external cost
burden of $167,458,800. Of those costs, we estimated that the amortized
aggregate annual hour burden associated with the rule 30e-3 amendments
to rule 498 was 4,529 hours, at a time cost of $1,286,236. We estimated
that the external costs of rule 498 did not change as a result of the
rule 30e-3 amendments. The table below summarizes our proposed
revisions to the estimated burden hours, and burden-hour costs based on
the proposed amendment to the scope of rule 30e-3.
[GRAPHIC] [TIFF OMITTED] TP05NO20.018

EE. Request for Comment

    We request comment on whether these estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
in order to: (1) Evaluate whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (3) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) determine whether there are ways
to minimize the burden of the collection of information on those who
are to respond, including through

the use of automated collection techniques or other forms of
information technology.
    Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the OMB
Desk Officer for the Securities and Exchange Commission,
<EMAIL_ADDRESS>and should send a copy to
Vanessa A. Countryman, Secretary, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-1090, with reference to File No.
S7-09-20. OMB is required to make a decision concerning the collections
of information between 30 and 60 days after publication of this
release; therefore a comment to OMB is best assured of having its full
effect if OMB receives it within 30 days after publication of this
release. Requests for materials submitted to OMB by the Commission with
regard to these collections of information should be in writing, refer
to File No. S7-09-20, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736.

V. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been
prepared in accordance with section 3 of the Regulatory Flexibility Act
(``RFA'').\881\ It relates to: The proposed amendments to funds' annual
and semi-annual report requirements, proposed new Form N-CSR
requirements, and proposed new website posting requirements; the
treatment of annual prospectus updates for existing fund shareholders
under proposed rule 498B; the proposed amendments to fund prospectus
disclosure requirements; the proposed investment company advertising
rule amendments; and the proposed technical and conforming amendments.
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    \881\ 5 U.S.C. 603.
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FF. Reasons for and Objectives of the Proposed Actions

    The Commission is proposing a new rule, rule amendments, and form
amendments that would create a simplified disclosure framework for
mutual funds and exchange-traded funds to highlight key information for
investors. Under the proposed amendments, fund investors would continue
to receive fund prospectuses in connection with their initial
investment in a fund, as they do today. On an ongoing basis thereafter,
the investors would receive more concise and visually engaging annual
and semi-annual reports designed to highlight information that we
believe is particularly important for retail shareholders to assess and
monitor their ongoing fund investments. The fund's shareholder reports
would serve as the primary fund disclosures that existing shareholders
receive each year, in addition to notices of certain material changes
if they occur during the year. The proposal would promote a layered
disclosure framework that would complement the shareholder reports by
continuing to make available additional information that may be of
interest to some investors, including the fund's financial statements.
This information would be available online, reported on Form N-CSR, and
delivered to an investor on request, free of charge. We also propose to
provide funds the flexibility to make electronic versions of their
shareholder reports more user-friendly and interactive. Under the
proposal, mutual funds and exchange-traded funds would no longer be
permitted to rely on rule 30e-3 to satisfy shareholder report
transmittal requirements, in order to promote the provision of
consistent disclosure that we believe is best tailored to investors'
informational needs. While it is currently common for fund shareholders
to receive an updated annual prospectus each year, the proposal's
layered disclosure approach would instead rely on shareholder reports
(which, in the case of the annual report, would include a summary of
material changes that occurred over the prior year), as well as the
online availability of the fund prospectus and timely notifications to
shareholders regarding material fund changes as they occur, to keep
investors informed about their ongoing fund investments. In addition,
we are proposing amendments to certain mutual fund and ETF prospectus
disclosure requirements, which are designed to improve the presentation
of fund fees and expenses and principal risks to help investors better
understand this important information. To improve fee- and expense-
related information more broadly, we further propose to amend
investment company advertising rules to promote more transparent and
balanced statements about investment costs. The proposed advertising
rule amendments would affect all registered investment companies and
BDCs.

GG. Legal Basis

    The Commission is proposing the rules and forms contained in this
document under the authority set forth in the Securities Act,
particularly, section 19 thereof [15 U.S.C. 77a et seq.], the Exchange
Act, particularly, sections 13, 23, and 35A thereof [15 U.S.C. 78a et
seq.], the Investment Company Act, particularly, sections 8, 24, 30,
and 38 thereof [15 U.S.C. 80a et seq.], and 44 U.S.C. 3506, 3507.

HH. Small Entities Subject to the Rule

    For purposes of Commission rulemaking in connection with the
Regulatory Flexibility Act, an investment company is a small entity if,
together with other investment companies in the same group of related
investment companies, it has net assets of $50 million or less as of
the end of its most recent fiscal year.\882\ Commission staff estimates
that, as of June 2019, approximately 50 open-end funds (including 8
ETFs), 33 closed-end funds, and 16 BDCs are small entities.
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    \882\ 17 CFR 270.0-10(a). Recognizing the growth in assets under
management in investment companies since rule 0-10(a) was adopted,
the Commission plans to revisit the definition of a small entity in
rule 0-10(a).
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II. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

1. Annual and Semi-Annual Reports
    We propose to tailor the disclosure requirements for funds' annual
and semi-annual reports to help shareholders focus on key information
that we believe is most useful for assessing and monitoring fund
investments on an ongoing basis, including information about a fund's
expenses, portfolio holdings, and performance. Among other things,
shareholder reports would be revised to include new disclosures (such
as material changes and fund statistics in annual reports), simplify
certain disclosures (such as the MDFP in annual reports), and remove
certain disclosures (such as financial statements currently found in
semi-annual and annual reports).\883\ We also propose to improve the
design of funds' shareholder reports by, for example, encouraging funds
to use features that promote effective communications (e.g., tables,
charts, bullet lists, question-and-answer formats) and permitting funds
to use technology to enhance an investor's understanding of material in
electronic versions of shareholder reports.
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    \883\ See supra Sections II.B.2 and II.C.1.
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    We estimate that approximately 50 funds are small entities that are
required to prepare and transmit shareholder reports under the proposed
rules.\884\ We expect the proposed amendments would result in some
initial implementation costs but, going forward, would reduce the
burdens associated with these

existing disclosure requirements related to shareholder reports. We
estimate that preparing amended annual report disclosure would cost
$12,096 for each fund, including small entities, in its first year of
compliance, and $3,360 for each subsequent year.\885\ We further
estimate that preparing amended semi-annual report disclosure would
cost $6,048 for each fund, including small entities, in its first year
of compliance, and $1,680 for each subsequent year.\886\
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    \884\ See text following supra footnote 882.
    \885\ See supra footnote 804 and accompanying text.
    \886\ See supra footnote 805 and accompanying text.
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2. New Form N-CSR and Website Availability Requirements
    We propose a layered disclosure framework that would complement the
proposed shareholder report requirements by continuing to make
available to investors additional, less retail-focused information,
including the fund's financial statements. This additional information,
which we believe would primarily benefit financial professionals and
other investors who desire more in-depth information, would be
available online, reported on Form N-CSR, and delivered to an investor
on request, free of charge.\887\ This new Form N-CSR disclosure also
would need to be available on the website specified on the cover page
or at the beginning of the fund's annual report and delivered in paper
or electronically upon request, free of charge.\888\
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    \887\ See supra Sections II.B through II.C.
    \888\ See supra Section II.B.3.
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    We estimate that approximately 50 funds are small entities that
would be required to comply with the proposed new Form N-CSR and