The release of the FAQs was timely based on the upcoming compliance date of July 24, 2024. The responses represent the staff views of the Division of Investment Management and are not rules, regulations or statements of the Commission.
Although the Commission has neither approved nor disapproved the answers to these FAQs, they provide guidance for issues raised since the October 2022 adoption of the rule and form amendments.
What’s in the FAQs for Tailored Shareholder Reports
Important issues addressed in the FAQs include:
- Binding individual shareholder reports of multiple funds
- Form N-CSR and website availability requirements
- Compliance date and Inline XBRL issues
- Electronically provided shareholder reports
- Appropriate broad-based securities market index
Of these issues, the changes to Form N-CSR and the website hosting requirements for Mutual Funds and variable products, presents a significant change to issuers.
Form N-CSR and website availability requirements
There have been questions raised about how the items, specifically Items 7 to 11, must be presented in Form N-CSR and on a fund website.
The Commission recognized some funds do not prepare separate financial statements (Item 7(a) of amended Form N-CSR) for each series of a trust. In the Adopting Release, the Commission acknowledged that a fund would be permitted to prepare, and file combined financial statements that include multiple series or portfolios in a trust to satisfy Item 7 of amended Form N-CSR provided such financial statement presentation is consistent with Regulation S-X. Therefore, responses to individual Form N-CSR items could include responses with respect to multiple series or portfolios in a trust.
Operational efficiencies can also be derived for a single fund, multiple series of a trust, or an entire trust to prepare its Form N-CSR filing by combining responses to multiple items of the form.
For example, a trust with three series could prepare Form N-CSR information in the following manners:
- Fund A (Items 7-11); Fund B (Items 7-11); Fund C (Items 7-11)
- Item 7 (Fund A, B, C); Item 8 (Fund A, B, C); Item 9 (Fund A, B, C); Item 10 (Fund A, B, C); Item 11 (Fund A, B, C)
The Commission did not address Form N-CSR preparation and submission practices that involve combining responses to multiple items of the form.
The release discusses the presentation of Form N-CSR information online to satisfy the requirements of the rule 30e-1(b) of the Act. The release states that funds will have the option to satisfy the website availability requirement for the information that the fund will file on Form N-CSR by posting the entire Form N-CSR on the website specified in the shareholder report. Although the SEC allows for the posting of the entire N-CSR, only Items 7 to 11 from Form N-CSR are required to be hosted.
Online presentation of Form N-CSR
The online presentation may be grouped by type of materials and/or by series, as long as the information meets certain presentation requirements, including the grouped information:
- Is formatted to effectively communicate the information;
- Clearly distinguishes the different types of materials and/or each series, as applicable; and
- Provides an easy way to locate the relevant information, including, for example, a table of contents that includes hyperlinks to the specified materials and series.
When funds submit combined Form N-CSR filings that include multiple series, the release states that information contained in the Form N-CSR filings will also need to meet these presentation requirements. Therefore, the staff believes that a combined response to multiple Form N-CSR items would generally be appropriate if this combined response satisfies the three requirements for grouped information in the context of website availability obligations.
Rule 30e-1 provides that, to satisfy its obligations under section 30(e) of the Act, a fund must make certain materials publicly accessible, free of charge, at the website address specified at the beginning of its shareholder report. Along with the N-CSR items, the SEC will require the Annual and Semi-Annual report TSR’s to be web hosted at the share class level, utilizing the layered disclosure framework initially introduced in Rule 498 for mutual fund Summary Prospectuses.
Web hosting requirements for variable product issuers
Other questions frequently raised relate to the web hosting requirement for variable product issuers. For example, when the requirement applies to a variable annuity or variable life insurance company issuer:
- “Where should the required materials for funds that are investment options underlying the variable contract (‘underlying funds’) be available?”
- “Should the required underlying fund materials appear on the variable contract issuer’s website or the fund’s website?”
The staff stated that the materials could appear either on the variable contract issuer’s website or the fund’s website. Neither rule 30e-1 nor Form N-1A includes express requirements regarding the entity that must host the required fund materials. The staff recognizes as a practical matter, if multiple variable contract issuers permit contract value to be allocated to the same underlying fund, it may be more efficient for the required fund materials to appear on the underlying fund’s website as opposed to the variable contract issuers’ websites.
For example, if the fund materials were to appear on the websites of Issuers A, B, and C, this would effectively require the beginning of the underlying fund’s shareholder report to list multiple websites instead of only listing the underlying fund’s website and multiple websites would be required to host materials for the same underlying fund.
On the other hand, the contract owner’s user-experience must be considered. By having the underlying fund documents appear on the variable contract issuer’s website, it minimizes the number of websites a contract owner would be required to search to find their fund documents. Many variable contract issuers choose to host the fund documents on their website to “keep the contract owner anchored” to their website, as opposed to sending them elsewhere for the information that can be easily made accessible on the contract issuer’s website. Considering the number of underlying funds a contract owner invests in as part of their contract, the optimal user-experience and preferred business practice should be considered.
The FAQ can be found on the SEC’s website at the following URL: https://www.sec.gov/investment/tailored-shareholder-reports-faqs
Streamlined compliance solutions from Toppan Merrill
Toppan Merrill has been helping funds and variable product issuers with their required financial reporting and compliance requirements for decades. We continually monitor the SEC modernization updates and help with formatting, inline XBRL and website display architecture for the new Tailored Shareholder Report requirements. Our experts are in constant contact with the SEC to clarify rules and ensure our clients are in full compliance.
We offer simple and straightforward solutions that help you bring your filing and reporting into compliance. If you have any questions about the Tailored Shareholder Report Rule, client communications systems, or other matters concerning the 1940 Securities Act, the experts at Toppan Merrill can help. Connect with us or call at 800.688.4400.
