Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements

1 15 U.S.C. 77a et seq. 2 15 U.S.C. 80a et seq. 3 15 U.S.C. 78a et seq. SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 230, 239, 240, 270, and 274 [Release Nos. 33–10814; 34–89478; IC– 33963; File No. S7–09–20] RIN 3235–AM52 Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’) is proposing rule and form amendments that would modernize the disclosure framework for open-end management investment companies. The disclosure framework would feature concise and visually engaging shareholder reports that would highlight key information that is particularly important for retail investors to assess and monitor their fund investments. Certain information that may be less relevant to retail investors—and of more interest to financial professionals and investors who desire more in-depth information— would no longer appear in funds’ shareholder reports but would be available online, delivered free of charge upon request, and filed on a semiannual basis on Form N–CSR. Funds’ shareholder reports would serve as the central source of fund disclosure for existing shareholders. Thus, instead of delivering prospectus updates to existing shareholders each year, openend funds would have an alternative way to keep shareholders informed. This framework would rely on the shareholder report (which would include a summary of material fund changes), along with timely notifications to shareholders about material fund changes as they occur and continued availability of the fund’s prospectus. The Commission is also proposing amendments to open-end fund prospectus disclosure requirements to provide greater clarity and more consistent information about fees, expenses, and principal risks. Finally, the Commission is proposing amendments to the advertising rules for registered investment companies and business development companies to promote more transparent and balanced statements about investment costs. DATES: Comments should be received by January 4, 2021. ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments

Use the Commission’s internet
comment form (https://www.sec.gov/ rules/submitcomments.htm); or
Send an email to rule-comments@
sec.gov. Please include File No. S7–09– 20 on the subject line. Paper Comments
Send paper comments to Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–09–20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s website (http://www.sec.gov/rules/ proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information you wish to make available publicly. Persons wishing to provide comments regarding the proposal may wish to submit our Investor Feedback Flier or Smaller Fund Feedback Flier, available at Appendices B and C, respectively. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT:
Zeena Abdul-Rahman, Daniel K. Chang, Mykaila DeLesDernier, Pamela K. Ellis, Angela Mokodean, Senior Counsels; Amanda Hollander Wagner, Branch Chief; or Brian McLaughlin Johnson, Assistant Director, at (202) 551–6792, Investment Company Regulation Office; Daniel Rooney, Assistant Chief Accountant; Keith Carpenter or Michael Kosoff, Senior Special Counsels, at (202) 551–6921, Disclosure Review and Accounting Office; Division of Investment Management; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. SUPPLEMENTARY INFORMATION: The Commission is proposing new 17 CFR 230.498B [new rule 498B] under the Securities Act of 1933 (‘‘Securities Act’’).1 We also are proposing amendments to the following rules and forms:
Commission reference CFR citation [17 CFR] Organization; Conduct and Ethics; And Information and Requests .................................................................. §§ 200.1 through 200.800.
Section 800 ................................................................................................................................................. § 200.800.
Securities Act:
Rule 156 ...................................................................................................................................................... § 230.156. Rule 433 ...................................................................................................................................................... § 230.433. Rule 482 ...................................................................................................................................................... § 230.482. Rule 498 ...................................................................................................................................................... § 230.498. Form N–14 .................................................................................................................................................. § 239.23. Securities Act and Investment Company Act of 1940 (‘‘Investment Company Act’’): 2 Form N-1A .................................................................................................................................................. §§ 239.15A and 274.11A. Securities Exchange Act of 1934 (‘‘Exchange Act’’): 3
Schedule 14A .............................................................................................................................................. § 240.14a–101.
Exchange Act and Investment Company Act:
Form N–CSR .............................................................................................................................................. §§ 249.331 and 274.128.

4For purposes of this release, the term ‘‘fund’’ generally refers to an open-end management investment company registered on Form N–1A or a series thereof, unless otherwise specified. Mutual funds and most ETFs are open-end management investment companies registered on Form N–1A. An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer. See sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a–4 and 80a–5(a)(1)]. 5Throughout this release, we generally use the term ‘‘investor’’ to refer to both prospective investors in a fund and fund shareholders (i.e., persons who hold an investment in securities issued by a fund). We generally use the term ‘‘shareholder’’ to refer specifically to those who hold an investment in securities issued by a fund. 6See section 5(b)(2) of the Securities Act [15 U.S.C. 77e(b)(2)] (generally requiring that a fund or financial intermediary deliver a prospectus to an investor in connection with his or her purchase of the fund’s securities). Funds generally amend their prospectuses annually to reflect changes to the disclosed information. A fund’s prospectus generally must include information contained in the fund’s registration statement. See section 10(a) of the Securities Act [15 U.S.C. 77j(a)]. For purposes of this release, a prospectus meeting the requirements of a section Continued Commission reference CFR citation [17 CFR] Investment Company Act:
Rule 30e–1 .................................................................................................................................................. § 270.30e–1. Rule 30e–3 .................................................................................................................................................. § 270.30e–3. Rule 31a–2 .................................................................................................................................................. § 270.31a–2. Rule 34b–1 .................................................................................................................................................. § 270.34b–1.
Table of Contents
I. Introduction and Background
A. Current Approach To Disclosure for Fund Shareholders B. Information About Investor Preferences
1. Fund Shareholder Preferences Regarding
Ongoing Disclosures
2. Fee and Risk Disclosure Preferences
3. Disclosure Delivery Preferences
C. Developments Affecting Fund
Disclosure and Marketing Practices
II. Discussion
A. Overview of Proposed New Disclosure Framework
1. Executive Summary
2. Considerations and Goals
B. Annual Shareholder Report
1. Scope of Annual Report Disclosure, and
Registrants Subject to Amendments
2. Contents of the Proposed Annual Report
3. Format and Presentation of Annual
Report
4. Electronic Annual Reports
C. Semi-Annual Shareholder Report
1. Scope and Contents of the Proposed
Semi-Annual Report
2. Format and Presentation of Semi-Annual
Report
3. Electronic Semi-Annual Reports
D. New Form N–CSR and website Availability Requirements
1. Proposed Form N–CSR Filing
Requirements
2. Proposed website Availability
Requirements
3. Proposed Delivery Upon Request
Requirements
E. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N–CSR F. Proposed Rule 498B and Treatment of Annual Prospectus Updates Under Proposed Disclosure Framework
1. Overview
2. Scope of Proposed New Rule 498B
3. Conditions To Rely Upon Proposed New
Rule 498B
4. Other Requirements
G. Amendments Narrowing Scope of Rule 30e–3 H. Proposed Amendments To Fund Prospectus Disclosure Requirements
1. Improved Prospectus Fee Disclosures
2. Improved Prospectus Risk Disclosures
3. Prospectuses and SAIs Transmitted
Under Rule 30e–1(d)
I. Investment Company Advertising Rule
Amendments
J. Technical and Conforming Amendments K. Compliance Date
III. Economic Analysis
A. Introduction
B. Economic Baseline and Affected Parties
1. Descriptive Industry Statistics
2. Fund Prospectuses
3. Fund Shareholder Reports
4. Delivery of Fund Prospectuses and
Shareholder Reports
5. Investor Use of Fund Disclosure
6. Fund Advertisements
C. Costs and Benefits
1. Broad Economic Considerations
2. Modified Disclosure Framework for
Existing Fund Shareholders
3. Prospectus Disclosure Amendments
4. Advertising Rule Amendments
D. Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives
1. More or Less Frequent Disclosure
2. More or Less Information in Shareholder
Reports
3. Retaining Rule 30e–3 Flexibility for
Open-End Funds Registered on Form N– 1A
4. Limiting the Advertising Rule
Amendments to ETFs and Mutual Funds
5. Amending Prospectus Fee, Expense, and
Principal Risk Disclosure in a Different Manner
6. Amending Shareholder Report
Requirements for Variable Insurance Contracts or Registered Closed-End Funds
7. Requiring Funds To Comply With
Proposed Rule 498B
8. Requiring Form N–CSR to be Tagged in
Inline XBRL Format
9. Modifying the AFFE Amendment
F. Request for Comment
IV. Paperwork Reduction Act Analysis
A. Introduction
B. Form N–1A
C. Proposed New Shareholder Report
Requirements Under Rule 30e–1 D. Form N–CSR E. Proposed Rule 498B F. Rule 482 G. Rule 34b–1 H. Rule 433
I. Rule 30e–3
J. Rule 498
K. Request for Comment
V. Initial Regulatory Flexibility Act Analysis
A. Reasons for and Objectives of the Proposed Actions B. Legal Basis
C. Small Entities Subject to the Rule
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements
1. Annual and Semi-Annual Reports
2. New Form N–CSR and website
Availability Requirements
3. Proposed Rule 498B, and Treatment of
Annual Prospectus Updates under Proposed Disclosure Framework
4. Amendments to Scope of Rule 30e–3
5. Proposed Amendments to Fund
Prospectus Disclosure Requirements
6. Investment Company Advertising Rules
E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives G. General Request for Comment
VI. Consideration of Impact on the Economy
VII. Statutory Authority
I. Introduction and Background
The Commission is proposing to tailor the disclosures that mutual funds and exchange-traded funds (‘‘ETFs’’ and, collectively with mutual funds, ‘‘funds’’) must provide to investors to highlight key information investors need to assess and monitor their fund investments and make informed investment decisions.4 Currently, most mutual funds and ETFs rely on a layered disclosure framework with respect to the prospectus information they provide to fund investors in order to tailor this disclosure to investors’ informational needs.5 The vast majority of funds provide: (1) A summary prospectus to investors in connection with their initial investment decision; and (2) more-detailed information that may be of interest to some investors, which is available online in the form of the ‘‘statutory prospectus’’ and Statement of Additional Information (‘‘SAI’’).6 However, this approach to

10(a) prospectus is referred to as a ‘‘statutory prospectus.’’ Form N–1A requires a fund to disclose the information that Items 2 through 8 of Form N– 1A require in numerical order at the front of the prospectus. See General Instruction C.3.a to Form N–1A. For purposes of this release, we refer to this front section of the statutory prospectus as the ‘‘summary section of the statutory prospectus.’’ A fund may use a summary prospectus (which includes the information required or permitted by Items 2 through 8 of Form N–1A) to satisfy prospectus delivery obligations under certain conditions (e.g., the statutory prospectus is posted online). See rule 498 under the Securities Act [17 CFR 230.498]. For purposes of this release, a summary prospectus that a fund uses to satisfy its prospectus delivery obligations, as rule 498 permits, is referred to as a ‘‘summary prospectus.’’ 7See section 30(e) of the Investment Company Act [15 U.S.C. 80a–29(e)]; rule 30e–1 under the Investment Company Act [17 CFR 270.30e–1]. Shareholders in a fund typically receive an annual update of the fund’s prospectus to satisfy prospectus delivery requirements for any additional shares of the fund the shareholder may purchase. See infra discussion accompanying and following footnote 11. In addition to the annual prospectus update, a shareholder also may receive prospectus supplements, or ‘‘stickers,’’ during the year if material or other changes occur to the fund. See infra footnote 13 and accompanying text. 8See Request for Comment on Fund Retail Investor Experience and Disclosure, Investment Company Act Release No. 33113 (June 5, 2018) [83 FR 26891 (June 11, 2018)] (‘‘Fund Investor Experience RFC’’). 9See, e.g., infra Sections I.B and I.C. 10See, e.g., Enhanced Disclosure and New Prospectus Delivery Option for Registered OpenEnd Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)] (‘‘2009 Summary Prospectus Adopting Release’’). The summary prospectus that the Commission adopted took into account investors’ preferences as reflected in focus group interviews and a telephone survey. See 2009 Summary Prospectus Adopting Release at n.32 and accompanying text. 11Section 10(a)(3) of the Securities Act, and
section 24(e) and 17 CFR 270.8b–16 [rule 8b–16
under the Investment Company Act], generally require a fund to update its registration statement (which includes its prospectus) annually. The effect of section 10(a)(3) is to require funds to update their prospectuses annually to reflect current fee, performance, and other financial information (the ‘‘annual prospectus update’’).
Section 5(b)(2) of the Securities Act makes it
unlawful to deliver a security for purposes of sale or for delivery after sale ‘‘unless accompanied or layered, tailored disclosure does not extend to other disclosure funds provide to their shareholders. After making their initial decision to invest in a fund, fund shareholders typically receive an updated prospectus annually, as well as annual and semi-annual shareholder reports (or ‘‘annual reports’’ and ‘‘semiannual reports’’ respectively, and collectively ‘‘shareholder reports’’).7 These shareholder reports provide detailed information about a fund’s operations and activities during the last full- or half-year period and can be quite lengthy. For example, it is not unusual for annual reports to exceed 100 pages in length. In June 2018, the Commission issued a request for comment seeking feedback on retail investors’ experience with fund disclosure and on ways to improve fund disclosure.8 We have considered feedback the Commission received in response to this request for comment, which generally showed that retail investors prefer concise, layered disclosure and feel overwhelmed by the volume of fund information they currently receive. We have also considered prior investor testing and surveys, past fund disclosure reform initiatives, and developments affecting fund disclosure practices.9 After considering this information, we are proposing a layered disclosure framework for fund shareholders that would highlight key information for assessing and monitoring a fund investment and informing investment decisions (e.g., whether to buy additional shares, continue to hold, or sell a fund investment), with additional information available online and upon request. The proposal would implement this new framework principally by amending the requirements for funds’ annual and semi-annual reports to highlight information that we believe is particularly important for retail shareholders to assess and monitor their ongoing fund investments. These tailored shareholder reports would serve as the primary fund disclosure that existing shareholders receive each year, in addition to notices of certain material changes if they occur during the year. The proposal is designed to alleviate concerns that fund retail shareholders currently may receive disclosure materials that are not well-suited to their needs, which may contribute to investor confusion or indifference. Current disclosures, for example, may include information that is less useful for most retail shareholders to assess and monitor their fund investments, either because the information is primarily designed to inform an initial purchase decision, or because the information is of interest to only some investors (for example, those investors who want detailed fund information), as well as financial professionals and market analysts. Furthermore, current fund disclosures in some cases are delivered close in time to one another and include similar sets of information that may appear redundant or
inconsistent to shareholders. Under the proposal, the amounts and types of available fund information would remain largely unchanged. However, information that is of interest only to some shareholders, or information that we believe generally is less useful for purposes of assessing and monitoring an ongoing investment, would be available online and delivered upon request to fund shareholders who want that additional information. In addition to layering disclosure for existing fund shareholders, we are proposing certain amendments to the way funds present their fees and expenses and principal risks in prospectuses. Many retail investors responding to the Fund Investor Experience RFC stated that current fee and expense and principal risk disclosure is difficult to understand and use. The proposed amendments are designed to provide investors with simpler, easier-to-understand information about a fund’s fees and expenses and principal risks, including a summary presentation of bottom-line fee figures that uses plain language descriptions and more concise principal risk disclosure that generally orders risks by importance. Consistent with the current layered approach to prospectus disclosure, additional information about a fund’s fee and expenses and risks would remain available for interested investors. To improve the clarity of fee and expense information that is available to investors more generally, we also propose to amend the Commission’s investment company advertising rules. The proposed amendments would require that a registered investment company or business development company (‘‘BDC’’) advertisement discussing fees and expenses include certain standardized figures and provide reasonably current information. In addition, we are proposing amendments to address potentially misleading statements about fees and expenses in these investment company advertisements. A. Current Approach To Disclosure for Fund Shareholders Today, a fund investor receives a prospectus in connection with his or her initial purchase of fund shares. A fund’s prospectus serves as the principal selling document for potential investors to help inform investment decisions and facilitate fund comparisons. Fund prospectuses provide important information that an investor should consider when making an investment, including information about a fund’s principal investment strategies, fees and expenses, principal risks, and performance.10 Under the Federal securities laws, a fund (or a financial intermediary) must deliver an updated copy of the fund’s summary or statutory prospectus to an existing fund shareholder if the shareholder purchases additional shares of the fund.11 We understand that, to satisfy

preceded’’ by a statutory prospectus. Because the requirements of section 5(b)(2) are applicable to ‘‘any person,’’ its obligations apply to financial intermediaries through which funds are sold, as well as to the funds themselves. See supra footnote 6 (recognizing that a fund or financial intermediary may deliver a summary prospectus to satisfy this prospectus delivery obligation under certain conditions). 12We estimate that as of December 31, 2018, approximately 93% of mutual funds and ETFs use summary prospectuses. This estimate is based on data on the number of mutual funds and ETFs that filed a summary prospectus in 2018 in the Commission’s Electronic Data, Gathering, Analysis, and Retrieval system (‘‘EDGAR’’) (10,808) and the Investment Company Institute’s estimated number of mutual funds and ETFs as of December 31, 2018 (11,656). See Investment Company Institute, 2019 Investment Company Fact Book, at 50, available at https://www.ici.org/pdf/2019_factbook.pdf. 13See generally 17 CFR 230.497 [rule 497 under the Securities Act]; see also section 12(a)(2) of the Securities Act (providing a civil remedy if a prospectus includes an untrue statement of a material fact or omits to state a fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading); 17 CFR 230.408 [rule 408 under the Securities Act] (requiring registrants to include, in addition to the information expressly required to be included in a registration statement, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading). 14See section 30(e) of the Investment Company Act [15 U.S.C. 80a–29(e)]; rule 30e–1 under the Investment Company Act [17 CFR 270.30e–1]. A fund or an intermediary may transmit the shareholder report to an investor. Most fund investors engage an investment professional and hold their fund investments as beneficial owners through accounts with intermediaries. As a result, intermediaries commonly assume responsibility for distributing fund shareholder reports to beneficial owners. See Optional internet Availability of Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (June 5, 2018) [83 FR 29158 (June 22, 2018)] (‘‘Rule 30e– 3 Adopting Release’’), at paragraph accompanying n.274. 15A fund may include a summary schedule of its investments in securities of unaffiliated issuers, which includes approximately its 50 largest holdings, in the financial statements it provides in the shareholder report, provided it makes the complete list of investments in unaffiliated issuers available online and upon request. Alternatively, a fund must include that complete list of its investments in securities of unaffiliated issuers in its shareholder reports. See Instruction 1 to Item 27(b)(1) of Form N–1A; Instruction to Item 27(c)(1) of Form N–1A; 17 CFR 210.12–12B [rule 12–12B of
Regulation S–X]. 16See Items 27(b)(1) and 27(b)(2) of Form N–1A. The financial statements and financial highlights in a fund’s semi-annual report need not be audited. See Items 27(c)(1) and 27(c)(2) of Form N–1A. 17See Item 27(b), (c), and (d) of Form N–1A; rule 30e–1(b) under the Investment Company Act [17 CFR 270.30e–1(b)]. 18See, e.g., Fund Investor Experience RFC, supra footnote 8, at Section II.D.5. 19We recognize, however, that the length of funds’ shareholder reports can vary substantially. For example, the staff observed annual reports ranging in length from 22 pages to more than 600 pages. These figures are based on a 2020 staff review that included a sample of reports from large, mid-sized, and small funds that were available on fund websites. One apparent reason for the different lengths of these reports is that some reports covered a single fund (or series), while others covered many. For example, most reports that were between 22 and 45 pages long covered a single series. However, the number of series a report covered did not solely explain the differences in length. For reports that were longer than 45 pages, there generally was not a clear and consistent relationship between the number of series a report covered and the report’s length. See also Comment Letter of Investment Company Institute on File No. S7–08–15 (Mar. 14, 2016), at n.49, available at https://www.sec.gov/ comments/s7-08-15/s70815-581.pdf (estimating that, in 2016, the average annual report was 114 pages long). 20Under rule 30e–1, funds generally must transmit annual reports within 60 days after the close of the fiscal year. See rule 30e–1(c) [17 CFR 270.30e–1(c)]. Under Securities Act section 10(a)(3) and Investment Company Act rule 8b–16(a), funds typically update their prospectuses within 120 days of the end of fiscal year-end, and updated prospectuses are often delivered to existing shareholders soon thereafter. 21See Use of Electronic Media for Delivery Purposes, Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (providing Commission views on the use of electronic media to deliver information to investors, with a focus on electronic delivery of prospectuses, annual reports, and proxy solicitation materials); Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, Investment Company Act Release No. 21945 (May 9, 1996) [61 FR 24644 (May 15, 1996)]; Use of Electronic Media, Investment Company Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]. applicable prospectus delivery requirements, most funds send an updated summary or statutory prospectus annually to all shareholders to avoid the need to track each shareholder’s additional purchase activity throughout the year. Other funds may track this activity and send a summary or statutory prospectus only to those shareholders who have purchased fund shares during the relevant period. The vast majority of funds
use summary prospectuses.12 Outside of the annual prospectus update, a fund shareholder may also receive updates at other times during the year when a fund supplements, or ‘‘stickers,’’ its prospectus disclosure to reflect material or other changes.13 In addition to annual prospectus updates and interim stickers, fund shareholders also receive shareholder reports on a semi-annual basis.14 These reports include detailed information about a fund’s operations over a given half- or full-year period, including information about the following items. Certain of this information, including fund performance information, appears only in annual reports.

The ongoing costs of a $1,000 fund
investment for the most recent fiscal half-year, including actual expenses (which a shareholder can use to understand his or her ongoing costs of investing in the fund) and hypothetical expenses (which a shareholder can use to compare different funds’ ongoing costs);
Performance, including information
about the fund’s performance over the past 10 years and fund management’s discussion of fund performance for the last fiscal year;
Portfolio holdings, which includes
a list of the fund’s investments and graphical representations of the fund’s holdings by certain categories (e.g., type of security, industry sector, geographic region, credit quality, or maturity); 15
Fund financials, including financial
statements and financial highlights, which are audited in annual reports; 16
A fund’s board of directors and
management, including remuneration that the fund paid to these and certain other parties;
Results of any shareholder vote
held during the relevant period;
The availability of additional
information regarding the fund’s proxy voting record, code of ethics, quarterly portfolio holdings, and board of directors;
Changes in and disagreements with
fund accountants;
Any board approval of an
investment advisory contract during the relevant period; and
The operation and effectiveness of
the fund’s liquidity risk management program.17 Additionally, some funds currently include other information in their shareholder reports that is not required by Commission rules or forms. For example, some funds typically include in their shareholder reports information such as president’s letters, interviews with portfolio managers, market commentary, or specific portfolio statistics that are not required (e.g., top ten largest holdings, summary statistics with respect to debt yields and maturities).18 Based on staff analysis, the average annual report is approximately 134 pages long, and the average semi-annual report is approximately 116 pages long.19 Shareholder reports and prospectuses provide some of the same categories of information, including information about expenses and performance. A fund shareholder typically receives an annual report and an annual prospectus update close in time, commonly within two months of one another.20 We understand that some funds even deliver a shareholder report and the annual prospectus update at the same time. With respect to the delivery mechanism, a fund shareholder currently receives shareholder reports and prospectuses in paper or electronically.21 We understand that

22See rule 30e–3 under the Investment Company Act [17 CFR 270.30e–3]; Rule 30e–3 Adopting Release, supra footnote 14. 23See infra Section II.I (discussing the Commission’s advertising rules and certain proposed changes to these rules). 24The majority of individual investors responding to the Fund Investor Experience RFC used the Feedback Flier to provide their views. See Fund Investor Experience RFC, supra footnote 8, at
Appendix B. Unless otherwise indicated, comments
cited in this release are the public comments on the Fund Investor Experience RFC, supra footnote 8, which are available at https://www.sec.gov/ comments/s7-12-18/s71218.htm. 25See, e.g., Comment Letter of Broadridge Financial Solutions, Inc. (Oct. 31, 2018) (‘‘Broadridge Comment Letter I’’); Comment Letter of the Consumer Federation of America (Oct. 31,
2018) (‘‘CFA Comment Letter’’); Comment Letter of
Investment Company Institute (Oct. 24, 2018) (‘‘ICI Comment Letter I’’); Comment Letter of Broadridge Financial Solutions, Inc. (Apr. 28, 2020) (‘‘Broadridge Comment Letter II’’). 26See Investor Testing of Selected Mutual Fund Annual Reports (Feb. 9, 2012) (‘‘2012 Report on Investor Testing of Fund Annual Reports’’), available at https://www.sec.gov/comments/s7-08- 15/s70815-3.pdf; SEC Staff, Study Regarding Financial Literacy Among Investors (Aug. 2012) (‘‘Financial Literacy Study’’), available at http:// www.investor.gov/publications-research-studies/ sec-research; see also Recommendation of the Investor Advisory Committee on Disclosure Effectiveness (May 21, 2020) (‘‘IAC Disclosure Effectiveness Recommendation’’), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/disclosure-effectiveness.pdf (discussing, among other things, research findings relating to investors’ understanding of fund disclosure). 27See 2009 Summary Prospectus Adopting Release, supra footnote 10; Updated Disclosure Requirements and Summary Prospectus for Variable Annuity and Variable Life Insurance Contracts, Investment Company Act Release No. 33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)] (‘‘Variable Contract Summary Prospectus Adopting Release’’); Form CRS Relationship Summary; Amendments to Form ADV, Investment Advisers Act Release No. 5247 (June 5, 2019) [84 FR 33492 (July 12, 2019)] (‘‘Form CRS Adopting Release’’). 28For example, of the 49 individual investors who responded to a question about summary disclosure in the Feedback Flier, 46 investors preferred summary disclosure and three investors did not. See, e.g., Comment Letter of Carol Palmer (June 5, 2018) (‘‘Palmer Comment Letter’’); Comment Letter of Perry Balke (June 5, 2018) (‘‘Balke Comment Letter’’) (‘‘Seems like there should be a disclosure for the ultimate investor and then additional/other disclosures for Advisors/ Institutions to analyze.’’); Comment Letter of Sara Karlidag (June 6, 2018) (‘‘Karlidag Comment Letter’’); Comment Letter of Chip Morton (Dec. 28,
2018) (‘‘Morton Comment Letter’’) (‘‘I like the more
detailed reports’’). Investors who responded to the Fund Investor Experience outside of the Feedback Flier also supported more concise, summary disclosure. See, e.g., Comment Letter of Virginia Lamp (Aug. 13, 2018); Comment Letter of Mark Pitts (July 15, 2018). 29See, e.g., Comment Letter of Ann Watters (Oct. 8, 2018); Comment Letter of Allen Weaver (Oct. 8,
2018) (‘‘Weaver Comment Letter’’); Comment Letter
of Steve Henry (Oct. 8, 2018) (‘‘Henry Comment Letter’’). 30See, e.g., Comment Letter of Carla Rojas (June 9, 2018) (‘‘Rojas Comment Letter’’) (stating that fund disclosure is too long); Comment Letter of Richard Franco (Sept. 24, 2018) (‘‘Franco Comment Letter’’); Comment Letter of Lisa Nevin (June 13, 2018) (‘‘Nevin Comment Letter’’); Comment Letter of Mike Woods (Sept. 2, 2018) (‘‘Woods Comment Letter’’); Comment Letter of David (Aug. 30, 2018) (‘‘David Comment Letter’’) (stating that fund disclosures are too overwhelming to be useful). shareholders electing electronic delivery of fund disclosure materials typically receive an email that contains a link to where the materials are available online. Additionally, if a fund chooses to rely on rule 30e–3, beginning as early as January 1, 2021, a shareholder who currently receives fund shareholder reports in the mail may begin receiving instead notices that a shareholder report is available at an identified website address.22 Nonetheless, a shareholder may continue to receive the full report in paper if he or she notifies the fund (or relevant financial intermediary) that he or she wishes to receive paper copies of the reports. The costs of delivering prospectuses and shareholder reports, including printing and mailing costs and processing fees, are generally fund expenses borne by shareholders. Beyond prospectuses and shareholder reports, many funds prepare other information for potential or current investors that the securities laws and Commission rules do not require. For example, many funds prepare advertising materials, which can include materials in newspapers, magazines, radio, television, direct mail advertisements, fact sheets, newsletters, and on various web-based platforms. Advertising materials are subject to certain requirements under Commission rules.23 As an example, many funds prepare monthly or quarterly fact sheets that concisely provide certain information about a fund, such as the fund’s performance and strategies, illustrations of the fund’s holdings, and certain fund statistics (e.g., net asset value, expense ratio). Fact sheets are often one or two pages long. Some shareholders or financial professionals may use fact sheets to monitor fund investments because, for example, they include more up-to-date performance information than shareholder reports or prospectuses. B. Information About Investor Preferences Our understanding of investor preferences regarding fund disclosure is informed by many sources, including responses to the Fund Investor Experience RFC, prior investor testing and surveys, and past disclosure reform initiatives. In response to the Fund Investor Experience RFC, the Commission received many comments from individual investors, including through a Feedback Flier on Improving Fund Disclosure (the ‘‘Feedback Flier’’) that accompanied the release to facilitate retail investor input.24 In addition to the input we received from individual investors, some other
commenters on the Fund Investor Experience RFC provided the results of investor surveys they conducted regarding fund disclosure.25 Moreover, the Commission and its staff have been involved with other relevant investor testing and surveys, including investor testing regarding shareholder reports in 2011 and a study on financial literacy in
2012.26 Several past Commission
rulemakings have also provided information about investors’ disclosure preferences, including rulemakings regarding summary prospectuses for mutual funds and ETFs, summary prospectuses for variable annuity and variable life insurance contracts, and broker-dealer and investment adviser relationship summaries.27

Fund Shareholder Preferences
Regarding Ongoing Disclosures Based on available information, as detailed below, we understand that many fund shareholders would prefer to receive a smaller volume of fund disclosures each year. In addition, many shareholders view funds’ current annual and semi-annual reports as overly long and complex. Available evidence suggests that, as a result of the volume and complexities of fund disclosures, many shareholders do not read much, if any, of the ongoing disclosures they receive. We understand that fund shareholders would prefer concise, layered shareholder report disclosure that highlights key information and that uses design features to make the reports easier to understand and use. Investor Preferences for Concise, Layered Disclosure The vast majority of individual investors responding to questions in the Fund Investor Experience RFC about summary disclosure expressed a preference for summary disclosure with additional information available online or upon request, while only a very few stated that they did not prefer concise, summary disclosure.28 Some investors specifically addressed and supported a more concise, summary shareholder report.29 Moreover, several investors expressed concern about the current length of fund disclosure materials.30 Commenters’ overall preference for summary disclosure is generally consistent with other information the Commission has received—through investor testing, surveys, and other information-gathering—that similarly

31See, e.g., Broadridge Comment Letter I; ICI Comment Letter I; Broadridge Comment Letter II; 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26 (noting that the concept of a shortened annual report appealed to many focus group participants); see also 2009 Summary Prospectus Adopting Release, supra footnote 10, at
Section II (discussing investors’ preferences for
summary disclosure with respect to fund prospectuses); Financial Literacy Study, supra footnote 26 (noting that, based on the feedback of commenters and the results of quantitative and qualitative research, ‘‘[w]ith respect to investment product disclosures, investors favor summary documents containing key information about the investment product’’); Understanding Investor Preferences for Mutual Fund Information, Investment Company Institute (2006) (‘‘Investor Preferences Report’’), available at https:// www.ici.org/pdf/rpt_06_inv_prefs_full.pdf; Form CRS Adopting Release, supra footnote 27, at n.36 (discussing similar preferences for concise disclosure with respect to broker-dealer and investment adviser relationship summaries); Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at n.33 (discussing commenters’ support for layered disclosure in the case of variable annuity and variable life insurance contracts); IAC Disclosure Effectiveness Recommendation, supra footnote 26 (discussing, among other things, the use of layered disclosure as an approach to develop more investor-friendly disclosures). 32See, e.g., Karlidag Comment Letter; Rojas Comment Letter; Comment Letter of Melanie Jallah (June 12, 2018) (‘‘Jallah Comment Letter’’); Nevin Comment Letter; Comment Letter of Roberto Delmonte (June 15, 2018) (‘‘Delmonte Comment Letter’’); Broadridge Comment Letter I (stating that in a quantitative survey, 72% of investors who review mutual fund or ETF disclosure said they do not find the information easy to understand); Comment Letter of Helen and Bob Hague (Aug. 30,
2018) (‘‘Hague Comment Letter’’) (stating that they
understand summary prospectus disclosure, but not annual report disclosure); Comment Letter of Michael Dougle (Aug. 30, 2018) (‘‘Dougle Comment Letter’’); David Comment Letter. 33See, e.g., Comment Letter of Harold Thomas (June 8, 2018) (‘‘Thomas Comment Letter’’); Rojas Comment Letter; Jallah Comment Letter; Comment Letter of Kate Freedman (June 12, 2018) (‘‘Freedman Comment Letter’’); Nevin Comment Letter; Delmonte Comment Letter; Comment Letter of Rich Kirchoff (June 21, 2018) (‘‘Kirchoff Comment Letter’’); Comment Letter of Tom Arnold (June 23,
2018) (‘‘Arnold Comment Letter’’) (stating that there
is too much boilerplate in fund disclosures, which are legal documents instead of informative documents); Comment Letter of Mimi Solo (July 16,
2018) (‘‘Solo Comment Letter’’); Woods Comment
Letter (stating that fund disclosure is not useful because there is too much boilerplate and legalese). 34See, e.g., Comment Letter of Jack Wilhelm (Aug. 30, 2018) (‘‘Wilhelm Comment Letter’’); Comment Letter of Frank W. (Aug. 30, 2018) (‘‘Frank W. Comment Letter’’); Comment Letter of Caryn Stiles (Aug. 30, 2018) (‘‘Stiles Comment Letter’’); Comment Letter of Mrs. Kellie (Aug. 30, 2018); Hague Comment Letter; Comment Letter of J.L. (Aug. 30, 2018) (‘‘J.L. Comment Letter’’); Woods Comment Letter; Comment Letter of Amanda Yukle (Sept. 6, 2018) (‘‘Yukle Comment Letter’’); Comment Letter of Joanna Baker (Sept. 11, 2018) (‘‘Baker Comment Letter’’). However, one investor expressed a preference for text disclosure. See Comment Letter of Mark Freeland (Dec. 2, 2018) (‘‘Freeland Comment Letter’’). See also Financial Literacy Study, supra footnote 26 (explaining that, based on public comments and qualitative and quantitative research, investors prefer that disclosures be written in clear, concise, understandable language, using bullet points, tables, charts, and/or graphs); Investor Preferences Report, supra footnote 31 (indicating that investors prefer graphics and charts describing an investment over a narrative description). 35See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 10, 75, and
80. For example, one focus group participant in the
2012 research described the annual report disclosure they reviewed as ‘‘mind-clogging,’’ while another participant suggested that annual reports ‘‘should be written in fifth grade English.’’ Another participant stated, ‘‘If they’re sending it to us, use a summary and pie charts. (The more sophisticated investors) can go online.’’ 36See Broadridge Comment Letter I (explaining the findings of qualitative feedback from 45 retail investors regarding a typical mutual fund annual report, including that investors found the document to be too long and overwhelming and preferred disclosures that can be read in a few minutes and that focus on essential information); Mutual Fund Investors’ Views on Shareholder Reports: Reactions to a Summary Shareholder Report Prototype, Investment Company Institute (Oct. 2018) (‘‘ICI Investor Survey’’), available at https://www.ici.org/ pdf/ppr_18_summary_shareholder.pdf; Broadridge Comment Letter II. 37See Broadridge Comment Letter I (stating that 72% of surveyed investors that review mutual fund or ETF disclosures do not find them easy to understand); ICI Investor Survey, supra footnote 36 (stating that 67% of surveyed mutual fund investors who recalled receiving fund shareholder reports indicated that the reports are difficult to understand); Broadridge Comment Letter II (providing the results of two surveys in which 41% and 53% of surveyed investors, respectively, found the reports very or somewhat difficult to understand, with older investors and those with lower incomes more likely to find the reports difficult to understand). 38See, e.g., Delmonte Comment Letter; Comment Letter of Helena Krus (July 29, 2018) (‘‘Krus Comment Letter’’); Comment Letter of Logan Fowler (Aug. 13, 2018) (‘‘Fowler Comment Letter’’); Wilhelm Comment Letter; Comment Letter of Nina Grano (Aug. 30, 2018) (‘‘Grano Comment Letter’’); Comment Letter of Jack Olstrom (Aug. 30, 2018) (‘‘Olstrom Comment Letter’’); Dougle Comment Letter; Comment Letter of Frank J. (Aug. 30, 2018); J.L. Comment Letter; Franco Comment Letter; Comment Letter of Irwin Joseph (Nov. 19, 2018) (‘‘Joseph Comment Letter’’). Some of these commenters stated that they do not review fund disclosure materials because they are too long or complex, or generally are not well suited to investors’ needs. See, e.g., Fowler Comment Letter; Franco Comment Letter; Grano Comment Letter. 39See Broadridge Comment Letter I. 40See ICI Investor Survey, supra footnote 36; see also 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 61, 69 (stating that, of participants in the qualitative component of this testing, 52% read a few key sections of fund annual reports, 14% scan the table of contents and/ or the first few pages, and 25% file it or discard it unread; of online survey respondents, 72% read a few key sections, 10% scan the first few pages, and 3% file it or discard it unread). 41See Broadridge Comment Letter II. One of these surveys found that 8% of surveyed
investors do not read the reports, 19% read very little of the reports, and 28% read some of the reports. The other survey found that 4% of surveyed investors do not read the reports and 56% read some of the reports. 42See id. (providing the results of a survey in which 21% of investors said that they typically spend 5 minutes or less reviewing shareholder reports and an additional 41% of investors said that they typically spend 6 to 15 minutes reviewing the reports). indicates that investors strongly prefer concise, layered disclosure.31 Investor Views on the Usability and Design of Funds’ Shareholder Reports Available evidence suggests that investors generally view fund shareholder reports as difficult to understand. Several investors responding to the Fund Investor Experience RFC stated that fund disclosure is too complicated.32 For instance, many investors indicated that there is too much technical writing in fund disclosure.33 Investors also expressed a strong preference for the inclusion of more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor.34 Similarly, the majority of investors participating in certain past quantitative and qualitative investor testing initiatives on the Commission’s behalf expressed the view that funds’ annual reports are written more for advanced investors, financial professionals, or regulators than for an average investor.35 Investor surveys that other market participants have conducted further support the conclusion that investors view funds’ shareholder reports as too lengthy and complicated, and difficult for the average investor to use to effectively find information of interest.36 These surveys have found that, for example, approximately 41% to 72% of surveyed investors find fund shareholder reports difficult to understand.37 Investors’ Current Use of Fund Disclosures Several investors responding to the Fund Investor Experience RFC stated that they do not review funds’ disclosure materials at all.38 Investor testing and surveys also suggest that many fund shareholders tend to read very little, if any, of funds’ disclosure materials. For example, in one investor survey, 12% of fund shareholders stated that they ‘‘never’’ review mutual fund or ETF disclosure, while an additional 37% said that they review this disclosure ‘‘some of the time.’’39 Another survey found that 63% of mutual fund shareholders who recalled receiving fund shareholder reports read, at most, very little of them.40 Two other surveys found somewhat higher readership levels of shareholder reports, with only 4% and 8% of surveyed shareholders responding that they do not read the reports.41 However, a majority of fund shareholders in one of these surveys also indicated that they spend 15 minutes or less reviewing the reports.42 Survey results relating to readership of shareholder reports also suggest that shareholders may not read some, or all,

43See, e.g., ICI Investor Survey, supra footnote 36 (‘‘The survey results demonstrate that mutual fund investors who find the current reports difficult to understand are less likely to read them.’’). 44See, e.g., Broadridge Comment Letter I (discussing the results of a quantitative survey related to fund disclosure in which approximately 39% of investors said they would be more likely to look at or review a summary format of a fund’s annual and semi-annual reports); ICI Comment Letter I (discussing an investor survey of a summary shareholder report prototype, in which more than 90% of participants indicated that they would be more likely to read the summary prototype than a full-length shareholder report); Broadridge Comment Letter II (providing the results of a survey in which 88% of investors indicated that they were more likely to read a summary shareholder report than a full-length report). Two commenters used the same summary shareholder report prototype, developed by the ICI, in their investor surveys. The prototype was approximately three pages in length and primarily focused on performance, fund expenses, and illustrations of fund holdings. See ICI Comment Letter I; Broadridge Comment Letter II. 45See, e.g., Disclosure: Psychology Changes Everything, George Loewenstein, Cass R. Sunstein, and Russell Goldman, Annual Review of Economics (2014) (providing a comprehensive survey of literature relevant to disclosure regulation and suggesting that ‘‘[g]iven the limits of human attention, perhaps the most obvious way to improve the effectiveness of disclosures is to simplify them . . . [and] to reduce the number of less important disclosures so as to increase the salience of the most important ones’’); see also infra Section III.C.1 (discussing additional academic research on characteristics that may increase the effectiveness of a given disclosure). 46We are not aware of investor testing or surveys that specifically have explored fund shareholders’ level of interest in prospectus-related disclosure they receive through annual prospectus updates or interim prospectus stickers. However, the results of at least one survey suggest that fund shareholders are more likely to use shareholder reports than prospectuses to monitor their fund investments. See Investor Preferences Report, supra footnote 31, at 15. 47See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 51–52 (stating that about half of online survey respondents considered items regarding performance, holdings, and expenses as ‘‘absolutely essential information for any investor’’); Broadridge Comment Letter I; ICI Comment Letter I; Investor Preferences Report, supra footnote 31; Broadridge Comment Letter II. Some commenters on the Fund Investor Experience RFC also suggested that a summary or streamlined shareholder report should focus on a fund’s expenses, performance, and holdings. See, e.g., Comment Letter of The Capital Group Companies (Oct. 30, 2018)
(‘‘Capital Group Comment Letter’’); Henry Comment Letter. Similarly, we understand that these content topics are those that experts recommend that investors consider in understanding a fund investment. See, e.g., IAC Disclosure Effectiveness Recommendation, supra footnote 26, at n.4 and accompanying text (‘‘To select a mutual fund, for example, experts are nearly unanimous in recommending that investors consider the fund’s investment objectives and strategies, risks, fees and expenses, past performance, including the volatility of that performance, the reputation of the fund manager, tax implications of an investment in the fund, and information about such account features as investment minimums.’’). 48See Broadridge Comment Letter I (finding that, of the 50% of surveyed investors that review mutual fund or ETF annual and semi-annual reports ‘‘always’’ or ‘‘most of the time,’’ 75% of those investors often look at or review fund performance information); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (stating that 61% of participants in the qualitative component of this testing ranked the discussion of fund performance in the top three most important shareholder report items); ICI Comment Letter I (finding that approximately 83% of surveyed investors said that performance highlights information is very important or somewhat important); Investor Preferences Report, supra footnote 31 (stating that, after purchase, 76% of investors review performance information); Broadridge Comment Letter II (providing the results of an investor survey in which 89% of investors rated the performance section of the annual report as important and 63% rated the portfolio commentary (or performance highlights) section as important). 49See Broadridge Comment Letter I (stating that, of the 50% of surveyed investors that review mutual fund or ETF annual and semi-annual reports ‘‘always’’ or ‘‘most of the time,’’ 67% of those investors often look at or review fund portfolio holdings information); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (finding that 38% of participants in the qualitative component of this testing ranked the graphical representation of holdings in the top three most important shareholder report items); see also ICI Comment Letter I (stating that approximately 79% of surveyed investors said that graphical representation of holdings information is very important or somewhat important); Investor Preferences Report, supra footnote 31 (stating that, after purchase, 41% of investors review portfolio holdings); Broadridge Comment Letter II (discussing a survey in which 63% of investors rated disclosure about the characteristics of a fund—including top holdings, asset allocations, and industry allocations—as important for annual reports and 64% of investors rated this disclosure as important for semi-annual reports). 50See Broadridge Comment Letter I (stating that, of the 50% of surveyed
investors that review mutual fund or ETF annual and semi-annual reports ‘‘always’’ or ‘‘most of the time,’’ 61% of those investors often look at or review fund expense information); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (finding that 34% of participants in the qualitative component of this testing ranked the expense example in the top three most important shareholder report items); Broadridge Comment Letter II (discussing a survey in which 69% of investors rated expense disclosure as important for annual reports and 66% of investors rated it as important for semi-annual reports); see also ICI Comment Letter I (stating that approximately 72% of surveyed investors said that the fund expense example is very important or somewhat important); Investor Preferences Report, supra footnote 31 (stating that, after purchase, 55% of investors review fund fees and expenses). 51See Broadridge Comment Letter I; Broadridge Comment Letter II (stating that 55% of investors rated the financial highlights as important annual report disclosure and 53% of investors rated this disclosure as important for semi-annual reports, but 47% of surveyed investors viewed the statement of financial condition and operations as important disclosure for annual or semi-annual reports). 52See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 and 52 (indicating that approximately 38% to 41% of surveyed investors found the financial highlights to be important, while approximately 24% to 33% of surveyed investors believed that financial statements were important); see also ICI Comment Letter I (determining not to include financial statements and most financial highlights data points in a summary shareholder report mockup and instead concluding that ‘‘they were of a more technical nature that a typical retail investor would not read or understand,’’ although such information would be available online under the commenter’s proposed approach); Rojas Comment Letter (‘‘What am I supposed to do with a very long list of holdings and financial statements?’’); Balke Comment Letter (‘‘Financial Statements are of little value.’’); Fowler Comment Letter (‘‘What am I supposed to do with fund financial statements?’’). 53See Broadridge Comment Letter I (finding that surveyed investors tended to have less interest in of a fund’s shareholder report due, in
part, to the fact that many view
shareholder reports as overly long and complex documents that are not designed to meet the average shareholder’s needs.43 Fund shareholders may, however, be more likely to read a more concise version of a fund’s shareholder report.44 Academic research similarly suggests that, due to limits on an individual’s ability to absorb and process information, investors may be more likely to understand and effectively use concise disclosure that is well-organized and focused on key information.45 Investor Views on the Content of Funds’ Shareholder Reports Investors participating in investor testing and surveys have expressed a consistent interest in certain specific shareholder report disclosure items.46 The principal items of interest that investors have consistently identified for purposes of monitoring an ongoing fund investment include performance, holdings, and fund expenses.47 For example, investor testing and surveys have found that approximately 60% to more than 80% of investors believe that fund performance information is important.48 As for fund holdings information, testing and surveys have found that approximately 38% to 79% of investors view this information as important.49 Testing and surveys have also found that approximately 34% to 72% of investors believe that fund expense information is important.50 Investors have expressed varying levels of interest in reviewing a fund’s financial statements and financial highlights. For example, at least one survey has found somewhat high levels of interest in this information from shareholders who currently review fund shareholder reports (i.e., 63% of these investors often review a fund’s financial statements), and another survey found that a majority of investors rated financial highlights disclosure as important.51 Other surveys, as well as comments on the Investor Experience RFC, suggest that the average investor may have less interest in financial statements and financial highlights.52 As for other types of shareholder report disclosure, investors typically have expressed less interest in these other disclosures.53

remuneration paid to directors, officers, and others, as well as information about directors and officers); 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 52 (stating that surveyed investors generally had less interest in information about changes in, and disagreements with accountants; results of any shareholder vote; discussion of the reasons the board approved an advisory contract; statements about where to find certain additional fund information; and information about directors and officers); Broadridge Comment Letter II (providing the results of a survey in which 26% of investors rated disclosure about the fund’s directors and officers as important, and 25% of investors rated disclosure about the board’s approval of the investment advisory contract as important). 54See, e.g., Delmonte Comment Letter (‘‘There is too much information provided to me. I buy a mutual fund because I want convenience and to more efficiently spend my time. Stop giving me hours[’] worth of reading I do not understand.’’); Solo Comment Letter (stating that there are too many fund disclosure materials, they are too long, and they do not distill the right information); Rojas Comment Letter. 55Comment Letter of Anonymous (Aug. 30, 2018) (‘‘Anonymous Comment Letter’’) (‘‘I invest for the long term. I do not need constant updates.’’) 56See supra footnote 44 (discussing the prototype summary shareholder report developed by the ICI). 57See Broadridge Comment Letter II. 58Approximately 33 investors responded to the Feedback Flier question asking, ‘‘Do you think funds clearly disclose their fees and expenses?’’ Of these 33 investors, 21 investors replied ‘‘no’’ and 12 investors replied ‘‘yes.’’ 59See, e.g., Krus Comment Letter; Stiles Comment Letter; Anonymous Comment Letter; Hague Comment Letter; J.L. Comment Letter; Woods Comment Letter; Comment Letter of Jake Hamm (Sept. 3, 2018); Yukle Comment Letter. 60See, e.g., Grano Comment Letter; Anonymous Comment Letter; Yukle Comment Letter; J.L. Comment Letter. 61See, e.g., Palmer Comment Letter; Balke Comment Letter; Karlidag Comment Letter; Kirchoff Comment Letter; Solo Comment Letter; Krus Comment Letter. 62See, e.g., Comment Letter of AARP (Oct. 31,
2018) (‘‘AARP Comment Letter’’); Comment Letter
of Independent Directors Council (Oct. 30, 2018); Comment Letter of Carla Ruiz (Aug. 17, 2018) (‘‘Ruiz Comment Letter’’). A recent study of mutual fund financial literacy also found that many survey participants were unable to correctly answer certain true-or-false questions about general aspects of funds’ fee structures, as well as other characteristics of funds. See Brian Scholl and Angela Fontes, Adding Depth to Financial Literacy: What Does the Public Know About Mutual Funds? Towards a New Index of Investor Knowledge, SEC Office of the Investor Advocate (July 18, 2019). 63See, e.g., AARP Comment Letter; Comment Letter of A. Miller (July 21, 2018); see also infra footnote 573 (citing other evidence that dollar-based disclosure may be easier for some investors to understand). 64See, e.g., Krus Comment Letter; Solo Comment Letter; Fowler Comment Letter; Stiles Comment Letter; Comment Letter of Hector Ewing (Aug. 30,
2018) (‘‘Ewing Comment Letter’’); J.L. Comment
Letter; Woods Comment Letter; Baker Comment Letter; Olstrom Comment Letter. 65See, e.g., Stiles Comment Letter; Dougle Comment Letter; J.L. Comment Letter; Ruiz Comment Letter; see also Frank W. Comment Letter (expressing interest in disclosure that better explains the level of a given risk). 66See, e.g., Freeland Comment Letter (stating that funds should only disclose risks based on how the fund normally and actually invests). 67See Division of Investment Management, Accounting and Disclosure Information 2019–08, Improving Principal Risks Disclosure, available at https://www.sec.gov/investment/accounting-anddisclosure-information/principal-risks/adi-2019-08- improving-principal-risks-disclosure (‘‘ADI 2019– 08’’). 68See Fund Investor Experience RFC, supra footnote 8, at Section II.B.2. 69See, e.g., Karlidag Comment Letter; Thomas Comment Letter; Jallah Comment Letter; Delmonte Comment Letter; Solo Comment Letter; Comment Letter of C. Scott (July 26, 2018) (‘‘Scott Comment Letter’’); Comment Letter of James McRitchie (Sept. 4, 2018) (‘‘McRitchie Comment Letter’’). Investor Views on the Volume and Frequency of Fund Disclosure In addition to concerns about the length of funds’ shareholder reports, some investors responding to the Fund Investor Experience RFC expressed concern about the overall volume and frequency of fund disclosures they receive each year. For example, several investors expressed the view that they receive too many fund disclosure materials and that they feel overwhelmed by the amount of information they receive.54 Another investor expressed a preference for less frequent disclosure.55 However, with respect to shareholder reports in particular, one investor survey found that 86% of investors thought that the current semi-annual frequency at which they receive reports was ‘‘about the right frequency,’’ while 11% of investors viewed semi-annual reports as too frequent and 3% expressed a preference for more frequent shareholder reports. In this survey, investors’ preferred frequency changed somewhat for a prototype summary shareholder report.56 If they were to receive a summary shareholder report, 56% of investors preferred semiannual reports, 27% preferred quarterly reports, 17% preferred annual reports, and 1% did not want to receive the reports.57
2. Fee and Risk Disclosure Preferences
We understand that investors generally prefer concise, summary disclosure that allows them to quickly understand key information. Similarly, we understand that this general preference extends to investors’ preferences about disclosures regarding fund fees and risks. Investor Views on Fee and Risk Disclosure The majority of investors responding to a question in the Feedback Flier about fee disclosure expressed the view that funds do not clearly disclose their fees and expenses.58 Many of these investors suggested that funds should simplify their fee and expense disclosure.59 Several investors recommended reducing the number of line items in the prospectus fee table or providing only one ‘‘bottom-line’’ number showing the fees associated with an investment in the fund.60 Several investors also expressed an interest in comparing fees and expenses across multiple funds to help inform their investment decisions.61 Other commenters who responded more generally to the Fund Investor Experience RFC also expressed concern that fund fees are hard to understand, and that certain terminology Form N– 1A uses (e.g., use of terms like ‘‘12b–1 fees’’ and ‘‘front-end loads’’) is similarly difficult to understand.62 Some commenters suggested that funds should disclose fees in terms of dollars rather than percentages to make the disclosure more understandable to investors.63 Investor Views on Principal Risk Disclosure Many investors responding to the Fund Investor Experience RFC also suggested that disclosure about a fund’s risks is too long.64 Some investors suggested that funds should order risks by importance and provide the most important risks first.65 Other investors suggested that more focused risk disclosure would be helpful.66 Consistent with these investor preferences, Commission staff has encouraged funds to take steps to improve their principal risk disclosure including by, for example, ordering risks by importance, better tailoring their risk disclosure, and concisely summarizing principal risks in the summary prospectus.67
3. Disclosure Delivery Preferences
Based on information from the Fund Investor Experience RFC and investor testing and surveys, investors have shown a general familiarity with using the internet to find information about a fund and have expressed a range of preferences regarding how they receive fund disclosure (i.e., in paper or electronically). In the Fund Investor Experience RFC, the Commission sought information on investors’ use of the internet to communicate about and find information on fund investments, as well as their preferences on the form and manner of disclosure delivery.68 In response, many investors indicated that they go to fund or intermediary websites to get information about a fund investment.69 Many investors also expressed a preference for receiving fund disclosure electronically, either through email, mobile application, or

70See, e.g., Rojas Comment Letter; Jallah Comment Letter; Freedman Comment Letter; Nevin Comment Letter; Kirchoff Comment Letter; Arnold Comment Letter; Scott Comment Letter; Krus Comment Letter. Some funds responding to the Fund Investor Experience RFC also suggested that website disclosure is consistent with many investors’ preferences. See, e.g., Capital Group Comment Letter; Comment Letter of Fidelity Investments (Oct. 31, 2018) (‘‘Fidelity Comment Letter’’); Comment Letter of Vanguard (Oct. 31,
2018) (‘‘Vanguard Comment Letter’’).
71Many of these investors preferred to receive statements in paper. See Comment Letter of Arthur Blanchard (Nov. 19, 2018) (‘‘Blanchard Comment Letter’’); Ewing Comment Letter; Joseph Comment Letter; Krus Comment Letter. Other investors appeared to have different preferences. See Comment Letter of Mark S. (Aug. 30, 2018) (preferring to receive ‘‘important’’ information by mail); Olstrom Comment Letter (preferring to receive tax forms in paper); Comment Letter of Carl Waranowksi (Nov. 25, 2018) (‘‘Waranowski Comment Letter’’) (preferring to receive ‘‘important’’ information in paper). 72See, e.g., Grano Comment Letter; Comment Letter of Jane D. Nelson (Aug. 30, 2018); Comment Letter of Duane Lee (Dec. 3, 2018) (‘‘Lee Comment Letter’’); Comment Letter of Mark Moran (Dec. 4, 2018); Morton Comment Letter; Comment Letter of Brad Shockey (Oct. 9, 2018). 73See Henry Comment Letter; Weaver Comment Letter. 74For example, the 2012 investor testing suggested that an investor looking for a fund’s annual report is most likely to seek it out on the fund’s website, rather than request it by mail or phone or by retrieving it from the Commission’s EDGAR system. See 2012 Report on Investor Testing of Fund Annual Reports supra footnote 26, at 72. Many investors indicated that they would prefer that fund information be made available in both electronic and paper versions, with a plurality of respondents preferring electronic transmission by email with the option to easily request a paper copy of a particular report, though a significant minority indicated that they would still prefer to receive a paper copy through the mail. Id. at 183. See also Broadridge Comment Letter I (providing data on surveyed investors’ current methods for receiving mutual fund and ETF disclosure and preferred delivery methods that suggest that preferences are mixed, with 47% of investors primarily receiving fund disclosure by mail and 44% primarily receiving fund disclosure by email); CFA Comment Letter (stating that the following percent of respondents to a 2006 survey expressed interest in using the internet to: (1) Obtain general information about funds (59%); (2) research individual funds (58%); (3) receive periodic reports and disclosure documents (49%); (4) use a calculator to compare costs (47%); (5) communicate with a financial services professional (39%); or (6) purchase mutual funds (26%)); Broadridge Comment Letter II (providing the results of a survey in which 34% of investors said they were more likely to review a summary shareholder report if received by mail and 50% of investors said they were more likely to review such a report if received by email). See also infra footnote 76 (discussing increasing internet access over the years). 75See, e.g., supra footnote 21. For a more-detailed discussion of other Commission releases that have involved using the internet to provide or improve access to information, see Rule 30e–3 Adopting Release, supra footnote 14, at n.18; see also
Exchange-Traded Funds, Investment Company Act Release No. 33646 (Sept. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (‘‘ETF Adopting Release’’), at n.229 (encouraging ETFs to consider whether there are technological means to make their disclosure more accessible). 76See Ownership of Mutual Funds, Shareholder Sentiment, and Use of the internet, ICI Research Perspectives (Oct. 2019) (‘‘Study on Mutual Fund Investors’ Use of the internet’’), available at https:// www.ici.org/pdf/per25-08.pdf; see also CFA Comment Letter (providing a 2014 report discussing the growth of internet usage). 77See, e.g., Vanguard Comment Letter; ICI Comment Letter I; CFA Comment Letter. 78See, e.g., Fidelity Comment Letter; Comment Letter of Putnam Investments (on behalf of the Mutual Fund Broker-Dealer Working Group) (Nov. 30, 2018) (‘‘Putnam Comment Letter’’); ICI Comment Letter I; Capital Group Comment Letter (stating that a growing percentage of fund shareholders and their advisers use the fund group’s website to obtain information about its funds, its organization, and other investment insights); CFA Comment Letter (providing a 2014 study entitled ‘‘Can the internet Transform Disclosures for the Better?’’ that, among other things, reviewed the content and design of fund and intermediary websites). For example, we understand that several funds and financial intermediaries provide interactive features on their websites such as fund screener tools, expense calculators, and retirement planning tools and use mobile applications to engage with fund shareholders. 79See Rule 30e-3 Adopting Release, supra footnote 14; Variable Contract Summary Prospectus Adopting Release, supra footnote 27. 80See New Disclosure Option for Open-End Management Investment Companies, Investment Company Act Release No. 23065 (Mar. 13, 1998) [63 FR 13968 (Mar. 23, 1998); 2009 Summary Prospectus Adopting Release, supra footnote 10; Variable Contract Summary Prospectus Adopting Release, supra footnote 27. 81See John Beshears, James Choi, David Laibson, and Brigitte Madrian, How Does Simplified Disclosure Affect Individuals’ Mutual Fund Choices?, Explorations in the Economics of Aging, website availability.70 Several other investors preferred to access most fund information electronically, with the exception of certain information they preferred to receive on paper.71 Other investors stated that they generally prefer to receive fund information in paper format.72 A few investors specifically suggested that paper should be the default delivery mechanism for a ‘‘summary’’ shareholder report.73 In addition, investor testing and surveys suggest that many investors would prefer enhanced availability of fund information on the internet in a layered disclosure framework, although some investors prefer to receive fund disclosures in paper format.74
C. Developments Affecting Fund
Disclosure and Marketing Practices In addition to evidence about investor preferences regarding fund disclosure, our proposal is informed by developments affecting fund disclosure and marketing practices. With respect to our proposed amendments to promote more concise, layered disclosure, these developments include advances in technology and the Commission’s experience with summary prospectus disclosure, as well as the growing length and complexity of funds’ shareholder reports since the mid-1990s. Additionally, our proposed amendments to investment company advertising rules are informed by our observations about recent investment company marketing practices in light of increased industry focus on fees, and competition based on fees. Advances in Technology For more than 20 years, the Commission has recognized the internet’s important role in providing disclosure materials and other information to investors and maximizing investor access to information.75 During this time, technology has continued to evolve, and investors’ access to the internet has increased. For example, as of 2019, approximately 94% of households owning mutual funds had internet access, while only 68% of these households had internet access in
2000.76 Moreover, advances in
technology, including increasing use of mobile devices to access information, are expanding the avenues that funds and intermediaries can use to communicate with investors and make it easier to provide interactive or customizable information.77 We understand that many funds and financial intermediaries are using technology in an effort to communicate more effectively with fund investors and to respond to investor preferences, and continue to explore additional ways to use technology to better communicate with investors.78 The Commission, while considering the needs and preferences of investors, also has recognized that modernizing the manner in which funds and others make information available to investors allows them to leverage the benefits of technology and reduce fund costs.79 Experience With Layered Disclosure, and the Growing Length and Complexity of Shareholder Reports Over Time The Commission also has taken multiple steps with respect to fund prospectuses to both recognize investors’ preferences for concise and engaging disclosure of key information and ensure that additional information that may be of interest to some investors is available through a layered approach to disclosure.80 We believe these initiatives have benefitted investors. For example, research shows that the introduction of a more concise summary prospectus may allow investors to spend less time and effort to arrive at the same portfolio decision they would have made after reading the longer statutory prospectus.81 Approximately

75, 76 (David A. Wise ed., 2011), available at https://scholar.harvard.edu/laibson/publications/ how-does-simplified-disclosure-affect-individualsmutual-fund-choices. 82See supra footnote 12. 83The Commission has, however, adopted rules that permit streamlined disclosure of portfolio holdings in funds’ shareholder reports. In 2004, the Commission adopted an approach that gives funds the option to include summary portfolio schedules in their shareholder reports, provided the complete portfolio schedule is filed on Form N–CSR and available, free of charge, to investors. See Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, Investment Company Act Release No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)], at Section II.B and paragraph accompanying n.111 (‘‘February 2004 Shareholder Report Adopting Release’’) (noting that these amendments were ‘‘designed to streamline shareholder reports and help investors to focus on a fund’s principal holdings, and thereby better evaluate the fund’s risk profile and investment strategy,’’ and would reduce printing and mailing costs for most funds). 84See, e.g., Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 13436 (Aug. 12, 1983) [48 FR 37928, 37951 (Aug. 22, 1983)] (adopting Form N–1A, which included annual and semi-annual report requirements in what was then Item 23 of the form). In 1994, the Commission adopted amendments requiring funds to disclose information in their shareholder reports about the results of shareholder votes and any changes in and disagreements with accountants. See, e.g., Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 20614 (Oct. 13, 1994) [59 FR 52689 (Oct. 19, 1994)]. In 1996, Congress added section 30(f) to the Investment Company Act, which allows the Commission to require that funds’ semi-annual reports include such other information as the Commission deems necessary or appropriate in the public interest or for the protection of investors. National Securities Markets Improvement Act of 1996, Public Law 104–290, Section 207, 110 Stat. 3416, 3430 (Oct. 11, 1996). 85See, e.g., Standardization of Financial Statement Requirements in Management Investment Company Registration Statements and Reports to Shareholders, Investment Company Act Release No. 11490 (Dec. 15, 1980) [45 FR 83517 (Dec. 19, 1980)], at nn.3–4 and accompanying text. 86See, e.g., Role of Independent Directors of Investment Companies, Investment Company Act Release No. 24816 (Jan. 2, 2001) [66 FR 3734 (Jan. 16, 2001)] (‘‘Independent Directors Release’’) (requiring shareholder report disclosure regarding a fund’s board of directors); Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Investment Company Act Release No. 25922 (Jan. 31, 2003) [68 FR 6564 (Feb. 7, 2003)] (requiring funds to disclose in their annual
and semi-annual reports to shareholders the methods by which shareholders may obtain information about proxy voting); February 2004 Shareholder Report Adopting Release, supra footnote 83 (requiring funds to add shareholder report disclosure regarding fund expenses borne by shareholders, a tabular or graphic presentation of a fund’s portfolio holdings by identifiable categories, and management’s discussion of fund performance, while allowing funds to include a summary portfolio schedule in these reports); Disclosure Regarding Approval of Investment Advisory Contracts by Directors of Investment Companies, Investment Company Act Release No. 26486 (June 23, 2004) [69 FR 39798 (June 30, 2004)] (requiring shareholder report disclosure about the basis for the board’s approval of advisory contracts during the most recent fiscal half-year). 87A fund’s expense ratio is the figure in its prospectus fee table that represents the fund’s total annual operating expenses, expressed as a percent of the fund’s average net assets. See also infra
Section II.H.1.c (discussing costs that the expense
ratio does not reflect).
88See, e.g., Amendments to Investment Company Advertising Rules, Investment Company Act Release No. 26195 (Sept. 29, 2003) [68 FR 57760 (Oct. 6, 2003)]; Advertising by Investment Companies, Investment Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868 (Feb. 10, 1988)] (‘‘1988 Advertising Rules Release’’); Mutual Fund Sales Literature Interpretive Rule, Investment Company Act Release No. 10915 (Oct. 26, 1979) [44 FR 64070 (Nov. 6, 1979)]. 89While Commission rules require a fund to disclose maximum sales loads in some advertisements, and FINRA rules also limit how a fund advertisement may describe investment costs in some respects, these limitations currently apply only to a subset of fund advertisements. See infra
Section II.H.2.
93% of funds use summary prospectuses.82 On the other hand, the Commission has not taken comprehensive steps to create a layered disclosure framework for funds’ shareholder reports.83 Funds’ shareholder reports generally have become longer and more complex over the years. For example, until 1994, funds were only required to provide certain financial information in their shareholder reports, generally consistent with the types of information that
section 30(e) of the Investment
Company Act identifies.84 During this time, however, many funds provided other information in these reports voluntarily, including information about general economic conditions, the fund’s performance, and services provided to shareholders.85 Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds otherwise voluntarily include in these reports) has increased substantially.86 Developments Affecting Investment Company Advertisements In recent years, investment companies increasingly have been marketing themselves on the basis of costs in an effort to attract investors. For instance, we have observed some funds calling themselves ‘‘no-expense’’ or ‘‘zeroexpense’’ funds, or emphasizing their low expense ratios, despite the fact that investors may experience other investment costs.87 These other investment costs include, for example, securities lending costs or wrap program fees that may provide revenue to the fund’s adviser, its affiliates, or others and that may effectively allow the fund to reduce its reported expense ratio because the prospectus fee table is not required to reflect the relevant category of costs. Investment company advertising rules currently place limits on how a fund may present its performance to promote comparability and prevent potentially misleading advertisements.88 These rules, however, generally do not prescribe the presentations of fees and expenses in advertisements to address similar concerns about comparability or potentially misleading information.89
II. Discussion
D. Overview of Proposed New Disclosure Framework

Executive Summary
The amendments we are proposing would modify the disclosure framework for funds registered on Form N–1A to create a new layered disclosure approach designed to highlight key information for retail investors. The new disclosure approach is designed to tailor the information that investors receive to help investors better assess and monitor their fund investments and make informed investment decisions. We recognize that investors have different levels of knowledge and experience, and we seek to promote disclosure that is inviting and usable to a broad spectrum of investors. In order to help achieve these goals, the proposal includes the following principal elements:

Shareholder Reports Tailored to the
Needs of Retail Shareholders: Under the proposal, fund investors would continue to receive fund prospectuses in connection with their initial investment in a fund, as they do today. Thereafter, a shareholder would receive concise and visually engaging annual and semiannual reports designed to highlight information that we believe is particularly important for retail shareholders to assess and monitor their fund investments on an ongoing basis. This information would include— among other things—fund expenses, performance, and portfolio holdings. We also propose to provide funds the flexibility to make electronic versions of their shareholder reports more userfriendly and interactive.
Availability of Additional
Information on Form N–CSR and Online: Information currently included in annual and semi-annual reports that may be less relevant to retail fund shareholders, and of more interest to financial professionals and other investors who desire more in-depth information, would be made available online and delivered free of charge in paper or electronically upon request by the fund (or intermediary through which shares of the fund may be purchased or sold). This information

90We discuss the operational aspects of this proposed amendment to the scope of rule 30e–3, including compliance date issues, in Section II.G infra. 91Notwithstanding rule 30e–3, investors who have elected electronic delivery of fund documents or have opted in to paper delivery of shareholder reports receive delivery of shareholder reports pursuant to their elections. See infra footnote 532 and accompanying text. 92For example, a shareholder report currently includes backward-looking information about a fund’s actual ongoing expenses over the most recent fiscal half-year, while a prospectus includes forward-looking information about fees for new investments in a fund (i.e., sales charges) and the fund’s projected future expenses. As another example, a shareholder report typically provides performance and other information as of the end of the fund’s most recent fiscal year, while a prospectus presents fund performance as of the end of a calendar year to help prospective investors compare potential fund investments. also would be filed on a semi-annual basis with the Commission on Form N– CSR. This information would include, for example, the schedule of investments and other financial statement elements. Shareholder reports would contain cover page legends directing investors to websites containing this information.

Amendments to Scope of Rule 30e–
3 to Exclude Funds Registered on Form N–1A: The proposal contemplates that a fund’s shareholder reports, as modified pursuant to the proposed rule and form amendments, would serve as the central source of fund disclosure for existing shareholders. To ensure that all fund investors would experience the anticipated benefits of the proposed new tailored disclosure framework, we are proposing to amend the scope of rule 30e–3 to exclude open-end funds.90 Beginning as early as January 1, 2021, funds may begin relying on rule 30e–3, which generally permits funds to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports’ online availability, instead of directly providing the reports to shareholders.91 The new proposed disclosure framework considers feedback that commenters provided in response to the Fund Investor Experience RFC and reflects the Commission’s continuing efforts to search for better ways of providing investors with the disclosure that they need. In light of these and other considerations, we preliminarily believe that the proposed disclosure approach represents a more-effective means of improving investors’ ability to access and use fund information, and of reducing expenses associated with printing and mailing, than continuing to permit open-end funds to rely on rule 30e–3.
Tailoring Required Disclosures to
Needs of New versus Ongoing Fund Investors: It is currently common for fund shareholders to receive an updated annual prospectus each year. We are proposing new rule 498B, which would provide an alternative approach that uses layered disclosure, discussed in more detail below, to keep investors informed about their fund investment and updates to their fund that occur year over year. Under this proposed rule, new investors would receive a fund prospectus in connection with their initial investment in a fund, as they currently do, but funds would not deliver annual prospectus updates to investors thereafter. The proposed layered disclosure framework would instead rely on the shareholder report (including a summary in the annual report of material changes that occurred over the prior year), as well as timely notifications to shareholders regarding material fund changes as they occur, to keep investors informed about their fund investments and enable them to make informed decisions about whether to buy, sell, or hold fund shares. Current versions of the fund’s prospectus would remain available online and would be delivered upon request in a manner consistent with the shareholder’s delivery preference.
Improvements to Prospectus
Disclosure of Fund Fees and Risks; Request for Comment on Improving Fund Fee and Expense Disclosures: We recognize that fund fees and risks are two areas that investors find particularly important to assessing a prospective fund investment, and two disclosure areas that can be complex and confusing. We are proposing amendments to funds’ prospectus disclosure that are designed to help investors more readily understand a fund’s fees and risks, and that use layered disclosure principles that tailor disclosures of these topics to different types of investors’ informational needs. We are also proposing amendments that would refine the scope of funds that are required to disclose the fees and expenses associated with investments in other funds as a component of a fund’s bottom line annual expenses in the prospectus fee table. Furthermore, we are requesting comment on how we could improve the ways in which funds disclose their fees and expenses, in order to represent the full costs associated with a fund investment more accurately and to help investors better understand their investment costs.
Fee and Expense Information in
Fund Advertisements: Finally, we are proposing amendments that are designed to respond to developments that we have observed in fund advertising. The proposed amendments would require that presentations of investment company fees and expenses in advertisements and sales literature be consistent with relevant prospectus fee
table presentations and be reasonably
current. The proposed amendments also address representations of fund fees and expenses that could be materially misleading. The proposed advertising rule amendments would affect all registered investment company and BDC advertisements and would not be limited to open-end fund advertisements.

Considerations and Goals
Concerns and Considerations About Current Disclosure Framework The proposed new disclosure framework—particularly, the new tailored approach to disclosure with respect to fund shareholder reports and prospectuses—is designed to address the concern that shareholder report and prospectus disclosures may appear redundant or inconsistent to shareholders, as well as our belief that prospectus disclosure in particular may often be less relevant to the informational needs of a shareholder who is simply monitoring his or her fund investment. As a preliminary matter, fund prospectuses and shareholder reports have historically served different purposes. The prospectus acts as the principal selling document for investors to inform investment decisions and facilitate fund comparisons. The shareholder report, on the other hand, provides information to a fund’s current shareholders about the fund’s operations and performance during the past fiscal period. Moreover, the shareholder report and prospectus present certain of the same types of information (e.g., fund performance and expenses) differently in light of their intended audiences.92 As a result, there are ways in which the current disclosure framework may not tailor fund disclosure contents to the needs of different types of investors. Much of the information in a fund’s prospectus, including disclosure about the fund’s principal investment strategy and principal risks, often remains the same from year to year. Receiving continuing disclosure of this unchanging information therefore might not be useful to existing fund investors, although investors typically receive annual prospectus updates that include this content. On the other hand, to the extent a fund has a material change (e.g., it materially changes its principal investment strategy and has different

93For example, to the extent a fund has a known or expected increase in its fees and expenses for the current year, a fund shareholder would receive information about the new fee and expense levels in the annual prospectus update. That is, the prospectus fee table in year 1 would present fees as x%, and in year 2 would present fees as y%. But the prospectus would not necessarily highlight or explain the change from year to year, nor would the fund’s shareholder reports. 94See supra footnote 20 and accompanying text. 95See supra footnote 19 and accompanying text (noting that the average page length of annual reports is approximately 134 pages). 96See supra Section I.B. 97See infra Section III.C.2.d (as discussed in this
section, we anticipate that the proposed new
disclosure framework would produce cost savings, due to reduced printing and mailing costs and processing fees, even after taking into account the effects of our proposed exclusion of open-end funds from the scope of rule 30e–3). 98See 2009 Summary Prospectus Adopting Release, supra footnote 10; Variable Contract Summary Prospectus Adopting Release, supra footnote 27; see also discussion at supra footnotes 5–6 and accompanying text. 99See Variable Contract Summary Prospectus Adopting Release, supra footnote 27. In particular, the Commission received positive feedback on its proposal to provide an ‘‘initial summary prospectus’’ to new investors in variable annuity and variable life insurance contracts, and an ‘‘updating summary prospectus’’ to investors each year after their initial investment in a variable contract. Id. at text accompanying nn.33 and 335. In part on the basis of that positive feedback, the Commission adopted that proposal. 100See Recommendation of the Investor Advisory Committee Regarding Promotion of Electronic Delivery and Development of a Summary Disclosure Document for Delivery of Investment Company Shareholder Reports (Dec. 7, 2017), available at https://www.sec.gov/spotlight/investoradvisory-committee-2012/recommendationpromotion-of-electronic-delivery-anddevelopment.pdf. The recommendation provided, among other things, that the Commission explore:
(1) Methods to encourage a transition to electronic delivery that respect investor preferences and that increase the likelihood that investors will see and read important disclosure documents; and (2) development of a summary, layered disclosure document for shareholder reports that incorporates key information from the report along with prominent notice regarding how to obtain a copy of the full report, and would be designed to be delivered either by mail or by email (depending on the investors’ delivery preferences). This proposal also takes into account the Investor Advisory Committee’s recent recommendation on improving the effectiveness of investor disclosures (including in the context of fund disclosures). See IAC Disclosure Effectiveness Recommendation, supra footnote 26. 101See discussion at supra Section I.B.1. 102 Individuals’ access to and use of the internet has increased significantly in the last few decades, including among demographic groups that have previously been less apt to use the internet. See Pew Research Center, internet/Broadband Fact Sheet (last updated June 12, 2019), available at https://www.pewresearch.org/internet/fact-sheet/ internet-broadband. We understand these trends extend to individuals’ use of online resources to manage their finances and investments. See, e.g., Can the internet Transform Disclosures for the Better? Consumer Federation of America (Jan. Continued principal risks, or changes its fees), this information may be more salient to a shareholder’s monitoring of his or her investments. Under the current disclosure framework, these changes might not be highlighted to shareholders.93 The fact that current fund disclosures might not meet investors’ informational needs may contribute to investor disinterest or confusion. The potential for disinterest or confusion may be particularly pronounced when a shareholder receives prospectus and shareholder report disclosure close in time, which often occurs in the case of the annual report and the annual prospectus update.94 Although prospectus disclosure may be less well-suited for analyzing and monitoring an ongoing fund investment, some fund shareholders may be more likely to review a fund’s prospectus instead of its shareholder reports based simply on length. Over the past two decades, the amount of information that funds are required to include in shareholder reports (or that funds otherwise voluntarily include in these reports) has increased substantially.95 This amount of disclosure may not correspond with investors’ expressed preferences for concise, layered disclosure that highlights key information. The substantial length of shareholder reports also may make it more difficult for investors to understand and effectively use the information.96 In addition, we have considered the extent to which modifying the disclosure framework for funds, for example by requiring funds to transmit the tailored shareholder reports that this proposal envisions, could result
in cost savings.97 Shareholders generally bear these fund expenses, and therefore may be bearing costs for information they prefer not to be delivered to them. For example, retail shareholders may prefer not to have delivered to them information that is more technical in nature and may be more relevant for financial professionals and other investors who desire more in-depth information (such as complete fund financial statements, as opposed to receiving summary disclosure about fund holdings and expenses). This proposal reevaluates funds’ disclosure framework in light of all of these considerations. The proposed new approach is based on the goal of promoting more-digestible, tailored disclosure that fund shareholders can use to monitor their ongoing fund investments efficiently and meaningfully, with layered information that may be less relevant to retail shareholders available online and upon request. Likewise, the proposed approach is designed to help a fund shareholder to use shareholder reports to compare funds he or she already owns and assess how the shareholder’s mix of funds fits into his or her overall investment portfolio. The proposed approach to funds’ overarching disclosure framework would be complemented by moretargeted proposed improvements to fund prospectus fee and risk disclosures, as well as proposed amendments to investment company advertising rules. Collectively, the proposed amendments are designed to facilitate investors’ ability to make informed investment decisions and monitor their investments thereafter. Tailoring Fund Disclosure Using Layered Disclosure Principles The layered disclosure approach underlying the proposed new disclosure framework would build on the Commission’s experience in conforming required fund disclosures to the informational needs of different types of investors. In recent years, the Commission has adopted rules that rely on layered disclosure principles to tailor fund disclosures to the particular needs of retail investors, as well as financial professionals and other investors who desire more in-depth information.98 Similarly, in past years the Commission has taken into account the relative informational needs of new investors and ongoing shareholders in tailoring the requirements for investment company disclosures.99 The proposed new disclosure framework also would reflect various stakeholders’ suggestions and stated preferences for fund disclosure that more directly highlights key fund information and is tailored to investors’ needs. For example, the Commission’s Investor Advisory Committee has recommended that the Commission develop an approach to funds’ shareholder reports that would rely on summary disclosure and layered disclosure principles.100 Similarly, the proposed new disclosure framework would reflect investor preferences as we understand them based on investor testing, surveys, and other informationgathering, which have consistently indicated that retail fund investors prefer
concise disclosure that focuses on the most important fund information.101 Leveraging Technology To Modernize Funds’ Disclosure Requirements In addition, the proposed new disclosure framework would leverage technology to modernize funds’ disclosure requirements.102 Our

2014), available at https://consumerfed.org/pdfs/ can-the-internet-transform-disclosures-for-thebetter.pdf. 103See infra Section II.B.4. 104See infra Section III.C.2.d. 105See id. 106This release separately discusses the proposed content requirements for funds’ semi-annual reports. See infra Section II.C. 107See infra Section II.B.4. proposal would use the internet as a medium to provide information to investors and distinguish between information that investors receive directly (either in paper or electronically, depending on investors’ preferences) and information that is available to investors online. The proposal also takes steps to encourage funds to use online tools to enhance and personalize the information that they provide to shareholders, as constantly developing online technology presents unique potential to enrich investors’ experience in understanding and engaging with their fund investments.103 Shareholder Report as the Central Source of Fund Disclosure for Existing Shareholders In proposing the new disclosure framework, which employs the shareholder report as the central source of fund disclosure for existing shareholders, we considered the extent to which permitting open-end funds to continue relying on rule 30e–3 to transmit shareholder reports would affect our policy goals. Since adopting rule 30e–3, we have continued to analyze and hear from industry participants regarding further improvements to our disclosure regime. As a result, we now believe that a tailored shareholder report that highlights key information would provide better information for investors than the notices required under rule 30e–3. Furthermore, if a fund were permitted to rely upon both rule 30e–3 and proposed rule 498B, shareholders in such a fund would no longer directly receive shareholder reports or annual prospectus updates, and thus would not be sent any periodic regulatory disclosure documents.104 We believe the proposed new disclosure framework would also largely preserve the expected cost savings to funds and investors that funds would experience by choosing to rely on rule 30e–3.105 E. Annual Shareholder Report We are proposing to add new Item 27A to Form N–1A to specify the design and content of funds’ annual and semiannual reports. We also are proposing to remove the provisions in current Item 27 of Form N–1A that relate to annual and semi-annual reports. The table below summarizes the proposed content that funds would include in their annual reports or Form N–CSR reports in comparison to current shareholder report disclosure requirements.106 While the proposed content requirements for shareholder reports that are transmitted in paper would generally be the same as the requirements for reports that are transmitted electronically (and that appear online or are accessible through mobile electronic devices), we are proposing instructions that address electronic presentation and are designed to provide flexibility to enhance the usability of
reports that appear online or on mobile devices.107
TABLE 1—ANNUAL REPORT CONTENTS
Current annual shareholder report disclosure (current Form provision) Description of proposed amendments Proposed rule and form provisions Discussed below in Add new identifying information to the beginning of the annual report. Item 27A(b) of Form N–1A ........... Section II.B.2.a. Expense example (Form N–1A Item 27(d)(1)). Retain in annual report in a more concise form. Item 27A(c) of Form N–1A ........... Section II.B.2.b. Management’s discussion of fund performance (‘‘MDFP’’) (Form N–1A Item 27(b)(7)). Retain in annual report in summary form ....... Item 27A(d) of Form N–1A ........... Section II.B.2.c. Add new fund statistics section to the annual report. Item 27A(e) of Form N–1A ........... Section II.B.2.d. Graphical representation of holdings (Form N–1A Item 27(d)(2)). Retain in annual report ................................... Item 27A(f) of Form N–1A ............ Section II.B.2.e. Add new material fund changes section to the annual report. Item 27A(g) of Form N–1A ........... Section II.B.2.f. Changes in and disagreements with accountants (Form N–1A Item 27(b)(4)). Retain in annual report in summary form ....... Item 27A(h) of Form N–1A ........... Section II.B.2.g The entirety of the currently-required disclosure would move to Form N–CSR and would need to be available online and delivered (in paper or electronic format) upon request.
Item 8 of Form N–CSR ................
Rule 30e–1(b)(2) and (b)(3) .........
Section II.D.1.c.
Statement regarding liquidity risk management program (Form N– 1A Item 27(d)(6)(ii)). Retain in annual report ................................... Item 27A(i) of Form N–1A ............ Section II.B.2.h. Statement regarding the availability of quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record (Form N–1A Item 27(d)(3) through (5)). Include a more general reference to the availability of additional fund information in the annual report. Item 27A(j) of Form N–1A ............ Section II.B.2.i. Add provision allowing funds to optionally disclose in their annual reports how shareholders may revoke their consent to householding. Item 27A(k) of Form N–1A ........... Section II.B.2.j.

108See sections 18(f)(1) and (2) of the Investment Company Act [15 U.S.C. 80a–18(f)(1) and (2)]; 17 CFR 270.18f–2 [rule 18f–2 under the Investment Company Act]. 109See, e.g., 17 CFR 270.22c–2(c)(2); 17 CFR 270.22e–4(a)(5); General Instruction A to Form N– 1A (defining ‘‘fund’’ to mean a registrant or a separate series of the registrant). 110See Rulemaking for EDGAR System, Investment Company Act Release No. 26990 (July 18, 2005) [70 FR 43558 (July 27, 2005)], at text following n.17. 111See Instruction 4 to proposed Item 27A(a). Similarly, we have generally required that registrants present summary information separately for each fund in a multiple fund prospectus to promote the goal of concise, readable summaries. See 2009 Summary Prospectus Adopting Release, supra footnote 10, at text accompanying nn.43–60. Under the proposal, fund registrants could continue to include multiple shareholder reports that cover different series in a single Form N–CSR report filed on EDGAR. We do not believe this would affect the usability of the information for shareholders because shareholder reports for each series would separately be available online, and we understand that shareholders generally do not go to EDGAR to find fund shareholder reports. See, e.g., supra footnote 74.
TABLE 1—ANNUAL REPORT CONTENTS—Continued
Current annual shareholder report disclosure (current Form provision) Description of proposed amendments Proposed rule and form provisions Discussed below in Financial statements, including
schedule of investments (Form
N–1A Item 27(b)(1)).
Move to Form N–CSR ....................................
Would need to be available online and delivered (in paper or electronic format) upon request.
Item 7(a) of Form N–CSR ............
Rule 30e–1(b)(2) and (b)(3) .........
Section II.D.1.a.
Financial highlights (Form N–1A Item 27(b)(2)). Retain certain data points, but generally move to Form N–CSR. Would need to be available online and delivered (in paper or electronic format) upon request.
Item 7(b) of Form N–CSR ............
Rule 30e–1(b)(2) and (b)(3) .........
Section II.D.1.b.
Results of any shareholder votes during the period (Rule 30e– 1(b)).
Move to Form N–CSR ....................................
Would need to be available online and delivered (in paper or electronic format) upon request.
Item 9 of Form N–CSR ................
Rule 30e–1(b)(2) and (b)(3) .........
Section II.D.1.d.
Remuneration paid to directors, officers, and others (Form N–1A Item 27(b)(3)).
Move to Form N–CSR ....................................
Would need to be available online and delivered (in paper or electronic format) upon request.
Item 10 of Form N–CSR ..............
Rule 30e–1(b)(2) and (b)(3) .........
Section II.D.1.e.
Statement regarding the basis for the board’s approval of investment advisory contract (Form N– 1A Item 27(d)(6)(i)).
Move to Form N–CSR ....................................
Would need to be available online and delivered (in paper or electronic format) upon request.
Item 11 of Form N–CSR ..............
Rule 30e–1(b)(2) and (b)(3) .........
Section II.D.1.f.
Management information and statement regarding availability of additional information about fund directors (Form N–1A Item 27(b)(5) and (6)). Remove from shareholder reports, but information would remain available in a fund’s SAI, which is available online or delivered upon request. ....................................................... Section II.E. Rule 30e–3 disclosure, if applicable (Form N–1A Item 27(d)(7)). Remove from shareholder reports .................. ....................................................... Section II.G. Funds have discretion to provide other information in their shareholder reports (e.g., president’s letters). Limit annual report disclosure to that which is permitted or required under proposed Item 27A of Form N–1A. Instruction 1 to Item 27A(a) of Form N–1A.
Section II.B.1.b.

Scope of Annual Report Disclosure,
and Registrants Subject to Amendments We propose to limit the scope of funds’ annual reports in several respects to reduce their overall length and complexity. First, we propose to require a fund to prepare separate annual reports for each of its series. Second, we generally propose to limit the content a fund may include in its annual report. a. Scope With Respect to Separate Series and Classes Many mutual funds and ETFs are organized as single registrants with several series (sometimes referred to as portfolios).108 Each series has its own investment objectives, policies, and restrictions. The Federal securities laws and Commission rules often treat each series as a separate fund.109 A single fund or series can have multiple share classes. Classes typically differ based on fee structure, with each class having a different sales load and distribution fee. Series and classes of a registrant are often marketed separately, without reference to other series or classes or to the registrant’s name.110 Currently, fund registrants may prepare a single shareholder report that covers multiple series. We believe this approach contributes to the length and complexity of shareholder reports. For example, a shareholder that is invested in one series of the registrant would need to spend more time searching through the report to find disclosure related to his or her investment. Moreover, a shareholder report that provides information for multiple series may present an increased risk of shareholder confusion. For instance, if two series included in the same shareholder report were to have similar names, there could be a greater risk that a shareholder would mistakenly review information that does not relate to his or her investment. Because the length and complexity associated with multi-series shareholder reports are inconsistent with our goal of creating concise shareholder report disclosure that a shareholder can more easily use to assess and monitor his or her ongoing fund investment, we are proposing to require fund registrants to prepare separate annual reports for each series of the fund.111 As a result, a shareholder would receive an annual report that only addresses the series in which he or she is invested. We believe that this more-focused annual report would be more relevant to shareholders than a multi-series report and, accordingly, shareholders would be more likely to read such disclosure. Although we are proposing to restrict funds’ annual reports to include only one series of a fund, our proposal would not require a shareholder report to cover

112See Instruction 4 to proposed Item 27A(a). This approach is similar to the approach taken in the summary prospectus, which similarly may describe more than one class of a fund. See rule 498(b)(4) [17 CFR 230.498(b)(4)]. 113For example, this would include, among other disclosure items, graphical representations of holdings, the required statistics (i.e., the size of the fund, its number of holdings, and portfolio turnover rate), the narrative discussion of factors that affected the fund’s performance, and most categories of material fund changes. 114We discuss these proposed requirements in more detail below. See infra Section II.B.2.b (discussing the proposed requirement to provide expense information for each class) and Section II.B.2.c.ii (discussing the proposed requirement to disclose average annual total returns for 1-, 5-, and 10-year periods for each class). 115See Instruction 3 to proposed Item 27A(a) of Form N–1A; see also infra Section II.B.2 (discussing the content requirements of the proposed annual report, as well as certain optional content that a fund may include in its annual report). We are, however, proposing flexibility with respect to the use of online tools to assist shareholders in understanding the contents of an annual report that appears online or otherwise is provided electronically. See Instruction 8 to proposed Item 27A(a) of Form N–1A; see also discussion at section II.B.4 infra. 116Many of the proposed instructions to each requirement provide some flexibility so that a fund can tailor its presentation of information to match how the fund invests. For instance, a fund has the ability to select the categories that are reasonably designed to depict clearly the types of a fund’s investments when preparing its graphical representation of holdings. See proposed Item 27A(f) of Form N–1A. 117See Instruction 2 to proposed Item 27A of Form N–1A (permitting a fund to include disclosure that is required under 17 CFR 270.8b–20 (rule 8b– 20 under the Investment Company Act)); rule 8b– 20 under the Investment Company Act (providing, ‘‘[i]n addition to the information expressly required to be included in a registration statement or report, there shall be added such further information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading’’). 118See Instruction 7 to proposed Item 27A(a) of Form N–1A. 119See id. 120See Instruction 5 to proposed Item 27A(a). Incorporation by reference refers to the practice of, instead of including disclosure in a specific document, referring to another document that contains the specified information. 121See, e.g., Instructions 1, 3, and 5 to proposed Item 27A(a) of Form N–1A. a single class of a multiple-class fund.112 Because different share classes of a fund represent interests in the same investment portfolio, much of the proposed shareholder report disclosure would be the same for all classes.113 For disclosure
that would differ among classes, such as expenses and performance data, the amended disclosure requirements that we are proposing would specifically require funds to provide certain class-specific information.114 We request comment on the proposed scope of disclosure for the annual report, including the following:

Would the proposed requirement
that a fund registrant prepare separate annual reports for each of its series result in shareholder report disclosure that is easier for fund shareholders to navigate and assess? If not, why not? Would requiring separate annual reports for each series increase the reports’ relevance to shareholders and increase the likelihood that shareholders would read them? If not, why not? How would this proposed requirement affect the approach fund registrants currently use to prepare and transmit shareholder reports? Are there ways to modify the proposed instruction that would further improve disclosure for shareholders or reduce burdens for fund registrants? Instead of the proposed instruction, should we continue to permit fund registrants to prepare a single annual report that covers multiple fund series, as they may today? If so, why, and should there be any limits on the number of series for which information is presented?
Are there certain types of funds for
which a multi-series presentation in an annual report may be useful to shareholders? If so, which types of funds, and what are the benefits of a multi-series presentation to shareholders? Should we permit certain types of funds, but not others, to prepare annual reports covering multiple series of the same fund?
Are there ways we could allow
multi-series presentations in annual reports while also promoting our goals of providing concise, readable disclosure to existing shareholders that is tailored to their informational needs? If so, how?
A fund may have multiple share
classes with differing fee structures. Should these multi-class funds be permitted to reflect only one or a subset of classes, rather than all share classes in a shareholder report so long as a fund produces a shareholder report that relates to each share class? Would such an approach reduce the complexity of the disclosure and provide moretailored information that is specific to a shareholder’s investment in the fund? Or, conversely, would such a requirement not benefit shareholders? For example, could it reduce shareholders’ ability to compare classes of a fund? Should there be limits on the number or types of classes that a single annual report may cover to reduce potential complexity or length? For example, should we prohibit an annual report transmitted to retail shareholders from including disclosure related to a fund’s institutional class? Are there potential complexities or burdens associated with such an approach? Please explain. b. Scope of Content As a general matter, we are proposing to allow a fund to include in its annual report only the information that Item 27A of Form N–1A specifically permits or requires.115 We believe that allowing only the required or permitted information to appear in a fund’s annual report would promote consistency of information presented to shareholders and would allow retail shareholders to focus on information particularly helpful in monitoring their investment in a fund.116 We also believe this approach would encourage more impartial information by preventing funds from adding information commonly used in marketing materials. We recognize, however, that there may be limited circumstances in which it may be appropriate for a fund to provide more or less information than what proposed Item 27A of Form N–1A would permit or require. Specifically, if a fund’s particular circumstances may cause the required disclosures to be misleading, the proposal would allow the fund to add additional information to the report that is necessary to make the required disclosure items not misleading.117 As an example, if a fund changed its investment policies or structure during or since the period shown, the expense, performance, or holdings information that a fund must include in its annual report may require additional disclosure to render those presentations not misleading. Disclosure in response to this provision should generally be as brief as possible. Moreover, if a required disclosure is inapplicable, the proposed rule would permit the fund to omit the disclosure.118 Similarly, to promote better-tailored disclosure, a fund would be permitted to modify a required legend or narrative information if the modified language contains comparable information to what is otherwise required.119 The proposed amendments to Form N–1A would not permit a fund to incorporate by reference any information into its annual report.120 That is, a fund could not refer to information that is located in other disclosure documents in order to
satisfy the content requirements for an annual report. The limited number of proposed disclosure items in the annual report is designed to promote the goal of providing a concise, more-engaging report that gives shareholders key information to assess and monitor their ongoing fund investments.121 We do not believe that permitting funds to

122See, e.g., Instructions 8 and 9 to proposed Item 27A(a) of Form N–1A; proposed Items 27A(b)(4) and 27A(j) of Form N–1A. 123See proposed Item 27A(j) of Form N–1A; infra
Section II.B.2.i (discussing the provision that would
allow funds to refer to the availability of additional website information, if the fund reasonably believes shareholders would likely view the information as important). 124See Instruction 12 to proposed Item 27A(a) of Form N–1A. This is substantially similar to a requirement in rule 498, which provides that a fund’s summary prospectus generally must be given greater prominence than other materials that accompany the summary prospectus. See rule 498(f)(2). 125These examples of how funds may satisfy the proposed prominence requirement are consistent with interpretations of similar requirements in other Commission rules and forms. See, e.g., 2009 Summary Prospectus Adopting Release, supra footnote 10, at text accompanying n.220 (‘‘Generally, we believe that the ‘greater prominence’ requirement would be satisfied if the placement of the Summary Prospectus is more prominent than accompanying materials, e.g., the Summary Prospectus is on top of a group of paper documents that are provided together.’’); General Instructions 10.C and 10.D of Form CRS (requiring a relationship summary delivered in paper format to be the first among any documents delivered at that time, and a relationship summary delivered electronically to be presented prominently in the electronic medium (e.g., as a direct link or in the body of an email or message)). 126See id. 127See infra Section III.B.1. 128See Variable Contract Summary Prospectus Adopting Release, supra footnote 27; Securities Offering Reform for Closed-End Investment Companies, Investment Company Act Release No. 33836 (Apr. 8, 2020) [85 FR 33290 (Jun. 1, 2020)] (‘‘Closed-End Fund Offering Reform Adopting Release’’). 129See, e.g., Closed-End Fund Offering Reform Adopting Release, supra footnote 128, at Section II.I.2.a (discussing new annual report requirements for funds that file a short-form registration statement), Section II.I.2.b (discussing proposed MDFP disclosure that would appear in registered closed-end funds’ annual reports), and Section II.I.5 (discussing enhancements to certain registered closed-end funds’ annual report disclosure). 130Moreover, of the variable contract structures, only variable contracts with separate accounts structured as management investment companies— those registered on Form N–3—have annual and semi-annual shareholder reporting requirements under rule 30e–1. incorporate information by reference into the shareholder report is consistent with this goal, because it would require shareholders to take an additional step to locate information that funds incorporate by reference into their reports. While the proposed rule would require or permit a fund’s shareholder report to refer to other materials in some cases, those other materials would not incorporate information into the fund’s shareholder report for purposes of satisfying the annual report disclosure requirements.122 Although the proposed rule would only permit the inclusion of certain information in the annual report, it
would not prevent a fund from referring shareholders to the availability of certain additional website information near the end of the report or providing additional information to shareholders in the same transmission as the annual report.123 For example, the proposed rule would not preclude a fund from providing a letter to investors explaining its management philosophy or investment outlook in the same transmission that includes the annual report. However, the proposal would require that the shareholder report be given greater prominence than these other materials, except for certain specified disclosure materials.124 We would generally consider a fund to satisfy the ‘‘greater prominence’’ requirement if, for example, the shareholder report is on top of a group of paper documents that are provided together or, in the case of an electronic transmission, the email or other message includes a direct link to the report or provides the report in full in the body of the message.125 This proposed requirement would not, however, apply to certain specified disclosure materials that a fund may transmit with an annual report, which include summary prospectuses, statutory prospectuses, notices of the online availability of proxy materials, and other shareholder reports.126 We request comment on the scope of content that the proposed rule would require or permit a fund to include in its annual report, including the following:
5. Is it appropriate to restrict the
content of a fund’s annual report to include only the information the form would permit or require? If not, why not? Would these proposed limits on content create a more effective presentation for investors? Are there other approaches we should consider (such as permitting space in the annual report for funds to disclose other information they deem important to investors)? What are the benefits and drawbacks of shorter or longer disclosure, or a more flexible approach to disclosure, for investors relative to the proposed approach?
6. Is it appropriate for funds to have
flexibility to include other communications to shareholders in the same transmission as a shareholder report? Should the shareholder report be subject to the proposed prominence requirement? If not, should we require other prominence or formatting standards if the transmission includes other materials, or should we impose other requirements or limitations associated with materials that funds could transmit along with the shareholder report?
7. As proposed, should we allow a
fund to modify a required legend or narrative information as long as the modified language contains comparable information? If not, why not? Should we use this approach for all aspects of the annual report, or are there particular areas where requiring uniform language across all funds’ annual reports would be particularly valuable to shareholders, for example, to facilitate comparisons or improve shareholder understanding? If so, how should we balance the potential value of uniform language with potential concerns that uniform language may not be well-tailored to a particular fund or its shareholders?
8. Is it appropriate not to permit funds
to incorporate information by reference into their annual reports, as proposed? If not, why not? Is there certain information that a fund should be permitted to incorporate by reference into its annual report? If so, what information, and why?
c. Scope With Respect to Other
Registrants
Our proposed amendments to annual reports would only apply to shareholder reports for investment companies registered on Form N–1A. These funds represent the vast majority of investment company assets under management.127 We also have recently adopted changes to the disclosure framework for closed-end funds and variable insurance contracts tailored to these investment companies’ characteristics and, in the case of closed-end funds, to implement congressional directives.128 The recently adopted changes to closed-end fund disclosure include multiple changes to these funds’ shareholder report disclosures, and we would like to understand funds’ and investors’ experience with this new disclosure framework before proposing additional disclosure amendments.129 Similarly, we anticipate that the recently adopted changes to the variable insurance contract disclosure framework would significantly change investors’ experience with variable contract disclosure. While these changes are focused more on prospectus disclosure and not shareholder report disclosure, we would like to assess the impact of these changes prior to proposing additional disclosure changes for variable contracts.130 Our proposed amendments therefore do not extend at this time to other investment companies such as closed-end funds, unit investment trusts, or managed open-end investment companies not registered on Form N–1A (i.e., issuers of variable

131A UIT is an investment company organized under a trust indenture or similar instrument that issues redeemable securities. See section 4(2) of the Investment Company Act [15 U.S.C. 80a–4]. By statute, a UIT is unmanaged and its portfolio is fixed. A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust. ETFs organized as UITs seek to track the performance of an index by investing in the component securities of an index in the same approximate proportions as the index. See ETF Adopting Release, supra footnote 75, at nn.42, 44. 132See also infra text accompanying footnote 645 (asking whether to extend any of the new requirements for funds’ prospectus risk disclosure to the risk disclosure that certain closed-end funds are required to include in their annual reports). 133See supra footnote 129. 134For example, we believe funds generally would be able to reduce the length of their annual reports from more than 100 pages on average to a more concise presentation that is approximately 3 to 4 pages in length for paper reports, or an equivalent length for electronic reports. For paper reports, the amendments may allow funds to deliver annual reports using a trifold self-mailer (or a similarly concise mailing). A trifold self-mailer can eliminate the need for an envelope or separate pieces of paper. It is generally a large piece of paper that is folded to create multiple pages of information within a self-contained piece of mail. annuity contracts registered on Form N– 3). We request comment on the scope of entities that would be covered by our proposed amendments to annual reports, including the following:
9. To what extent, if any, should the
proposed amendments to shareholder reports be extended to other investment companies besides open-end mutual funds and ETFs organized as management investment companies?
10. For example, ETFs can be
organized as management investment companies registered on Form N–1A or as unit investment trusts (‘‘UITs’’) that are registered on Form N–8B–2 and subject to certain Commission exemptive orders. UIT ETFs are organized differently than and subject to a different disclosure framework than funds.131 For example, exemptive orders for UIT ETFs generally require these ETFs to transmit annual reports that include their financial statements, but the content of these ETFs’ annual reports is not necessarily the same as the current content of funds’ annual reports. Despite these differences between funds and UIT ETFs, should UIT ETFs be permitted to rely upon proposed rule 498B, or permitted or required to use a tailored annual report? If so, to what extent, if any, should the conditions to rely on proposed rule 498B or use a tailored annual report be modified for UIT ETFs? If a UIT ETF were to use a tailored annual report, should the content of its report differ from the content of a tailored annual report for open-end management companies? For example, should this ETF’s financial statements remain in the report in accordance with its exemptive order, or should it be able to provide its financial statements through other means (e.g., on a website and through a Form N–CSR report, even though these ETFs are not otherwise required to file Form N–CSR reports), subject to potential conditions that the ETF provide other information in an annual report? Do shareholders in UIT ETFs have the same informational needs as fund shareholders? For example, do UIT ETFs’ shareholders need the same performance information, or do their needs differ since a UIT ETF generally replicates an index?
11. Should the Commission amend
the requirements for registered closedend funds’ and BDCs’ annual reports, to reflect any of the amendments we are proposing for open-end funds’ annual reports?132 As an example, the Commission recently adopted rules requiring: (1) Certain closed-end funds (registered closed-end funds, as well as BDCs) to include key information in their annual reports regarding fees and expenses, premiums and discounts, and outstanding senior securities that the funds currently disclose in their prospectuses; and (2) registered closedend funds to provide management’s discussion of fund performance in their annual reports to shareholders.133 If the Commission were to propose to tailor closed-end funds’ shareholder reports in a manner that is similar to how we are proposing to tailor open-end funds’ shareholder reports, how should such tailoring incorporate these recently adopted disclosure requirements, as well as the other content that currently appears in closed-end funds’ shareholder reports? For example, should we propose to update the fee and expense information that appears in closed-end funds’ shareholder reports to more closely match the proposed fund expense presentation that would appear in open-end funds’ shareholder reports? As another example, would it be appropriate to require closed-end funds to file on Form N–CSR certain information that currently appears in their shareholder reports (such as their full financial statements) and make this information available on a website, instead of including it in their reports, as we are proposing for open-end funds?
2. Contents of the Proposed Annual
Report
The following table outlines the information the proposed rule would generally require funds to include in their annual reports. As is the case today, the proposed annual report would not be subject to page or word limits. We are not proposing page or word limits because we believe such limits could constrain appropriate disclosure or lead funds to omit material information. However, we believe that the proposed limits on the contents of these reports would limit their length, which would support our goal of concise, readable disclosure.134
TABLE 2—OUTLINE OF PROPOSED ANNUAL REPORT
Description Proposed item of form N–1A Current item of form N–1A containing similar requirements
Cover Page or Beginning of Report ................. Fund/Class Name(s) ....................................... Item 27A(b) ................
Ticker Symbol(s) ............................................. Item 27A(b) ................
Principal U.S. Market(s) for ETFs ................... Item 27A(b) ................
Statement Identifying as ‘‘Annual Shareholder Report’’.
Item 27A(b) ................
Legend ............................................................ Item 27A(b) ................
Content ............................................................. Expense Example ........................................... Item 27A(c) ................. Item 27(d)(1). Management’s Discussion of Fund Performance. Item 27A(d) ................ Item 27(b)(7).
Fund Statistics ................................................ Item 27A(e) ................
Graphical Representation of Holdings ............ Item 27A(f) ................. Item 27(d)(2).
Material Fund Changes .................................. Item 27A(g) ................

135The hypothetical annual report is substantially similar to the prototype summary shareholder report that two commenters used in investor surveys. See supra footnote 44. For example, both of these sample reports provide information about a fund’s expenses, performance, and holdings. The primary differences between the sample reports are that the hypothetical annual report would include a modified expense presentation, a performance line graph similar to current shareholder reports, and two new items related to fund statistics and material fund changes. Further, while the commenter that developed the prototype summary shareholder report supported the inclusion of liquidity risk management program disclosure, the prototype did not include this disclosure because the underlying requirement was not effective at that time. See ICI Comment Letter I. 136See proposed Item 27A(b) of Form N–1A. The reference to the ‘‘beginning’’ of an annual report is designed to address circumstances in which there is not a physical page that would precede the report, for example, when the report appears online or on a mobile device. See infra Section II.B.4. 137See Item 1 of Form N–1A.
TABLE 2—OUTLINE OF PROPOSED ANNUAL REPORT—Continued
Description Proposed item of form N–1A Current item of form N–1A containing similar requirements Changes in and Disagreements with Accountants. Item 27A(h) ................ Item 27(b)(4). Statement Regarding Liquidity Risk Management Program. Item 27A(i) .................. Item 27(d)(6)(ii). Availability of Additional Information ............... Item 27A(j) .................. Item 27(d)(3) through (5). Householding Disclosure (optional) ................ Item 27A(k) ................. *.

Rule 30e–1(f)(3) currently requires a
fund to explain, at least once a year, how a shareholder may revoke his or her consent to householding. This explanation is not currently required in funds’ shareholder reports, and we similarly would not require it in the proposed annual report. To help market participants understand this proposed disclosure,
Appendix A to this release includes a
hypothetical annual report. This hypothetical annual report is provided solely for illustrative purposes and is not intended to imply that it would reflect a ‘‘typical’’ annual report under the proposed amendments. We also are providing the hypothetical annual report to illustrate for investors what a more concise, tailored shareholder report could look like and are providing a feedback flier that investors can use to provide their views on the hypothetical report and other issues in Appendix B.135 We discuss each of the proposed content requirements in detail below, including specific requests for comment regarding each proposed item of the annual report. In addition to the morespecific requests for comment below, we also request general comments on the proposed content requirements for funds’ annual reports.

In addition to the proposed
content requirements for funds’ annual reports, should we require or permit funds to provide additional information in their shareholder reports? For example, is there other information that funds typically include in their annual reports as a matter of practice or to comply with other regulatory requirements (e.g., tax-related disclosure under the Internal Revenue Code about the fund’s distributions)? Would it be beneficial to shareholders to receive any additional information in the annual report, or should funds provide this information through other mechanisms (e.g., on their websites, in materials separately transmitted with the annual report, or in account statements)?
Are the topics that funds would
discuss in their annual reports under the proposed amendments appropriate to provide fund shareholders with key information for assessing and monitoring their fund investments? Are there additional topics that should be required? Please explain. Are any of the topics redundant with information that appears in other disclosure requirements? If so, which topics, and why are they redundant?
How would the proposed
amendments affect the length of funds’ annual reports? Would the length of the proposed reports affect a fund’s approach for delivering the full report in the mail, relative to its current approach for mailing annual reports?
Would proposed Item 27A result
in disclosure that is of an appropriate length to be engaging and accessible to fund shareholders, or should we take additional steps to limit the length or complexity of annual report disclosure? For example, should we impose page or word limits on annual reports? If so, what should they be? Should we limit the length of any particular section of the annual shareholder report, and if so, what should these limits be? a. Cover Page or Beginning of the Report The proposed amendments to Form N–1A would require a fund to provide the following information on the cover
page or at the beginning of the annual
report:

The name of the fund, as well as the
class(es) to which the annual report relates;
The exchange ticker symbol of the
fund’s shares, or the ticker symbol of each class adjacent to the class name;
If the fund is an ETF, the principal
U.S. market(s) on which the fund’s shares are traded;
A statement identifying the
document as an ‘‘annual shareholder report;’’ and
The following legend: ‘‘This annual
shareholder report contains important information about [the Fund] for the period of [beginning date] to [end date] [as well as certain changes to the Fund]. You can find additional information about the Fund at [Fund website address]. You can also request this information by contacting us at [toll-free telephone number and, as applicable, email address].’’ 136 Currently, funds are not required to include specific cover page information in their shareholder reports. However, we understand that, as a matter of practice, funds typically include identifying information—such as the fund’s name, the period of time the report covers, and whether the report is an annual or semi-annual report—at the beginning of the report or on a cover
page. We are proposing to require
specific identifying information at the beginning of the annual report so that shareholders can readily identify the purpose and scope of the report. This is also substantially similar to information that must appear at the beginning of fund prospectuses.137 The proposed legend is designed to help shareholders understand the purpose of the annual report, as well as the time period covered by the report. It also describes how a shareholder can obtain additional information about the

138See rule 498(b)(1)(v). 139See Instruction 2 to proposed Item 27A(b); infra Section II.C. The website could be a central site with prominent links to the materials that would need to be accessible under the proposed amendments to rule 30e–1. 140A QR code is a two-dimensional barcode capable of encoding information such as a website address, text information, or contact information. For example, when included on print materials, these codes can be read using the camera on a smartphone to take the user directly to a specific website address. 141See Instruction 1 to proposed Item 27A(b) of Form N–1A. 142See proposed Item 27A(c) of Form N–1A; see also discussion at infra Section II.B.4 and infra footnote 338 and accompanying text for a discussion of additional tools a fund can provide online to facilitate shareholder engagement. 143See proposed Item 27A(c) of Form N–1A. fund, consistent with similar legends that appear on the cover page of the summary prospectus.138 The website address a fund would provide in the legend would need to be specific enough to lead shareholders directly to the materials that would be required to be accessible on the fund’s website under this proposal, including the fund’s financial statements and financial highlights.139 Funds also would have discretion to include other ways a shareholder can find or request additional information about the fund, such as Quick Response Code (‘‘QR code’’) or referring the reader to mobile applications.140 In addition, the proposed amendments would permit funds to include graphics, logos, and other design or text features to help shareholders identify the materials as the fund’s annual report.141 We request comment generally on the proposed content requirements for the cover page or beginning of the annual report, and specifically on the following issues:
16. Is there additional information
that we should permit or require funds to provide on the cover page or at the beginning of their annual reports? If so, what are the benefits of that additional information? For example, should we permit or require funds to include a
table of contents, or would a table of
contents add undue length to the shareholder report and provide limited benefits to shareholders given the general brevity of the report?
17. Should we remove or modify any
of the information the proposed rule would permit or require funds to include on the cover page or at the beginning of their annual report, and if so, what information and how should we modify it? b. Fund Expenses We are proposing a simplified expense presentation in the annual report that would require a fund to provide the expenses associated with a hypothetical $10,000 investment in the fund during the preceding reporting period. In particular, the table must show: (1) An assumed $10,000 beginning account value; (2) total return during the period, before deducting expenses; (3) expenses in dollars paid during the period; (4) ending account value in dollars, based on net asset value return and the assumed $10,000 beginning account value; and (5) expenses as a percent of an investor’s investment in the fund (i.e. expense ratio).142 ETFs must also include the ending value of the account based on market value return.143 The proposed expense example would appear as follows, and the individual aspects of the example are described in more detail below. What were your Fund costs for the period? (based on a hypothetical $10,000 investment) EP05NO20.000</GPH>

144See, e.g., ICI Comment Letter I (stating that the information provided in the current expense example is responsive to investors’ keen interest in knowing how much it will cost them to invest in a fund); see also Capital Group Comment Letter (noting that the current expense example provides investors with information on the cost of their investments). 145See Item 27(d)(1) of Form N–1A. The instructions to this item require a fund to calculate the expense example using a fund’s expense ratio for the preceding six months and not to include the impact of sales loads, if any. 146The first table does not permit a direct comparison of fund costs because positive performance would make fund expenses expressed as a dollar amount higher and negative performance would make fund expenses expressed as a dollar amount lower. So, for example, if two funds had the same fees, the fund with the better performance would appear more expensive. See February 2004 Shareholder Report Adopting Release, supra footnote 83. 147See February 2004 Shareholder Report Adopting Release, supra footnote 83, at text following n.96. 148See Item 27(d)(1) of Form N–1A; see also
Section II.H.1.g (discussing proposed changes to the
disclosure requirements for AFFE in fund prospectuses, which would permit funds that invest 10% or less of their total assets in acquired funds to omit the AFFE line item in the fee table and instead disclose the amount of the fund’s AFFE in a footnote to the fee table). 149See Instruction 3(d)(ii) and 3(e) of Item 3 of Form N–1A (prohibiting a fund from reflecting fee waivers unless they reduce the fund’s operating expenses for no less than one year from the effective date of the fund’s prospectus). 150See proposed Item 27A(c) of Form N–1A. 151See Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998] (‘‘1998 Form N–1A Prospectus Amendments’’), at n.74 and accompanying text (increasing the hypothetical investment to $10,000 in the prospectus example presentation because the Commission recognized that the typical fund investment was increasing in size). Because we are proposing to raise the hypothetical investment amount to $10,000, we are also proposing to similarly raise the required rounding conventions for dollar values in the table to the nearest dollar, rather than the nearest cent. 152But see supra footnotes 147 through 149 and accompanying text (discussing the key differences between the presentation of expense information in the prospectus and the shareholder report). 153See proposed Instruction 1(a) of Item 27A(c) of Form N–1A (requiring all percentages in the table to be rounded to the nearest hundredth of one percent and all dollar figures in the table to be rounded to the nearest dollar). 154The expense example in the annual report would provide expense information that covers a 12-month reporting period. 155See proposed Instructions 1(b) of Item 27A(c) of Form N–1A (‘‘Provide the amounts in each of the columns as a mathematical expression, as appropriate (i.e., include +, ¥ and = symbols). Costs paid during the period must be expressed as a negative amount. Total return, if negative during the period, must be expressed as a negative amount.’’). Commenters on the Fund Investor Experience RFC stated that shareholders believe the information provided in the current shareholder report expense example is important because it helps them understand the costs associated with investing in the fund.144 The proposed expense information is intended to reflect shareholders’ preferences to understand fee and expense information, while simplifying the expense example that currently appears in funds’ shareholder reports. Funds’ shareholder reports currently include an expense example consisting of two different tables.145

The first table shows the actual cost
in dollars for a $1,000 investment in the fund over the prior six-month period based on the actual return of the fund. This presentation is intended to help a shareholder calculate the actual ongoing fund expenses, in dollars, that he or she has incurred.
The second table shows the cost in
dollars for a $1,000 investment in the fund over the prior six-month period based on a hypothetical 5% annual return (and not, as for the first table, the actual return of the fund during that period). Because funds are required to use the same hypothetical annual return in calculating their expenses here, this second table is designed to help shareholders compare the expenses of their fund with those of other funds.146 Currently, the fund expenses presented in the shareholder report expense examples are different in several respects from those in the prospectus fee table and example. The shareholder report example is derived from a fund’s financial statements and therefore reflects actual historical expenses that a shareholder incurred over the past year (i.e., backwardslooking expenses). The prospectus example, on the other hand, reflects hypothetical future expenses (i.e., forward-looking expenses).147 Currently, the prospectus fee table also reflects sales loads that an investor would pay and the expenses associated with the fund’s investments in another fund (referred to as Acquired Fund Fees and Expenses (‘‘AFFE’’)), whereas the shareholder report expense presentation does not, because these elements are not reflected in the fund’s financial statements.148 Additionally, unlike the shareholder report example, the prospectus fee table must reflect any material changes in fees that occurred since the prior fiscal year and cannot reflect certain fee waivers.149 The information about fund expenses that we are proposing funds include in the annual report is designed to simplify the expense example that currently appears in funds’ shareholder reports, and to provide shareholders with additional tools to understand the expenses they paid during the prior fiscal year. The proposal would replace the two current expense examples in the shareholder report with one simplified expense table. The new table would vary from the current disclosures in several respects. First, under the proposal, funds would have to provide the expenses associated with a $10,000 investment in the fund, rather than the current $1,000 investment amount.150 We are proposing to increase the dollar value because we believe that $10,000 is a more realistic investment amount for an individual shareholder today.151 Additionally, because Form N–1A requires funds to use an assumed $10,000 investment for the expense presentation in the prospectus, the proposal would align this aspect of the two expense presentations and promote a more consistent disclosure experience for investors.152 Similarly, we are proposing to align the rounding conventions of the expense presentations in the shareholder report with those of the prospectus.153 Furthermore, funds would no longer be required to show the total amount of expenses along with hypothetical return information for the period. Instead, funds would continue to provide expense information along with actual return information, with amendments
to this presentation of expenses that we believe would help show shareholders how much of their money was actually invested in the market (versus how much of their money was paid for fees and expenses).154 Like the current expense presentation, the proposed presentation would show an assumed beginning account value, an ending account value, and expenses paid during the period. However, rather than only requiring funds to disclose the ending account value net of fees (as they do today), we are proposing to require funds to disaggregate this amount. Funds would individually disclose: (1) The costs paid during the period, (2) the fund’s total return during the period before costs were paid, and (3) the ending account value based on the fund’s net asset value return. A fund would have to provide each of these figures as a mathematical expression (using ‘‘+’’, ‘‘¥’’, and ‘‘=’’ signs), as shown in the example above.155 Costs would have to be expressed as a negative amount (with a ‘‘¥’’ sign preceding the cost amount), and total return, if negative during the period, also would have to be expressed as a negative amount with a ‘‘¥’’ sign preceding it. Conversely, if the fund’s total return were positive during the period, it would be preceded by a ‘‘+’’ sign.

156See Fund Investor Experience RFC, supra footnote 8, at text accompanying n. 36. Some commenters on the Fund Investor Experience RFC expressed concern that fund disclosure may not accurately represent the full costs associated with a fund investment. See, e.g., Delmonte Comment Letter; Fowler Comment Letter; Blanchard Comment Letter. 157For example, some commenters on the Fund Investor Experience RFC discussed challenges associated with disclosing transaction costs, including a potential negative impact on investors’ ability to understand fund costs. See, e.g., ICI Comment Letter I; Comment Letter of BlackRock, Inc. (Oct. 31, 2018) (‘‘BlackRock Comment Letter’’). Based on experience in certain jurisdictions that require transaction cost disclosure, these commenters indicated that transaction cost disclosure can confuse or mislead investors— including through reported transaction costs of zero or negative amounts in some instances in those jurisdictions—because funds may use different calculation methods and certain calculation inputs are subjective in nature. See ICI Comment Letter I; see also Slippage Causes Confusion in MiFID II Fund Rules Row, Chris Flood, Financial Times (Jan. 26, 2018), available at https://www.ft.com/content/ 7b37016a-00fc-11e8-9650-9c0ad2d7c5b5. 158See supra footnote 147 and accompanying text. While the current expense example based on a hypothetical 5% annual return was designed to help shareholders compare the expenses of their fund with those of other funds, we believe that the proposed requirement to present expense information as a percentage as well as a dollar amount also would provide this comparative value. See supra footnote 146 and accompanying text; infra paragraph accompanying footnote 161. 159We are also proposing conforming changes to Item 13(a) of Form N–1A to incorporate the requirement for ETFs to disclose total return based on the ETF’s per share market value return in the financial highlights. See proposed amendments to General Instruction 3 of Item 13(a) of Form N–1A. 160See proposed General Instruction 1(i)(i) of Item 27A(c) of Form N–1A. We also are proposing to maintain the current instructions specific to ETFs, including the requirement to state that investors may pay brokerage commissions on their purchases and sales of ETF shares, which are not reflected in the expense table, as well as the requirement to exclude any fees charged for the purchase and redemption of the ETF’s creation units. See proposed General Instruction 1(i)(ii) and 1(i)(iii) of Item 27A of Form N–1A. 161See proposed General Instruction 1(c) of Item 27A(c) of Form N–1A (providing flexibility for funds to use, for example, graphics, larger font size, different border width or column shading, or different colors or font styles to satisfy this prominence requirement). 162Currently, a fund must precede the expense example with a narrative preamble explaining that the purpose of the expense example disclosure is to help
shareholders understand the ongoing costs of investing in the fund and to compare those costs with the ongoing costs of investing in other mutual funds. The preamble defines ongoing costs as fund expenses, including management fees and distribution [and/or service] (12b–1) fees. See Item 27(d)(1) of Form N–1A. 163See footnotes to the expense example in proposed Item 27A(c). 164See Instruction 1(f) to proposed Item 27A(c) We believe that this presentation would facilitate a shareholder’s understanding of how costs and performance affect his or her ending account value. Fund fees and expenses are central information for shareholders because they can significantly affect a fund’s investment returns over time.156 We recognize that shareholders could benefit from additional transparency into the costs associated with investing in the fund. However, while some of these costs are fixed and easily quantifiable, others are variable and can be difficult to calculate.157 The proposed presentation is designed to help investors evaluate these costs by disclosing costs directly deducted from the fund’s assets alongside the fund’s return. The fund’s return will reflect these costs as well as any performance expenses associated with the fund’s portfolio management activities (such as the fund’s securities lending activities and transaction costs associated with the fund purchasing and selling portfolio investments). Similarly, some fund expenses are paid directly as fees for investing in the fund, while others are performance expenses associated with the fund’s portfolio management activities. We believe it is important for shareholders to appreciate fully the costs they pay to invest in a fund, and how performance expenses affect the fund’s investment return. We also are proposing to require that funds qualitatively describe, in a footnote to the example, any of these performance expenses that are material as discussed below. We are not proposing to require a similar presentation based on hypothetical performance, because we believe that the primary purpose of a shareholder report is to provide shareholders with actual information about the fund’s performance and expenses over the past year or half-year period.158 We also are proposing certain ETFspecific disclosures that would provide shareholders more transparency into the unique cost structure of an ETF. Under our proposal, an ETF would be required to disclose two versions of the ending account value, one based on the ETF’s net asset value return and the other based on its market value return.159 This proposed requirement is designed to allow shareholders to understand any difference between the ETF’s performance and market price, and to highlight for shareholders the indirect costs associated with investing in an ETF, including commissions and premium/discount costs.160 Unlike the current expense presentation, we are proposing to require funds to present expense information in two formats: (1) As a dollar
amount, as discussed above; and (2) as a percentage of a shareholder’s investment in the fund (which would be a new addition to the current presentation). We believe that requiring two formats would provide shareholders with a more complete understanding of the expenses associated with their investments. The proposed new percentage-based expense information is designed to provide shareholders with a basis for comparing the level of current period expenses of different funds (as percentages are comparable). This addition would complement the dollarbased expense presentation, which is designed to permit shareholders to estimate the costs, in dollars, that they incurred over the reporting period.We are also proposing to require funds to give the expense columns (i.e., the ‘‘costs paid’’ and ‘‘costs paid as a percentage of your investment’’ columns) of the table more prominence than the remainder of the expense table to draw the attention of investors to these important data points. Funds would have flexibility to use various text and table features to satisfy this requirement.161 We also are proposing several modifications to simplify other aspects of the required expense disclosure. First, we are proposing to remove the currently required narrative preamble to the expense table in its entirety.162 As a replacement for this preamble, we are proposing certain specified brief required footnotes to the table.163 We believe that the simplified expense
table, along with the footnotes to the
table that we would require funds to
include, would provide shareholders with the most relevant information from the lengthy preamble that currently precedes the expense example. First, a fund would be required to include a footnote to the ‘‘total return before costs paid’’ column that qualitatively describes, in plain English, other costs that are included in the fund’s total return, if material to the fund. For example, if applicable, the fund should explain that total return includes fund investment transaction costs, securities lending costs, or AFFE, and that these costs materially reduced the fund’s return.164 We believe that requiring this qualitative discussion would give funds the opportunity to describe certain expenses that may be difficult to calculate, but that materially affect fund performance. Also, by requiring funds to describe these types of performance expenses in a footnote, while including the direct costs of the fund in the expense example, shareholders might be better able to appreciate the fact that the costs associated with their investment include both fixed costs and indirect variable costs.

165See Instruction 1(g) to proposed Item 27A(c). Funds would not be required to disclose the amount of such fees. 166See Instruction 1(i) to proposed Item 27A(c). This would generally apply to newly formed funds that are required to file an annual or semi-annual report for a period less than the reporting period. 167See Instruction 2(a) to proposed Item 27A(c) of Form N–1A. 168See proposed Instruction 2(c). In the semiannual report, the fund’s expense ratio would be calculated in the manner required by Instruction 4(b) to Item 13(a) of Form N–1A, using the expenses for the fund’s most recent fiscal half-year. Id. 169See proposed Instruction 2(e). In the semiannual report, the fund’s ending account value would be calculated in the manner required by Instruction 3 to Item 13(a) of Form N–1A. Id. 170See proposed Instruction 2(d) of Item 27A(c) of Form N–1A. 171See proposed Instruction 2(f) of Item 27A(c) of Form N–1A (requiring funds to multiply $10,000 by the fund’s market value return). In an ETF’s annual report, an ETF would be required to use the market value return as it appears in the ETF’s most recent audited financial statements or financial highlights in its calculations. In the semi-annual report, the fund’s market value return should be calculated in the manner required by Instruction 3 to Item 13(a) of Form N–1A. Id. 172See Instruction 1(k) to proposed Item 27A(c) of Form N–1A (defining ‘‘extraordinary expenses’’ as ‘‘expenses that are distinguished by their unusual nature and by the infrequency of their occurrence. Unusual nature means the expense has a high degree of abnormality and is clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the Fund, taking into account the environment in which the Fund operates. Infrequency of occurrence means the expense is not reasonably expected to recur in the foreseeable future, taking into consideration the environment in which the Fund operates. The environment of a Fund includes such factors as the characteristics of the industry or industries in which it operates, the geographical location of its operations, and the nature and extent of government regulation’’); see also Instruction 2(a)(ii) to Item 27(d) of Form N–1A. 173See Instruction 1(d) to proposed Item 27A(c) of Form N–1A. 174See Instruction 1(e) to proposed Item 27A(c) of Form N–1A. Furthermore, a fund would be required to briefly explain, in plain English, in a footnote to the ‘‘Costs paid as a percentage of your investment’’ column that the expense information does not reflect shareholder transaction costs associated with purchasing or selling fund shares.165 This would draw investor attention to the fact that there may be additional costs not reflected in the expense example, if applicable. Finally, if a fund’s shareholder report covers a period of time that is less than a full reporting year, the fund would be required to include a footnote to the
table noting this and explaining that
expenses for a full reporting period would be higher than the figures shown.166 We also are proposing certain modifications to the instructions associated with the computation of fund expenses to reflect the proposed changes to the expense example. We are proposing an instruction that would direct funds to calculate ‘‘Costs paid’’ by multiplying the figure in the ‘‘Cost paid as a percentage of your investment’’ column by the average account value over the period based on an investment of $10,000 at the beginning of the period.167 The figure in the ‘‘Cost paid as a percentage of your investment’’ column, in turn, would be the fund’s expense ratio as it appears in the fund’s most recent audited financial statements or financial highlights.168 The figure in the ‘‘Ending account value (based on net asset value return)’’ column would similarly be derived from figures in the fund’s audited financial statements or financial highlights. To calculate this
figure, the fund would multiply $10,000
by the fund’s net asset value return as it appears in the fund’s most recent audited financial statements or financial highlights.169 The figure in the ‘‘Total return before costs paid’’ column would be calculated by subtracting $10,000 (the figure in the ‘‘Beginning account value’’ column) and the figure in the ‘‘Costs paid’’ column from the ‘‘Ending account value (based on net asset value return)’’ column.170 Additionally, for ETFs we are proposing an instruction for how an ETF should calculate the ETF’s ending account based on market value return.171 We are proposing to maintain certain of the current instructions that we believe would continue to provide useful information to shareholders. If a fund incurred any ‘‘extraordinary expenses’’ during the reporting period, we are proposing to continue to allow the fund to briefly describe, in a footnote to the expense table, what the actual expenses would have been if these extraordinary expenses were not incurred.172 Similarly, if a fund is a feeder fund, we are proposing to continue to allow that fund to reflect the aggregate expenses of the feeder fund and the master fund in the expense table and to include a footnote stating that the expense table reflects the expenses of both the feeder and master funds.173 Additionally, if the shareholder report covers more than one class of a fund or more than one feeder fund that invests in the same master fund, the shareholder report may include a separate expense table, or a separate line item in the expense table, for each class or feeder fund.174 We request comment on our proposed approach to revising the expense information that would appear in funds’ annual reports, and specifically on the following issues:
18. Would the information that would
be included in the proposed expense example permit shareholders to estimate the actual costs, in dollars, that they incurred over the reporting period and provide shareholders with a basis for comparing expenses across different funds? If not, why not? Which, if any, of the proposed disclosure requirements should we modify? Is there a better way of describing the fund’s expenses to shareholders in the annual report?
19. Should we, as proposed, require
funds to provide the costs in dollars associated with investing in the fund based on an assumed $10,000 investment? Should we increase the assumed investment amount from $1,000 to $10,000, as proposed? Should we use some other amount, and if so, what amount would be more appropriate and why?
20. Should we, as proposed, align the
rounding conventions included in the expense example instructions in the shareholder report with those included in the instructions to the prospectus expense table?
21. Should we, as proposed, require
funds to disclose individually: (1) The costs paid during the period, (2) the fund’s total return during the period before costs were paid, and (3) the ending account value based on the fund’s net asset value return? Why or why not? Instead, should we require funds to disclose the total return net of fees? Are the proposed calculation instructions for these figures appropriate? Why or why not? Would providing expense information in this disaggregated manner facilitate shareholder understanding of how costs and performance each affect the ending account value? Why or why not?
22. Should we, as proposed, require
funds to disclose the figures in the expense table as a mathematical expression? Would shareholders find this presentation useful?
23. Should we, as proposed, require
funds to use text features to highlight the columns showing costs paid during the period (both in dollars and as a percentage of the investment)? Would this approach draw shareholder attention to those figures? Is there a particular format that we should require to highlight these columns, instead of (as proposed) providing flexibility in how to highlight them?
24. Should we require funds to
provide the costs associated with investing in the fund as a percentage of a shareholder’s investment in the fund (i.e., expense ratio)? Would this disclosure assist shareholders in comparing the level of current period expenses of different funds?
25. Should we, as proposed, require
ETFs to provide the ending value of the

175See February 2004 Shareholder Report Adopting Release, supra footnote 83, at paragraph accompanying n.36 (recognizing that a requirement for individualized expense disclosure in quarterly statements would have required costly systems changes for funds and intermediaries at that time). 176See supra footnote 47 and accompanying text (discussing information about investors’ interest in shareholder report performance information, including the results of various investor testing and surveys in which approximately 60–80% of surveyed investors expressed interest in fund performance information or the narrative discussion of factors affecting the fund’s performance). account based on market value return, in addition to the value based on net asset value return? If so, should we require or permit ETFs to provide any additional information to explain the costs reflected in these two values to shareholders? For example, should we require or permit ETFs to provide a narrative explanation of what these values represent, how they differ from each other, and/or what impact they have on the fund’s performance?
26. Should we require, as proposed,
funds to include the expense ratio and cost in dollars only for the period covered by the report? Should we instead require funds to include fund expense information over other historical periods, such as 5 years, 10 years, or some other period?
27. Should we, as proposed, require
funds to describe qualitatively other costs included in total return, if material to the fund? Would this requirement be helpful to investors, and if so, what types of investors would find the disclosure to be particularly helpful? If the disclosure would not be helpful to investors, why not? Should we instead permit, rather than require, funds to include these costs in the expense example or in a footnote? Should we require funds to separately disclose the amount of securities lending costs, or fund investment transaction costs, that the fund incurred during the period? Should we require funds to include in the footnote the amount of any acquired fund fees and expenses that the fund includes in its then-effective prospectus fee table? Would quantifying acquired fund fees and expenses in the footnote be appropriate in light of the fact that acquired fund fees and expenses are not included in a fund’s audited financial statements, and calculation of acquired fund fees and expenses can require a degree of estimation when the acquired funds have different fiscal year-ends than the acquiring fund? Would disclosing quantitative amounts of securities lending or fund investment transaction costs present the same or additional considerations? Is it appropriate for any or all of these costs to be included in a footnote? Should funds instead be required to include this information in the expense table itself? Is there another, more appropriate, place to include this information?
28. Should we, as proposed, require
funds to briefly explain in a footnote that the example does not reflect transaction costs associated with purchasing or selling fund shares? Alternatively, should we permit, rather than require, funds to include this footnote?
29. Should we, as proposed, continue
to allow a fund that is a feeder fund to reflect the aggregate expenses of the feeder fund and the master fund in the expense table and to include a footnote stating that the expense table reflects the expenses of both the feeder and master funds? Should we instead require feeder funds to separately disclose the fees associated with the feeder and the master funds, respectively?
30. Do the proposed footnotes to the
expense presentation adequately convey the information that was previously included in the preamble to the current expense examples? If not, what additional information should we require or permit funds to disclose, and in what format should funds have to present this additional disclosure? Instead of including the information in footnotes, is there a more appropriate location for the information? Is there any additional information that we should permit or require funds to convey in notes to the expense presentation? For example, if the fund plans to increase its fees materially and this change would be disclosed in the proposed ‘‘Material Fund Changes’’ of the annual report, should we either permit or require the fund to crossreference this disclosure as a note to the expense presentation?
31. Should we adopt any additional or
different expense disclosure requirements for certain types of funds? For example, in addition to what we proposed, are there any additional or different expenses that may only be relevant to ETFs (accounting for the unique characteristics of their structure) that we should require or permit ETFs to disclose?
32. Should we allow funds to crossreference additional resources that
would allow each shareholder to calculate the actual expenses that he or she paid? For example, should we allow funds to cross-reference online expense calculators produced by third-party vendors? Alternatively, should we allow funds to cross-reference an online expense calculator provided by the Commission or FINRA, such as FINRA’s fund analyzer tool? Since FINRA’s fund analyzer only provides forward-looking information, rather than the actual past expenses that shareholders have paid during the period, would this information be useful to shareholders?
33. In what ways can technology
make personalized expense information possible? For example, should funds or intermediaries provide calculators or other tools to help investors understand their individual investment costs? Have improvements in technology since 2004, when the Commission considered requiring personalized expense information in quarterly account statements, made it easier for funds or intermediaries to provide personalized expense information in quarterly account statements or through other mechanisms? 175 If funds were to provide personalized expense information, how can we design the disclosure to reduce potential investor concerns about sharing their personal information or about data security? Are there any other concerns associated with such disclosure?
34. Should we require funds to submit
interactive data files (for example, formatted using eXtensible Business Reporting Language (‘‘XBRL’’)) containing their expense example information? Why or why not? Would it be useful for shareholders to have access to the expense example in a structured data format? Would this meaningfully complement the current requirement that funds submit their prospectus risk/ return summary information in Inline XBRL format, or would it be duplicative with this current requirement? Is there any other information from funds’ shareholder reports that we should require funds to submit in a structured data format?
c. Management’s Discussion of Fund
Performance
Given fund investors’ interest in performance information for purposes of monitoring and assessing their ongoing fund investments, we propose largely to maintain the current requirements for the management’s discussion of fund performance (‘‘MDFP’’) section of the annual report, with several proposed targeted changes.176 Currently, MDFP disclosure consists of the following:

A narrative discussion of the factors
that materially affected the fund’s performance during the most recently completed fiscal year;
A line graph providing account
values for each of the most recently completed 10 fiscal years (or for the life of the fund, if shorter) based on an initial $10,000 investment in comparison to the returns of an appropriate broad-based securities

177See Item 27(b)(7) of current Form N–1A. 178See infra Section II.F. 179See Item 27(b)(7)(i) of Form N–1A; proposed Item 27A(d)(1) of Form N–1A. Currently, funds are required to discuss the factors that materially affected the fund’s performance during the most recently completed fiscal year, including the relevant market conditions and the investment strategies and techniques used by the fund’s investment adviser. Item 27(b)(7)(i) of Form N–1A. 180See February 2004 Shareholder Report Adopting Release, supra footnote 83, at paragraph accompanying n.96; Disclosure of Mutual Fund Performance and Portfolio Managers, Investment Company Act Release No. 19382 (Apr. 6, 1993) [58 FR 19050 (Apr. 12, 1993)] (‘‘MDFP Adopting Release’’). 181See proposed Item 27A(d)(1) of Form N–1A. 182See Instruction 1 to proposed Item 27A(d)(1) of Form N–1A. 183See supra Section II.B.1.b (discussing the proposed instruction that would permit funds only to include in their annual reports information that is permitted or required by proposed Item 27A). 184Commission rules currently do not preclude a fund from including other materials in the same transmission as shareholder reports. Our proposal similarly would not limit a fund’s ability to provide other materials in the same transmittal as the proposed annual report. We believe this would allow funds to communicate with shareholders more efficiently through a single transmittal without detracting from our goal of concise, readable shareholder reports. However, we are proposing to require that the annual report be given greater prominence than other materials, with the exception of certain other specified disclosure materials. See supra footnotes 124–126 and accompanying text. 185See infra Section II.B.2.i. market index for the same period (as well as more narrowly based indexes that reflect the market sectors in which the fund invests, at the fund’s discretion);

A table showing the fund’s average
annual total returns for the past 1-, 5-, and 10-year periods (or for the life of the fund, if shorter);
A statement accompanying the line
graph and table to the effect that past performance does not predict future performance and that these presentations do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares;
A discussion of the effect of any
policy or practice of maintaining a specified level of distributions to shareholders on the fund’s investment strategies and per share net asset value, as well as the extent to which the fund’s distribution policy resulted in distributions of capital; and
For ETFs that do not provide
certain premium or discount information on their websites, a table showing the number of days the fund shares traded at a premium or discount to net asset value.177 We are proposing amendments to the MDFP requirements to make the disclosure more concise and to take into account that shareholders may no longer receive fund prospectuses—which include performance information—after their initial purchase of fund shares.178 These proposed amendments therefore would require the MDFP to include additional performance-related information that is available in fund prospectuses, including certain classspecific performance information and comparative information showing the average annual total returns of one or more relevant benchmarks. We also are proposing to amend the definition of an appropriate broad-based securities market index to clarify that all funds should compare their performance to the overall applicable securities market, for purposes of both fund annual reports and prospectuses.
i. Narrative MDFP Disclosure
We propose to retain the current requirement that funds’ annual reports include a narrative discussion of factors that materially affected the fund’s performance during the most recent fiscal year, with minor modifications to encourage concise disclosure.179 The narrative MDFP disclosure is designed to aid shareholders in assessing a fund’s performance over the prior year.180 We continue to believe this disclosure provides information that helps shareholders understand and evaluate fund performance over that time period. However, based on staff review of current disclosures, we believe that some funds provide overly long narrative discussions that likely impede shareholders’ ability to understand easily the key factors that affected the fund’s performance. Therefore, we are proposing to amend the current requirement to specify that the disclosure must ‘‘briefly summarize’’ the ‘‘key’’ factors that materially affected the fund’s performance during the last fiscal year, including the relevant market conditions and the investment strategies and techniques used by the fund’s investment adviser.181 A proposed instruction would direct funds not to include lengthy, generic, or overly broad discussions of the factors that generally affected market performance during a fund’s last fiscal year.182 The proposed instruction would also direct funds to use graphics or text features—such as bullet lists or tables— to present the key factors, as appropriate. We understand that some funds currently attempt to make their narrative disclosure easier for shareholders to understand by, for example, using tables or charts to show how the fund performed in comparison to a relevant benchmark or to identify the significant contributors to or detractors from the fund’s performance by holding, industry, geographic region, or other relevant category. We believe these types of presentations may be helpful to shareholders, and funds could continue to include them in annual reports under the proposal. We recognize that funds currently may include additional information in their shareholder reports that is designed to help shareholders understand fund performance and market conditions, such as a fund president’s letter to shareholders, interviews with portfolio managers, market commentary, and other similar information. Under the proposed amendments, a fund could not include this additional information in its annual report.183 We believe that information about the key factors affecting a fund’s performance, which the proposal would require, would likely satisfy many fund shareholders’ needs and would provide a more focused presentation. Although we understand that the additional information funds currently include in shareholder reports may be helpful to some shareholders, we believe the potential benefits of this information to a subset of shareholders, on balance, do not warrant the additional length they would contribute to the annual report. We also believe that allowing
this discretionary information would not further our goal of presenting shareholders with the information that is most central to understanding their fund’s performance. Funds would, however, be able to provide materials that include this additional information to shareholders in the same transmission as the annual report (e.g., in the same email or envelope), provided that the annual report is given greater prominence.184 Funds could also provide this additional information on their websites, as we understand many funds do today. Further, funds could refer to additional website information near the end of their shareholder reports if they reasonably believe that shareholders will likely view the information as important.185 We request comment on the proposed amendments to the narrative MDFP disclosure, including:

Should we retain the requirement
for a fund to include narrative MDFP disclosure in annual reports? Why or why not? Does this disclosure help shareholders better understand a fund’s performance?
Should we require the narrative
MDFP disclosure to summarize briefly the key factors that materially affected

186See, e.g., Item 303 of Regulation S–K; Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Securities Act Release No. 10750 (Jan. 30, 2020) [85 FR 12068 (Feb. 28, 2020)]. 187See Item 27(b)(7)(ii)(A) of Form N–1A; proposed Item 27A(b)(2)(A). 188An ‘‘appropriate broad-based securities market index’’ is one that is administered by an organization that is not an affiliated person of the fund, its investment adviser, or principal underwriter, unless the index is widely recognized and used. See Instruction 5 to Item 27(b)(7)(ii) of current Form N–1A; Instruction 6 to proposed Item 27A(d)(2) of Form N–1A. 189See MDFP Adopting Release, supra footnote 180, at paragraph accompanying n.17. 190See Instruction 6 to Item 27(b)(7)(ii) of Form N–1A; Instruction 7 to proposed Item 27A(d)(2) of Form N–1A. 191Many investors view performance information as important for purposes of monitoring a fund investment. See supra footnote 48 and accompanying text. With respect to the performance line graph in particular, one study found that 55% of surveyed investors ranked the line graph and
table of fund’s performance in the top three most
important categories of annual report information. Approximately 49% of surveyed investors classified this information as ‘‘absolutely essential for any investor.’’ See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49, 51. 192See infra Section II.B.2.c.iii (discussing total returns table). To the extent that a fund chooses to provide tools to help shareholders better understand online or mobile presentations of annual reports, the ability to customize the investment amount and investment time horizon could be areas that lend themselves to add-on functionality that funds may wish to build into these presentations. If a fund provides such tools, the default presentation would be required to be the values that the proposed Form N–1A requirements prescribe (e.g., an initial investment of $10,000 would be the default presentation for the line graph, although the tools would allow a shareholder to increase or reduce this investment amount). See discussion at infra Section II.B.4 and infra footnote 338 and accompanying text. the fund’s performance during the last fiscal year, as proposed? Would different instructions better further the Commission’s goals of making narrative MDFP disclosure more concise so shareholders can understand more efficiently the key factors that affected a fund’s performance? If so, what should those alternative instructions be, and how would they better further our goals?
37. As proposed, should we direct
funds to use graphics or text features, such as bullet lists or tables, to present the key factors, as appropriate? Should we require funds to use specific graphics or text features to help shareholders more readily understand the key factors affecting fund performance and to create consistency among annual reports? Or is a more flexible approach, like we propose, more appropriate to allow funds to develop presentations tailored to individual funds and the needs of their shareholders?
38. Should we expressly limit the
length of the narrative MDFP disclosure? If so, how (e.g., word or page limits)? If not, why not?
39. Are there other ways we could
require or encourage funds to provide concise narrative MDFP disclosure focused on the key factors that affected the fund’s performance, beyond our proposed revisions and instruction directing funds not to include lengthy, generic, or overly broad discussions of the factors that generally affected market performance? For example, should we expressly require a discussion about the types of investments that drove fund performance, or can shareholders intuit this by reviewing the fund’s investment strategy?
40. Should we amend the narrative
MDFP disclosure requirement to limit or expand the examples of the types of factors that funds should discuss? For example, should we refer to other factors, beyond the current references in this requirement to relevant market conditions and the investment strategies and techniques the fund’s adviser used? Should we require funds to discuss holdings that significantly contributed to or detracted from their performance during the past fiscal year (e.g., by holding, industry, geographic region, or other relevant category), as many funds do today? Should we require or encourage funds to discuss other topics, such as: (1) The fund’s performance in relation to its benchmark; (2) the reason for and effect of any large cash or temporary defensive position on fund performance; (3) the effect of any tax strategies, or the effects of taxes, on fund performance; or (4) whether the fund engages in high portfolio turnover and the effect of portfolio turnover on fund performance?
41. Should we incorporate concepts
or requirements from management’s discussion and analysis requirements that apply to annual reports of operating companies and BDCs on Form 10–K? 186 For example, should we require or encourage funds to disclose material financial and statistical data that the fund believes would enhance a shareholder’s understanding of the fund’s performance? As another example, would it be appropriate to require or permit forward-looking disclosure? If so, are there any related rules or rule amendments we should adopt to facilitate this disclosure? For instance, should we require or permit a fund to disclose when a key factor that materially affected the fund’s performance for the last fiscal year is not expected to materially affect the fund’s future performance (e.g., because the fund has sold the underlying investment or because of an unusual or infrequent event or transaction)?
42. Are there ways we could prevent
funds from providing generic or boilerplate narrative MDFP disclosure that does not change much from year to year? If so, how?
43. Are there any best practices in
narrative MDFP disclosure that we should encourage or require?
44. Should we permit or require
additional information in the annual report that is intended to help shareholders understand fund performance, such as interviews with portfolio managers or a president’s letter? Is this additional information helpful to shareholders? If so, should it be included as part of the MDFP, or in some other part of a fund’s annual report?
ii. Performance Line Graph and Request
for Comment on Use of Market Indexes in Performance Disclosure We also are proposing to retain the requirements for the performance line graph currently included in annual reports, with certain amendments designed to improve the current presentation.187 The line graph generally shows the performance of a $10,000 investment in the fund and in an appropriate broad-based securities market index over a 10-year period.188 This disclosure is designed to permit a comparison of the performance of the fund with ‘‘the market’’ and to put the narrative discussion into perspective.189 In addition to required information about an appropriate broad-based securities market index’s performance, a fund has the option to compare its performance to other indexes, including more narrowly based indexes that reflect the market sectors in which the fund invests.190 We continue to believe the line graph presentation helps shareholders understand how the fund has performed over a 10-year time horizon in comparison to an appropriate broad-based securities market index and other relevant indexes, as applicable.191 Because this presentation shows performance in dollar terms, based on an initial $10,000 investment, we believe the line graph may contribute to shareholders’ understanding of fund performance—because some individuals may find it easier to assess dollar figures than percentages—and complements the percentage-based presentation in the average annual total returns table.192 We also believe the line graph helps illustrate the variability of a fund’s returns (e.g., whether the fund’s returns have been volatile or relatively consistent from year to year) and

193See Item 4(b)(2)(ii) of Form N–1A (requiring a bar chart in a fund’s prospectus that shows a fund’s annual total returns for each of the last 10 calendar years (or the life of the fund, if shorter). Because the prospectus bar chart shows the percentage of returns for each year, it may more clearly show variations in a fund’s returns than the line graph, which shows the cumulative performance of a $10,000 investment. For example, assume a fund experienced returns of negative 10% in year 1 and year 9. The bar chart would clearly show a negative 10% return in each of these years. However, in the line graph presentation, the negative 10% return in year 1 could appear as a much smaller change than a negative 10% return in year 9 (e.g., a $1,000 decrease on a $10,000 investment in year 1 versus, for example, a $3,000 decrease in year 9 if the account value had increased to $30,000 in year 8). 194See SEC Chairman Jay Clayton, PCAOB Chairman William D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman, SEC Division of Investment Management Director Dalia Blass, Emerging Market Investments Entail Significant Disclosure, Financial Reporting and Other Risks; Remedies are Limited (Apr. 21, 2020), available at https://www.sec.gov/news/publicstatement/emerging-market-investments-disclosurereporting. 195See Instruction 13(a) to proposed Item 27A(d)(2). 196See current Instruction 3 to Item 4(b)(2) of Form N–1A (allowing a fund to select which class to include (e.g., the oldest class, the class with the greatest net assets) if the fund: (1) Selects the class with 10 or more years of annual returns if other classes have fewer than 10 years of annual returns; (2) selects the class with the longest period of annual returns when the classes all have fewer than 10 years of returns; and (3) if the fund provides annual total returns for a class that is different from the class selected for the most immediately preceding period, it explains in a footnote the reasons for selecting a different class). 197See Item 4(b)(2)(iii) and Instruction 5 to Item 27(b)(7) of Form N–1A. 198 In 1993, the Commission adopted rules requiring funds to compare their performance to a ‘‘broad-based index in order to provide investors with a benchmark for evaluating fund performance that affords a greater basis for comparability than a narrow index would afford.’’ See MDFP Adopting Release, supra footnote 180, at paragraph preceding nn.19–20, and n.21 and accompanying paragraph. therefore provides shareholders with some information about the risks of their fund investment. Moreover, the line graph presentation may help investors understand the general benefits of long-term investments (e.g., compound interest). We recognize potential critiques that the line graph may not show the variability of a fund’s returns as clearly as certain other presentations (such as the bar chart we require in fund prospectuses that shows annual total
returns as a percentage of an investment).193 However, given the other benefits of the line graph— particularly that it presents performance in dollar terms that may be easier for some shareholders to assess—we are proposing to retain the line graph presentation. We are proposing to retain the current requirement to present fund performance in relation to an appropriate broad-based securities market index because we continue to believe that performance disclosure without relevant context showing market performance would not provide the information that shareholders need to understand how their fund performed. For example, performance disclosure without this type of context would not give shareholders a sense of how their investments might have performed had their money been invested elsewhere. However, we request comment on this proposed requirement below. We also recognize potential critiques about the use of market indexes in presenting performance information. These include critiques that index licensing fees can be costly to funds (and, indirectly, to fund investors) and that, depending on the index selected, comparing a fund’s performance against the index in some cases may be less effective in helping shareholders understand the fund’s performance and risks. For example, because funds have discretion to choose an appropriate broad-based securities market index, a fund may choose an index that it is more likely to outperform to make it look like the fund is doing better than the corresponding market (for instance, this could occur if a bond fund selects a more conservative bond market index). In addition, index providers can experience errors or other difficulties in constructing, computing, or maintaining indexes. For example, an index that includes companies in emerging and frontier markets may experience data or computational errors if there is less information publicly available about these companies due to differences in regulatory, accounting, auditing, and financial recordkeeping standards.194 While we propose largely to maintain the current line graph presentation and associated instructions, we are proposing three revisions to the instructions associated with the line graph. First, we propose to add a new instruction to clarify the scope of required disclosure in an annual report that covers multiple classes.195 The proposed instruction would require a fund to present performance information for at least one class in the line graph (in addition to the required information for an appropriate broadbased securities market index). The proposed instruction provides funds with discretion to determine which class or classes to present in the line graph, subject to certain limitations that are consistent with existing limitations on prospectus performance presentations.196 Second, we propose to remove an instruction that allows the line graph to cover periods longer than the past 10 fiscal years. We are concerned that this current
instruction may introduce variability that reduces the benefits of the line graph. For example, as the time period on the line graph lengthens, any volatility of the fund’s returns may become harder to identify because the scale of the line graph typically would need to cover a wider range of account values (e.g., a scale of $0 to $1,000,000 rather than $0 to $30,000) that reflects growth in the account. This increase in scale generally would make any particular increase or decrease in account value (e.g., an increase or decrease of $3,000) harder to identify. Further, this current instruction may result in performance presentations that could give rise to unrealistic investor expectations. For funds in existence for a long period of time (e.g., 40 years), a line graph that shows the performance of a $10,000 investment at the outset of the fund may not be particularly relevant for the average shareholder, who likely has not been invested in the fund for such an extended period of time. The line graph also could show an ending account value that is substantially higher than the value of an initial $10,000 investment at the end of a 10-year period (e.g., an ending account value of $1,000,000 versus an ending account value of $25,000). While we propose to limit the line graph presentation to the fund’s last 10 fiscal years, funds may include similar presentations covering longer periods of time on their websites or in other marketing materials. Third, we propose to clarify the definition of an appropriate broad-based securities market index. Currently, both a fund’s prospectus and annual report must compare the fund’s performance to an ‘‘appropriate broad-based securities market index.’’ 197 The Commission has described such an index as ‘‘one that provides investors with a performance indicator of the overall applicable stock or bond markets, as applicable,’’ while also stating that a fund would have ‘‘considerable flexibility in selecting a broad-based index that it believes best reflects the market(s) in which it invests.’’ 198 Our staff has observed varying practices with respect to the benchmarks funds use. Some funds, for example, disclose their performance against a benchmark index that may not provide a performance indicator of ‘‘the overall applicable stock or bond markets,’’ such as an index tied to a particular sector, industry, geographic location, asset class, or strategy (e.g.,

199When the Commission adopted the requirement to compare a fund’s performance against an appropriate broad-based securities market index, the Commission clarified, ‘‘An index would not be considered to be broad-based if it is composed of securities of firms in a particular industry or group of related industries.’’ See id. at n.21. 200See proposed Instruction 6 to proposed Item 27A(d)(2) of Form N–1A. 201See proposed Instruction 7 to proposed Item 27A(d)(2) of Form N–1A. 202See proposed Item 4(b)(2)(iii) of Form N–1A. 203See supra footnote 193. 204See Item 4(b)(2)(ii) of Form N–1A. 205See MDFP Adopting Release, supra footnote 180, at n.21 and accompanying text. 206See MDFP Adopting Release, supra footnote 180, at n.21 and accompanying text. growth or value indexes).199 While indexes based on narrow segments of the market may be useful for comparison purposes, we believe that all funds should compare their performance to the overall market. Therefore, we are proposing to include language that clarifies that a ‘‘broad-based index’’ is one that represents the overall applicable domestic or international equity or debt markets, as appropriate.200 This clarifying language would continue to provide a fund with flexibility in selecting a broad-based index that the fund believes best reflects the market(s) in which it invests. The form instructions also would continue to encourage a fund to include narrower indexes that reflect the market segments in which the fund invests in its performance presentation along with its appropriate broad-based securities market index.201 If a fund invests in both equity and debt securities, such as a balanced fund, the fund may include more than one appropriate broad-based securities market index. The fund may also include a blended index—one that combines the performance of more than one index, such as equity and debt indexes—as an additional index to supplement the appropriate broad-based securities market index(es) that the fund includes. The proposed amendments to the definition of an appropriate broadbased securities market index would affect performance presentations in fund prospectuses, as well as fund annual reports.202 We request comment on the proposed line graph presentation and on the use of market indexes more generally in performance presentations, including the following:
45. Should we require the annual
report to include the performance line graph, as proposed? Why or why not? Should we modify the proposed requirements for the line graph? For example, should the line graph show returns in terms of percentages instead of dollar values? Are there other presentations that would help shareholders better understand a fund’s performance over the past 10 years (or for the life of the fund, if shorter) and the variability of its returns?
46. We understand that the line graph
can be difficult to read in black and white and may not fully illustrate volatility in the early years displayed in the graph.203 Are there other performance presentations that could better address these issues than the proposed approach and that would retain the benefits of the line graph presentation to shareholders? For example, should we replace the line graph with something similar to the bar chart required in fund prospectuses, which may be easier to read in black and white? 204 Would this alternative presentation better show year-to-year volatility? Is the risk/return bar chart easy for shareholders to understand, or do shareholders prefer the line graph presentation that shows returns in terms of dollars rather than percentages? If we were to replace the line graph with something similar to the risk/return bar chart, should that alternative presentation present returns in terms of dollars instead of percentages?
47. Should we require the line graph
to cover at least one class of a fund when a single shareholder report covers multiple classes, as proposed? Alternatively, should the graph be limited to one class or required to cover more than one class? How can we make sure that the line graph remains readable but provides sufficient information to help shareholders understand fund performance and risks?
48. Should we no longer allow funds
to provide a line graph that covers periods longer than 10 years in their annual reports, as proposed? What are the benefits and drawbacks of permitting line graph presentations that cover more than 10 years, if a fund’s registration statement has been effective for more than 10 years? If we were to continue to permit the line graph to cover a period of time that is longer than 10 years, should we limit the time period that the graph may cover in any way (e.g., limit the time period to no more than 20 years)?
49. Should we require funds to
provide information in shareholder reports about the performance of an appropriate broad-based securities market index, as proposed? What are the advantages and disadvantages of this information? Does information about an appropriate broad-based securities market index’s performance provide investors with a helpful performance indicator of the overall relevant market? 205 If so, do these benefits justify the burdens, including costs to the fund (and ultimately its shareholders) of paying one or more index providers to allow the fund to include this information in the fund’s disclosure? Is cost a significant factor for funds when they determine which, and how many, indexes to include in their shareholder reports? How are these costs assessed (for example, are they assessed on a per-disclosure basis or on some other basis)?
50. Should we modify the definition
of ‘‘appropriate broad-based securities market index,’’ as proposed? If not, why not? If so, is the proposed definition appropriate, or should we modify it in any way? For example, should we permit funds to use blended indexes only as secondary indexes, as proposed (as an index could be ‘‘broad-based’’ only if it represents the overall applicable equity or debt markets), or should we permit funds to use these indexes as primary appropriate broadbased securities market indexes under certain circumstances? If we were to permit this, what if any conditions would be appropriate to ensure that the index remains ‘‘broad-based’’? For example, should there be requirements limiting a fund to the number of indexes that could be blended for this purpose (e.g., 2), or the types of indexes that could be blended? Similarly, should we modify current requirements that permit funds to use non-securities market indexes only as secondary indexes, and not as appropriate broad-based securities market indexes? Are there concerns with certain funds using blended indexes or non-securities market indexes as secondary, rather than primary, indexes, such as concerns about investor understanding or costs associated with disclosing multiple indexes (e.g., index licensing fees)? Do blended or non-securities market indexes provide an appropriate point of comparison for an investor to evaluate his or her fund’s performance? If we were to allow blended indexes or nonsecurities market indexes as a primary index, how could we tailor this approach to make sure that investors receive a performance indicator of the overall applicable market? 206 Is the proposed definition clear? For example, is it clear that an index composed of securities of firms in a particular industry or group of related industries would not be broad-based?

207See, e.g., Fowler Comment Letter (‘‘Compare to a market measure I understand, and the asset class the fund holds.’’); Ewing Comment Letter (‘‘Compare against a market measure I know, like the S&P 500, not some obscure thing I never heard of.’’); Frank W. Comment Letter; see also ICI Comment Letter I (requesting that the Commission be mindful of, and sensitive to, the fees and costs associated with including index information in a fund’s prospectus). 208See Instruction 4.g(2)(F) to Item 24 of Form N– 2, as amended by Closed-End Fund Offering Reform Adopting Release, supra footnote 128. 209For example, some market participants consider the 10-year U.S. Treasury note rate as a risk-free rate. 210See Item 27(b)(7)(ii)(B) of Form N–1A; proposed Item 27A(d)(2)(ii) of Form N–1A. Item 27(b)(7)(ii)(B) of Form N–1A currently requires the following:
‘‘In a table placed within or next to the graph, provide the Fund’s average annual total returns for the 1-, 5-, and 10-year periods as of the end of the last day of the most recent fiscal year (or for the life of the Fund, if shorter), but only for periods subsequent to the effective date of the Fund’s registration statement. Average annual total returns should be computed in accordance with Item 26(b)(1).’’ 211See MDFP Adopting Release, supra footnote 180, at paragraph accompanying n.26. We recognize, however, that the table has certain limitations with respect to fund comparisons because it reflects fiscal year data and funds can have different fiscal year periods. 212See Item 4(b)(2)(iii) of Form N–1A (requiring that a fund’s prospectus include a table showing its average annual total returns for 1-, 5-, and 10- calendar year periods, along with the returns of an appropriate broad-based securities market index for the same periods). The proposed amendments to the performance table would use the same amended definition of an appropriate broad-based securities market index as the proposed line graph presentation. See supra paragraph accompanying footnote 197. 213See 1998 Form N–1A Prospectus Amendments, supra footnote 151, at text accompanying n.69 (discussing the purpose of the required prospectus disclosure regarding the average annual total returns of an appropriate broad-based securities market index). 214See infra Section II.E. 215See Instruction 2(b) to Item 4(b)(2) of current Form N–1A; Instruction 2(b) to proposed Item 4(b)(2) of Form N–1A (amending the cross reference to the description of other more narrowly based indexes from Instruction 6 to current Item 27(b)(7) to Instruction 7 to proposed Item 27A(d)(2)); Instruction 7 to proposed Item 27A(d)(2) of Form N–1A. 216See supra Section II.B.2.c.ii.
51. Are there other changes we should
make to the definition of appropriate broad-based securities market index, or to the framework for providing index performance more generally? For example, are there ways we could facilitate an investor’s ability to understand the relevance of an appropriate broad-based securities market index, while maintaining funds’ flexibility to select an appropriate and cost-effective benchmark? 207 As another example, are there ways we could address concerns that some funds may choose an index for the purpose of making the fund’s performance look better? Are there other instructions or guidance we could provide regarding the selection of an appropriate broadbased securities market index?
52. We are proposing to amend the
definition of appropriate broad-based securities market index for purposes of Form N–1A. Should the same amended definition apply to fund prospectuses and fund shareholder reports, as proposed? If not, why not? Should we make corresponding amendments to the definition of appropriate broad-based securities market index in Form N–2 with respect to MDFP requirements for registered closed-end funds? 208 Why or why not?
53. Should funds have discretion to
provide information in shareholder reports about the performance of more narrowly based indexes that reflect the market sectors in which the fund invests, as proposed? Is the information these indexes provide helpful to shareholders, or does additional index performance information make the disclosure more difficult for shareholders to understand?
54. Should index providers be
required to meet certain governance, due diligence, or other similar standards if an index’s performance will be included in fund disclosure? Why or why not? If we imposed any such requirement, how would funds expect to determine whether those standards have been met?
55. Are there alternative measures
that we should permit or require funds to use to provide investors with comparative information about market performance, instead of an appropriate broad-based securities market index or more narrowly based indexes that reflect the market sectors in which the fund invests? If so, what alternative measures (e.g., the rate of inflation or a risk free rate), and why are those measures appropriate and preferable to the use of indexes? 209
iii. Performance Table
We are proposing to retain the current requirement that funds’ annual reports include a table presenting average annual total returns for the past 1-, 5-, and 10-year periods, although we are proposing amendments to require three pieces of additional information. Specifically, the proposal would require that the table include: (1) The average annual total returns of an appropriate broad-based securities market index; (2) the fund’s average annual total returns without sales charges (in addition to current disclosure that shows returns reflecting applicable sales charges); and (3) average annual total returns for each class that the report covers, in each case for the past 1-, 5-, and 10-year periods.210 The average annual total returns table is designed to assist shareholders in comparing the performance of different funds.211 We also believe that the table complements the line graph to help shareholders evaluate a fund’s performance and risks. The amendments we are proposing to the average annual total returns table are designed, in part, to better conform the
table to a similar presentation that funds
include in their prospectuses. Like the current prospectus disclosure regarding average annual total returns, we propose to require funds to include in the shareholder report table information about the average annual total returns of an appropriate broad-based securities market index.212 A fund would provide the index’s returns for the same periods as its own returns (e.g., 1-, 5-, and 10- year periods). We understand that many funds already provide this information in their annual reports. We believe that requiring all funds to provide this information would help shareholders better understand a fund’s performance and risks in the context of the broader market.213 We also believe that proposing this change would be beneficial because fund shareholders may no longer receive annual prospectus updates as a result of our proposed amendments to the prospectus delivery framework for existing fund shareholders.214 Consistent with the current prospectus performance presentation, the proposed amendments would permit funds to include returns information for one or more other relevant indexes, such as a more narrowly based index that reflects the market sectors in which the fund invests.215 We are proposing to permit funds to include more than one index in the table because we understand that in some cases this approach may help shareholders understand how the fund’s performance compared to, for example, performance of both the broader market and the market sector in which the fund invests. These proposed amendments are designed to help shareholders more easily evaluate a fund’s performance and risks relative to the market and to better align the information in the table with the current line graph presentation so a shareholder has contextual information to help assess both yearover-year returns and average annual returns over set periods. At the same time, we recognize concerns about the use of indexes in performance presentations, and we are seeking comment on our proposed approach.216

217See proposed Item 27A(d)(2)(ii) of Form N– 1A. One commenter on the Fund Investor Experience RFC prepared a mock summary shareholder report that included average annual total returns shown with and without sales charges, as applicable. See ICI Comment Letter I. Under the proposal, a fund that does not impose sales charges would only provide a single set of average annual total returns figures (i.e., returns without sales charges). 218See Item 27(b)(7)(ii)(B) of Form N–1A (requiring average annual total returns computed in accordance with Item 26(b)(1), which reflects sales charges in the calculation of returns). In connection with the proposed amendment, we propose to add a new computation instruction to explain that funds should calculate average annual total returns without sales charges in accordance with Item 26(b)(1) of Form N–1A, except the fund should not deduct sales charges as otherwise described in the instructions to that item. To provide a fund’s 1-year annual total return without sales charges, a fund would use the same 1-year total return figure reflected in its most recent audited financial highlights. See Instruction 5 to proposed Item 27A(d)(2) of Form N–1A. 219Further, the proposed requirement to present the fund’s annual total return without sales charges for the last fiscal year would align with audited information shareholders currently receive in the financial highlights section of shareholder reports. See Item 27(b)(2) of Form N–1A; Instruction 3 to Item 13(a) of Form N–1A. We understand that some shareholders review financial highlights information when assessing and monitoring their fund investments. See, e.g., supra footnote 52. 220See Instruction 13(b) to proposed Item 27A(d)(2) of Form N–1A. 221See Instruction 3(c)(i) to Item 4(b)(2) of Form N–1A. 222See 1998 Form N–1A Prospectus Amendments, supra footnote 213, at text accompanying n.66. 223See Item 27(b)(7)(ii)(B) of Form N–1A. 224See proposed Item 27A(d)(2)(iii)(A) of Form N–1A. We also propose to make a conforming change to similar language that must appear in the prospectus. See proposed amendments to Item 4(b)(2) of Form N–1A. 225See proposed Item 27A(d)(2)(iii)(A) of Form N–1A. 226See proposed Item 27A(d)(2)(iii)(B) of Form N–1A. 227See Instruction 14 to proposed Item 27A(d)(2). In addition, consistent with current Form N–1A requirements, if a fund uses an index in a shareholder report that is different from the index used for the immediately preceding reporting period, the later report would need to explain the reason(s) for the change and disclose the returns of both the new and former indexes. See Instruction 7 to Item 27(b)(7)(ii) of Form N–1A; Instruction 8 to proposed Item 27A(d)(2) of Form N–1A. 228See Blanchard Comment Letter (suggesting that identifying fund changes that may have changed a fund’s performance would improve current fund performance presentations). 229See, e.g., rule 8b–20 under the Investment Company Act [17 CFR 270.8b–20]. We further
propose to modify the average annual total returns table to require funds to separately provide the average annual total returns with and without sales charges, as applicable.217 Currently, the table is only required to include average annual total returns that reflect sales charges.218 We believe comparative information about average annual total returns with and without sales charges may help shareholders better understand the impact of sales charges on the returns of their investments. We also believe that additional information about average annual total returns without sales charges may help shareholders better compare the fund’s returns to that of a relevant index.219 We also propose to add a new instruction for the average annual total returns table to require a fund to provide average annual total returns information for each class the shareholder report covers.220 This is consistent with the prospectus average annual total returns table, which must reflect average annual total returns for every class a prospectus covers.221 We believe it is important for shareholders to receive performance information that directly relates to the class in which they invest. Because each class can have different expenses that affect the class’s returns, performance information for each class would allow a shareholder to understand the performance of his or her investment better and to compare performance among the classes the report covers.222 While the proposed shareholder report expense disclosure would include class-specific performance information for the reporting period, the average annual total returns table would provide classspecific performance information over a longer time period. Further, although the line graph in the annual report similarly provides longer-term performance information, it is not currently required to include information for each class (nor are we proposing to require this, because we recognize that additional lines in the graph for each class may make the graph difficult to read). Additionally, under the proposal, shareholders generally may not receive annual prospectus updates, which include class-specific returns, and would instead receive prompt notices of certain material changes that generally would not include this information. As a result of these considerations, we believe the average annual total returns table in the shareholder report should include information for each class the report includes. Currently, funds must include a statement accompanying the line graph and table to the effect that past performance does not predict future performance, and that the line graph and table presentations do not reflect taxes that a shareholder would pay on fund distributions or redemptions.223 We propose to simplify the statement about past performance. Specifically, under the proposed amendments, a fund would be required to include a statement to the effect that the fund’s past performance is not a good predictor of how
the fund will perform in the future.224 We propose to require funds to use text features to make this statement noticeable and prominent through, for example, graphics, larger font size, or different colors or font styles.225 Under the proposal, funds would continue to be required to state that the disclosed performance information does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares to alert investors to these tax consequences.226 Additionally, we propose to add a new instruction allowing funds to add brief additional disclosure that would contextualize the line graph and average annual returns table they include in their shareholder reports. Specifically, the proposed instruction provides that if a material change occurred to the fund during the relevant performance period, such as a change in investment adviser or a change to the fund’s investment strategies, the fund may include a brief legend or footnote to describe the material change and when it occurred.227 We believe this additional disclosure could help shareholders understand potential changes in fund performance related to material fund changes that have occurred during the relevant performance period.228 Under the proposal, funds would have discretion to determine when to disclose information about a prior material change to a fund in connection with its performance presentation. We are proposing a discretionary approach, instead of requiring funds to include this disclosure for all material changes, because we recognize that some material changes to a fund may not affect a fund’s performance, or may have only an insignificant effect on performance. Although a fund generally would be able to use discretion to determine when to disclose a prior material change in connection with its performance presentation, a fund would need to disclose information about such a change if, absent that disclosure, the fund’s performance presentation would otherwise be misleading.229 While we believe it is beneficial for shareholders to receive information about a fund’s performance in the annual report each year, we understand that funds provide more current, ongoing performance information through other mechanisms, such as their websites. We are proposing to require funds that provide updated performance

230See Instruction 15 to proposed Item 27A(d)(2). 231See Instruction 9 to proposed Item 27A(a); see also infra footnotes 342 and 343 and accompanying paragraph. Consistent with this instruction, a fund could provide a direct link to the updated performance information or a link to a central site that provides a direct link to the fund’s updated performance information. 232See supra footnote 196 and accompanying text. 233See Item 27(b)(7)(iii) of Form N–1A (requiring a fund to ‘‘[d]iscuss the effect of any policy or practice of maintaining a specified level of distributions to shareholders on the Fund’s investment strategies and per share net asset value during the fiscal year [as well as] the extent to which the Fund’s distribution policy resulted in distributions of capital’’). 234See MDFP Adopting Release, supra footnote 180, at Section I.C.4. 235See proposed Item 27A(d)(3) of Form N–1A. 236See id. information through widely accessible mechanisms, such as fund websites, to include a statement in the shareholder report directing shareholders to where they can find this information.230 If a fund were to include such a statement, it also would be required to provide a means of facilitating access to the updated performance information, including, for example, a hyperlink to where the information may be found if the shareholder report is provided electronically or a URL address or QR code if the shareholder report is delivered in paper format.231 We request comment on the proposed average annual total returns table and associated amendments, including the following:
56. Should the annual report include
the average annual total returns table, as proposed? Why or why not? Should we modify the proposed requirements for the table? If so, how?
57. Should we require funds to
include the average annual total returns of an appropriate broad-based securities market index and allow funds to include the returns of additional indexes in the average annual total returns table, as proposed, and as funds currently do in their prospectuses? Should we make any changes to this aspect of the proposal? Please explain.
58. Should we require funds to
include the average annual total returns of each class that the annual report covers, as proposed, and as funds currently do in their prospectuses? Should we modify this aspect of the proposal? For example, should we only require average annual total returns for one class or for a set number of classes? If so, should we provide funds with flexibility for determining which class to disclose in the average annual total returns table, similar to the proposed instruction for the line graph, or should we take a different approach? 232 Are there ways to improve the design or presentation of the table, particularly when covering multiple classes?
59. Should we modify the average
annual total returns table to require funds to separately provide the average annual total returns with and without sales charges, as proposed? Would requiring information about average annual total returns without sales charges be helpful to shareholders, or would this information make the table too confusing or complex? Have we provided sufficient calculation instructions for funds to determine average annual total returns without sales charges? If not, what additional information do funds need for purposes of this calculation?
60. Should we, as proposed, modify
the statement that currently must accompany the line graph and table indicating that past performance does not predict future performance and retain the statement that the line graph and table presentations do not reflect taxes that a shareholder would pay on fund distributions or redemptions? Are there other ways we could make the statement about past performance more understandable for shareholders? Is the statement clarifying that performance does not reflect the deduction of taxes helpful to shareholders, or is it unnecessary boilerplate? If it is not helpful to shareholders, should we modify or remove this language?
61. Should we, as proposed, allow a
fund to include a brief legend or footnote to its line graph and average annual total returns table to describe a material change, such as a change in investment adviser or a change to the fund’s investment strategies, that occurred to the fund during the relevant period? Would this provision provide shareholders with useful contextual information? If so, should we make the disclosure mandatory? If not, why not? Are there ways we could improve the utility or design of this provision? For example, are there ways we should modify the provision to limit any risk that funds might attempt to justify fund losses by referring to an unrelated change to the fund? Is the meaning of ‘‘material change’’ in this provision sufficiently clear, or do funds need more guidance to help them determine whether a change is material for purposes of this provision? Should we modify the standard for determining the types of changes that funds can disclose in connection with their shareholder report performance presentations? For example, rather than refer to material changes, should we identify specific types of changes that funds can disclose? If so, what types of changes should the provision cover (e.g., should it be limited to changes in investment advisers and changes in principal investment strategies, or should it include other changes)? If we retain a principles-based standard, should we use a different standard than material changes (e.g., significant changes)? Should we only allow a ‘‘brief’’ legend or footnote, as proposed?
62. Should we require funds that
provide updated performance information through widely accessible mechanisms, such as fund websites, to include information in their annual reports directing shareholders to where they can find updated performance information, as proposed? Should we modify or clarify this requirement in any way? Should we instead permit, but not require, a fund to include this information in its annual report? As proposed, should we require funds that provide updated performance information on their websites to inform shareholders of this updated information in their annual shareholders reports and to direct shareholders to where the updated performance information is located? Should we require all funds to provide updated performance information on their websites? If so, what performance information? How often should it be updated?
iv. Other MDFP Amendments
We propose to simplify the current requirement that a fund discuss in its annual report the effect of any policy or practice of maintaining a specified level of distribution to shareholders (a ‘‘stable distribution policy’’) on the fund’s investment strategies and per share net asset value during the last fiscal year, as well as the extent to which the fund’s distribution policy resulted in distributions of capital.233 The current disclosure requirement is meant to give shareholders a clearer picture of whether a fund had to distribute capital, as well as profits, to maintain its distribution rate.234 Under the proposed amendments, a fund that has a stable distribution policy and that was unable to maintain the specified level during the past fiscal year would need to disclose this.235 We also propose to maintain disclosure concerning distributions that resulted in returns of capital.236 By modifying this provision to focus on circumstances when a fund was unable to meet the specified level of distribution in its stable distribution policy or had distributions that resulted in returns of capital, the proposal is designed to result in disclosure that is more meaningful to shareholders than

237See Adopting Release, supra footnote 75; Item 27(b)(7)(iv) of Form N–1A. 238See proposed Item 27A(d)(4) of Form N–1A. 239See ETF Adopting Release, supra footnote 75, at paragraph accompanying n.499 (stating that the Commission believes that most ETFs not relying on rule 6c–11 will choose to comply with the website disclosure requirements in that rule). 240See MDFP Adopting Release, supra footnote 180, at Section I.C.5 (noting, however, that money market funds retain the option of providing investors with a discussion of their performance, including illustrative line graphs). 241See proposed Item 27A(e). 242See Broadridge Comment Letter I (commenter conducted survey showing that investors are more likely to review fund disclosures if they are delivered in a summary format); see also ICI Comment Letter I (encouraging the Commission to allow funds to produce summary shareholder reports that are succinct and informative). 243Because the measure of a fund’s net assets is included in the fund’s audited financial statements, the fund would be required to use or derive such statistic from the fund’s audited financial statements. See proposed Instruction 3 to proposed Item 27A(e). If a fund provides tools to help shareholders better understand online or mobile presentations of annual reports, it may wish to provide the ability for shareholders to refer to updated net assets when reviewing these presentations, so they are seeing current information. Because the measure of a fund’s net assets that would appear in the annual report would be derived from the fund’s audited financial statements, the ability to update this statistic (which updates would presumably not be based on audited financial statements) would have to be an add-on functionality, and not a replacement for the end-of-period statistic that would appear on online presentations. For example, a fund could include a pop-up box attached to the fund’s net assets information showing the fund’s net assets as of a more recent specified date. See discussion at infra Section II.B.4; see also infra footnote 338 and accompanying text (discussing the proposed instruction requiring that the default presentation that any electronically presented annual report uses must be the value that the applicable form requirement prescribes). 244See infra footnote 259. Because we are proposing to require that the fund statistics section appear adjacent to the graphical representation of holdings in the annual report, the net assets statistic would provide shareholders with relevant context for the holdings information that we believe would be helpful to shareholders. See infra Section II.B.3. 245See infra text accompanying footnote 264. the current requirement. In particular, we believe that the proposed disclosure about a fund’s inability to maintain a specified level of distribution would be important to shareholders in funds that have stable distribution policies because they typically expect to receive regular
distributions. As a result, the fund’s inability to meet the specified level of distributions may affect a shareholder’s investment decision (e.g., whether to continue to hold the fund). In addition, we believe that simplifying the language of this requirement, as proposed, could result in disclosure that is more understandable to shareholders because funds tend to use language in their disclosures that tracks the language of Commission form requirements. As most funds do not have stable distribution policies, we do not anticipate that this proposed disclosure requirement would add to the length of most shareholder reports. The Commission recently adopted amendments to limit the requirement that ETFs provide premium and discount information in their annual reports to only those ETFs that do not provide premium and discount disclosure on their websites in accordance with 17 CFR 270.6c–11 [Investment Company Act rule 6c– 11].237 We are not proposing any amendments to this annual report requirement beyond a technical amendment to clarify that it only applies to ETFs.238 We believe that most ETFs will provide premium and discount information on their websites instead of in their annual reports.239 We request comment on the proposed amendments to the MDFP disclosure regarding stable distribution policies and on the ETF premium and discount information that would remain in the annual report, as well as on MDFP disclosure more generally, including:
63. Should we modify the
requirement that funds discuss the effects of any stable distribution policy under current Item 27(b)(7)(iii) in their annual reports, as proposed? Would the proposed requirement provide meaningful information to shareholders that is not otherwise available? Should we instead remove any specific disclosure requirements related to stable distribution policies? If we do not require this type of information in annual reports, should we require funds to make it available elsewhere?
64. Should we continue to require
ETFs that do not provide premium and discount information on their websites in accordance with Investment Company Act rule 6c–11 to include premium and discount information in their annual reports? If not, where should they disclose this information?
65. Money market funds currently are
not required to provide MDFP disclosure in their annual reports because the Commission has previously noted that the problems that MDFP disclosure seek to address with respect to investor understanding of performance do not appear to exist with respect to money market funds.240 The proposal similarly would not require money market funds to provide MDFP disclosure. Should we require some or all money market funds to provide performance information in their shareholder reports? For example, should we require money market funds to include performance information similar to what they must disclose in their prospectuses (e.g., 7-day yield, average annual total returns table, and performance bar chart) or similar to what other funds must disclose in their annual reports (e.g., performance line graph)? If so, should these requirements apply to all money market funds or to a subset of money market funds, such as only money market funds that rely on proposed rule 498B (i.e., whose shareholders receive prompt notice of certain material changes to the fund, with online access to the prospectus)?
66. Are there other changes we should
make to current MDFP disclosure requirements? Please explain. d. Fund Statistics We are proposing to require a fund to disclose certain fund statistics in its annual report, including the fund’s: (1) Net assets, (2) total number of portfolio holdings, and (3) portfolio turnover rate. We are also proposing to permit a fund to disclose any additional statistics that the fund believes would help shareholders better understand the fund’s activities and operation during the reporting period (e.g., tracking error, maturity, duration, average credit quality, or yield).241 Based on information we received in response to the recent Fund Investor Experience RFC, it is our understanding that investors prefer succinct fund disclosures in graphical format, and they are less likely to review information presented in long narratives.242 We believe that permitting funds to provide key fund statistics in a user-friendly format could enable funds to provide more meaningful information to investors, and encourage investors to focus on the more significant factors in evaluating the fund’s operations. We are proposing to require funds to include their net assets as of the end of the reporting period because we believe this disclosure would provide important context for other required information in the shareholder report.243 Under our proposal, funds would be required to provide a graphical presentation of holdings.244 A fund would have the flexibility to provide this graphical presentation either as a percentage of the fund’s net asset value, total investments, or investment exposures.245 We believe that knowing the fund’s net assets would allow a shareholder to appreciate better the impact of each holding on the overall performance of the fund. Similarly, we are proposing to require funds to include the total number of portfolio holdings as of the end of the

246Because all portfolio holdings are included in a fund’s audited financial statements, the fund would be required to use or derive this statistic from the fund’s audited financial statements. See proposed Instruction 3 to proposed Item 27A(e) of Form N–1A; see also supra footnote 243 (discussing the use of online tools to supplement, rather than replace, statistics that are derived from a fund’s audited financial statements). 247See e.g., 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 9 (noting that 45% of investors deemed a fund’s portfolio holdings as ‘‘absolutely essential information to any investor’’). 248See, e.g. Morningstar’s Investing Glossary, available at http://www.morningstar.com/ InvGlossary/number_of_holdings_in_portfolio.aspx (noting that number of holdings information is meant to be a measure of portfolio risk because the lower the number of portfolio holdings, ‘‘the more concentrated the fund is in a few companies or issues, and the more the fund is susceptible to the market fluctuations in these few holdings’’). But see Concentrate on Concentration, FINRA Weekly Update, available at https://www.finra.org/ investors/learn-to-invest/advanced-investing/ concentration-risk (stating that a portfolio can be subject to concentration risk even when assets are invested in many different holdings). 249Because a fund’s portfolio turnover is included in the fund’s audited financial highlights, the fund would be required to use or derive the portfolio turnover from the fund’s audited financial highlights. See Instruction 3 to proposed Item 27A(e); see also supra footnote 243 (discussing the use of online tools to supplement, rather than replace, statistics that are derived from a fund’s audited financial statements). 250See supra footnote 558. 251For instance, funds have the ability to select the most appropriate categories when preparing their graphical representation of holdings. See proposed Item 27A(f) of Form N–1A. 252See Instruction 1 to proposed Item 27A(e). For example, a fund that chooses to disclose its yield as an additional statistic would have to calculate the yield pursuant to the requirements of Item 26(b)(2) of Form N–1A. 253We are not proposing to require such formatting to maintain flexibility and allow a fund to tailor the format of its disclosure to its unique characteristics. 254See Instruction 2 to proposed Item 27A(e). 255See proposed Instruction 3 to proposed Item 27A(e) of Form N–1A. 256See proposed Instruction 4 to proposed Item 27A(e). For example, a fund that chooses to disclose its tracking error may wish to include additional disclosure explaining that tracking error is the difference between a mutual fund portfolio’s returns and its benchmark index, calculated on a scale between 0 and 1.0—with 1.0 representing perfect correlation. 257See proposed Instruction 5 to proposed Item 27A(e). This proposed instruction is designed to limit the types of statistics a fund includes only to
those that are most pertinent in light of a fund’s investment strategy, and to prevent disclosure ‘‘creep.’’ reporting period.246 Investors historically have viewed information about a fund’s holdings as important to their investment decision process.247 Many funds currently voluntarily provide the number of fund holdings on their websites, but Commission rules do not require them to do so. We believe that, together with the graphical holdings information and net assets, knowing the number of a fund’s holdings could help investor to understand better the fund’s diversification, which could in turn provide insight into the fund’s susceptibility to market fluctuations.248 Accordingly, to help ensure that an investor has access to information about the total number of fund holdings and to help contextualize other information that funds disclose, we are proposing that funds include that information as of the end of the reporting period in their annual reports. Finally, we are proposing to require funds to include their portfolio turnover rate as of the end of the reporting period.249 A higher portfolio turnover rate generally indicates higher transaction costs and may result in higher taxes.250 Therefore, we believe that a fund’s portfolio turnover rate may provide shareholders with a more complete view of the costs associated with investing in the fund. Besides requiring funds to include their net assets, number of fund holdings, and portfolio turnover rate, we are providing flexibility for funds to disclose additional fund statistics if they are reasonably related to a fund’s investment strategy. In general, funds would be limited in their ability to include information in their annual reports beyond that which Form N–1A would specifically permit or require.251 We are proposing an exception to this limitation because these additional fund statistics may help shareholders better understand the fund’s activities and operation during its most recent fiscal year. Permitting funds to provide key fund statistics that are tailored to the fund’s investment strategy could enable them to provide information that is meaningful to their specific shareholder base. The proposed flexibility to include additional ‘‘statistics’’—a term that we believe conveys a brief presentation of quantitative measures—is designed to provide information in a concise format that would assist shareholders in evaluating significant factors that reflect the fund’s performance and operations. For example, a fund that has a stated investment objective of maintaining returns that correspond to the returns of a securities index might consider including its tracking error as an additional statistic. Similarly, a fund that invests primarily in fixed-income bonds might consider including statistics such as maturity, duration, average credit quality, or yield. In each case, these additional statistics would be reasonably related to the relevant fund’s investment strategy and would help
shareholders better understand the fund’s activities and operations during the reporting period. We are proposing several instructions that are designed to help shareholders more easily digest any additional statistics that funds would disclose in their annual reports, and to provide context for understanding the disclosed statistics. First, if a fund provides a statistic that is disclosed elsewhere on Form N–1A, the fund must follow any associated instructions describing the calculation method for the relevant statistic.252 Second, we are proposing an instruction that would encourage a fund to use tables, bullet lists, or other graphics or text features to disclose the statistics.253 This instruction is designed to promote the presentation of fund statistics in a useful format.254 Third, if a statistic is included in, or could be derived from, a fund’s financial statements or financial highlights, we are proposing an instruction that would require a fund to use or derive such statistic from the fund’s most recent financial statements or financial highlights.255 Fourth, we are proposing an instruction that would allow a fund to describe briefly the significance or limitations of any disclosed statistics in a parenthetical, footnote, or similar presentation.256 Finally, if a fund chooses to include additional statistics, we are proposing an instruction that would require additional statistics to be reasonably related to the fund’s investment strategy.257 These proposed instructions are, in the aggregate, designed to help promote the integrity and consistency of the information that funds may choose to provide, while allowing funds to tailor their disclosure to increase its usefulness to investors. We seek comment on our proposal to require funds to provide important fund statistical information in the annual report and specifically on the following issues:
67. Should we require a fund to
include its size, in terms of its net assets, in the annual report, as proposed? Should we instead permit, but not require, a fund to include its net assets? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, would knowing a fund’s net assets provide shareholders with useful context for evaluating the required graphical representation of holdings that also would appear in the annual report?
68. Are there any additional statistics
we should require funds to disclose that would provide information about their size, or the change in their size over

258See infra Section II.B.4. time? For example, should we require a fund to provide the change in the fund’s net asset value from one year to another over a five-year period, as is currently required in the financial highlights? Why or why not?
69. Should we require a fund to
include the total number of portfolio holdings in the annual report, as proposed? Should we instead permit, but not require, funds to include total number of portfolio holdings? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, would knowing this information help shareholders evaluate other aspects of the fund’s investment strategy, risks, and/or performance? Or, would this information be misleading to investors under certain circumstances (for example, if a fund has over 1,000 holdings but the majority of the fund’s assets are invested in only 10–20 of those holdings)? Does the total number of portfolio holdings information serve as a useful statistic for a shareholder to help understand a fund’s diversification and/or susceptibility to market fluctuations? Is the total number of holdings information a useful supplement to the graphical representation of holdings?
70. Should we require a fund to
include its portfolio turnover rate in the annual report, as proposed? Should we instead permit, but not require, funds to include portfolio turnover rate? Why or why not? What informational benefits would requiring this information in the annual report serve? For example, does the portfolio turnover rate information serve as a useful statistic for a shareholder to understand the costs associated with investing in the fund?
71. Are there any other statistics that
we should require funds to disclose in their annual reports? For example, should we require a fund to include information regarding its annual total return for each of the preceding five years or the fund’s portfolio turnover rate, as is currently required in the financial highlights?
72. Is it appropriate to allow a fund,
as proposed, to include additional statistics that are reasonably related to the fund’s investment strategy and that the fund believes would help shareholders better understand the fund’s activities and operations during the reporting period? Why or why not? Should the Commission provide additional guidance on how to determine whether a statistic is reasonably related to the fund’s investment strategy? Would allowing funds to include additional fund statistics in their shareholder reports result in disclosure that may be overly long, complex, technical and/or duplicative? The proposal would permit funds to include additional fund statistics online (for example, in online tools that funds may overlay onto the shareholder reports that they provide on their websites), but not in the version of the report that shareholders receive in paper format.258 Is this approach appropriate? Why or why not?
73. Would funds include additional
statistics in their shareholder reports, as the proposed rule would permit? If so, what types of statistics would funds include, and how would these statistics help investors to understand the fund’s investment strategy, risks, and/or performance? For example, would a fixed-income fund include statistics regarding yield, maturity, and/or duration?
74. If a fund chooses to include in its
annual report a statistic that Form N–1A requires the fund to disclose elsewhere, should we, as proposed, require such a fund to follow the Form N–1A instructions describing the calculation methodology for the relevant statistic? Should we place any additional limitations on the statistics funds would be allowed to include? For example, should we limit the number of additional statistics a fund could include? Should we specify the share class(es) tied to the statistics funds could disclose (e.g., require funds to include information only for the most expensive share class)? Should we only allow a fund to include a fund statistic that the fund otherwise discloses to shareholders and reports to the Commission, such as information the fund includes on Form N–PORT, Form N–CEN, or in the fund’s financial statements, prospectus, or SAI? Should we include an instruction that would prohibit funds from including information generated by third-party vendors, such as Morningstar or Lipper ratings or sustainability rankings? If so, why, and what should this instruction specify?
75. Is the proposed instruction that
would encourage a fund to use graphics or text features, such as bullet lists or tables, as appropriate to disclose fund statistics helpful to promote succinct, useful presentations of information that will help shareholders understand their fund’s investment strategy, risks, and/or performance? Should we require any particular presentation for the statistics that all funds would have to include in their annual report, and if so, what presentation and why?
76. Should we, as proposed, allow
funds to describe the significance or limitations of each disclosed statistic? If so, is the instruction that the additional disclosure be presented in a parenthetical, footnote, or similar presentation appropriate, or are there any more-specific requirements that we should include in the instruction? Should we require, rather than permit, this disclosure?
77. Should we, as proposed, require
additional statistics to be reasonably related to the fund’s investment strategy? Would this limitation appropriately tailor the statistics a fund chooses to include to those that are most pertinent in light of a fund’s investment strategy?
78. Should we require a fund to
organize the disclosure of the statistics in a manner that gives each statistic similar prominence? Would such a limitation prevent funds from obscuring statistics that reflect less favorably on the fund’s performance returns? Are there other instructions that could achieve this goal? Would a ‘‘similar prominence’’ requirement for fund statistics result in any anomalous disclosure results, or the need for Commission clarification or guidance (for example, if certain statistics require more context than others, or certain statistics lend themselves better to graphic display than others)?
79. Are there any additional
instructions that we should include that would permit additional flexibility in presenting fund statistics? For example, if the value of a statistic significantly changed during the most recent fiscal year, should we allow or require funds to briefly describe the factors that contributed to the change? As another example, should we allow funds to provide comparative statistics, such as applying the same statistic to a relevant index or peer group in the same fiscal year? Would investors find this comparative information useful? If so, should we require, rather than permit, this disclosure? If the value of a statistic has significantly changed from the value disclosed in the fund’s previous shareholder report, should we allow a fund to explain the factors that contributed to the change in value? Would shareholders find this information useful? If so, should we require, rather than permit, this disclosure? e. Graphical Representation of Holdings We are proposing to retain the current requirements for the graphical representation of holdings that funds currently include in their shareholder reports, with certain revisions designed

259See Item 27(d)(2) of current Form N–1A. 260See February 2004 Shareholder Report Adopting Release, supra footnote 83, at Section II.B.3. 261See, e.g., Baker Comment Letter; Scott Comment Letter; Stiles Comment Letter; Waranowski Comment Letter; Wilhelm Comment Letter; see also supra footnote 47; supra footnote 247 (stating that the 2012 Report on Investor Testing of Fund Annual Reports noted that 45% of investors deemed a fund’s portfolio holdings as ‘‘absolutely essential information to any investor’’). 262 Investors have expressed a strong preference for including more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor. See supra footnote 34. The full schedule of portfolio holdings will be available online and upon request on at least a quarterly basis. See proposed rule 30e–1(b)(2). We discuss the availability of the schedule of investments in infra Sections II.D.1.a and II.D.2.a. See also rule 6c–11 under the Investment Company Act, which requires daily portfolio holdings for ETFs relying on the rule. 263See proposed Item 27A(f) of Form N–1A. 264See id.; see also Item 27(d)(2) of current Form N–1A. 265See Use of Derivatives by Registered Investment Companies and Business Development Companies; Required Due Diligence by BrokerDealers and Registered Investment Advisers Regarding Retail Customers’ Transactions in Certain Leveraged/Inverse Investment Vehicles, Investment Company Act Release No. 33704 (Nov. 25, 2019) [85 FR 4446 (Jan. 24, 2020)] ‘‘Derivatives Proposing Release’’), at Section I.A (providing an overview of funds’ use of derivatives). 266For example, the XYZ Commodity Strategy Fund might invest 20% in commodity-linked derivatives and 75% in money market funds, such that the economic exposure of the fund would be the same as a 95% direct investment in commodities. Under the proposal, the fund would be permitted to show 95% exposure to commodities in its graphical representation of holdings instead of showing both the 20% derivative position and 75% money market fund position. However, a fund would have to select a basis of presentation that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives. See infra footnote 268 and accompanying text. 267As an example, if a fund had a 5% long position in XYZ Automotive Co and a 4% short position in QRS Automotive Inc., the fund might show (1) the 5% long position in the automotive industry and separately show a 4% short position (total exposure); or (2) the net position of 1% in the automotive industry (net exposure). 268See proposed Item 27A(f) of Form N–1A. 269See Item 27(d)(2) of current Form N–1A. Funds that choose to depict portfolio holdings according to credit quality must include a description of how the credit quality of the holdings was determined. This description should include a discussion of the credit quality evaluation process, the rationale for its
selection, and an overview of the factors considered. If the fund uses credit ratings issued by a credit rating agency to depict credit quality, the fund should explain how the credit ratings were identified and selected, and include this description near, or as part of, the graphical representation. See Removal of Certain References to Credit Ratings under the Investment Company Act, Investment Company Act Release No. 30847 (Dec. 27, 2013) [79 FR 1316 (Jan. 8, 2014)], at Section III.B. 270See proposed Item 27A(f) of Form N–1A. to improve the current presentation. The graphical representation of holdings is one or more tables, charts, or graphs depicting the fund’s portfolio holdings by category (for example, type of security, industry sector, geographic region, credit quality, or maturity) as of the end of the reporting period.259 The purpose of this presentation is to illustrate, in a concise and user-friendly format, the allocation of a fund’s investments across particular categories of investments (such as asset classes).260 We understand that many investors, including investors responding to the Fund Investor Experience RFC, have viewed information about a fund’s holdings as important to know when making an investment decision.261 We believe a layered approach to the disclosure of portfolio holdings, where a graphical representation of holdings is provided in the annual report and more detailed and current portfolio holdings information is available online and upon request, helps shareholders understand how the fund invested its assets. While currently investors receive both the graphical representation of holdings and a schedule of investments, we are only retaining the graphical representation of holdings, and not a more complete list of fund portfolio holdings, because we believe it provides a better summary presentation that shareholders can more easily review.262 We are proposing two changes to the current requirements relating to the graphical representation of holdings. Currently, funds have the flexibility to base the tabular or graphic presentation of holdings on the fund’s net asset value or total investments. We also are proposing to permit funds to show their holdings based on either the fund’s net exposure, or total exposure, to particular categories of investments.263 As funds do today, a fund would have to disclose its graphical representation of holdings using categories, and with a basis of presentation (i.e., presented according to the fund’s net asset value, total investments, or investment exposures) that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives.264 The proposed amendment to allow investment exposure as a basis for presenting a fund’s graphical representation of holdings is designed, in part, to provide a more meaningful presentation of holdings for funds that use derivatives to obtain investment exposures as part of their investment strategies.265
A graphical representation of holdings based on net asset value or total investments may not represent the true economic exposure of a fund that uses derivatives. For example, a fund that executes its strategy primarily through derivatives transactions (e.g., a managed futures fund or a commodity strategy fund) may invest a majority of its assets in government securities or money market funds, while a substantial portion of the fund’s risks and returns may be derived from derivatives that compose only a small portion of its assets. In this situation, giving a fund the flexibility to present the graphical representation of holdings on an exposure basis could show a more accurate picture of the sources of the fund’s investment risks and returns.266 A fund that uses ‘‘net exposure’’ or ‘‘total exposure’’ as a basis for representing its holdings would also be permitted to include a brief explanation of this presentation. The proposed amendment also is designed to provide a more meaningful presentation of holdings for certain funds that hold both long and short positions. Currently, the requirements for the graphical representation of holdings may not take into account both long and short positions. The proposed amendment provides clarity that funds that hold both long and short positions may present the long and short positions separately (i.e., total exposure), or show the combined effect of both positions (i.e., net exposure).267 We believe this additional flexibility will allow certain funds, such as funds with ‘‘long-short’’ investment strategies, to provide representations that are tailored to their holdings and investment strategies. However, funds would not have full discretion to select their basis of presentation. They must select a basis of presentation (i.e., presented according to the fund’s net asset value, total investments, or investment exposures) that is reasonably designed to depict clearly the types of investments made by the fund, given its investment objectives.268 We are also proposing a minor change with respect to funds that intend to depict portfolio holdings according to credit quality. Currently, such a fund must describe how the credit quality of its holdings was determined and, if credit ratings are used, the fund must explain why it selected a particular credit rating.269 We understand that there is diversity in practice as to the length of these disclosures, with some funds including a significant level of detail, while others include only relatively brief disclosure. We are proposing minor revisions instructing funds to keep these disclosures brief and concise.270 These proposed

271See proposed Item 27A(g) of Form N–1A; see also supra footnote 20 (recognizing that funds generally must transmit annual reports within 60 days after fiscal year-end and funds’ annual prospectus updates are typically finalized within 120 days after fiscal year-end) and infra paragraph accompanying footnote 287 (discussing the annual report disclosure of material changes the fund plans to make in connection with its annual prospectus update). 272See infra Section II.H (discussing proposed amendments to Item 3 of Form N–1A). The proposed rule would only require funds to disclose material increases to the fund’s ongoing annual fees, transaction fees (e.g., purchase charges or exit charges), or maximum account fee because we believe shareholders would be more interested in investment cost increases, rather than decreases. A fund may, however, voluntarily disclose material decreases to its fees and expenses in its annual report. 273Under 17 CFR 270.35d–1 [Investment Company Act rule 35d–1], a fund with a name that suggests investments in certain industries, investments, countries, or geographic regions generally must have a policy to invest at least 80% of the value of its assets in the relevant investments that its name suggests (a ‘‘names rule investment policy’’). This names rule investment policy is part of the fund’s principal investment strategy. Under rule 35d–1, a fund must provide shareholders with at least 60 days prior notice of any change to its names rule investment policy under certain circumstances. See rule 35d–1(a)(2)(ii), (a)(3)(iii), and (c); Request for Comments on Fund Names, Investment Company Act Release No. 33809 (Mar. 2, 2020) [85 FR 13221 (Mar. 6, 2020)]. If, under the proposed requirement to disclose certain material fund changes in the annual report, the fund provides notice of a change to its names rule investment policy, that notice would satisfy the requirements of rule 35d–1 if: (1) The annual report is provided to shareholders at least 60 days before the fund changes its names rule investment policy; (2) the annual report contains the statement required by rule 35d–1(c)(2) (e.g., ‘‘Important Notice Regarding Change in Investment Policy’’); (3) and the envelope in which the shareholder report is delivered (if applicable) has this same statement, as required by rule 35d–1(c)(3). 274The proposal would not require a fund to disclose a change in a sub-adviser where Item 5 of Form N–1A would not require the fund to disclose the name of the sub-adviser in its prospectus. See Instructions 1 and 2 to Item 5 of Form N–1A. 275For example, a fund may wish to disclose in its annual report plans to liquidate or merge the fund, even if previously disclosed to shareholders. 276See supra footnote 13 and accompanying text; Comment Letter of Investment Company Institute (Oct. 1, 2019) (‘‘ICI Comment Letter II’’) (stating that respondents to an ICI member survey indicated that they primarily mail prospectus stickers to inform
shareholders of material changes to the portfolio manager, material increases in fees, material (but amendments are designed to keep the narrative disclosures in the annual report brief. We request comment on the proposed amendments to the graphical representation of holdings disclosure requirements:
80. Should we retain the graphical
representation of holdings in annual reports? Why or why not? Does this graphical representation help shareholders better understand a fund’s holdings?
81. Are there any concerns about the
current graphical representation of holdings presentation in shareholder reports? Are there any best practices we should encourage or require?
82. For funds that take significant
derivatives positions or hold both long and short positions, would an exposurebased presentation help shareholders better understand a fund’s holdings? Should we permit all funds to present their holdings on an exposure basis, as proposed? Should we require certain funds to present their holdings on an exposure basis? Why or why not? If so, for what types of funds and fund strategies would an exposure-based presentation be particularly useful? Should we be more prescriptive as to how to calculate exposure? If so, how? Should an exposure presentation be on a net or total basis or permit flexibility? Why or why not? Should we permit funds to pick how they present their holdings or should we prescribe when funds should use net asset value, total investments, net exposure, or total exposure? If we prescribe the basis of presentation, how should we determine which type of fund uses which type of presentation?
83. For funds that depict portfolio
holdings according to credit quality, we are proposing to require that a fund briefly describe how the credit quality of its holdings was determined and, if credit ratings are used, the fund must concisely explain why it selected a particular credit rating. Is this additional disclosure about credit quality necessary and/or useful? If so, why? Would funds be able to succinctly provide this information? If not, why not?
84. Should we expressly permit or
require other types of presentations, such as top 10 holdings or changes in holdings over time? If so, what types of presentations and why? If not, why not?
85. Should we permit or require other
ways of presenting a fund’s holdings? For example, instead of or in addition to the graphical representation of holdings, should we require disclosure of a fund’s top holdings or a complete
schedule of investments in the annual
report? If so, what types of presentations should we require and why?
86. Should we consider any other
changes to the graphical representation of holdings requirements? f. Material Fund Changes We propose to add a new section to the annual report to describe material changes to the fund. Specifically, a fund would have to describe briefly any material change in an enumerated list of items (as well as any other material change that the fund chooses to disclose) that has occurred since the beginning of the reporting period or that the fund plans to make in connection with its annual prospectus update.271 This proposed requirement is designed to highlight for fund shareholders the most salient information they typically receive through annual prospectus updates and tailor the presentation of this information to these existing shareholders’ needs (as opposed to the needs of new or prospective investors for whom prospectus disclosure is primarily designed). We believe this new shareholder report disclosure would allow shareholders to better recognize and understand material changes to their fund investment, which may inform a shareholder’s future investment decisions (i.e., whether to hold or sell the fund investment, or to purchase additional shares). Under the proposal, a fund would be required to include disclosure in its annual report that briefly describes a material change with respect to any of the following items:

A change in the fund’s name (as
described in Item 1(a)(1) of Form N–1A);
A change in the fund’s investment
objectives or goals (as described in Item 2 of Form N–1A);
An increase in the fund’s ongoing
annual fees, transaction fees, or maximum account fee (as described in Item 3 of Form N–1A); 272
A change in the fund’s principal
investment strategies (as described in Item 4(a) of Form N–1A); 273
A change in the principal risks of
investing in the fund (as described in Item 4(b) of Form N–1A);
A change in the fund’s investment
adviser(s), including sub-adviser(s) (as described in Item 5(a) of Form N– 1A); 274 and
A change in the fund’s portfolio
manager(s) (as described in Item 5(b) of Form N–1A). Additionally, a fund could include any other material fund change that it would like to disclose to its shareholders.275 This item would notify fund shareholders of material changes to the fund that have occurred or that the fund expects to make in its forthcoming annual prospectus update. Currently, fund shareholders typically receive information about these changes in: (1) Annual prospectus updates; or (2) other prospectus updates they may receive throughout the year (which can take the form of a prospectus ‘‘sticker’’ or an updated copy of the fund’s prospectus or, under the proposal, a notice of material change under proposed rule 498B).276 While fund shareholders

nonfundamental) changes to the fund’s investment objectives or strategies, changes to subadvisory agreements or subadvisers, changes in the fund’s index or benchmark, changes to the fund’s name, or planned fund mergers or liquidations). See also infra Section II.F.3.b (discussing proposed rule 498B’s notice requirement). 277This also may be the case when a fund delivers an updated version of its prospectus to reflect material or other changes at other times throughout the year. However, a prospectus sticker that a fund instead may deliver for the same purpose typically would identify a change more explicitly. Some other types of registered investment companies currently are required to identify certain changes in their shareholder disclosure materials. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27 (requiring updating summary prospectuses for variable contracts, which provide a brief description of any important changes with respect to the contract that occurred within the prior year to allow investors to better focus their attention on new or updated information relating to the contract); rule 8b–16(b) under the Investment Company Act (requiring certain registered closed-end funds to identify specific types of material changes in their annual reports). 278See 2009 Summary Prospectus Adopting Release, supra footnote 10, at n.35 and accompanying text; see also Arnold Comment Letter; Baker Comment Letter; Dougle Comment Letter; Freeland Comment Letter; Wilhelm Comment Letter. 279See supra footnote 278; What US Households Consider When They Select Mutual Funds, 2018, ICI Research Perspective (May 2019), available at https://www.ici.org/pdf/per25-03.pdf. 280For example, we considered an approach that would direct funds to disclose all material changes, without identifying the categories of material changes they would need to disclose. 281See infra Section II.D.1.d. 282These earlier communications may include, for example, notices about a change in the fund’s names rule investment policy, prospectus stickers, or notices under proposed rule 498B. See, e.g., supra footnotes 273 and 276 and infra Section II.F.3.b. 283See Instruction 1 to proposed Item 27A(g). receive information about material changes today, we are concerned that material changes to a fund may not always be readily apparent to an existing shareholder. For example, changes that the annual prospectus update discusses may not be easy for an average shareholder to identify, as there is no requirement for a fund to identify or highlight changes to the fund in its prospectus.277 Instead, a fund only has to update the prospectus disclosure to reflect the substance of the change. For example, if a fee has changed, the prospectus disclosure would include the new fee, but the prospectus would not have to disclose the old fee or highlight that the fee had changed. Thus, we believe the proposed requirement to disclose material fund changes in the annual report may
increase the salience of material fund changes for shareholders and help shareholders more efficiently monitor and assess their fund investments relative to current disclosure requirements. The categories of fund changes that we propose to require funds to disclose in their annual reports are meant to capture the types of material changes to prospectus disclosure that we believe are important to fund shareholders, that may influence their investment decisions, and that are more likely to occur. Specifically, the types of material changes that a fund would need to disclose in its annual report generally align with the key prospectus disclosure items the Commission requires in summary prospectuses (and in the summary section of statutory prospectuses) that we understand investors typically use to make investment decisions.278 We believe the annual report should help a shareholder monitor and assess his or her fund investment, which includes information to help a shareholder assess whether to maintain or change a fund investment. Because we understand that investors often use information about a fund’s principal investment strategy, principal risks, fees, investment objectives or goals, name, investment adviser, and portfolio manager to inform initial investment decisions, we believe that material changes to these items may affect a shareholder’s assessment of whether to hold, buy, or sell fund shares.279 In addition to the identified types of changes, funds could disclose other material changes on a discretionary basis, which we believe would provide flexibility to funds to highlight any additional material changes for investors concisely. Instead of identifying the types of material changes a fund must disclose and providing flexibility for funds to disclose other material changes, we considered proposing a more principlesbased approach.280 However, we believe that our proposed approach would provide more certainty to funds about the types of changes they must disclose and enhance consistency of annual report disclosure across funds. Under the proposal, a fund would not be required to disclose material changes to other summary prospectus items (or to the corresponding items in the summary section of the statutory prospectus) because either they are unlikely to change, and we believe they are less likely to affect a shareholder’s investment decisions (e.g., tax information or financial intermediary compensation), or the shareholder report already provides similar information (e.g., performance information). Additionally, information about shareholder voting results would not be required to be disclosed in the annual report because we believe that the material fund changes section of the report would reflect many of the types of material fund changes that may result from a shareholder vote.281 For example, if shareholders approve a change in the fund’s concentration policy, implementing this change would likely affect the fund’s principal
investment strategy and principal risks and warrant shareholder report disclosure of the associated change to the fund’s principal investment strategy and principal risks. Further, if shareholders approve a new investment advisory contract with a higher management fee, this would likely increase the fund’s ongoing annual fees and would trigger disclosure under this item if the resulting increase was material. A fund would be required to disclose a change in its annual report only if the change is material to the particular fund. A fund should base this materiality determination on the facts and circumstances of the fund and the specific change. For example, an index fund might determine that a change in its portfolio manager is not a ‘‘material’’ change that it would need to disclose in its annual report, given the nature of the manager’s involvement in portfolio decisions for the fund. At the same time, a fund that changes its principal investment strategy from primarily investing in U.S. investment-grade bonds to primarily investing in emerging market high-yield bonds would disclose this change in its annual report, as well as through earlier communications to shareholders if the change already occurred.282 To help shareholders understand the material changes, a fund would have to provide a concise description of each change that provides enough detail to allow shareholders to understand the change and how it may affect shareholders.283 For example, this could include stating that the fund’s ongoing annual fees have increased from 0.55% to 0.65%, rather than simply stating that the fund’s ongoing annual fees have changed or increased. As another example, if a fund’s principal risks have materially changed, it could identify the newly identified or newly removed types of principal risks, rather than only stating that the principal risks have changed. Disclosure of material fund changes in the annual report would include a legend to the effect of the following:
This is a summary of certain changes [and planned changes] to the Fund since [date]. For more complete information, you may

284See Instruction 2 to proposed Item 27A(g) of Form N–1A. A fund would provide the internet address of the central site where a link to the fund’s next prospectus will be available, if applicable, as well as a toll-free telephone number and, as applicable, the email address that shareholders can use to request copies of the fund’s prospectus. 285However, the proposed rule would not require a fund to disclose a material change that it already disclosed in its last annual report. This could occur if, for example, a material change took place at the beginning of the last fiscal year before the fund transmitted the last annual report or the fund planned to make the material change in connection with its annual prospectus update for the last fiscal year. See Instruction 3 to proposed Item 27A(g) of Form N–1A. 286Under proposed rule 498B, a fund would need to timely notify existing shareholders of material fund changes. A fund also would have to disclose recent material changes in its annual report even if previously disclosed through a rule 498B notice. See infra Section II.F.3.b. 287See supra footnote 20 and accompanying text; infra Section II.F.3.b (discussing a proposed requirement that a fund provide timely notices of material fund changes to shareholders if the fund relies on proposed rule 498B to no longer deliver prospectuses to its shareholders). 288A fund typically must file a post-effective amendment to its registration statement that includes material changes at least 60 days prior to the time the amendment is effective (that is, before the fund can use it), and a fund typically aims for the amendment to be effective within 120 days of its fiscal year-end. See generally 17 CFR 230.485 [rule 485 under the Securities Act]; supra footnote
20. As a result, we understand that funds typically
have already prepared and filed these post-effective amendments within 60 days of fiscal year-end, before they must transmit annual reports under Commission rules. See rule 30e–1(c) under the Investment Company Act [17 CFR 270.30e–1(c)]. 289 Generally, the staff reviews post-effective amendments to fund registration statement that contain material changes (other than certain specific routine items). See generally rule 485 under the Securities Act. 290See rule 30e–1(c) [17 CFR 270.30e–1]. 291As an example, assume a fund’s fiscal year ends on December 31, 2020. As a result, it would be required to transmit its 2020 annual report by March 1, 2021 (60 days after December 31) and would likely finalize its annual prospectus update by April 30, 2021 (120 days after December 31). If the fund’s high-profile portfolio manager resigned on February 25, 2021, and it were difficult for the fund to prepare disclosure about this change to include in its 2020 annual report before March 1, 2021, the fund could instead disclose this change in its 2021 annual report. Shareholders would also receive more-timely notice of the change through other mechanisms, including the annual prospectus update, prospectus stickers, or notices under proposed rule 498B, depending on the circumstances. If the fund instead were able to disclose the change in its portfolio manager in the 2020 annual report, it would not be required to also disclose that change in its 2021 annual report or, if the fund relied on proposed rule 498B, in a notice under that rule. See Instruction 3 to proposed Item 27A(g) of Form N–1A; proposed rule 498B(c)(2). review the Fund’s next prospectus, which we expect to be available by [date] at [website address] or upon request at [toll-free telephone number and, as applicable, email address].284 The proposed legend would inform shareholders that they can obtain more information about a specific material change by consulting the fund’s next annual prospectus update. It also would explain how shareholders may find or request a copy of the annual prospectus update once it is available. Under the proposed rule, funds generally would be required to disclose any enumerated material change that occurred since the beginning of the fund’s most recently completed fiscal year, even if the fund already disclosed the material change to shareholders through other mechanisms during the year.285 For example, if a shareholder received a prospectus sticker discussing the change, the change would still appear in the annual report.286 As a result, the annual report would be a general repository for the enumerated material changes that occurred throughout the year. We believe it may be helpful for shareholders to be able to review a brief summary of all material changes that occurred during the year, instead of requiring shareholders to compile information from different sources if they want to understand all material changes for the year. Along with changes that occurred since the
beginning of the last fiscal year, the fund’s annual report also would have to disclose material changes that the fund plans to make in connection with updating its prospectus for the current fiscal year. We are proposing this requirement so the annual report could be the primary disclosure source for fund shareholders, and they generally would not need to review the fund’s annual prospectus update (other than to gather additional information about a particular fund change of interest). For example, we believe it would be more efficient for a shareholder to be able to review a single report to assess and monitor his or her fund investment, instead of receiving an annual report and then subsequently receiving an annual prospectus update or notice of additional material changes approximately two months later.287 We understand that it is common for funds generally to be aware of material changes they plan to make in connection with updating their prospectuses before they transmit annual reports.288 However, we recognize that the fund’s associated post-effective amendment making these changes to its prospectus may not be effective at the time the fund transmits its annual report and may be subject to the staff review process.289 As a result, the manner in which the fund describes the change in its prospectus may be subject to modification at the time the fund is required to transmit an annual report. Under these circumstances, we believe it would be appropriate for a fund to provide only a high-level description of the change because the exact disclosure regarding the change in the prospectus could be subject to modification. The proposed legend that would accompany this disclosure would direct shareholders to the fund’s next prospectus for additional detail, and the fund would need to provide a date by which it expects the updated prospectus to be available. In any event, a fund would not have to use the same language describing the change in its annual report as it uses in its prospectus (although neither description of the change would be permitted to be misleading). We acknowledge that there could be scenarios where a material change occurs shortly before a fund transmits its annual report and, as a result, it would be difficult for the fund to disclose the material change in the annual report while still transmitting the report to shareholders within the required period (60 days after the fund’s fiscal year-end).290 For example, a fund’s high-profile portfolio manager may resign shortly before the fund must transmit its annual report to shareholders. Under these circumstances, a fund (or intermediary) should provide a timely notice of the material change to shareholders under proposed rule 498B, if applicable, or through a prospectus sticker or annual prospectus update. The fund would also need to disclose the material change in its next annual report.291 We request comment on the proposed material fund changes section of the annual report,
including the following:
87. Should funds be required to
disclose material fund changes in their annual reports, as proposed? Should all funds be required to disclose fund changes in their annual reports, as proposed, or should we exclude any subset of funds from this requirement (for example, should we exclude funds that do not rely on proposed rule 498B and that deliver annual prospectus updates to existing shareholders each year)? Instead of requiring disclosure about material changes in the annual report, should we require disclosure of these changes somewhere else, such as the prospectus or the fund’s website? What location would be most appropriate for purposes of making the information available to shareholders? What location would be the most efficient for these purposes?
88. Are the categories of fund changes
in the proposed enumerated list the types of changes that are most relevant to fund shareholders and that may

292See infra Section II.H.1.g. influence their investment decisions? Are there other categories of material changes that should be disclosed in the annual report? For example, should funds be required to disclose all material changes that occur as a result of a shareholder vote, rather than just the ones included in the enumerated list?
89. Is the scope of the categories of
fund changes in the proposed enumerated list appropriate? If not, how should we modify the scope? For example, rather than requiring a fund to disclose material increases in a fund’s ongoing annual fees, transaction fees, or maximum account fee (as described in proposed Item 3 of Form N–1A), should we require funds to disclose any material changes (that is, both increases and decreases) to fee and expense information described in its prospectus fee summary or fee table?
90. Should we expand or reduce the
scope of fee-related items that the material fund changes disclosure would include? For example, should we only require funds to disclose a material increase in ongoing annual fees because the annual report is directed to existing shareholders, or is it valuable for a fund shareholder to receive information about material increases to the fund’s transaction fees in case he or she is considering purchasing additional shares in the fund? We understand that account fees are relatively rare and typically small in size. Should the proposed item refer to account fees, or should it only refer to ongoing annual fees and transaction fees? Additionally, we are proposing to allow funds that invest 10% or less of their total assets in acquired funds to disclose acquired fund fees and expenses in a footnote to the prospectus fee table, instead of in the bottom-line ongoing annual fees.292 Although such a fund’s investments in acquired funds would be limited, are there circumstances in which its acquired fund fees and expenses could increase to such an extent that we should require the fund to disclose the increase in acquired fund fees and expenses in the annual report (e.g., as a separate material change, or as a material increase to the fund’s ongoing annual fees if the fund’s combined ongoing annual fees and acquired fund fees and expenses materially increase in the aggregate)?
91. Would disclosure about the
identified categories of material changes be redundant with other shareholder report disclosure? For example, would funds discuss certain categories of material changes, such as material changes to the fund’s principal investment strategy, in the narrative MDFP disclosure? If so, do the two disclosure items serve sufficiently different purposes, or should we modify the proposed requirements to limit potential redundancy? For example, if we require funds to disclose information about material strategy changes in the narrative MDFP disclosure and not in the material fund changes disclosure, would it be more difficult for shareholder to identify and understand information about material fund changes? Under that approach, where should a fund disclose information about a material strategy change the fund plans to make in its annual prospectus update?
92. Instead of identifying particular
types of material changes a fund must disclose in its annual report, as proposed, should we use a more principles-based or flexible framework for disclosing fund changes? For example, should we require funds to disclose all material changes without identifying particular categories of changes? Under a more principles-based or flexible framework, how could we make sure the disclosure focuses on fund changes that would be of interest to fund shareholders and is not unduly long or complex?
93. Does the proposed provision
allowing funds to disclose additional material changes on a discretionary basis provide funds with appropriate flexibility to consider their particular facts and circumstances? Would the benefits of this flexibility justify any resulting increase in the shareholder report’s length and complexity? Should we provide more flexibility by permitting funds to disclose other changes that may not necessarily be material to the fund? If so, what types of other changes would funds disclose, and how would information about that change assist shareholders? Alternatively, should we not permit funds to optionally disclose other categories of material changes and instead limit the types of material changes funds can disclose in the annual report to only those listed in the form item?
94. Should funds be required to
disclose only material changes, as proposed? Would requiring funds to make a materiality assessment of relevant changes introduce unnecessary subjectivity into the disclosure? Or is a materiality threshold appropriate to limit the annual report disclosure to the types of changes that would be most important to shareholders? Would a different threshold be more appropriate? For example, should we require a fund to disclose ‘‘significant’’ or ‘‘substantial’’ changes in its annual report? If so, why?
95. As proposed, should funds be
required to disclose any material changes in their annual reports that occurred since the beginning of the fund’s last fiscal year (even if the fund has already disclosed any of these changes to existing shareholders, for example through prospectus supplements, notices under proposed rule 498B, or other non-shareholder report mechanisms)? Would it be beneficial for shareholders to see all of these changes summarized in a single place? Alternatively, would this approach have unintended consequences, such as increased investor confusion?
96. Should funds be required to
disclose material changes that they plan to make in connection with updating their prospectuses under section 10(a)(3) of the Securities Act for the current fiscal year, as proposed? Does this proposed requirement raise timing concerns, compliance difficulties, liability risks, or other concerns that we have not adequately addressed? Are there certain types of changes where these concerns are more pronounced (e.g., where the parameters of the change are more likely to be modified between the time a fund transmits its annual report within 60-days after its fiscal year end and the time its posteffective amendment updating the relevant prospectus disclosure is effective, generally within 120 days after its fiscal year end)? How should we address any associated concerns? Are there other mechanisms, other than the annual report, that funds should be required or permitted to use to notify existing shareholders of these changes?
97. How detailed should annual
report disclosure of a fund change be? Should we require, as proposed, that the description of the change be concise but with sufficient detail to allow shareholders to understand the change and how the change may affect shareholders? If not, should the description of the change be more or less detailed than proposed? Please explain.
98. Should funds be required to
provide the proposed legend in the fund changes section of the annual report? Would the proposed requirement to provide an estimated date by which the fund’s next prospectus will be available on its website or upon request present difficulties for funds or shareholders? What are those difficulties, and how could we address them? Would the proposed legend make it sufficiently clear to fund shareholders that the

293Specifically, the disclosure requirement is applicable when the independent accountant who was engaged as the principal accountant to audit the fund’s financial statements, or an independent accountant who was previously engaged to audit a significant subsidiary and on whom the principal accountant expressed reliance in its report, has resigned or was dismissed. 294See 17 CFR 229.304; see also Item 27(b)(4) and Item 27(c)(4) of Form N–1A. The types of disagreements that funds are required to disclose relate to—among other things— internal controls over financial reporting, management representations, the need to expand the scope of the audit based on information suggesting issues with a prior audit report, and questions regarding reliability of previous audit reports. See Items 304(a)(1)(v)(A)–(D) of Regulation S–K. 295See, e.g., ICI Comment Letter I (noting that changes in and disagreements with accountants are not common, but when they do occur, this information is key information for shareholders). 296See Disclosure Amendments to Regulation S– K, Form 8–K and Schedule 14A Regarding Changes in Accountants and Potential Opinion Shopping Situations, Securities Act Release No. 6766 (Apr. 7,
1988) [53 FR 12924 (Apr. 12, 1988)] (‘‘Changes in
Accountants and Potential Opinion Shopping Adopting Release’’); see also Foreign Issuer Reporting Enhancements, Securities Act Release No. 8959 (Sept. 23, 2008) [73 FR at 58310 (Oct. 6, 2008)]. 297See Changes in Accountants and Potential Opinion Shopping Adopting Release, supra footnote 296, at Section I. 298See infra Section II.D.1.c (discussing proposed Form N–CSR filing requirement). 299See proposed Item 27A(h) of Form N–1A. This proposed disclosure requirement is applicable specifically in the circumstances that footnote 293, supra, describe. 300 Investment Company Liquidity Risk Management Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)]; Investment Company Swing Pricing, Investment Company Act Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016) (‘‘2016 Liquidity Rule Release’’); Investment Company Liquidity Disclosure, Investment Company Act of 1940 Release No. 33142 (June 28,
2018) [83 FR 31859 (Jul. 10, 2018)] (‘‘2018 Liquidity
Disclosure Release’’).
301See Item 27(d)(6)(ii) of Form N–1A; see also 2018 Liquidity Disclosure Release, supra footnote
300. The compliance date for larger entities was
December 1, 2019 and for smaller entities was June 1, 2020. 302See 2018 Liquidity Disclosure Release, supra footnote 300, at n.47 and accompanying text. prospectus with additional information about the change is not currently available but will be available at a later date? If not, how could we make this clearer? g. Changes in and Disagreements With Accountants We are proposing to require funds to include a concise discussion of certain disagreements with accountants in the annual report. Funds currently are required to disclose certain information concerning changes in and disagreements with accountants in their shareholder reports. The current disclosure requirement is applicable only if a fund’s accountant has resigned or was dismissed.293 In this case, the fund has to disclose the information that 17 CFR 229.304 [Item 304 of Regulation S–K] requires, concerning the circumstances surrounding the former accountant’s dismissal or resignation, whether in the fund’s two most recent fiscal years there were certain accounting-related disagreements with the former accountant, and other related information.294 We understand that funds rarely include disclosure about disagreements with accountants, and therefore we assume that the events that necessitate this disclosure rarely occur. In addition, we believe that current disclosure regarding these types of events may not be particularly investorfriendly because of the complexity of the accounting issues that may give rise to any disagreements. However, we believe that retaining this disclosure in funds’ shareholder reports in summary form continues to be important because this would put investors on notice of the dismissal or resignation of an accountant and the existence of a material disagreement with that accountant.295 We believe this shareholder report disclosure could discourage funds’ audit ‘‘opinion shopping.’’ 296 ‘‘Opinion shopping’’ generally refers to the search for an auditor that is willing to support a proposed accounting treatment that is designed to help a fund achieve its reporting objectives, even though that treatment could frustrate reliable reporting.297 We propose to move the currentlyrequired disclosure to Form N–CSR and to replace it in the annual report with a high-level summary of information that funds would report on Form N– CSR.298 Specifically, when a fund has a material disagreement with an accountant that has resigned or been dismissed, the fund would have to include in its annual report: (1) A statement of whether the former accountant resigned, declined to stand for re-election, or was dismissed and the date thereof; and (2) a brief, plain English description of disagreement(s) with the former accountant during the fund’s two most recent fiscal years and any subsequent interim period that the fund discloses on Form N–CSR.299 Funds would not be required to disclose, and we would not expect funds to disclose, the absence of disagreements in response to this proposed
disclosure requirement. We request comment on the proposed amendments to the current requirements to include disclosure about disagreements with accountants in funds’ annual reports, including:
99. Should we require funds to
include high-level disclosure about changes in and disagreements with accountants in their annual reports, as proposed? Why or why not? Is the current disclosure requirement regarding changes in and disagreements with accountants helpful to fund shareholders? How frequently do the events that necessitate this disclosure occur? Would the proposed amendments improve shareholders’ ability to understand this information?
100. As proposed, funds would only
need to disclose certain disagreements with accountants (those that occurred within the past two fiscal years and where the accountant either has resigned or was dismissed) in the annual report. Should we require any additional information about changes in or disagreements with accountants in the annual report? Are there any types of disagreements that funds should not have to include in their annual report? Which ones and why?
101. Is there any other information
about the fund’s accountants or the fund’s financial statements that we should require funds to disclose in the annual report? h. Statement Regarding Liquidity Risk Management Program In 2016 and 2018, the Commission adopted a series of reforms designed to promote effective liquidity risk management across the open-end fund industry and enhance disclosure regarding fund liquidity and redemption practices.300 As part of these reforms, if a fund’s board of directors has reviewed the fund’s liquidity risk management program as required by 17 CFR 270.22e– 4 [rule 22e–4 under the Act] during the fund’s most recent fiscal half-year, the fund is required to briefly discuss the operation and effectiveness of the liquidity risk management program in its most recent shareholder report.301 In adopting this requirement, the Commission stated that it had considered commenters’ suggestions that shareholder report disclosure would have the benefit of allowing funds to produce tailored disclosure suited to the particular liquidity risks and management practices of the specific fund.302 We continue to believe that requiring funds to provide shareholders with information about the operation and effectiveness of the fund’s liquidity risk management program (along with appropriate prospectus risk disclosure and MDFP disclosure) may help provide investors a comprehensive picture of the fund’s liquidity risks and their

303See proposed Item 27A(i) of Form N–1A. 304See proposed Item 27A(i) of Form N–1A. 305See Instruction 1 to proposed Item 27A(i) of Form N–1A. For example, using the same disclosure for all funds in a fund group may not be appropriate in light of this proposed instruction. However, we generally believe it would be appropriate for funds in a fund group with similar investments, and that are subject to the same liquidity risks, to use the same disclosure. 306Appendix A to this release contains a hypothetical annual report that was created solely for illustrative purposes and includes an example of the type of disclosure Item 27A(i) intends to elicit. 307See 2018 Liquidity Disclosure Release, supra footnote 300, at Section II.B.2. If the board were to review the liquidity risk management program more frequently than annually, a fund could choose to include the discussion of the program’s operation and effectiveness over the past year in the fund’s annual and/or semi-annual report, but this discussion would not be required to be included in both reports. See infra footnote 369 and accompanying text. 308See proposed Item 27A(j) of Form N–1A. 309See Instruction 9 to proposed Item 27A(a) of Form N–1A; see also infra Section II.B.4. 310See Items 27(d)(3) through (5) of Form N–1A. 311See, e.g., 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26 (reports on investor preferences for shareholder report items); Investor Preferences Report, supra footnote 31 Continued management. However, having reviewed shareholder report disclosures responsive to this requirement, we preliminarily believe that the disclosure in its current form is not well-suited to a concise shareholder report. The staff has observed that the shareholder report liquidity risk management disclosure often appears as a lengthy recitation of the requirements of rule 22e–4 and is not tailored to a particular fund. This disclosure does not lend itself to the type of focused disclosure that the proposed shareholder report is designed to include. Therefore, we propose to revise the disclosure requirements to emphasize that the disclosure must be tailored to each fund and be concise.303 Given the nature and quality of the disclosure we have seen, we believe the statement regarding the fund’s liquidity risk management program (‘‘liquidity risk management disclosure’’) should be more tailored, concise, and informative to help shareholders better understand how the fund is managing its liquidity risks, which in turn could inform the shareholders’ ability to monitor their investments in the fund. Therefore, we propose replacing the current disclosure with a brief summary of:

The key factors or market events
that materially affected the fund’s liquidity risk during the reporting period;
The key features of the fund’s
liquidity risk management program; and
The effectiveness of the fund’s
liquidity risk management program over the past year.304 We are also proposing an instruction that a fund should, where appropriate, tailor the disclosure responsive to this requirement to the fund rather than rely on generic, standard disclosures.305 The disclosure should not include a recitation of all the elements of the fund’s liquidity risk management program. Instead, it should include the key features of the program as they relate to the fund.306 For example, a loan fund may briefly describe any expedited settlement agreements, or an international fund may describe the availability of a line of credit or increasing its investments in highly liquid assets ahead of extended holidays (e.g., Chinese New Year). We believe this disclosure would help inform investors about the sources of the liquidity risk for the fund, the key steps fund management takes to ameliorate those risks, and a statement explaining whether those steps have been effective. We believe that requiring tailored disclosure would better inform investors, which is a benefit we considered in assessing any incremental additional burden. Finally, we propose to keep the timing requirements for the liquidity risk management disclosure consistent with the current requirements. We continue to believe it is appropriate to require a fund to include the liquidity risk management disclosure in the annual or semi-annual report following the period when the fund performed its required annual review of the liquidity risk management program, which may reduce costs and allow funds to provide more effective and timely disclosure.307 We request comment on the proposed approach of including the liquidity risk management disclosure in the shareholder report:

Should we require the liquidity
risk management disclosure be included in the shareholder report, as proposed? Should we instead require it to be included in another disclosure document such as the fund’s Form N– CSR, statutory prospectus or summary prospectus, or on the fund’s website? If so, where should it be included?
Would the proposed disclosure
requirements provide shareholders the appropriate information to help them understand the fund’s liquidity and liquidity risks and make more-informed investment decisions? Is the disclosure an improvement over the current disclosure requirements? Is the requirement to tailor the disclosure to each fund appropriate? If not, why not? How could the proposed disclosure requirements be improved?
Should we continue to require
the liquidity risk management disclosure to be included in the most recent shareholder report following the board’s review of the program or, for consistency, should we only require the disclosure in the annual report?
Rather than requiring all funds to
include the liquidity risk management disclosure in their shareholder reports as proposed, should we instead require only a subset of funds to include this disclosure? For example, should we only require this disclosure for funds that hold less than 50% of their net assets in highly liquid investments? Alternatively, should all funds that have a highly liquid investment minimum be required to include this disclosure? Are there any concerns about funds identifying themselves through this disclosure as holding a certain percentage of assets that are not primarily highly liquid investments? If so, what are those concerns and how can they be addressed?
Is there any other liquidityrelated information that may be relevant
to shareholders that funds should be required to disclose in the shareholder report or on Form N–CSR? Are there alternative approaches to providing relevant liquidity information to shareholders? If so, what are they, and why should we use them?
i. Availability of Additional Information
We are proposing to require funds to include a statement in the annual report that informs investors about additional information that is available on the fund’s website.308 Specifically, funds would have to provide a brief, plain English statement that certain additional fund information is available on the fund’s website. This statement would have to include plain English references to, as applicable, the fund’s prospectus, financial information, holdings, and proxy voting information. In addition, if the shareholder report appears on a fund’s website or otherwise is provided electronically, the fund must provide a means of immediately accessing this additional information (such as a hyperlink or QR code).309 Under current shareholder report requirements, funds must include statements regarding the availability of the fund’s: (1) Quarterly portfolio
schedule, (2) proxy voting policies and
procedures, and (3) proxy voting record.310 We believe that this information may be important to certain investors, and they may not know this information is available or how to find it.311 Because of the importance of this

(reports on investor preferences with respect to fund disclosure items); Scott Comment Letter; Wilhelm Comment Letter; Stiles Comment Letter; McRitchie Comment Letter. 312See Instruction 1 to proposed Item 27A(a) and proposed Item 27A(j); see also infra Section II.B.3. If the annual report appears on a website or is otherwise provided electronically, funds must provide a means of facilitating access to this information, such as including a hyperlink to this information. 313See Instruction 3 to proposed Item 27A(a) of Form N–1A. 314The proposed annual report may only include information that Item 27A of Form N–1A specifically permits or requires. See Instruction 3 to proposed Item 27A(a) of Form N–1A; see also discussion at supra Section II.B.1.b. 315See discussion at infra Section II.B.4. 316The Commission’s Office of Investor Education and Advocacy maintains the website as an online resource to help investors make sound investment decisions and avoid fraud. The website includes investment bulletins, alerts, guidance and tools designed to assist investors, including those owning funds, in obtaining additional information and resources on understanding and managing their investments. See, e.g., Investor Bulletin: How to Read a Mutual Fund Shareholder Report (Apr. 3,
2013) (‘‘How to Read a Mutual Fund Shareholder
Report’’), available at https://www.investor.gov/ additional-resources/news-alerts/alerts-bulletins/ investor-bulletin-how-read-mutual-fundshareholder; How to Read a Mutual Fund Prospectus (June 13, 2016), available at https:// www.investor.gov/news-alerts/investor-bulletins/ how-read-mutual-fund-prospectus-part-1-3- investment-objective-strateg. 317See current rule 30e–1(f) and proposed rule 30e–1(e) and proposed Item 27A(k) of Form N–1A. 318See 17 CFR 230.154 [rule 154 under the Securities Act] (permitting the householding of prospectuses); 17 CFR 240.14a–3(e)(1) [rule 14a– 3(e)(1) under the Exchange Act] (permitting the householding of proxy materials other than the proxy card); and rule 30e–1 under the Investment Company Act (permitting the householding of shareholder reports). 319See rule 30e–1(f); proposed rule 30e–1(b)(2). information to some investors and consistent with a layered approach to fund disclosure that makes more– detailed or technical information available to those investors who find the information valuable, we believe it is important to continue to inform investors that this information is available and how to find it. The proposed new statement would consolidate several currently required statements about the availability of information (including the quarterly portfolio schedule, proxy voting policies and procedures, and proxy voting record) with a single statement that covers this same information. We are also proposing to require funds to refer in the statement to other information that would not itself be included in the annual report under the proposal.312 First, because the annual report would no longer include financial statements, we believe it is appropriate to inform investors that this information is available. In addition, because the annual report briefly describes certain changes to the fund’s prospectus, we believe it is important to remind investors about the availability of the current fund prospectus, which may provide additional context to the changes described in the report. We also propose to provide a fund with the flexibility to refer to other information available on the fund’s website, if it reasonably believes that shareholders would likely view the information as important.313 For example, a fund may wish to refer investors to a document describing the benefits of certain types of investments, a description of credit ratings, additional performance presentations, or additional commentary about how the fund performed. We believe this flexibility is appropriate because funds may wish to provide additional information to investors that may be more tailored or relevant to a given fund. We also believe this flexibility is appropriate given the content limitations imposed on the proposed annual report.314 This additional information referred to in the annual report would have the same status under the Federal securities laws as any other website or other electronic content that the fund produces or
disseminates. The fact that a shareholder report references other information available on a fund’s website does not change the legal status of the referenced information. For instance, a performance presentation or description of credit ratings on a fund’s website would be subject to the same legal requirements and have the same legal status regardless of whether the information was referenced in a shareholder report.315 We request comment on the proposed amendments to include disclosure about additional information that is available to investors outside of the annual report, including:
107. Would this proposed disclosure
requirement be useful to investors? Instead of requiring a statement that certain items are available online, should we require a statement that more generally indicates that additional information is available on the fund’s website without listing particular items? Are there any other changes we should make to the proposed statement about the availability of additional information? Are there other information items that funds should be required to include in the statement? Why? Are there any information items that should be excluded? If so, why? Instead of one statement that certain items are available online, should we require shareholder reports to include hyperlinks throughout the report linking to additional related content that is available online (e.g., require a hyperlink in the ‘‘Graphical Representation of Holdings’’ section to the fund’s portfolio schedule)? If so, what specific additional references and hyperlinks should we require and why?
108. As proposed, funds would have
the flexibility to refer investors to additional information that is available on the fund’s website if the fund reasonably believes that shareholders would likely view the information as important. Should any limits be placed on this additional information? If so, why? For example, should it be limited to content that the fund has prepared?
109. Should we permit or require
funds to refer investors to information at Investor.gov, such as information about how to read a shareholder report? 316 If not, why not?
110. Are there any other changes that
should be made to the disclosure requirement about the availability of additional information? j. Householding We are proposing to retain the provision that permits funds to explain how to revoke consent to the householding of the annual report.317 Investors often invest in funds through a variety of individual and family accounts and, as a result, sometimes receive multiple copies of the same documents from those funds. To avoid duplication, Commission rules allow funds to deliver a single copy of a prospectus, proxy materials, and a shareholder report to investors who share the same address and meet certain other requirements.318 This practice is known as ‘‘householding.’’ Rule 30e–1 permits and we propose to continue permitting the householding of fund shareholder reports if, in addition to the other conditions set forth in the rule, the fund has obtained from each investor written or implied consent to the householding of shareholder reports at such address.319 The rule requires funds that wish to household shareholder reports based on implied consent to send a notice to each investor stating, among other things, that the investors in the household will receive one report in the future unless the investors provide contrary instructions. In addition, at least once a year, funds relying on the householding provision must explain to investors who have provided written or implied consent

320Because the proposed annual report may only include information that Item 27A of Form N–1A specifically permits or requires, the proposed householding provision is necessary to permit funds to include a householding statement in the report. See Instruction 3 to proposed Item 27A(a) of Form N–1A; see also discussion at supra Section II.B.1.b. 321See Instruction 1 to proposed Item 27A(a) of Form N–1A. This proposed instruction would also include provisions that are applicable to an annual report that appears on a website or is otherwise provided electronically. See infra footnote 331 and accompanying text. 322While investors may be more likely to compare prospective investments using a prospectus, an investor may use the proposed annual report to compare funds he or she already owns and assess how the investor’s mix of funds fits into his or her overall investment portfolio. A consistent presentation would assist in this analysis. 323See Instruction 6 to proposed Item 27A(a) of Form N–1A. 324See Instruction 8 to proposed Item 27A(a) of Form N–1A; see also, e.g., Susan Kleimann, Making Disclosures Work for Consumers, Presentation to the SEC’s Investor Advisory Committee (June 14,
2018) (‘‘Kleimann’’), available at https://
www.sec.gov/spotlight/investor-advisorycommittee-2012/iac061418-slides-by-susankleimann.pdf (encouraging, for example, using question-and-answer format, the using headings to make structure clear, using a strong design grid to organize elements, making line length readable, and using common words and sentence constructions as ways of designing disclosure to promote readability). 325See Instruction 13 to proposed Item 27A(a) of Form N–1A. In an annual or semi-annual shareholder report posted on a website or otherwise provided electronically, the proposed instructions would provide that a fund may satisfy legibility requirements applicable to printed documents by presenting all required information in a format that promotes effective communication as described in Instruction 8 to proposed Item 27A(a). 326 17 CFR 230.430 [Rule 420 under the Securities Act] generally provides that the body of all printed prospectuses and all notes to financial statements and other tabular data included therein be in roman type at least as large as legible 10-point modern type. However, where a prospectus is distributed through an electronic medium, rule 420 provides, in part, that issuers may satisfy legibility requirements applicable to all printed documents, by presenting all required information in a format readily communicated to investors. how they can revoke their consent. If relying on the householding provision, one way to satisfy this last requirement (to provide an annual notice) is to include a statement in the annual report. We propose to continue permitting funds to include this statement in the annual report.320 We request comment on the proposed permitted inclusion of householdingrelated language in the annual report:
111. Should funds be permitted to
include language about how an investor can revoke consent to householding in the annual report? If not, why not? Should we prescribe specific householding-related language that funds could include in their annual reports? If so, why, and what should that language be?
112. Should we consider any change
to the householding disclosure requirements or to the rule provision that permits householding of shareholder reports? If so, why?
3. Format and Presentation of Annual
Report
In addition to the proposed content requirements for the annual report, we are proposing general instructions related to the format and presentation of the report. These proposed general instructions are designed to improve and simplify the presentation of shareholder reports and encourage funds to use plain-English, investorfriendly principles when drafting their reports. First, we are proposing an instruction specifying that the information in the annual reports would be required to appear in the same order as would be required under the proposed amendments to Form N–1A.321 We are requiring that information appear in a specific order so that the information that we believe to be most salient to shareholders, such as expenses, would appear first in the report, and to promote consistency and comparison across funds.322 The proposed ordering requirements also would place related content close together to help investors better understand the topics being discussed. For example, fund statistics and graphical representation of holdings both provide information about the fund’s portfolio and therefore would be placed adjacent to one another. In addition, the proposed general instructions to the shareholder report requirements are designed to promote effective communication between the fund and its investors. Therefore, we propose new requirements that funds use ‘‘plain English’’ principles for the organization, wording, and design of the annual report, taking into consideration fund shareholders’ level of financial experience.323 Specifically, the proposed instructions would direct funds to be concise and direct and to use short sentences, active voice, and definite, concrete, everyday words. Funds would be instructed not to use legal jargon, highly technical business terms (unless they are clearly explained) or multiple negatives. Funds also would be instructed to write their annual report as if addressing the investor, using terms such as ‘‘you’’ or ‘‘we.’’ The proposed instructions also would direct funds to avoid the use of vague or imprecise boilerplate, as we believe this type of language would be unlikely to inform an investor effectively. The proposed instructions also direct funds to use white space, and implement other design features to make the annual report easy to read. Further, the proposed instructions would encourage funds to consider using, as appropriate, a question-andanswer format, charts, graphs, tables, bullet lists, and other graphics or text features as a way to help provide context for the information presented.324 We believe that these alternative ways of presenting information could increase readability and that this proposed instruction could encourage funds to use these presentation options, where appropriate. In addition, the proposed instructions would include legibility requirements for the body of every printed annual or semi-annual shareholder report and other tabular data.325 Those requirements would be consistent
with the legibility requirements that apply to prospectuses.326 We believe that the proposed legibility requirements would help ensure that shareholder reports are easily readable by investors. We request comment on the proposed general instructions regarding the format and presentation of the annual report, including:
113. Would the proposed general
instructions provide clear guidance to funds when preparing an annual report? Should any of the proposed instructions be modified or not be included? If so, which ones, how should they be modified (if applicable), and why?
114. The proposed general
instructions prescribe the order of information in the annual report. Is requiring a specific order for that information appropriate? Should the order be changed? If so, how? For instance, are there certain items that funds should disclose earlier (or later) in the report to be more consistent with shareholders’ general areas of interest? Should we, for example, require disclosure of material fund changes earlier in the report? Does the proposed order of disclosure items appropriately place related items close together, or are there changes we could make to improve a shareholder’s ability to understand how different disclosure items relate to one another?
115. Would the proposed general
instruction that directs funds to comply with legibility requirements assist investors by helping to promote the readability of shareholder reports? Are there other requirements that we should include to assist investors with the readability of shareholder reports?

327Under this proposal, shareholder reports must be delivered in paper unless, consistent with Commission guidance, a shareholder elects electronic delivery. See supra footnote 21 and accompanying text. 328See infra Sections II.F.3.a and II.J. 329For example, the legal requirements associated with a particular online tool may vary based on what information is present and how it is presented. We discuss these issues in more detail below. In addition, it may be costly to produce, maintain and update electronic tools and produce tools that function well on a variety of devices (such as phones, tablets and computers). 330See supra footnote 136. 331See Instruction 1 to proposed Item 27A(a) of Form N–1A. 332See infra footnotes 338–340 and related discussion regarding the recordkeeping and record retention requirements associated with such electronic tools. 333See Instruction 8 to proposed Item 27A(a) of Form N–1A. 334For example, one feature may be the ability to hover over a point on the performance line graph to see the date and dollar value associated with that point. 335See Instruction 10 to proposed Item 27A(a) of Form N–1A. 336See id. (providing that any supplemental information may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included). 337See Instruction 8 to proposed Item 27A(a) of Form N–1A. 338See Item 27A(c) and (d) of Form N–1A. 339See Instruction 8 to proposed Item 27A(a) of Form N–1A. That instruction would provide, in
part: ‘‘Any information that is not included in the
annual or semi-annual shareholder report filed on Form N–CSR shall have the same status, under the Federal securities laws, as any other website or electronic content that the Fund produces or disseminates.’’ 340 17 CFR 230.482. An investment company advertisement that complies with rule 482 is
116. Are there other alternative ways
of presenting information that we should encourage funds to consider using?
4. Electronic Annual Reports
We recognize that fund shareholders may access their annual reports and other regulatory documents online, rather than (or in addition to) receiving the reports in paper format. Shareholders could elect to receive their annual reports through electronic delivery.327 Additionally, under our proposal, funds that rely either on rule 498 or on proposed rule 498B would have to make the most recent annual report available online.328 We also recognize that investors are increasingly relying on mobile applications for financial information, and we anticipate that funds may wish to make annual reports available in a format that these applications support (for example, electronic presentations other than a static email or PDF file). Presenting fund information—including annual reports—electronically has the potential advantage of permitting greater innovation and information-tailoring than the use of a static paper document. For example, funds could overlay electronic tools onto online disclosure, such as calculators, hover-over or popup information, and interactive features. Presenting information electronically could also improve the content of fund disclosures by, for example, allowing investors to customize certain fund disclosures, such as fees, expenses, and performance, based on an investor’s individual circumstances. However, we appreciate that the use of electronic channels, and the overlay of electronic tools onto required regulatory documents, may present both practical and legal questions for fund registrants and other market participants.329 In light of this, we are proposing instructions that are designed to clarify requirements for electronic annual reports and to promote the use of interactive, user-friendly design features that may be tailored to meet individual investors’ needs and improve investor engagement. We are tailoring certain proposed instructions to reflect that annual reports may be electronic as well as paper-based. First, the proposed requirements for the annual report’s ‘‘cover page’’ are also applicable to the ‘‘beginning’’ of the report, which is designed to reflect that electronic reports may not have a physical page at their beginning.330 Similarly, the proposed instruction that would provide an ordering requirement for the contents of an annual report also includes a provision for annual reports that appear on a website or are otherwise provided electronically.331 This proposed instruction specifies that information should be organized in a manner that gives each item similar prominence, and presents the information in the same order, as that provided by the order the proposed instruction prescribes. For instance, an annual report available on a website could satisfy this requirement if each required disclosure item is presented with equal prominence in a separate tab and the order of the tabs follows the prescribed order, such as from left-toright or top-to-bottom. Similarly, a mobile application could satisfy this
requirement if the shareholder report navigation screen presents each shareholder report item with equal prominence and follows the prescribed order of information.332 We are also proposing instructions that would provide additional flexibility for funds to add additional tools and features to annual reports that appear on a website or are otherwise provided electronically.333 The proposed instructions would encourage funds to use online tools designed to enhance an investor’s understanding of material in the annual reports. This could include, for example: Video or audio messages, mouse-over windows, pop-up definitions or explanations of difficult concepts, chat functionality, and expense calculators. It also includes other forms of electronic media, communications, or tools designed to enhance an investor’s understanding of material in the annual report. For example, this could include the ability to customize expense, performance or holdings information, or to make performance information more interactive.334 We believe that permitting and encouraging these design features would allow for a more interactive and user-friendly experience and would improve investor engagement. When using interactive graphics or tools, funds are permitted to include instructions on their use and interpretation.335 In addition, the proposed general instructions clarify that any explanatory or supplemental information that funds provide as online tools may not obscure or impede understanding of the required disclosures.336 The default presentation of the content of any electronically presented annual report must use the value that the applicable requirement under Item 27A prescribes.337 For example, while the default presentation in the expense example and performance line graph must be on a $10,000 assumed investment, a feature may permit an investor to enter a different amount but the investor must, as a default, be able to view the assumed amount.338 One result of this instruction would be that when the contents of a fund’s annual reports are derived from the fund’s audited financial statements, the default online presentation would be the audited figures. Under the general instructions we are proposing, any information that is included in online tools that the fund uses, but that is not included in the annual report that the fund files on Form N–CSR, would have the same status under the Federal securities laws as any other website or other electronic content that the fund produces or disseminates.339 For example, if a fund includes a video providing more detail about the fund’s investments and performance, the video may, based on the facts and circumstances, be an advertisement subject to rule 482.340

deemed to be a section 10(b) prospectus for purpose of section 5(b)(1) of the Securities Act. As a section 10(b) prospectus, an investment company advertisement is subject to liability under section 12(a)(2) of the Securities Act and the antifraud provisions of the Federal securities laws. 341Section 31(a) of the Investment Company Act imposes recordkeeping obligations on registered investment companies, and also requires that each investment adviser (that is not a majority-owned subsidiary), depositor, and principal underwriter for a registered investment company maintain and preserve such records as the Commission shall prescribe to record that person’s transactions with the registered investment company. The Commission prescribes those recordkeeping requirements under 17 CFR 270.31a–1 [rule 31a–1] and rule 31a–2. Specifically, rule 31a–1 provides the records that a registered investment company must maintain; rule 31a–2 provides the retention period for those records. To address funds’ retention of any supplemental information that a fund chooses to include in its online version of its annual report (other than the shareholder report information that the fund files with the Commission on Form N–CSR), we are proposing a conforming change to rule 31a–2 that would require that every investment company preserve for a period not less than six years, the first two years in an easily accessible place, any shareholder report required by § 270.30e–1 (including any version posted on a website or otherwise provided electronically) that is not filed with the Commission in the exact form in which it was used. See proposed rule 31a–2(a)(7). 342See Instruction 9 to proposed Item 27A(a) of Form N–1A. 343See id. 344See supra paragraph accompanying footnotes 339 through 341 and accompanying text (discussing the status under the Federal securities laws of information that funds include on their websites). Under these circumstances, the fund would be subject to the same liability standard and filing requirements that attach to any other rule 482 advertisement. This proposed instruction is designed to remind funds about liability and any filing requirements associated with any additional information that a fund chooses to include with the online version of its annual report (other than the shareholder report information that it files with the Commission on Form N–CSR). This supplemental information would also be subject to a record retention requirement.341 Finally, we are proposing an instruction providing that if the shareholder report references other information that is available online, the report should include a link or some other means of immediately accessing that information.342 The proposed instruction states that, for example, the fund should provide hyperlinks to the fund’s prospectus and financial statements if the information is available online. The proposed instruction also states that, in an annual report that is delivered in paper format, funds
may include website addresses, QR codes, or other means of providing access to such information.343 We believe these approaches are consistent with a layered approach to disclosure, and that providing ready access to the information that a shareholder report references (but does not directly include) would be a convenient feature for investors. Under these requirements, a fund must include a link specific enough to lead investors directly to a specific item or alternatively to a central site with prominent links to the referenced information. For example, a reference to a fund’s prospectus could include a direct link to the prospectus or might include a link to the landing
page that includes prominent links to
several fund documents, such as the summary prospectus, prospectus, SAI and annual reports. However, the link cannot lead investors to a home page or
section of the fund’s website other than
on which the specified item is posted. This proposed requirement is designed to permit the investor easily to locate (i.e., without numerous clicks) the information in which he or she is interested. We request comment on the proposed general instructions regarding electronic annual reports, including:
117. Are the proposed instructions
that are designed to reflect that annual reports may be electronic as well as paper-based appropriate? Specifically, would the requirements for the ‘‘beginning’’ of the shareholder report clarify the contents that the Commission would require to appear first in electronically presented annual reports? Similarly, is the proposed instruction permitting an ‘‘equivalent’’ order (to that prescribed in Form N–1A) for annual reports that appear on a website or are otherwise provided electronically (such as a mobile application) appropriate, and is this instruction clear? If not, why not? Are there any other instructions that would help clarify content and format requirements for electronic annual reports?
118. The proposed general
instructions would encourage a fund to use online tools for annual reports that are available electronically. Would this proposed instruction help to explain the content required to be included in the annual report? Is permitting the additional information conveyed by these tools appropriate? Should there be any limits on the types of additional information that funds present along with electronic versions of their annual reports, in addition to the limits prescribed by the proposed instructions (e.g., that explanatory or supplemental information be responsive to the proposed shareholder report content requirements, that it not be misleading or impede understanding of the required disclosures, and that the default presentation contents in electronically presented shareholder reports be based on the same assumptions required by Item 27A)? For instance, should we permit a fund’s expense presentation to include an explanation that compares a fund’s expenses to its peer group?
119. The federal securities laws
generally do not prohibit a fund from posting a version of its annual or semiannual shareholder report translated into a foreign language on its website.344 Further, we understand that funds occasionally will include online tools, such as translators, on their websites to assist non-English speaking investors and investors with disabilities to assess information about the fund. Should the Commission address the translation of a shareholder report or other documents filed with the Commission (such as a prospectus) into a foreign language and the transmission of those documents to shareholders? If so, what factors should the Commission consider? Should the Commission address foreign language shareholder reports (and foreign language versions of other fund regulatory materials) not only for openend funds, but also other types of funds? If the Commission were to amend its rules to address the transmission of foreign language shareholder reports, should it also require foreign language versions of shareholder reports to be filed with the Commission?
120. As proposed, any additional
information that a fund presents in connection with an electronic version of its annual report that is not included in the annual report filed on Form N–CSR would have the same status under the Federal securities laws as any other website or electronic content that the fund produces or disseminates. Is this approach appropriate? Notwithstanding this proposed instruction, should we require a fund to file this additional information with the Commission? If so, why, and through what channels should funds be required to file the additional information (e.g., on Form N–CSR)? Is it appropriate to provide investors additional information online that would not have to be provided in paper to investors who request paper documents? If not, why not?
121. Is it appropriate to require that
any electronic version of an annual report provide a means of facilitating access (such as a hyperlink) to any information that is referenced in the annual report that is available online? If not, why not? Similarly, is it appropriate to permit an annual report that is delivered in paper to include website addresses, QR codes, or other

345See supra section II.B.
346See Instruction 4 to proposed Item 27A of Form N–1A. 347See Instruction 3 to proposed Item 27A of Form N–1A. 348See Instruction 5 to proposed Item 27A of Form N–1A. 349See supra Section II.B.1.a and II.B.1.b; see also Instructions 3, 4, and 5 to proposed Item 27A of Form N–1A. 350Because we estimate that the proposed annual report would be approximately 3 to 4 pages in length, we similarly estimate that the proposed semi-annual report (which would include fewer required disclosure items than the proposed annual report) would be approximately 3 to 4 pages in length or shorter. In the case of paper delivery, this means of facilitating access to such information? Should the use of website addresses and QR codes be required for annual reports delivered in paper?
122. As proposed, the additional
explanatory or supplemental information permitted in an electronic annual report may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. Are these restrictions appropriate? If not, why not? Should this instruction also specify that any explanatory or supplemental information that funds provide as online tools be responsive to the proposed content requirements for shareholder reports? Could this additional restriction prevent funds from providing information that some shareholders might find useful? Or would it be helpful in furthering the goal of ensuring that explanatory or supplemental information not obscure understanding of the required disclosures?
123. Rather than what we are
proposing, should funds be able to transmit multiple-series annual reports to shareholders but be required to provide tools for tailoring the online presentation of the disclosure to an individual series? Should we require multi-class funds to provide tools for tailoring the online presentation of the disclosure to an individual class? Why or why not?
124. When a fund’s annual report is
available on a website or otherwise available electronically, should the investor be warned when he or she leaves the annual report content and moves to other fund content? If so, why? Should all annual report content (particularly when shown on multiple pages or tabs), be clearly identified as being part of the annual report? If not, why not?
125. Do the proposed general
instructions sufficiently encourage electronic design and delivery of the annual report? Are the general instructions sufficiently flexible to permit delivery on phones, tablets, and other devices and to accommodate information conveyed via videos, interactive graphics, or tools and calculators? How can the Commission encourage funds to make fuller use of innovative technology to enable more interactive, user-friendly annual reports? F. Semi-Annual Shareholder Report We are proposing to specify the design and content of funds’ semiannual reports through new Item 27A of Form N–1A. These design and content specifications are similar to those we are proposing for funds’ annual reports.345 The table below summarizes the proposed content that funds would include in their semi-annual reports and compares the proposal to current semiannual report disclosure requirements.
TABLE 3—OUTLINE OF PROPOSED SEMI-ANNUAL REPORT
Description Proposed item of form N–1A Current item of form N–1A containing similar requirements Cover Page or Beginning of Report.
Fund/Class Name(s) .........................................................
Ticker Symbol(s) ...............................................................
Item 27A(b).
Item 27A(b).
Principal U.S. Market(s) for ETFs .................................... Item 27A(b). Statement Identifying as ‘‘Semi-Annual Shareholder Report’’. Item 27A(b). Legend .............................................................................. Item 27A(b). Content ..................................... Expense Example ............................................................. Item 27A(c) ................. Item 27(d)(1). Management’s Discussion of Fund Performance (optional). Item 27A(d) ................. Item 27(b)(7). Fund Statistics .................................................................. Item 27A(e). Graphical Representation of Holdings ............................. Item 27A(f) .................. Item 27(d)(2). Material Fund Changes (optional) .................................... Item 27A(g). Changes in and Disagreements with Accountants .......... Item 27A(h) ................. Item 27(b)(4). Statement Regarding Liquidity Risk Management Program. Item 27A(i) .................. Item 27(d)(6)(ii) Availability of Additional Information ................................ Item 27A(j) .................. Item 27(d)(3) through (5).

Scope and Contents of the Proposed
Semi-Annual Report
As with the proposed annual report, we propose to limit the scope of funds’ semi-annual reports in several respects to reduce the overall length and complexity of these reports. First, we propose to require a fund registrant to prepare separate semi-annual reports for each series of the fund.346 Second, we propose generally to limit the content a fund may include in its semi-annual report to the information that Item 27A of Form N–1A specifically permits or requires.347 However, if a fund’s particular circumstances may cause the required disclosures to be misleading, the fund may add additional information that is necessary to make the required disclosure items not misleading. Finally, the proposed amendments to Form N–1A would not permit a fund to incorporate by reference any information into its semiannual report.348 Collectively, these restrictions parallel our proposed scope and content limitations for annual reports.349 As is the case today, the proposed semi-annual report would not be subject to page or word limits. As noted above, we believe a set limit could constrain appropriate disclosure or lead funds to omit material information. However, we believe that the proposed limits on the contents of shareholder reports should nonetheless limit their length in support of our goal of concise, readable disclosure.350

may allow funds to deliver semi-annual reports using a trifold self-mailer (or a similarly concise mailing). See supra footnote 134 and accompanying text. 351See proposed Item 27A(b) of Form N–1A; see also supra Section II.B.2.a. 352See Item 27(d)(1) of Form N–1A. 353See proposed Item 27A(c) of Form N–1A; see also supra Section II.B.2.b. The expense example in the semi-annual report would cover a 6-month reporting period. 354See proposed Item 27A(d) of Form N–1A. 355See supra Section II.B.2.c. 356See proposed Item 27A(e) of Form N–1A. 357We note, however, that semi-annual reports currently must disclose net assets and portfolio turnover rate as part of the requirement to disclose condensed financial information. See Item 27(c)(2) of Form N–1A; see also supra footnotes 243 and 249 and Section II.B.2.d. 358See supra text accompanying footnotes 243 through 250. 359See proposed Item 27A(e) of Form N–1A; see also supra text accompanying and following footnote 251. 360See Item 27(d)(2) of Form N–1A. 361See supra footnotes 260–262 and accompanying text. 362See proposed Item 27A(f) of Form N–1A; see also supra Section II.B.2.e. 363See proposed Item 27A(g) of Form N–1A. 364See infra Section II.F.3.b (discussing the notices of material changes that the proposal would require, for funds relying on proposed rule 498B); see also infra footnote 870 and accompanying text (estimating that 90 percent of funds would rely on proposed rule 498B instead of sending annual prospectus updates to existing shareholders). 365See supra Section II.B.2.f. 366See supra Section II.B.2.g. 367See proposed Item 27A(i) of Form N–1A. 368See supra footnote 307 and accompanying text. 369See Instruction 3 to proposed Item 27A(i) of Form N–1A. Current Form N–1A includes the same instruction providing flexibility for a fund whose board reviews the liquidity risk management program more frequently than annually to include the discussion of the program in either the semiannual report or the annual report, but not both. See Instruction to Item 27(d)(6)(ii) of Form N–1A. 370See Items 27(d)(3) through (5) of Form N–1A. 371See proposed Item 27A(j) of Form N–1A. 372 Id. The cover page or beginning of the proposed semi-annual report would essentially contain the same content as the annual report (with the only difference being references to a ‘‘semiannual report’’ instead of an ‘‘annual report’’).351 Semi-annual reports currently include an expense example.352 The proposed semi-annual report would retain an expense example, which would be subject to the same content requirements as the expense example in the proposed annual report.353 We do not currently require MDFP in semi-annual reports. Under our proposal, semi-annual reports similarly would not require MDFP, but funds could include this disclosure on an optional basis.354 We understand that it is currently common for funds to include MDFP in their semi-annual reports, and we believe that continuing to allow this disclosure would enable
funds to identify factors that could help investors better contextualize other information disclosed in the semiannual report. However, any such disclosure would have to comply with the proposed content requirements for MDFP in annual reports.355 Under our proposal, semi-annual reports, like annual reports, would have to include certain fund statistics, including the fund’s: (1) Net assets, (2) total number of portfolio holdings, and (3) portfolio turnover rate.356 This new disclosure requirement for semi-annual reports would parallel proposed required disclosures in annual reports.357 As in annual reports, this proposed disclosure requirement is intended to provide succinct fund disclosures in a format that investors may be more likely to review than long narratives, and is designed to help contextualize other disclosures required in semi-annual reports.358 In addition, a fund could disclose any additional statistics that it believes would help shareholders better understand the fund’s activities and operation during its most recent fiscal half-year.359 Semi-annual reports currently include a graphical representation of holdings.360 For the same reasons that we propose to retain the current requirements for the graphical representation of holdings in the annual report (with revisions designed to improve the presentation), we propose to retain the current requirements for the graphical representation of holdings in funds’ semi-annual reports.361 The graphical representation of holdings in the proposed semi-annual report would be subject to the same content requirements as in the proposed annual report.362 We do not currently require a discussion of material changes to the fund in semi-annual reports. Under our proposal, such disclosure would still not be required, but funds could include this disclosure on an optional basis.363 We believe that permitting, but not requiring, this disclosure is appropriate because we anticipate that it would be common under the proposed rules for fund shareholders to receive notices of material changes as they occur throughout the year (i.e., the notices that proposed rule 498B would require, or as prospectus ‘‘stickers’’ for those funds that do not rely on proposed rule 498B).364 Requiring a discussion of material changes in the semi-annual report could be duplicative in light of these other notices. However, we are permitting funds to include this disclosure in their semi-annual reports because we anticipate that there could be circumstances in which discussing material changes could help investors better contextualize other information in the semi-annual report. Any such disclosure would have to comply with the proposed content requirements for the discussion of material changes in annual reports.365 As discussed above, we are proposing to require funds to include, under certain conditions, a statement in their semi-annual or annual reports regarding their liquidity risk management program.366 This statement
would include a brief summary of: (1) The key factors or market events that materially affected the fund’s liquidity risk during the reporting period, (2) the key features of the fund’s liquidity risk management program, and (3) the effectiveness of the fund’s liquidity risk management program over the past year.367 Depending on the timing of the fund’s board’s review of the fund’s liquidity risk management program, the fund would include the statement in either its annual or semi-annual report.368 If the board were to review the liquidity risk management program more frequently than annually, a fund could choose to include the discussion of the program’s operation and effectiveness over the past year in the fund’s annual and/or semi-annual report, but this discussion would not be required to be included in both reports.369 Under current shareholder report requirements, funds must include statements regarding the availability of certain information not included in the semi-annual report, namely the fund’s:
(1) Quarterly portfolio schedule; (2) proxy voting policies and procedures; and (3) proxy voting record.370 Under our proposal, the semi-annual report would have to similarly include a brief, plain English statement that certain additional fund information is available on the fund’s website, including, as applicable, the fund’s prospectus, financial statements, quarterly portfolio
schedule, and proxy voting record.371
The statement could also reference other information on the fund’s website that the fund reasonably believes shareholders would view as important.372 In addition, if the shareholder report appears on a fund’s website or otherwise is provided electronically, the fund must provide a means of facilitating access to that additional information (such as a

373See Instruction 1 to proposed Item 27A(j) of Form N–1A. 374See id.; see also supra Section II.B.2.g. 375See infra Section II.C.3.b (seeking comment on, among other things, an alternative approach in which the requirement to transmit a semi-annual report could be satisfied instead by updating certain information that appears on a fund website either semi-annually or on some more-frequent basis). 376See Section II.B.3. 377See Instruction 2 to proposed Item 27A(a) of Form N–1A. This proposed instruction would also include provisions that are applicable to a semiannual report that appears on a website or is otherwise provided electronically. See infra Section II.C.3. 378 Id. 379See Instruction 6 to proposed Item 27A(a) of Form N–1A; see also supra footnote 323 and accompanying paragraph. 380See Instruction 8 to proposed Item 27A(a) of Form N–1A; see also supra footnote 324 and accompanying paragraph. 381See supra footnotes 354 and 355 and accompanying text (discussing the proposal to permit, but not require, MDFP to be included in semi-annual reports) and supra footnotes 363 through 365 (discussing the proposal to permit, but not require, a discussion of material fund changes to be included in semi-annual reports). 382See supra Section II.B.4. 383 Id. hyperlink).373 Collectively, these requirements would be the same as the proposed requirements with regard to the availability of additional information in annual reports.374 We request comment generally on the proposed scope and content requirements for funds’ semi-annual reports, and specifically on the following issues:
126. Is the proposed scope for semiannual reports appropriate? To the
extent the Commission changes the proposed scope of annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique scope considerations for semi-annual reports, as opposed to annual reports?
127. Are the proposed content
requirements for semi-annual reports appropriate? To the extent that the Commission adopts changes to the proposed content requirements for annual reports, should the Commission adopt those same changes for semiannual reports? In contrast, are there any unique content considerations for semi-annual reports, as opposed to annual reports? For example, are there any amendments we should make to the proposed MDFP requirement to clarify disclosure obligations in the context of a semi-annual reporting period, as opposed to an annual reporting period? As another example, should we require the statement regarding the fund’s liquidity risk management program in both the annual and the semi-annual reports, instead of providing the flexibility to include this disclosure in either report (depending on the timing of the board’s review of the program)?
128. Is it appropriate to permit, but
not require, funds to include MDFP and a discussion of material fund changes in their semi-annual reports? Why or why not? Would funds include this optional disclosure in their semi-annual reports, and if so, why? Should we permit any additional flexibility with regard to the content requirements of semi-annual reports and, if so, are there any corresponding changes that we should make to the proposed form amendments to implement such flexibility?
129. Should the Commission make
any changes to the frequency of fund shareholder reports? For example, should the Commission require the transmittal of fund shareholder reports more or less frequently than on a semiannual basis? 375 To what extent would changes in the frequency of shareholder reports impact investors and their investment decision-making?
2. Format and Presentation of SemiAnnual Report
Under our proposal, as discussed below, the semi-annual report would be generally subject to the same format and presentation requirements as the annual report.376 Information in semi-annual reports would be required to appear in the same order as the corresponding form items appear in the proposed amendments to Form N–1A.377 Any information that a fund could choose to include in the semi-annual report would also be subject to this proposed ordering requirement (that is, it would have to be presented in the same order as the parallel mandatory disclosures in annual reports).378 Like the parallel requirement for annual reports, this proposed ordering requirement for semiannual reports is designed to ensure that information we believe is most salient to shareholders would appear first in the report. The proposed ordering requirement also is designed to promote consistency and comparison across funds and would place related report contents close together. The other proposed instructions for annual reports’ format and presentation discussed above also would apply to semi-annual reports. These include the proposed ‘‘plain English’’ instructions for the organization, wording, and design of the report.379 They also include the proposed instructions encouraging funds to consider using, as appropriate, a question-and-answer format, charts, graphs, tables, bullet lists, and other graphics or text features as a way to help provide context for the information presented.380 We request comment generally on the proposed format and presentation requirements for funds’ semi-annual reports, and specifically on the following issues:
130. Are the proposed format and
presentation requirements for semiannual reports appropriate? To the extent that the Commission adopts rules that include changes to these requirements for annual reports, should the Commission adopt those same changes for semi-annual reports? In contrast, are there any unique considerations with regard to the format and presentation requirements for semiannual reports, as opposed to annual reports?
131. Under our proposal, semi-annual
reports may optionally include certain disclosures that would be required to be included in annual reports.381 Is it appropriate to require any such optional disclosures to be presented in the same order as the information would be presented in annual reports? To what extent could this cause confusion for investors reading semi-annual reports, given that some semi-annual reports might contain additional optional disclosures interspersed between required disclosures? In contrast, to what extent would it be confusing to require these optional disclosures to be presented in a different order (e.g., following all required disclosures)?
3. Electronic Semi-Annual Reports
a. Proposed Instructions and Requirements Our proposed instructions for electronic annual reports, including those that promote the use of interactive, user-friendly electronic design features, would also apply to semi-annual reports.382 Among other things, these proposed instructions would (1) provide ordering and presentation requirements for semiannual reports that appear on a website or are otherwise provided electronically, (2) provide additional flexibility for funds to add additional tools and features to semi-annual reports that appear on a website or are otherwise provided electronically, and (3) require a semi-annual report to include a link or some other means of immediately accessing information referenced in the report that is available online.383 We request comment generally on the proposed instructions regarding funds’ electronic semi-annual reports, and specifically on the following issues:

384See supra footnote 22 and accompanying text. The Commission has previously interpreted the meaning of ‘‘transmit’’ in this context. See discussion of previous Commission guidance on the use of electronic media for delivery purposes, supra footnote 21. 385See generally supra text following footnote 23. 386See section 30(e) of the Investment Company Act. 387See, e.g., Broadridge Comment Letter II. See also ICI Comment Letter I (asserting that a streamlined shareholder report should be required on the same semi-annual frequency as the current shareholder report). But see supra footnotes 54 to 55 and accompanying text (discussing some investors’ concerns about the volume and frequency of fund disclosure materials they currently receive). 388For example, rule 30e–3 could be understood as a hybrid ‘‘push/pull’’ disclosure framework in which notices are pushed out to investors to notify them that shareholders reports have been posted online and are available to be pulled down. See rule 30e–3(c). In addition, rule 30e–3 allows shareholders to elect to remain in a pure ‘‘push’’ disclosure framework in which those shareholders will continue to have shareholder reports directly delivered to them. See rule 30e–3(f). 389See supra footnote 70 and accompanying text. 390See supra footnotes 71 and 72 and accompanying text.
132. Are the proposed instructions
regarding funds’ electronic semi-annual reports appropriate? Should any of those instructions be modified or should any other revisions be made to the Commission’s proposal with regard to electronic shareholder reports, in order to better reflect investor preferences or to encourage the use of electronic shareholder reports by funds? b. Alternatives Involving Electronic Semi-Annual Reports Currently, funds are required to transmit semi-annual reports to shareholders, and—as with annual reports—they will be able to satisfy this requirement in certain cases under rule 30e–3 by posting the report (and certain other required materials) online and providing a notice of the reports’ online availability.384 We considered proposing alternative requirements for transmitting semi-annual reports. For example, we considered allowing funds to satisfy the requirement to transmit semi-annual reports by filing certain information on Form N–CSR. Also, in light of current internet use trends, we considered allowing funds to satisfy the requirement to transmit a semi-annual report by updating certain information on a fund website either semi-annually or on some more-frequent basis. For example, we understand that many funds currently publish monthly or quarterly fact sheets online.385 These fact sheets tend to include much of the information that would appear in the proposed requirements for funds’ semiannual reports, and often present such information in a concise format that may be appealing to investors. We understand that some shareholders or financial professionals may use fact sheets to monitor fund investments because, among other reasons, fact sheets include more up-to-date performance information than shareholder reports or prospectuses. While we are not proposing an approach in which a fund’s obligation to transmit semi-annual reports would be deemed to be satisfied if the fund were to merely post updated fact sheets (or similar documents) online on a semi-annual or more-frequent basis, we are soliciting comment on potential disclosure alternatives that would leverage information that many funds already provide on their websites. An approach that would leverage frequently updated website content, such as fund fact sheets, raises the consideration of how frequently required regulatory disclosures should ideally be provided to fund shareholders. Our proposed semiannual report requirement parallels current requirements with regard to the frequency of shareholder reports, which are statutorily mandated to be transmitted on a semi-annual basis.386 We are currently unaware of any evidence indicating that fund investors specifically desire shareholder reports to be provided less frequently.387 The proposed approach also reflects our view that the proposed amendments to the contents of annual and semi-annual reports represent the information that would be most useful and salient to investors in assessing and monitoring their fund investments. More generally, we
considered the effects and benefits of a disclosure framework in which fund shareholders have regulatory information ‘‘pushed’’ to them on a semi-annual basis (e.g., the required direct transmission of shareholder reports twice a year) versus a hypothetical disclosure framework in which fund shareholders would have the onus to periodically ‘‘pull’’ regulatory disclosures from various sources (e.g., information that is periodically updated on a fund website).388 We are concerned that such a hypothetical disclosure framework would represent a significant change in current practices. We are also concerned that a ‘‘pull’’-only disclosure framework may not be aligned with investor preferences. Although we understand that some investors prefer receiving fund disclosure electronically (e.g., through email, mobile application, or website availability), we do not have evidence that these investors would prefer a disclosure approach in which they would receive no notification that updated disclosures are available.389 We recognize that a hypothetical disclosure framework could require funds to ‘‘push’’ to investors a short notice that updated information is available online, similar to the current approach under rule 30e–3. However, rule 30e–3 contemplates notices being provided semi-annually. To the extent that, under the hypothetical disclosure framework, funds would update their online materials more frequently than semiannually, providing notices each time that online materials were updated could be costly and could dissuade funds from updating these materials. Moreover, we understand that some investors generally prefer to receive at least certain fund information in paper format.390 We recognize that there are other possible permutations of these disclosure approaches (for example, providing a notice of updated online information only semi-annually or permitting a fund to rely on rule 30e– 3 with respect to the requirement to provide semi-annual reports, while continuing to require funds to provide annual reports directly to shareholders), and we request comment on these possible approaches below. In addition, potential regulatory challenges and unintended consequences could result from such a hypothetical disclosure framework. For example, as discussed below, we seek comment regarding the extent to which this hypothetical framework could result in a bifurcated disclosure system. That is, we ask about the effects on fund investors if certain funds would no longer transmit semi-annual reports directly and instead would update information posted online, while other funds would continue to transmit semiannual reports directly. We request comment generally on the alternatives to the proposed semiannual report transmission requirement that we considered, and specifically on the following issues:
133. Should the Commission require
the direct transmission of semi-annual reports, as proposed? Alternatively, should the Commission adopt different conditions for satisfying this transmission requirement? For example, should funds be permitted to satisfy this requirement by filing certain information on Form N–CSR, pursuant to certain conditions? If so, what information should be filed, and what conditions would be appropriate? As another example, under the proposal, funds registered on Form N–1A would no longer be permitted to rely on rule 30e–3 to satisfy annual and semi-annual

391See infra Section II.G.
392See proposed Items 7 through 11 of Form N– CSR. 393See Investment Company Act sections 30(a), 30(e); see also infra Table 4. 394See 17 CFR 270.0–4 [rule 0–4 under the Investment Company Act] (additional rules on incorporation by reference for funds); 17 CFR
230.411 [rule 411 under the Securities Act] (general
rules on incorporation by reference in a prospectus); 17 CFR 232.303 [rule 303 of Regulation S–T] (specific requirements for electronically filed documents); General Instruction D to Form N–1A. 395See 17 CFR 270.30a–2 [rule 30a–2 under the Investment Company Act] and Item 13(a)(2) of Form N–CSR; see also Certification of Disclosure in Companies’ Quarterly and Annual Reports, Investment Company Act Release No. 25722 (Aug. 28, 2002) [67 FR 57275 (Sept. 09, 2002)]. The Sarbanes-Oxley Act of 2002, Public Law 107– 204, 116 Stat. 745 (2002) (the ‘‘Sarbanes-Oxley Act’’) requires the principal executive and principal financial officer of most management investment companies to provide two different certifications in their periodic reports. Section 302 of the SarbanesOxley Act requires a certification that, among other things, relates to the accuracy of the information included in the N–CSR filing. Section 906 of the Sarbanes-Oxley Act added new Section 1350 to Title 18 of the United States Code, which requires a certification that, among other things, represents that the N–CSR filing fairly presents, in all material respects, the fund’s financial condition and results of operations, and is subject to specific Federal criminal provisions. 396See proposed rule 30e–1(b)(2) (funds would be required to post online Items 7 through 11 of Form N–CSR as well as the fund’s complete portfolio holdings, if any, as of the close of the company’s most recent first and third fiscal quarters). report transmission requirements.391 Should we instead continue to permit these funds to rely on rule 30e–3 as an alternative method of transmitting their semi-annual reports (while, as proposed, no longer permitting them to rely on the rule with respect to annual reports)? What evidence is there (for example, of investor preferences) to support different transmission requirements for semi-annual reports versus annual reports?
134. As a further alternative, would it
be appropriate for the Commission to permit funds to satisfy their obligations to transmit semi-annual reports by updating certain information that appears on their websites (for example, updating a fund fact sheet), either semiannually or on some more frequent basis? If so, what frequency and which information would be appropriate? Would it be appropriate to require a fund’s website to include all of the information that we are proposing that funds include in their semi-annual reports, a subset of this information, or different information? To what extent should the Commission specify the content, presentation, and/or accessibility requirements for such information, and what should these requirements be? How, if at all, should funds be required to inform shareholders that updated information is available on their websites? Should there be any other conditions for a fund to be able to satisfy its semi-annual report transmission obligations in this way, and if so what should they be? To what extent should the Commission consider or address the fact that, pursuant to rule 482 under the Securities Act, fact sheets and other information that funds make available online are generally considered to be omitting prospectuses, and are thus subject to prospectus liability that does not apply to shareholder reports? Should information that funds make available online under this alternative be required to be filed with the Commission? To what extent would this alternative approach result in a bifurcated disclosure system, as described above? What would be the effects on investors and those who wish to review semi-annual reports, if semiannual reports were only prepared by some, but not all, funds? Would this alternative be aligned with investor preferences for fund shareholder report disclosure? Would it otherwise raise any investor protection concerns, and if so, what concerns?
135. Are there any further alternatives
the Commission should consider with regard to semi-annual reports specifically, or reports that the fund would transmit on an other-than-annual basis generally? To what extent should any of these alternatives provide special consideration for electronic shareholder reports? G. New Form N–CSR and Website Availability Requirements We are proposing to amend Form N– CSR and rule 30e–1 to implement our proposed layered disclosure framework. We are proposing to require funds to continue to file certain information, which is currently included in fund shareholder reports, on Form N–CSR.392
Section 30 of the Investment Company
Act requires funds to file their shareholder reports, including certain information that must appear in their reports, with the Commission.393 Because we are proposing a framework in which certain information would no longer appear in funds’ shareholder reports, we are proposing amendments to Form N–CSR that would create new filing requirements for this information in order to continue to require funds to file the information with the Commission. This Form N–CSR filing requirement would further the proposed layered disclosure framework by making available a broader set of fund information than the information that appears in funds’ annual and semiannual reports. The information that would be filed on Form N–CSR is less retail-focused than the information that would appear in funds’ annual and semi-annual reports, but as detailed below we believe that retaining the availability of this information would be important for investors who desire more in-depth information, financial professionals, and other market participants. The information included on Form N–CSR also would continue to provide shareholders and other market participants with access to historical, immutable data regarding the fund on EDGAR. This historical information also would facilitate the Commission’s fund monitoring responsibilities and could create significant efficiencies in the location of information for data gathering, search, and alert functions used in those monitoring activities. For example, filing on EDGAR facilitates the financial statement reviews that section 408 of the Sarbanes-Oxley Act of 2002 mandates. Additionally, because Form N–CSR is filed with the Commission on EDGAR, a fund can incorporate by reference information that is disclosed on Form N–CSR, including the fund’s financial statements, into a fund’s registration statement, subject to certain limitations.394 Finally, a fund’s principal executive and financial officer(s) are required to certify the financial and other information included on Form N–CSR, and are subject to liability for material misstatements or omissions on Form N– CSR.395 The amendments that we are proposing to rule 30e–1 would require funds to make available on their website the information that they would newly have to file on Form N–CSR, and to deliver such information upon request, free of charge.396 These proposed website availability requirements are designed to provide ready access to this information for shareholders who find this information pertinent. The proposed requirements also would assist those investors who find it most convenient to locate fund materials on a website that is not EDGAR. The following table outlines the content that we propose to require funds to include in their Form N–CSR filings and make available online. This content is currently included in a fund’s annual and semi-annual reports.

397See proposed Item 7(a) of Form N–CSR; see also supra footnotes 198 through 211 and accompanying text (discussing the proposed requirement to include a graphical representation of a fund’s holdings in the shareholder report). 398See Item 27(b)(1) and 27(c)(1) of Form N–1A. A fund’s audited financial statements must include, among other items: (1) An audited balance sheet, or statement of assets and liabilities, as of the end of the most recent fiscal year; (2) an audited statement of operations for the most recent fiscal year; (3) an audited statement of cash flows for the most recent fiscal year if necessary to comply with generally accepted accounting principles (‘‘GAAP’’); (4) audited changes in net assets for the two most recent fiscal years; and (5) a schedule of investments in securities of unaffiliated issuers. See 17 CFR 210.3–18 and 210.6–10 [rules 3–18 and 6– 10 of Regulation S–X]. 399See sections 30(e)(1) through (4) of the Investment Company Act [15 U.S.C. 80a–29(e)(1) through (4)], and section 30(e)(6) of the Investment Company Act [15 U.S.C. 80a–29(e)(6)]. 400See section 30(g) of the Investment Company Act [15 U.S.C. 80a–29(g)]. 401See Investment Company Reporting Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 2015)] (‘‘Reporting Modernization Proposing Release’’), at text following n.55. 402See February 2004 Shareholder Report Adopting Release, supra footnote 83, at text accompanying n.32. 403See Instruction 1 to Item 27(b)(1) of Form N– 1A (permitting the inclusion of Schedule VI– summary schedule of investments in securities of unaffiliated issuers under 17 CFR 210.12–12C [Rule 12–12C of Regulation S–X] in lieu of Schedule 1— Investments of securities of unaffiliated issuers under 17 CFR 210.12–12 (Rule 12–12 of Regulation S–X)). 404See rule 12–12C, n.3 of Regulation S–X [17 CFR 210.12–12C]. 405See supra footnote 19 and accompanying text (discussing the typical length of funds’ annual reports today).
TABLE 4—OUTLINE OF PROPOSED NEW FORM N–CSR AND WEBSITE AVAILABILITY REQUIREMENTS
Description (and related statutory requirement) Current rule and form requirement(s) for shareholder report disclosure (if any) Proposed new disclosure items for filing on SEC forms Proposed website availability requirements Financial statements for funds (required by section 30(e) of the Investment Company Act). Items 27(b)(1) and 27(c)(1) of Form N–1A. Proposed Item 7(a) of Form N–CSR. Proposed rule 30e–1(b)(2)(i). Financial highlights for funds ................. Items 27(b)(2) and 27(c)(2) of Form N–1A. Proposed Item 7(b) of Form N–CSR. Proposed rule 30e–1(b)(2)(i). Remuneration paid to directors, officers and others of funds (required by section 30(e) of the Investment Company Act). Items 27(b)(3) and 27(c)(3) of Form N–1A. Proposed Item 10 of Form N–CSR. Proposed rule 30e–1(b)(2)(i). Changes in and disagreement with accountants for funds. Items 27(b)(4) and 27(c)(4) of Form N–1A; Item 304 of Regulation S–K. Proposed Item 8 of Form N– CSR. Proposed rule 30e–1(b)(2)(i). Matters submitted to fund shareholders for a vote. Rule 30e–1(b) ...................................... Proposed Item 9 of Form N– CSR. Proposed rule 30e–1(b)(2)(i). Statement regarding the basis for the board’s approval of investment advisory contract. Item 27(d)(6) of Form N–1A ................ Proposed Item 11 of Form N–CSR. Proposed rule 30e–1(b)(2)(i). Complete portfolio holdings as of the close of the fund’s most recent first and third fiscal quarters. Currently required in Part F of Form N–PORT. Also website availability of this information currently required for funds relying on rule 30e–3.. N/A ....................................... Proposed rule 30e–1(b)(2)(ii).

Proposed Form N–CSR Filing
Requirements a. Financial Statements We are proposing to require a fund to file its most recent complete annual or semi-annual financial statements on Form N–CSR, and provide certain data points from the financial statements in its annual and semi-annual reports, in lieu of including the fund’s complete financial statements in its shareholder reports.397 Consistent with current requirements, the fund’s annual financial statements would be audited and accompanied by any associated accountant’s report, while the semiannual financial statements need not be audited. Currently, funds are required to include audited financial statements in their annual reports and unaudited financial statements in their semiannual reports.398 Section 30(e) of the Investment Company Act provides that funds’ annual and semi-annual reports include the fund’s financial statements, which in turn must include a statement of assets and liabilities, a schedule of investments that shows the amount and value of each security owned by the fund on that date, a statement of operations, and a statement of changes in net assets.399 The annual report must include audited financial statements accompanied by a certificate of an independent public accountant.400 The financial statements (including the fund’s schedule of portfolio investments) provide data regarding the values of the fund’s portfolio investments as of the end of the reporting period. This provides a ‘‘snapshot’’ of data at a particular point in time, or, for example in the case of the statement of operations, historical data over a specified time period.401 The rules under Regulation S–X establish general requirements for portfolio holdings disclosures in fund financial statements. Information regarding a fund’s schedule of portfolio investments is designed to enable shareholders to make more informed asset allocation decisions by allowing them to better monitor the extent to which their investment portfolios overlap. In addition, this information may provide shareholders—particularly those with facility in analyzing funds’ individual portfolio holdings—with information about how a fund is complying with its stated investment objective and expose any deviation from the fund’s investment objective (i.e., style drift).402 In lieu of providing a complete schedule of portfolio investments as part of the financial statements included in its shareholder report, a fund may provide a summary
schedule of portfolio investments
(‘‘summary schedule’’).403 The summary
schedule must list, separately, the 50
largest issues and any other issue exceeding one percent of the net asset value of the fund at the close of the period.404 Much of the length of funds’ current annual and semi-annual reports is due to the inclusion of the complete financial statements.405 Commenters on the Fund Investor Experience RFC, as well as information from prior investor testing and surveys, suggest that some investors generally believe the financial statements, or information derived from

406See supra footnotes 51 and 52 and accompanying text (summarizing research findings regarding the level of investor interest in financial statement information). 407See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 15. The results of the 2012 Report on Investor Testing of Fund Annual Reports found that 24% of shareholders that were surveyed ranked the financial statements within the top three items of importance. 408See ICI Comment Letter I. 409See proposed Item 7 of Form N–CSR (requiring funds to provide the complete financial statements on Form N–CSR); see also Item 27A(f) of Form N–1A (requiring shareholder reports to include the graphical representation of holdings). 410See Kleimann, supra footnote 324; see also supra footnote 34. 411Under the proposal, this information would also appear online. As part of its proposal and adoption of rule 30e–3, the Commission similarly proposed to eliminate the ability of a fund relying on rule 30e–3 to provide a summary schedule in its shareholder report because the shareholder report would only be filed online and, therefore, the fund would not bear additional printing and mailing costs associated with providing the full schedule of investments. See Reporting Modernization Proposing Release at Section II.D. The Commission ultimately determined to retain the ability for a fund that relies on rule 30e–3 to provide a summary schedule in the Rule 30e–3 Adopting Release, and acknowledged that a fund may choose to use a summary schedule for cost considerations or otherwise. See Rule 30e–3 Adopting Release, supra footnote 14, at n.120. We believe the considerations underlying this proposal’s treatment of the summary schedule are different because, unlike under rule 30e–3, no fund investors would have a shareholder report that includes the fund’s financial statements directly transmitted to them. Under rule 30e–3, funds would still have to deliver shareholder reports that include full financial statements to any shareholder who so requests. 412See infra Section II.D.2.a. financial statements, is important.406 However, we understand that many shareholders may find the current shareholder report financial statement disclosure to be complex and difficult to understand. For example, the 2012 Report on Investor Testing of Fund Annual Reports noted that while about a quarter of investors surveyed expressed the view that financial statement information is important, the majority of investors did not find the financial statement section of the shareholder report easy to understand, and investor comprehension of the
section was low.407 Similarly, one
commenter on the Fund Investor Experience RFC stated that much of the information included in financial statements is of a technical nature with little importance to the average retail investor, and recommended that this information be included online.408 We are proposing to require funds to provide the complete financial statements on Form N–CSR, while retaining the graphical representation of holdings in the annual and semi-annual reports.409 We believe that this layered approach to disclosure will help shareholders understand how the fund invests its assets. This approach is also designed to permit all shareholders, including retail shareholders, to monitor and assess their ongoing investment in the fund in a concise, easy-tounderstand pictorial format, while preserving access to the more complete financial statements for shareholders that find this broader information useful. The graphical representation of holdings in funds’ shareholder reports is also in line with the preferences investors have expressed for including more tables, charts, and graphs in fund disclosure to make information more understandable to the average investor.410 We also are proposing amendments to Form N–1A that would eliminate a fund’s ability to provide a summary
schedule in lieu of providing a complete
schedule of portfolio investments as
part of the financial statements. We
believe that this is appropriate because the proposed annual and semi-annual reports would no longer include the complete financial statements (which includes the schedule of portfolio investments). Therefore, because a fund’s full schedule of investments would only be included on Form N– CSR and on the fund website, we believe that allowing funds to use the summary schedule would be unnecessary and could potentially be confusing to shareholders. This proposed change would also reduce costs to the extent funds need not print and mail a complete schedule of portfolio investments as part of the financial statements unless a shareholder requests this information.411 Furthermore, because the proposed annual and semi-annual reports are designed to help investors focus on the most salient features of the fund to better evaluate their investment, we do not believe it would be useful to shareholders, and may even be confusing, to allow funds to provide a summary schedule alongside the complete schedule of portfolio investments online. We seek comment on our proposal to require funds to file their annual and semi-annual financial statements on Form N–CSR and make them available online rather than in a fund’s shareholder reports, and specifically on the following issues:
136. Would our proposed layered
approach to disclosure of financial statement information—by providing the graphical representation of holdings in the annual and semi-annual report and the complete financial statements on Form N–CSR—help tailor information to shareholders based on their informational needs? Are there any other data elements from funds’ financial statements that should be included in funds’ annual and semiannual reports, and if so, what elements and why would they be useful for retail shareholders?
137. Is the direct transmission of
audited financial statements, or a portion of them, important to fund investors, and if so, why? If important, would it be helpful to investors for any information in the annual report to be replicated verbatim from the audited financial statements, and for the report to make clear that certain information was audited? What information and why?
138. Should we, as proposed,
eliminate a fund’s ability to provide a summary schedule in lieu of providing a complete schedule of portfolio investments as part of the financial statements? Should we instead either permit funds to continue providing a summary schedule as part of their financial statements, or require funds to include a summary schedule in their shareholder reports? Would the latter alternative provide an appropriate complement to the graphical representation of holdings, or would including the summary schedule in funds’ shareholder reports be duplicative and/or confusing in light of the proposed requirement to include the graphical representation of holdings in funds’ annual and semi-annual reports? If we were to continue to permit funds to provide a summary schedule as part of their financial statements, should we also require these funds to make their complete portfolio holdings, as of the close of the fund’s most recent second and fourth fiscal quarters, available on a website (in addition to the proposed requirement discussed below that funds make their first and third fiscal quarters’ complete portfolio holdings available online)? 412 Should we permit a fund to make the summary schedule available online instead of the complete schedule of portfolio holdings? Why or why not?
139. Other than complete financial
statements, is there any other financial information that funds should be required to file on N–CSR? Do investors and other market participants currently use the financial statement information that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? b. Financial Highlights We are proposing to require funds to file their financial highlights

413See proposed Item 7(b) of Form N–CSR. 414See Items 27(b)(2) and 27(c)(2) of Form N–1A. See also Item 13(a) of Form N–1A. 415The summary table contains information regarding changes in a fund’s net asset value, total returns, portfolio turnover rate, and capital distributions, among other things, during the preceding five years. See Item 13(a) of Form N–1A. 416See Instruction 4(e) to Item 13 of Form N–1A. A fund currently may incorporate the financial highlights from a shareholder report into the prospectus if the fund delivers the shareholder report simultaneously with the prospectus or if the shareholder report has been previously delivered to shareholders. A fund that incorporates the financial highlights by reference must include a statement in its prospectus explaining that: (1) Additional information about the fund’s investments is available in the annual and semi-annual reports to shareholders; (2) the fund’s annual report provides a discussion of the market conditions and investment strategies that significantly affected the fund’s performance during its last fiscal year; and (3) the fund’s annual and semi-annual reports are available, without charge, upon request. A fund must also explain how shareholders may make inquiries to the fund, provide a telephone number for shareholders to call to request the annual or semi-annual report, and state whether the fund makes available its annual and semi-annual reports, free of charge, on the fund’s website. See Item 1(b)(1) of Form N–1A. 417See Improving Descriptions of Risk by Mutual Funds and Other Investment Companies, Investment Company Act Release No. 20974 (Mar. 29, 1995) [60 FR 17172 (Apr. 4, 1995)]. 418See How to Read a Mutual Fund Shareholder Report, supra footnote 316. 419 Id. 420See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 138 (noting that a few of the investors who were surveyed indicated that they saw value in the financial highlights information and stated that financial highlights provided them with a snapshot of the fund and important fund performance trend data that is easy to digest). 421See ICI Comment Letter I (noting that shareholders from all age and income groups supported the inclusion of total return and expense ratio information in a summary shareholder report and indicated that it was important to include a graphical representation of these key measures. The survey also noted that two-thirds of mutual fund investors who read very little of the current shareholder report and found it difficult to understand, still indicated the total return and expense ratio chart was very important and needed to be kept in the summary shareholder report). 422See proposed Item 27A(c) of Form N–1A. The expense ratio would be based on the fund’s net expenses under GAAP and would reflect any interest or dividend expense. 423See proposed Item 27A(d)(2)(B) of Form N– 1A. Our proposal would require a fund to continue to disclose its average annual total
returns for the 1-, 5-, and 10-year periods as of the end of the last day of the most recent fiscal year (or for the life of the fund, if shorter) in its annual report, as funds do today. 424See supra Sections II.B.2.c.ii, II.B.2.c.iii. 425See supra Section II.B.2.d. 426The information that would be available online includes detailed year-over-year comparisons over the past five years of per-share information associated with net investment income, net gains or losses on securities and distributions, as well as expense ratio, portfolio turnover and return information. 427A fund may incorporate this information by reference if the fund delivers the shareholder report with the prospectus or, if the report has been previously delivered (e.g., to a current shareholder), the fund includes the statement that Item 1(b)(1) of Form N–1A requires (i.e., a statement that additional information about the fund’s investments is available in the fund’s annual and semi-annual reports to shareholders). See Instruction (4)(e) to Item 13 of Form N–1A. 428See proposed amendments to Instruction (4)(e) to Item 13 of Form N–1A. 429See proposed amendments to Item 1(b)(1) of Form N–1A. The required statement would state (among other things) that: (1) Additional information about the fund’s investments is Continued information on Form N–CSR.413 This information is identical to the information currently required in fund shareholder reports. We are proposing that funds would not include financial highlights information in their annual or semi-annual reports, with the exception of certain specific data points as discussed below. Currently, funds are required to disclose the condensed financial information that Item 13(a) of Form N– 1A requires (i.e., financial highlights) in their annual and semi-annual reports.414 The financial highlights include a summary table of financial information covering the preceding five years (or since the fund’s inception, if less than five years).415 Under certain circumstances, a fund may incorporate by reference its financial highlights from a report to shareholders into its prospectus.416 The information contained in a fund’s financial highlights is generally designed to help investors evaluate the fund’s historical performance and fund manager’s investment management expertise.417 For example, disclosure of changes in a fund’s total return over a five-year period is designed to give a shareholder information regarding the fund’s performance trends over time (i.e., volatile vs. steady returns).418 Similarly, a higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account.419 While we would require funds to file the entirety of their financial highlights on Form N–CSR, we are also proposing to retain certain elements of the financial highlight information in funds’ annual and semi-annual reports. These retained elements are those that we understand may be
particularly helpful for shareholders to evaluate a fund’s performance. This layered disclosure approach is designed to retain the financial highlight information that we believe would be most salient to retail shareholders in funds’ shareholder reports, while preserving the entirety of this information on Form N–CSR for those shareholders to whom the broader information would be useful.420 While one industry survey found that the average retail shareholder finds most of the items from the financial highlights
section difficult to understand, this
survey also concluded that a majority of shareholders found the total return and expense ratio information important for shareholders to monitor and assess their investments in a fund.421 Accordingly, we are proposing that a fund would have to disclose its expense ratio in the ‘‘Fund Expenses’’ section of the proposed annual and semi-annual reports.422 Also, while funds’ shareholder reports would no longer include annual total returns for each of the preceding five years, the MDFP
section of the annual report would
continue to include certain information regarding a fund’s annual total returns.423 Shareholders also would continue to be able to assess performance trends over time using the performance line graph and performance table that would appear in the annual report.424 Finally, we would require annual and semi-annual reports to include funds’ disclosure of their net assets and portfolio turnover rate (which are also data elements from the fund’s financial highlights) as of the end of the period covered by the report.425 We believe that all of these data elements that would appear in the proposed annual and semi-annual reports would together serve as a snapshot—of both period-end data and data over time— that would provide retail shareholders with the financial highlights data that they have indicated they find most useful. Investors who want to continue to have access to all of the information that currently appears in funds’ financial highlights would continue to be able to access this information on Form N–CSR and online.426 Item 13 of Form N–1A currently requires a fund to include financial highlights information in its prospectus, and an instruction to this item permits a fund to incorporate this information from a shareholder report under rule 30e–1 by reference into its prospectus.427 Because, under the proposal, funds’ shareholder reports would no longer include financial highlights, we are proposing to amend the current instruction to allow a fund to incorporate by reference into its prospectus its financial highlights from Form N–CSR.428 For existing shareholders that have received the fund’s shareholder report, a fund would be required to include a legend stating that additional information about the Fund’s annual and semi-annual financial statements is available in Form N–CSR.429 For new investors in the

available in the fund’s annual report to shareholders and in Form N–CSR; (2) the fund’s annual report and Form N–CSR are available, without charge, upon request. A fund must also explain how shareholders may make inquiries to the fund, provide a telephone number for shareholders to call to request the fund’s annual report and Form N–CSR, and state whether the fund makes available Form N–CSR, free of charge, on the fund’s website. See Item 1(b)(1) of Form N–1A. 430See proposed amendments to Instruction 4(e) to Item 13 of Form N–1A, current Instruction 4(e) to Item 13 of Form N–1A (allowing a fund to incorporate by reference its financial highlights from its shareholder report into the prospectus so long as the fund delivers the shareholder report with the prospectus (i.e., for new shareholders)). If the shareholder report has been previously delivered (e.g., to a current shareholder), the fund must include a statement clarifying that the financial highlights are being incorporated by reference pursuant to the requirements of Item 1(b)(1) of Form N–1A). 431See supra footnote 159. We are also proposing amendments to the instructions pertaining to total return calculations that would specify how an ETF should calculate its total return based on its per share market value. See proposed Instruction 3(a)(5) of Item 13(a) of Form N–1A. 432Under section 10(a)(3) of the Securities Act, funds typically update their prospectuses within 120 days of the end of fiscal year-end, and, typically, updated prospectuses are delivered to existing shareholders soon thereafter. See supra footnotes 11 and 20 (discussing the transmittal requirements for fund prospectuses). 433See proposed Item 8 of Form N–CSR. 434See supra footnote 293 and accompanying text. fund, the fund would be required to provide the fund’s most recent shareholder report along with its prospectus.430 This provision parallels the current provision that allows a fund to incorporate by reference its financial highlights from the fund’s shareholder report. Finally, as discussed above, we also are proposing amendments to Item 13(a) of Form N–1A to require an ETF to disclose its total return based on the ETF’s per share market value return as of the end of the period.431 This would align the information provided in the financial highlights with the expense information included in the annual and semi-annual reports. We seek comment on our proposal to require financial highlights information to be disclosed on Form N–CSR, and specifically on the following issues:
140. Should we, as proposed, layer
the information that appears in funds’ financial highlight information to preserve the most retail-focused disclosure in funds’ shareholder reports, while making the full financial highlights available on Form N–CSR and online? Would this proposed layered approach help tailor disclosure to shareholders based on their informational needs? If not, what changes should we make to the proposed approach?
141. Should we, as proposed, revise
the Form N–1A instruction to permit funds to incorporate by reference their financial highlights from Form N–CSR into their prospectuses? Why or why not? If so, should we require funds to include a statement explaining that the fund’s financial statements are included on Form N–CSR, that Form N–CSR is available, without charge, upon request, and how a shareholder may make inquiries to request Form N–CSR, and whether the fund makes available Form N–CSR on the fund’s website?
142. Should we, as proposed, require
ETFs to disclose market value return in their financial highlights? Would shareholders find this information useful? Because we are proposing to require this information to be included in the fund expenses section of the shareholder report, is it useful for shareholders to have this information in both the financial highlights and in the shareholder report?
143. Rather than allowing funds to
incorporate by reference their financial highlights from Form N–CSR, should we instead remove the current Form N–1A instruction permitting funds to incorporate their financial highlights by reference into their prospectuses (thereby requiring funds to include their financial highlights in their prospectuses instead of incorporating this information by reference)? If we were to require funds to include their financial highlights in their prospectuses, should it be necessary for them to also file this information on Form N–CSR? Would shareholders benefit from having access to this information on Form N–CSR in addition to the prospectus? How burdensome would it be for a fund to include financial highlights into their prospectuses and also file that information on Form N–CSR? 432
144. Rather than requiring the full
financial highlights to be filed on Form N–CSR, should we require funds to file and post only certain data points from the financial highlights? If so, which ones? Do investors and other market participants currently use the financial highlights information that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how?
c. Changes in and Disagreement With
Accountants for Funds
We are proposing to require a fund to file on Form N–CSR the disclosures that Item 304 of Regulation S–K currently requires, concerning changes in and disagreements with accountants.433 As discussed above, funds must currently include this information in their shareholder reports.434 The proposed Form N–CSR filing requirement would complement the proposed requirement for funds to include a high-level summary of changes in and disagreements with accountants in their annual reports. While the disclosure that we are proposing funds to include in their shareholder reports would be designed to put shareholders on notice of the dismissal or resignation of an accountant and the existence of a material disagreement with that accountant, the information that funds would report on Form N–CSR would provide additional, more nuanced and technical disclosure that may be informative to some shareholders and other market participants. For example, this disclosure could be meaningful as it indicates that the fund has especially challenging, subjective, and/or complex accounting policies and financial statement disclosures or the accountant could not resolve audit findings. Moreover, we believe that it is appropriate to retain this disclosure in a location that includes audited financial information (as proposed, Form N–CSR) to provide those investors, financial professionals, and other market participants who review and analyze this disclosure with appropriate contextual information. We seek comment on our proposal to require a fund to disclose on Form N– CSR the information required by Item 304 of Regulation S–K. We specifically request comment on the following issues:
145. Should we, as proposed, require
a fund to file the information required by Item 304 of Regulation S–K on Form N–CSR? Why or why not?
146. Would requiring the Item 304
information to be filed on Form N–CSR be useful to investors, financial professionals, or other market participants? If so, what types of audiences would find this information to be particularly useful, and why? If not, why not?
147. Is the proposed Form N–CSR
disclosure requirement appropriate and necessary in light of the proposed summary information about changes in and disagreements with accountants that we propose funds to include in their shareholder reports? If not, why not?
148. Rather than the proposed
approach, should we instead amend and/or streamline the requirement to disclose Item 304 information and retain the amended disclosure in the fund’s annual report? Why or why not? Do investors and other market participants currently use the Item 304 information that appears on EDGAR as part of funds’

435See proposed Item 9 of Form N–CSR (requiring a fund to file on Form N–CSR the information that the fund currently provides in its shareholder reports pursuant to rule 30e–1(b)). See also infra footnote 437 (detailing the disclosure requirements with respect to matters submitted for a shareholder vote). The information regarding matters submitted for a shareholder vote that would be disclosed on Form N–CSR is identical to the information currently included in fund shareholder reports. 436See e.g. Schedule 14A [17 CFR 240.14a–101] under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (providing the content requirements for investment company proxy statements). 437See rule 30e–1(b). This disclosure must include: (1) The date of the meeting and whether it was an annual or special meeting; (2) if the meeting involved the election of directors, the name of each director elected at the meeting and the name of each other director whose term of office as a director continued after the meeting; and (3) a brief description of each matter voted upon at the meeting and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each such matter, including a separate tabulation with respect to each matter or nominee for office. 438See Item B.10 of Form N–CEN. 439See e.g., Amendments to Proxy Rules for Registered Investment Companies, Investment Company Act Release No. 19957 (Dec. 16, 1993) [58 FR 67729 (Dec. 22, 1993)] at text following n.6. 440See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 50 (stating that only 4% of investors say they review the discussion of the results of shareholder votes included in their annual and semi-annual reports). 441See supra Section II.B.2.f. 442See proposed Item 10 of Form N–CSR. 443See section 30(e)(5) of the Investment Company Act [15 U.S.C. 80a–30(e)(5)] (permitting the Commission to require that funds transmit to shareholders, at least semi-annually, reports containing, among other things, a statement of aggregate remuneration paid by the fund during the period covered by the report to officers, directors, and certain affiliated persons); see also Items 27(b)(3) and 27(c)(3) of Form N–1A. Funds are required to disclose aggregate remuneration paid to:
(1) All directors and all members of any advisory board for regular compensation; (2) each director and each member of an advisory board for special compensation; (3) all officers; and (4) each person of whom any officer or director of the fund is an affiliated person. filed shareholder reports, and if so, how? d. Matters Submitted for a Shareholder Vote We are proposing to require funds to include information about matters submitted for a shareholder vote on Form N–CSR, rather than in their shareholder reports.435 This information is identical to the information currently required in fund shareholder reports. Currently, when a matter is submitted to a vote of shareholders, funds must disclose information regarding the substance of these matters, along with the results of such votes, in several ways. First, shareholders receive proxy statements that include detailed descriptions of issues brought before shareholders for their vote.436 If a matter is submitted to a vote of fund shareholders during the period covered by an annual or semi-annual report, the fund must include certain information regarding the vote results in that report.437 Furthermore, funds are required to disclose on Form N–CEN whether the fund submitted any matters for a shareholder vote during the reporting period.438 Shareholder voting plays a valuable role in fund regulation, and providing information regarding shareholder votes keeps shareholders informed and may operate as a deterrent to self-dealing by the fund’s adviser.439 The proposed amendments to the disclosure requirements for matters submitted for a shareholder vote are designed to further our proposed layered approach to shareholder report disclosure. The approach we are proposing also reflects our understanding that many retail shareholders tend not to review the information regarding vote results currently required in the shareholder report.440 Under our proposal, funds’ annual and semi-annual reports would no longer include information about the results of shareholder votes, but shareholders would continue to receive information about these matters through other channels. Shareholders would continue to receive a detailed description of matters submitted for a shareholder vote in fund proxy statements. Furthermore, because the proposed annual report would require funds to describe certain material changes that have occurred in the fiscal year, shareholders would receive disclosure of certain material changes that have resulted from shareholder votes.441 If it would be valuable to a shareholder to review additional information about the outcome of matters submitted for a shareholder vote, the shareholder would continue to have access to this more-detailed information, which the fund would file on Form N–CSR. For example, we anticipate that certain shareholders, particularly investors who desire more in-depth information, and other market participants would want to continue to have ready access to information about
shareholder votes, to the extent they express investor preferences on matters such as changes in the fund’s fundamental policies, investment advisory agreements, board of directors, and organizational documents. We seek comment on our proposal to require funds to disclose the matters submitted to a vote of shareholders on Form N–CSR rather than the fund’s shareholder reports, and specifically on the following issues:
149. Should we, as proposed, require
funds to file the information regarding matters submitted for a shareholder vote on Form N–CSR? Why or why not? Alternatively, should we only require funds to disclose the information regarding matters submitted for a shareholder vote on the fund’s website, and not also require funds to file this information with the Commission on Form N–CSR? Why or why not? Do investors and other market participants currently use the information regarding matters submitted for a shareholder vote that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how?
150. Would requiring this information
to be filed on Form N–CSR be useful to investors, financial professionals, or other market participants? If so what types of audiences would find this information to be particularly useful, and why? If not, why not? If so, should we include information regarding matters submitted for a shareholder vote, or any summary of this information, in the proposed annual report? Why or why not?
151. Are there certain types of matters
submitted for a shareholder vote that shareholders find more important than others? If so, what are they? Should we require funds to include in their annual and semi-annual reports the results of only certain matters submitted to a shareholder vote that retail shareholders find most pertinent? What matters would those be?
152. Rather than the proposed
approach to disclosure regarding matters submitted for a shareholder vote, should we instead amend and/or simplify the current shareholder report disclosure requirement? If so, should we retain the amended disclosure in funds’ annual and semi-annual reports? Why or why not? e. Remuneration Paid to Directors, Officers, and Others We are proposing to require funds to file the aggregate remuneration the fund paid to its directors, officers, and certain affiliated persons on Form N–CSR.442 This information is identical to the information currently required in fund shareholder reports. Funds currently provide this information in their annual reports under section 30(e) of the Investment Company Act.443 As the Commission has noted, because of the substantial influence a fund’s investment adviser has in determining its own remuneration, as well as the remuneration paid to directors and officers of the fund,

444See Disclosure of Management Remuneration, Investment Company Act Release No. 9900 (Aug. 18, 1977) [42 FR 43058 (Aug. 26, 1977)] at text accompanying nn.15 and 16 (noting that full public disclosure of remuneration paid to officers, directors and other persons is necessary for shareholders to make ‘‘informed voting and investment decisions, regardless of whether the [fund’s] board of directors or its security holders have approved the remuneration package received by management because of the substantial influence of management in determining its remuneration’’). 445See Item 17(c) of Form N–1A (requiring a fund to disclose certain compensation information for each of the fund’s directors and for each member of any advisory board who receives compensation from the fund, and for each of the three highest paid officers or any affiliated person of the fund who received aggregate compensation from the fund for the most recently completed fiscal year exceeding $60,000). 446See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 50 (stating that only 7% of investors say they review the discussion regarding fund directors and officers included in their annual and semi-annual reports); see also Broadridge Comment Letter I. 447See ICI Comment Letter I. 448See Item 27(d)(6) of Form N–1A. 449See proposed Item 11 of Form N–CSR. We are also proposing to eliminate Item 10(a)(1)(iii) of Form N–1A which requires funds to include, in the SAI, a statement noting that a discussion regarding the basis for the board’s approval of any investment advisory contract is available in the fund’s annual or semi-annual report, as applicable, and providing the period covered by the relevant report. 450See Disclosure Regarding Approval Of Investment Advisory Contracts By Directors Of Investment Companies, Investment Company Act Release No. 26486 (June 23, 2004) [69 FR 39798 (June 30, 2004)] (‘‘Disclosure Regarding Approval of Advisory Contracts Release’’), at text following n.23. 451See id. at n.18. availability of information about remuneration paid to the fund’s directors and officers may help shareholders to analyze the use of corporate funds and assets, and to assess the value the fund’s directors and officers bring to the fund.444 In addition to the aggregate remuneration disclosure in a fund’s shareholder report, a fund is currently required to provide detailed disclosures regarding compensation paid to each of the directors, members of any advisory board, and certain officers and affiliates in the fund’s SAI.445 Based on the comments the Commission received on the Fund Investor Experience RFC, as well as information from prior investor testing and surveys, we understand that retail shareholders generally do not find remuneration information useful in the shareholder report and seldom review this section of the current shareholder report.446 One commenter also stated that information regarding the remuneration of directors is technical, and
recommended that this information instead be included online.447 Because we believe that this type of information is not directly pertinent to a retail shareholder’s understanding of the fund’s operation and performance, and because similar information is available in the fund’s SAI, we are proposing to remove the current remuneration disclosure from the shareholder reports. Investors who desire more in-depth information, financial professionals, and other market participants who would find remuneration-related information valuable (for example, in monitoring fund management) would continue to be able to find it in the fund’s SAI (where compensation information is disclosed for each director), as well as in Form N– CSR filings (where compensation information is aggregated, as it is in shareholder reports today). We seek comment on our proposal to require funds to disclose information about remuneration paid to directors, officers and others on Form N–CSR rather than the fund’s annual reports, and specifically on the following issues:
153. Should we require funds to
include information concerning remuneration paid to directors, officers and others in the proposed annual report? If so, why?
154. Is this remuneration information
useful to investors, financial professionals, or other market participants? If so what types of audiences would find this information to be particularly useful, and why? If not, why not?
155. Rather than removing this
disclosure entirely from the annual report, should we require funds to provide certain data points regarding remuneration paid to directors, officers and others in their annual reports? For example, should we require disclosure of remuneration paid to directors in the fund’s shareholder report if it exceeds a certain threshold? Or, should we require a fund to disclose in its annual report any changes to director or officer remuneration during the reporting period?
156. Because more detailed
information regarding compensation paid to directors and officers already must appear in a fund’s SAI, would the proposed aggregated remuneration information filed on Form N–CSR meaningfully and usefully supplement this current SAI disclosure? If so, how? Or would the proposed aggregated remuneration information be duplicative of existing SAI disclosures? Do investors and other market participants currently use the information regarding compensation paid to directors and officers that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how? f. Statement Regarding Basis for Approval of Investment Advisory Contract Currently, funds are required to provide a statement, in the annual and semi-annual reports, regarding the basis for the board’s approval of the fund’s investment advisory contract.448 We are proposing to require funds to provide this information on Form N–CSR, rather than in the fund’s shareholder reports.449 This information is identical to the information currently required in fund shareholder reports. Under current shareholder report disclosure requirements, if the board of directors approved any investment advisory contract during the fund’s most recent fiscal half-year, the fund is required to discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board’s approval. When the Commission adopted these requirements in 2004, it stated that the purpose of this requirement was to ‘‘encourage funds to provide a meaningful explanation of the board’s basis for approving an investment advisory contract,’’ which, in turn, the Commission hoped would encourage boards to ‘‘consider investment advisory contracts more carefully and investors to consider more carefully the costs and value of the services rendered by the fund’s investment adviser.’’ 450 We continue to believe that requiring funds to provide shareholders with information regarding the board’s review of investment advisory contracts preserves transparency with respect to those contracts, and fees paid for advisory services, assists investors in making informed investment decisions, and encourages fund boards to engage in vigorous and independent oversight of advisory contracts.451 However, we preliminarily believe that this disclosure is not well suited to the fund’s shareholder report because it pertains less directly to a retail shareholder’s understanding of the operations and performance of the fund and does not lend itself to the type of focused disclosure that the proposed annual report is designed to include. Because of the nature and quantity of information in this disclosure, we therefore believe that it may be better suited to appear in a different location that would continue to permit access to fund shareholders and other market participants who find this information to be particularly useful and

452See 2012 Report on Investor Testing of Fund Annual Reports, supra footnote 26, at 49 (noting that only 5% of investors surveyed ranked the discussion of board approvals of advisory contracts within the top three most important areas of information provided in shareholder reports). 453Fund shareholders also would receive disclosure about the factors that form the basis for the board’s approval of the advisory contract if a fund’s advisory contract were to require a shareholder vote. In this case, the fund would be required to include in its proxy statement a discussion of the material factors the board considered as part of its decision to approve the fund’s investment advisory contract. See Item 22(c)(11) of Schedule 14A. 454See infra sentence accompanying footnote 470 (under our proposal, funds would have the option to satisfy this website availability by posting online its most recent report on Form N–CSR). 455See proposed rule 30e–1(b)(2)(i) (requiring a fund to disclose Items 7 through 11 of Form N–CSR on a website no later than 70 days after the end of the fiscal half-year or fiscal year of the fund until 70 days after the end of the next fiscal half-year or fiscal year of the fund, respectively). 456While rule 30e–1(c) requires a shareholder report to be transmitted to shareholders within 60 days after the close of the relevant period, we believe it is appropriate to align the availability of information online with the filing of Form N–CSR, because the online information would be filed on Form N–CSR. 457See proposed rule 30e–1(b)(2)(ii). 458Under this proposed requirement, the portfolio holdings for each of the first and third fiscal quarters would be required to appear on a website no later than 70 days after the close of each of the first and third fiscal quarters, respectively. For example, a fund with a December 31 fiscal year end would be required to make its complete portfolio holdings for the first quarter ending March 31 of the next year available within 70 days after the end of the first quarter. 459Proposed rule 30e–1(b)(2)(ii). 460See supra Section II.D.1.a. To conform the format and content of the portfolio holdings schedules for the first and third quarters to those schedules presented in the fund’s financial statements for the second and fourth quarters, the proposed rule would require the schedules for the first and third quarters to be presented in accordance with §§ 210.12–12 through 210.12–14 of Regulation S–X, which need not be audited. See proposed rule 30e–1(b)(2)(ii). 461But see rule 30e–3(b)(1)(iv) (requiring funds that rely on rule 30e–3 to make holdings information as of the end of the first and third quarters available on the fund’s website). Our proposal would ensure that all investors have convenient access to the most recent four quarters of portfolio holdings in a central location. 462See Part F of Form N–PORT (requiring N– PORT filers to provide, as exhibits to Form N– PORT, the fund’s complete portfolio
holdings for the end of the first and third quarters of the fund’s fiscal year, as of the close of the period, no later than 60 days after the end of the reporting period). meaningful.452 We believe that providing this information on Form N– CSR would continue to allow these persons effectively to consider the costs and value of the services that the fund’s investment adviser renders.453 We seek comment on our proposal to require funds to disclose the basis for the board’s approval of the fund’s investment advisory contract on Form N–CSR rather than in the fund’s shareholder reports, including the following specific issues:
157. Should we, as proposed, remove
the information regarding the basis for the board’s approval of a fund’s advisory contract from shareholder reports? Should we instead amend and/ or simplify this disclosure requirement and/or retain the amended disclosure in funds’ annual and semi-annual reports? Would this amended disclosure be useful for retail shareholders to use to monitor and assess their ongoing investment in a fund?
158. Should we, as proposed, require
funds to file the information regarding the board’s approval of a fund’s advisory contract on Form N–CSR? Why or why not? Do investors and other market participants currently use the information regarding the board’s approval of a fund’s advisory contract that appears on EDGAR as part of funds’ filed shareholder reports, and if so, how?
2. Proposed Website Availability
Requirements a. Website Content Requirements We are proposing to require a fund to post online all of the information that the proposal would newly require on Form N–CSR.454 The fund would have to make this information available from 70 days after the end of the relevant fiscal period until 70 days following the next respective fiscal period.455 Currently, funds are required to file reports on Form N–CSR not later than 70 days after the close of the fund’s fiscal half-year.456 Therefore, our proposal would align the timing of the availability of the information provided online with when reports on Form N– CSR are filed. In addition, we are also proposing to require a fund (other than a money market fund) to make its complete portfolio holdings, as of the close of the fund’s most recent first and third fiscal quarters, available on a website.457 A fund would have to make this information available within 70 days after the close of each such quarter.458 A fund’s portfolio holdings information for its first and third fiscal quarters would have to remain publicly accessible online for a full fiscal year.459 This portfolio holdings information would complement the second and fourth fiscal quarter portfolio holdings information that we also are proposing to require funds to make available on a website (as part of the proposed requirement to make their financial statements available online).460 The proposed requirement to post first and third quarter portfolio holdings online is therefore designed to provide investors and other market participants with easy access to a full year of complete portfolio holdings information in one location. Funds are currently required to disclose their holdings as of the end of each fiscal quarter in reports on Form N–PORT filed with the Commission (which are available on EDGAR). However, all open-end funds are not currently required to send holdings information as of the end of the firstand third-quarters to shareholders or to make that information accessible on a website other than EDGAR.461 The proposed requirement would provide centralized access to this information, rather than requiring investors to access the fund’s reports on Form N–PORT for each of those periods separately.462 Also, we anticipate that the portfolio holdings information that funds would make available online would be available in a more user-friendly presentation than the information that funds report on N–PORT in structured data format. We seek comment on the proposed requirements for website content that funds would have to make available under the proposals, including the following specific issues:
159. Should we, as proposed, require
a fund to post online all of the information that would newly be filed on Form N–CSR?
160. How often should funds be
required to update the information that appears online? For example, should we require a fund to update its online financial statement information more or less frequently than semi-annually or its online portfolio holdings information more or less frequently than quarterly? Should we instead, for example, require funds to update all information that appears online monthly or as soon as it becomes available? Why or why not?
161. What is the appropriate time
period for a fund to have to make the newly required Form N–CSR information available online? Should we, as proposed, allow funds to delay the availability of materials online by 70 days after the end of the relevant fiscal period? Because funds send their annual and semi-annual reports 60 days after the end of the fiscal period, should we similarly adopt a 60-day delay for the online accessibility of information that funds would file on Form N–CSR?
162. How long should each of the
newly required Form N–CSR materials have to remain accessible online? Should we, as proposed, require funds to maintain the required information on their websites for a full fiscal year? Is it useful for investors to have this

463Proposed rule 30e–1(b)(2). These requirements are similar to the accessibility requirements of rule 30e–3 and rule 498 under the Securities Act (permitting funds to use a summary prospectus to satisfy prospectus delivery obligations) and rule 14a–16 under the Securities Exchange Act (requiring issuers and other soliciting persons to furnish proxy materials by posting these materials on a public website and notifying shareholders of the availability of these materials and how to access them). 464Proposed rule 30e–1(b)(2)(i) through (iii). The Commission’s electronic filing system for fund documents is EDGAR. Rule 498 under the Securities Act includes a similar requirement. See 17 CFR 230.498(b)(1)(v)(A). 465Proposed rules 30e–1(b)(2)(iv) and (v); see also infra footnote 529 (discussing similar provisions in proposed rule 498B(e)(2)(ii) and parallel provisions in current rule 498(f)(3)(ii)). 466See proposed rule 30e–1(b)(2)(vi). The rule provides that the requirements in paragraphs (b)(2)(i) through (v) of the rule (i.e., the posting requirements) shall be deemed to be met, notwithstanding the fact that the materials required by paragraphs (b)(2)(i) and (ii) of the rule are not available for a period of time in the manner required by the posting requirements, so long as certain conditions are met. See id. 467See proposed rule 30e–1(b)(2)(vi)(A) and (B). 468Compare rule 30e–3 (providing a similar safe harbor provision for funds that rely on rule 30e–3 for the same reasons) and rule 498(e)(4) of the Securities Act (providing a similar safe harbor under the summary prospectus rule for the same reasons) with proposed rule 30e–1(b)(2)(vi). 469See, e.g., Exchange Act Release No. 81760 (Sept. 28, 2017) [82 FR 46335 (Oct. 4, 2017)] (exemptive relief for individuals and entities affected by Hurricanes Harvey, Irma, or Maria); Securities Act Release No. 10416 (Sept. 27, 2017) [82 FR 45722 (Oct. 2, 2017)] (Regulation Crowdfunding and Regulation A relief and assistance for individuals and entities affected by Hurricanes Harvey, Irma, or Maria); see also Rule 30e–3 Adopting Release, supra footnote 14, at n.135. information available for a full fiscal year? Should we require the information to be available for a period longer or shorter than a full fiscal year (such as two years, or six months)?
163. Should we require only certain
Form N–CSR items to be available for a full fiscal year? If so, which items should we require funds to make available for a full year and why? For example, how long should funds be required to maintain the portfolio holdings information that appears online? Should we, as proposed, require a fund to maintain its holdings information as of the close of each fiscal quarter for a full fiscal year? Would shareholders find this useful? As another example, should we require funds to maintain only their financial statements and portfolio holdings information for a full fiscal year, while permitting funds to remove the remainder of Form N–CSR information from their websites on a semi-annual basis?
164. Should we, as proposed, require
the portfolio holdings information for the first and third quarters to be presented in accordance with the schedules set forth in §§ 210.12–12 through 210.12–14 of Regulation S–X?
165. Should we require any additional
disclosure on fund websites to clarify to investors that portfolio holdings information for the fund’s second and fourth quarters is available online as
part of the fund’s financial statements?
166. Should we adopt a specific
format for how a fund should present its first and third fiscal quarter information online? If so, what should it be? For example, should we require this information be posted in XML format or a PDF form?
167. Rather than requiring funds to
maintain all four most recent fiscal quarters of portfolio holdings information on fund websites, should we instead require funds to only provide portfolio holdings information for their most recent fiscal quarter (or some other period, such as the fund’s most recent two fiscal quarters)? Alternatively, should we require funds to maintain additional portfolio holdings information on their websites, such as the past two or five years of information?
168. As funds would be required to
file their portfolio holdings information as of the close of their second and fourth fiscal quarters on Form N–CSR as part of their financial statements, should we also require funds to file the portfolio holdings information as of the close of their first and third fiscal quarters on Form N–CSR? Would it be useful for investors or any other market participants—for example, data aggregators—to have historical holdings data for all of a fund’s fiscal quarters filed on a single Commission form (as opposed to having to aggregate this information either from information filed on Form N–CSR and the portfolio holdings filed as exhibits to Form N– PORT, or from information that funds would otherwise be required to make available online on websites other than EDGAR)? Is it easier for data aggregators to collect information from a single Commission form? Does easier access to information by data aggregators increase the flow of information to investors?
169. Instead of requiring complete
portfolio holdings information, should we require funds only to disclose a subset of holdings, such as the top ten largest holdings, for each quarter on their websites and/or in the proposed annual report? b. Accessibility and Presentation Requirements Under our proposal, funds also would have to comply with certain conditions designed to ensure the accessibility of information that is required to appear online.463 First, the website address where the required information appears must be specified on the cover page or beginning of the shareholder report and could not be the address of the Commission’s electronic filing system.464 Second, the materials required to appear online would have to be presented in a format convenient for both reading online and printing on paper, and persons accessing the materials would have to be able to retain permanently (free of charge) an electronic copy of the materials in this format.465 These conditions are designed to ensure that information appearing online pursuant to the proposed rule is user-friendly and allows shareholders the same ease of reference and retention abilities they would have with paper copies of the information. The rule as proposed also would include a safe harbor provision providing that a fund shall have satisfied its obligations to transmit shareholder reports even if it did not meet the posting requirements of the rule for a temporary period of time.466 In order to rely on this safe harbor, a fund would have to have reasonable procedures in place to help ensure that the required materials appear on its website in the manner required by the rule and take prompt action to correct noncompliance with these website availability requirements.467 The proposed rule would require prompt action as soon as practicable following the earlier of the time at which the fund knows, or reasonably should have known, that the required documents are not available in the manner prescribed by the proposed rule. We are proposing this safe harbor because we recognize that there may be times when, due to events beyond a fund’s control, such as system outages or other technological issues or natural disasters, a fund may temporarily not be in compliance with the web posting requirements of the proposed rule.468 Providing for this safe harbor by rule may obviate the need to provide exemptive relief from the proposed rule’s conditions under these very limited and extenuating circumstances, as we have done from time to time.469 Finally, we are proposing to provide funds with some flexibility on how online information is presented. Under our proposal, funds would have the option to satisfy the website availability requirement for the information that the fund would newly have to file on Form N–CSR by posting its most recent report

470See proposed rule 30e–1(b)(2)(i). 471See proposed rule 30e–1(b)(2)(vii). 472See id. 473The three-business-day timeframe also appears in similar existing conditions with respect to requests for copies of other similar documents. Based on staff experience in these other contexts, we believe that three business days generally is an appropriate time frame to send shareholders paper copies of information. See, e.g., rule 498(f)(1) (parallel delivery upon request requirements for funds and intermediaries relying on rule 498); see also Instruction 3 to Item 1 of Form N–1A (requiring the SAI and shareholder reports to be sent within three business days of receipt of a request). 474See proposed rule 30e–1(b)(3)(i); see also supra Section II.C. This information includes: The fund’s most recent financial statements and financial highlights; changes in and disagreements with fund accountants; matters submitted for a shareholder vote; remuneration paid to directors, officers, and others; a statement regarding the basis for the board’s approval of the fund’s investment advisory contract; and portfolio holdings information as of the close of the most recent first and third fiscal quarters. 475See proposed rule 30e–1(b)(3)(ii). The proposed requirement to send an electronic copy of materials may be satisfied by sending a direct link to the online materials; provided that a current version of the materials is directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent and the email explains both how long the link will remain useable and that, if the recipient desires to retain a copy of the materials, he or she should access and save the materials. 476See supra footnote 71 (discussing the 2012 Report on Investing Testing of Fund Annual Reports, which stated that there was a lack of consensus among shareholders who participated in the survey regarding their preferences for receiving information about their fund investments in print or electronically). on Form N–CSR, free of charge, on the website specified on the cover page or beginning of the shareholder report.470 The proposed rule also provides funds flexibility to post the online information separately for each series of the fund or grouped by types of materials and/or by series.471 If a fund were to group the information on its website by type of materials and/or by series, the grouped information would have to meet certain presentation requirements, including that the grouped information: (1) Is presented in a format designed to communicate the information effectively, (2) clearly distinguishes the different types of materials and/or each series (as applicable), and (3) provides a means of easily locating the relevant information (including, for example, a
table of contents that includes
hyperlinks to the specified materials and series).472 This proposed provision is designed to allow funds to tailor the presentation of information on their websites to the unique aspects of their funds, while presenting the information in a manner that facilitates shareholder access. For example, for a fund complex that includes several funds, each with multiple classes, the fund complex’s website could include a master table of contents that contains hyperlinks to the specific materials for each fund and each class. We seek comments on the proposed website availability requirements, including:
170. The rule as proposed would
require that the materials required to be accessible online be publicly accessible, free of charge, at the website specified at the cover page or beginning of the shareholder report, and does not expressly require that the website be the fund’s website. Should the rule require that the materials be accessible at the fund’s website? Why or why not?
171. The rule as proposed would
require that the website information be presented in a format or formats that are convenient for both reading online and printing on paper. Are these proposed format requirements appropriate? Should we instead require that the materials be presented in a format or formats that are human-readable and capable of being printed on paper in human-readable format? Why or why not?
172. Are there any additional
presentation or formatting requirements that we should adopt to facilitate investor access to the information that would appear online? For example, should we require that each item appear separately on the fund’s website under a relevant header instead of permitting, as proposed, a fund to post its Form N– CSR to satisfy the requirement to make certain information that the fund would file on Form N–CSR available online?
173. The proposed rule would contain
a safe harbor for instances in which the online materials are not available for a temporary period of time. Is the safe harbor as proposed appropriate, or should we modify it in any way? For example, should the rule be more prescriptive as to the period of time in which a fund must take action to resolve any issues?
174. Should we, as proposed, provide
funds the flexibility to either post the online information separately for each series of the fund or to group the information by types of materials? Why or why not? Should we, as proposed, allow funds to group the material by type or by series? Are there other type of groupings that we should allow? If we allow funds to group the information posted online, should we require the grouped information to meet the presentation requirements discussed above? Are there any additional presentation requirements that we should consider?
3. Proposed Delivery Upon Request
Requirements
We are proposing to require funds to send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of any of the materials discussed above to any person requesting such a copy within three business days 473 after receiving a request for a paper copy.474 A fund must also send, at no cost to the requestor by email or other reasonably prompt means, an electronic copy of any of the materials discussed above within three business days after receiving a request for an electronic copy.475 These requirements would apply also to any financial intermediary through which shares of the fund may be purchased or sold. We understand that some investors continue to prefer to receive information in paper format, and therefore our proposal is designed to allow shareholders to have ready access to the fund information that appears online in print format, if they so prefer, or to receive electronic copies of this same information.476 We seek comment on our proposal to require funds to provide shareholders, upon request, paper or electronic copies of the information that the proposed rule would require to appear online, including the following issues:
175. Are the proposed delivery upon
request provisions appropriate? Is the delivery time frame that the provisions would require appropriate? For example, would a fund experience challenges sending a paper copy of the information to a requesting shareholder within three business days, and if so what would these challenges be? Would other time frames for sending a paper copy be more appropriate, and if so, what should these time frames be?
176. Do funds require additional
clarity regarding what would qualify as a ‘‘reasonably prompt means’’ of delivering an electronic copy of any of the materials discussed above? If so, what type of guidance should the Commission provide?
177. Should we incorporate a
provision in rule 30e–1 that would permit investors the option to notify the fund (or the shareholder’s financial intermediary) that the investor wishes to receive paper copies of reports on a going forward basis? Why or why not? H. Disclosure Item Proposed To Be Removed From Shareholder Report and Not Filed on Form N–CSR In general, we are proposing that the disclosure items that funds currently have to include in their annual and

477We are also proposing to remove the requirement that a fund provide a statement in the annual report that the SAI includes additional information about fund directors. This requirement would be replaced by a more general statement on the cover page of the proposed shareholder report that describes how a shareholder can obtain additional information about the fund. See supra footnote 137 (discussing this proposed requirement) and proposed Item 27A(b)(4) of Form N–1A. 478See Item 27(b)(5) of Form N–1A. For each director and officer, a fund must disclose: (1) Name, address, and age; (2) position(s) held with the fund; (3) term of office and length of time served with the fund; (4) principal occupation(s) during the past five years; (5) number of portfolios in the fund complex overseen by the director; and (6) other directorships held by the director. 479See Item 17(a)(1) of Form N–1A (requiring the inclusion of the management information table in the fund’s SAI). In addition, when a fund solicits a shareholder vote with respect to the election of directors or executive officers, the fund must provide shareholders with a proxy statement that includes information regarding the candidates for election similar to the management information table. See Item 22(b) of Schedule 14A. 480See Independent Directors Release, supra footnote 86 at text following n.69. 481See ICI Comment Letter I (recommending that the management information table not be included in the annual report because it is technical in nature). 482See generally supra Section II.A. semi-annual reports would either be retained in those reports (some items in a simplified form, and some items only in the annual report), or instead filed on Form N–CSR and made available online. However, with respect to the management information table that currently appears in funds’ annual reports, we are proposing to remove this disclosure item from the shareholder report without requiring its disclosure elsewhere.477 Currently, a fund is required to disclose certain information about each of the fund’s directors and officers in the annual report (‘‘management information table’’).478 This information is also included in the fund’s SAI.479 The Commission adopted these requirements in order to provide shareholders with basic information about the identity and experience of the fund’s directors and to highlight for shareholders any potential conflicts of interests that the fund’s directors and officers may have that would be relevant to shareholders.480 While we continue to believe that shareholders should have access to information regarding fund directors, we believe it is unnecessary to include this disclosure in multiple disclosure documents. We also preliminarily believe that the management information table is not well suited to the fund’s shareholder report because it pertains less directly to retail shareholders’ understanding of the operations and performance of the fund and does not lend itself to
the type of focused disclosure that the proposed annual and semi-annual reports are designed to include.481 We considered whether we should propose to require funds to file the management information table on Form N–CSR or to post it online. We determined, however, not to propose such a requirement because the information included in the management information table does not frequently, or significantly, change from year to year. The most significant changes to this information usually occur when the fund has an election of directors, which would require disclosure of this information for the candidates standing for election in the relevant fund proxy statement. The results of such an election would be reflected in the fund’s SAI, which is updated annually. Therefore, we believe that it would be unnecessarily duplicative for funds to also include this information on Form N–CSR. We seek comment on our proposal to remove the management information
table from the annual report, and
specifically on the following issues:
178. Should we require funds to
include the management information
table in the proposed annual report? If
so, why? Should this information also be included in the proposed semiannual report? Is the management information table useful to shareholders to monitor and assess their ongoing investment in a fund? Why or why not?
179. Rather than removing this
disclosure entirely from the shareholder report, should we require funds to provide certain data points regarding fund management (for example, any subset of the disclosure about directors and officers that funds currently have to include in the management information
table) in their shareholder reports? If so,
what information and why, and should it be included in the semi-annual report as well as the annual report? For example, should we require disclosure of other directorships held by the director? Should we require disclosure of information in the management information table only with respect to interested directors? Or should we require a fund to disclose in its shareholder reports only if any changes have occurred during the reporting period with respect to management information (other than changes that the proposed rules already would require funds to disclose in the annual report’s discussion of fund changes)?
180. Should we require funds to file
the management information table on Form N–CSR? Should we require funds to post this table online? Should we require funds to do both? Would shareholders benefit from having the information in one or both locations? What benefit would this provide to shareholders and other market participants, in light of the fact that this disclosure already appears in the SAI and in proxy statements for the election of directors?
I. Proposed Rule 498B and Treatment of
Annual Prospectus Updates Under Proposed Disclosure Framework

Overview
In addition to the changes we are proposing to the requirements for fund shareholder reports, we are also proposing new rule 498B, which would address shareholders’ continued receipt of annual prospectus updates following their initial investment in an open-end fund. Like the proposed new requirements for funds’ shareholder reports, proposed rule 498B uses layered disclosure concepts to tailor funds’ required disclosures to the informational needs of different types of investors. 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 fund’s current prospectus would be available online, and the shareholder would be receiving (1) tailored shareholder reports (which would include a summary of material fund changes in annual reports), and (2) timely notifications regarding material fund changes as they occur. This new rule is designed to further the disclosure goals discussed above, including improving fund disclosure by tailoring it to the needs of new versus existing investors, addressing concerns about duplicative and overlapping disclosure materials, and responding to investors’ expressed preferences for simplified, layered disclosure that highlights key information.482 Legal Operation of Proposed Rule 498B Specifically, proposed rule 498B would allow a fund to satisfy any obligations under section 5(b)(2) of the Securities Act to have a statutory prospectus precede or accompany the carrying or delivery of a security to the fund’s existing shareholders to be satisfied under specific conditions. Those conditions would be: (1) The existing shareholders have been

483See proposed rule 498B(b) and (c). Under our proposal, existing shareholders would also receive annual and semi-annual reports pursuant to proposed rule 30e–1 and proposed Item 27A of Form N–1A. 484See proposed rule 498B(d). 485See, e.g., sections 11, 12(a)(2), and 17(a)(2) of the Securities Act. Under section 11 of the Securities Act, purchasers of an issuer’s securities have private rights of action for untrue statements of material facts or omissions of material facts required to be included in the registration statement or necessary to make the statements in the registration statement not misleading. Under
section 12(a)(2) of the Securities Act, sellers have
liability to purchasers for offers or sales by means of a prospectus or oral communication that includes an untrue statement of material fact or omits to state a material fact that makes the statements made, based on the circumstances under which they were made, not misleading. Section 17(a)(2) of the Securities Act is a general antifraud provision which makes it unlawful for any person in the offer and sale of a security to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. See also infra footnotes 514 and 658. 486See Items 2 through 8 of Form N–1A; see also proposed rule 498(b)(2) (requiring a summary prospectus to contain disclosures required by Items 2 through 8 of Form N–1A); 2009 Summary Prospectus Adopting Release, supra footnote 10 (stating that the information required in the summary prospectus is key information that is important to an investment decision). 487For example, both the proposed annual and semi-annual reports and the prospectus would include fund fee information (the shareholder reports in the form of the expense example, and the prospectus in the form of the fee table). See supra
Section II.B.2.b and infra Section II.H.1. 488See proposed rule 498B(a)(2).
previously sent or given a prospectus in order to satisfy any obligation under
section 5(b)(2) of the Securities Act,
such as in connection with their initial investment in the fund; (2) certain specified disclosure materials (including, among other things, current summary and statutory prospectuses) appear online; and (3) existing shareholders receive notices of certain material changes to the fund when those changes occur.483 The proposed rule also includes delivery upon request and website presentation requirements (which are not conditions of reliance on the proposed rule to satisfy prospectus delivery obligations), including that a fund must: (1) Deliver, in a manner consistent with the requester’s delivery preference, a copy of any of the fund documents that the rule would require to be made available online, at no charge to the requester, subject to certain additional conditions; and (2) ensure that those fund documents required to appear online are presented in a format convenient for both reading online and printing on paper, and can be permanently retained in such a format by persons accessing those materials, free of charge.484 Proposed Rule 498B and the Legal Responsibility for Misleading Disclosures The proposed rule would not relieve funds of any legal responsibility for misleading disclosures with regard to the fund documents required to be made available online. In particular, a fund that relies upon the layered disclosure framework in proposed rule 498B would be subject to the same prospectus and registration statement liability and antifraud provisions as if the fund had sent or given those prospectuses to existing shareholders.485 Those liability provisions would apply to the summary and statutory prospectuses required to appear online, together with information incorporated therein by reference.
2. Scope of Proposed New Rule 498B
Delivery Obligations for New Investors and Existing Shareholders The proposed new rule is designed to tailor delivery obligations for new investors and existing shareholders in open-end funds registered on Form N– 1A, to match their respective informational needs. For this reason, proposed rule 498B would continue to require that investors receive a fund prospectus in connection with their initial fund investment, and would affect funds’ prospectus delivery obligations only as they apply to existing shareholders. The prospectus provides forward-looking information and acts as the principal selling document for potential investors. It provides certain key information, including disclosures regarding the fund’s: (1) Investment objectives; (2) costs; (3) principal investment strategies, principal risks, and performance; (4) investment advisers and portfolio managers; (5) purchase and sale of fund shares; (6) tax information; and (7) financial intermediary compensation.486 We believe it is important for new investors making an initial investment decision to receive a prospectus that includes this information to inform their investment decisions and facilitate fund comparisons. The proposed shareholder reports would contain similar information to some of those prospectus disclosures where we believe that both new investors and existing shareholders would benefit from receiving this information to make informed decisions about whether to buy, sell, or hold fund shares.487 Definition of ‘‘Existing Shareholder’’ Under Proposed Rule 498B For the purposes of proposed rule 498B, an ‘‘existing shareholder’’ would generally be a shareholder to whom a summary or statutory fund prospectus was sent or given to satisfy any obligation under section 5(b)(2) of the Securities Act and who has held fund shares continuously since that time.488 This definition is designed to ensure that after an investor has received a prospectus, that investor would have received notice regarding all subsequent material changes to the fund. The investor would have received notice of these changes either through prospectus amendments or supplements that would be sent or given per current practice to investors that hold fund shares (before the fund relies on proposed rule 498B), or via notices of material changes that proposed rule 498B would require (after the fund relies on proposed rule 498B). We believe that the definition’s requirement that the shareholder continuously hold the fund shares is necessary because, if the investor purchased fund shares and then subsequently sold these shares, that investor would not receive notification of material fund changes that occurred when he or she did not hold fund shares. In this case, we believe it would be appropriate for such an investor to once again receive a fund prospectus before falling under a disclosure framework that provides information tailored to continuously existing investors. For purposes of the proposed rule 498B, an
‘‘existing shareholder’’ of a money market fund also would generally be a shareholder to whom a summary or statutory fund prospectus was sent or given to satisfy any obligation under section 5(b)(2) of the Securities Act. However, the requirement that the shareholder must have continuously held fund shares since that time would differ under the proposed rule with respect to shareholders in a money market fund. This difference would recognize the manner in which money market funds are used by investors and practices that we understand are generally common with money market funds. Money market funds are often used as cash vehicles with frequent withdrawals and deposits, and thus a money market fund investor who has sold all shares may often purchase additional shares shortly thereafter. For this reason, we understand that money market funds generally send or give prospectus

489See proposed rule 498B(a)(2). The proposed rule would further define ‘‘account’’ as any contractual or other business relationship between a person and a fund to effect transactions in securities issued by the fund, including the purchase or sale of securities. 490See proposed rule 498B(a)(2) and (3). 491See proposed rule 498B(a)(2); see also generally Form N–4 [17 CFR 239.17b and 274.11c] and Form N–6 [17 CFR 239.17c and 274.11d]. 492See Variable Contract Summary Prospectus Adopting Release, supra footnote 27 (adopting rule 498A under the Securities Act); rule 498A(j) (providing a new option to satisfy prospectus delivery requirements for mutual funds available through separate accounts funding a variable contract). 493For example, rule 498A permits prospectus delivery requirements for funds serving as underlying investment options under a variable contract to be satisfied if, among other things, an initial summary prospectus is used that provides investors with certain key summary information about those funds. See rule 498A(j)(1)(i). This condition is designed to further the use of initial summary prospectuses for variable contracts, and is tailored to enhance the ability of variable contract investors to make informed investment decisions regarding how to allocate their investments in the variable contract. See Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at
Section II.B.2.
supplements and amendments to former shareholders who maintain accounts in those funds. Similarly, we understand that money market funds generally apply the same treatment to beneficial owners of such accounts opened through financial intermediaries, such as brokerage clients who have their cash deposited in a money market fund sweep account maintained in the name of the broker but for which the brokerage client is a beneficial owner. Therefore the definition of ‘‘existing shareholder’’ would also include a shareholder in a money market fund who has continuously maintained (or been a beneficial owner of) an account with that fund because a fund prospectus has been sent or given to that shareholder.489 Scope Excludes Variable Annuity and Variable Life Insurance Contracts Proposed rule 498B would be available only with respect to funds registered on Form N–1A.490 Proposed rule 498B would not apply to investors that hold the fund through a separate account funding a variable annuity contract offered on Form N–4 or a variable life insurance contract offered on Form N–6.491 The Commission recently adopted 17 CFR 230.498A [rule 498A], which provides that prospectus delivery requirements under section 5(b)(2) of the Securities Act are satisfied with respect to those investors if the fund’s current prospectuses and certain other documents appear online and certain other conditions are met.492 Rule 498A, like the disclosure framework for funds that we are proposing, relies on a layered disclosure approach that tailors the disclosure that investors receive to the informational needs of both new and ongoing investors in variable contracts. The conditions associated with the satisfaction of prospectus delivery requirements pursuant to rule 498A are tailored to the unique nature of variable annuity and variable life insurance contracts, and provide disclosures and protections that we believe are more appropriate for investors in those contracts (compared to disclosures and protections associated with the satisfaction of prospectus delivery requirements pursuant to proposed rule 498B).493 Accordingly, we are not proposing to make proposed rule 498B available for those products. We seek comment on the scope of our proposed new rule 498B and specifically on the following issues:
181. Is the way that the proposed new
rule would address existing fund shareholders’ continued receipt of annual prospectus updates appropriate, in light of the other aspects of the rules and rule amendments we are proposing? Would existing shareholders be receiving the right set of information under the proposal, and would such information be delivered or made available in an appropriate manner?
182. Should we make proposed rule
498B mandatory for all funds (instead of a permissive rule, as proposed)? If so, why? Would a permissive rule result in confusion for fund shareholders (because existing shareholders in funds that choose not to rely on the rule would continue to receive annual prospectus updates year over year), or produce any other detrimental effects? What would be funds’ primary considerations in determining whether to rely on proposed rule 498B?
183. Would the proposed rule’s
layered disclosure approach adequately protect existing shareholders who have no or limited internet access or who prefer not to receive information about their investments over the internet?
184. Should we modify the proposed
scope of the rule in any way? For example, should the scope be extended to include new investors, or investors that hold the fund through a separate account funding a variable insurance contract? Why or why not?
185. Is the definition for ‘‘existing
shareholder’’ under the proposed rule appropriate? If not, how should we revise this definition? Is it appropriate that, as proposed, the definition of ‘‘existing shareholder’’ includes a shareholder in a money market fund who has continuously maintained (or been a beneficial owner of) an account with that fund because a fund prospectus has been sent or given to that shareholder? Do commenters agree that money market funds generally continue to send or give prospectus supplements to former shareholders, so long as those shareholders maintain (or are beneficial owners of) an account with the money market fund? Are there any general limitations on this industry practice or other limitations that we should add with regard to this provision in the proposed rule? Should the proposed definition of ‘‘existing shareholder’’ also include specific provisions for certain types of funds other than money market funds, and if so, what types of funds, and what should these provisions be, and why? For example, should the rule generally reference funds used for cash management purposes, as opposed to (or in addition to) simply referencing money market funds?
186. Proposed rule 498B’s layered
disclosure framework for existing shareholders would only apply to openend management investment companies. To what extent, if any, should we extend this aspect of our proposal to other types of investment companies? If we were to do this, should we modify any of the conditions to rely on proposed rule 498B, and if so, how? For example, proposed rule 498B is designed to work in conjunction with our proposed amendments to funds’ shareholder reports. How should we modify the rule to apply in contexts where other types of investment companies (for example, registered closed-end funds and BDCs, and ETFs that are organized as unit investment trusts) have different shareholder report requirements than those we propose for open-end management investment companies? Please address the utility and policy implications of implementing a layered disclosure framework for existing shareholders, similar to that which proposed rule 498B would create, in the context of other types of investment companies.
187. If we were to adopt proposed
rule 498B, how should we evaluate the effectiveness of the new framework? What methods or approaches should we use to evaluate it, and what areas of the new framework should we focus on in any such review?
3. Conditions To Rely Upon Proposed
New Rule 498B
A fund would have to satisfy certain conditions in order to rely on the proposed new layered disclosure framework for existing shareholders, as outlined below. Failure to satisfy any of these conditions would mean that the fund could not rely on proposed rule

494See proposed rule 498B(c)(1); see also proposed rule 498(e) (providing requirements regarding website availability of certain fund documents). 495The rule 498B online fund documents would not include information required to be filed on Form N–CSR and made available online on a semiannual basis, as discussed above. See supra Section II.D.2. However, this and other information (including information provided in Form N–CSR) that the proposed amendments to rule 30e–1 would require a fund to make available online would have to be made available at the same website address where the rule 498B online fund documents would appear (e.g., the website specified on the cover page or at the beginning of the fund’s annual and semiannual shareholder reports). See supra footnote 464 and accompanying text. 496See generally supra footnotes 11 through 13. 497But see rule 498(e) (specifying the time frame for posting current versions of the documents it requires to appear online (i.e., on or before the time that the summary prospectus is sent or given and until 90 days after the date the fund security is carried or delivered (in the case of reliance on rule 498(c)) or the date that the communication is sent or given (in the case of reliance on rule 498(d))). 498The proposed rule specifies that the current summary prospectus that the fund makes available online must comply with the requirements described in rule 498(b). See proposed rule 498B(a)(7). 499See supra footnote 82. 500For example, the option that proposed rule 498B would provide would reduce—or possibly fully eliminate—the cost savings currently associated with printing and mailing a summary prospectus as opposed to the statutory prospectus, because those summary prospectuses would be made available online instead of being printed and mailed. See also 2009 Summary Prospectus Adopting Release, supra footnote 10, at nn.400 and 401 (discussing the cost savings associated with printing and mailing a mutual fund summary prospectus). 501The layered disclosure framework represented by the summary prospectus was designed to provide investors with ‘‘ready access to the information that investors need, want, and choose to review in connection with a mutual fund purchase decision.’’ See 2009 Summary Prospectus Adopting Release, supra footnote 10, at Section III.B.1. In adopting the summary prospectus framework, the Commission stated: ‘‘We believe that the new rule will result in funds providing investors with more useable information than they receive today in a format that investors are more likely to use and understand.’’ Id. Further, commenters have expressed an overall preference for concise, layered summary disclosure. See supra footnotes 27 through 30 and accompanying text. 502See 2009 Summary Prospectus Adopting Release, supra footnote 10, at paragraph accompanying n.195; Variable Contract Summary Prospectus Adopting Release, supra footnote 27, at text accompanying and following n.1038. 503See rule
498(a)(3) and (b)(4) under the Securities Act (collectively limiting the scope of a summary prospectus to a single fund, or series). 504Proposed rule 498B(c)(1)(ii)(A). 505Proposed rule 498B(c)(1)(ii)(B). 498B to satisfy prospectus delivery obligations to existing shareholders. a. Website Availability of Certain Fund Documents To rely on rule 498B, a fund would have to make certain materials publicly accessible, free of charge, at the website address specified on the cover page or at the beginning of the fund’s annual and semi-annual reports.494 These materials would include: The fund’s current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports (collectively, the ‘‘rule 498B online fund documents’’).495 This set of documents would be identical to the set of documents that are publicly accessible online for funds currently relying on rule 498. This proposed condition is designed to implement the contemplated layered disclosure approach by ensuring that current versions of the fund’s summary prospectus, statutory prospectus, and SAI would be available online so that existing shareholders who did not receive those documents would have ready access to them in a convenient, centralized location, together with other relevant documents for existing shareholders such as the most recent annual and semi-annual shareholder reports. The reference to ‘‘current’’ versions is designed to ensure that amendments or supplements to those documents are included in the rule 498B online fund documents as a condition of reliance on proposed rule 498B. Because funds generally continuously offer and sell shares, funds effectively must continuously maintain a current prospectus to satisfy their ongoing obligations to deliver the fund’s prospectus to new investors.496 Thus, a fund relying on proposed rule 498B would be required to maintain current versions of the rule 498B online fund documents so long as the fund is engaged in a continuous offering. Proposed rule 498B would not specify a time frame for maintaining current versions of these documents online, but when the document is no longer ‘‘current,’’ a fund would have to replace it with the current version.497 Under the proposal, a fund would be required to include a summary prospectus as one of the rule 498B online fund documents.498 While funds’ use of a summary prospectus is optional under rule 498, we estimate that currently 93% of all funds use a summary prospectus.499 Without requiring a summary prospectus, proposed rule 498B’s new layered disclosure framework for existing shareholders could result in funds having less incentive to use a summary prospectus.500 We believe it is important to make available both a summary prospectus and the statutory prospectus to continue the current approach for funds, which gives investors the option to choose the amount and type of information to review.501 To the extent that existing shareholders might find it useful to review a
fund prospectus (for example, in connection with a prospective additional investment in the fund), this condition would continue to make summary information about the fund available online, which we believe investors may be more likely to use and understand than the lengthier statutory prospectus.502 Although funds would be required to prepare a summary prospectus to comply with the conditions of rule 498B, a statutory prospectus could still be used to satisfy prospectus delivery obligations under section 5(b)(2) of the Securities Act. We understand that some funds that prepare summary prospectuses still choose to deliver a statutory prospectus under certain circumstances. For example, we understand that certain funds that prepare summary prospectuses still choose to send or give a statutory prospectus when investors are invested in multiple series covered by a single statutory prospectus. Likewise, certain funds may choose to send or give a statutory prospectus for certain product lines where the fund believes it would be helpful for investors to see the full suite of fund options (e.g., target date funds, sector funds, or target risk funds), to the extent that multiple series of the fund are described in a single statutory prospectus.503 The proposed rule would include additional conditions regarding the format, or formats, in which the rule 498B online fund documents would be presented on the website. First, the format must be human-readable and capable of being printed on paper in human-readable format.504 This requirement is designed to help ensure that the information provided will be user-friendly, both online and when printed. This would impose a standard of usability on the online information that is comparable to the readability of a paper document. Second, the format must provide persons with the ability to move back and forth within documents and between certain documents. Specifically, the format must permit persons accessing the statutory prospectus or SAI to move directly back and forth between each section heading in a table of contents of such document and the corresponding section of the document.505 Similarly, the format must permit persons accessing the summary prospectus to move directly back and forth between: (1) Each section of the

506Proposed rule 498B(c)(1)(ii)(C). 507Proposed rule 498B(c)(1)(iii). 508Proposed rule 498B(c)(1)(iv). 509See proposed rule 30e–1(b)(2)(vi); see supra footnotes 479 through 481 and accompanying text. 510See also supra footnote 469 (discussing similar safe harbor in the context of proposed rule 30e–1). 511See rule 498(e). 512See, e.g., supra footnote 501 and accompanying text. summary prospectus and any section of the statutory prospectus and the SAI that provides additional detail concerning that section of the summary prospectus; or (2) links located at both the beginning and end of the summary prospectus, or that remain continuously visible to persons accessing the summary prospectus, and tables of contents of the prospectuses and the SAI.506 These requirements are designed to result in online information that is in a better and more usable format than the same information when provided in paper. Being able to move directly within and between documents would be more efficient than the equivalent task in a paper document (i.e., flipping through multiple pages). Additionally, documents required to appear online would be subject to retention requirements that would require that persons accessing the rule 498B online fund documents would have to be able permanently to retain, free of charge, an electronic version of such materials in a format that is human-readable and permits persons accessing the statutory prospectus or SAI to move directly back and forth between each section heading in a table of contents and the corresponding
section of the document.507 This
condition would provide shareholders with the same retention capabilities they would have with paper copies of the information, while still maintaining the technological enhancements associated with the electronic versions of the materials. Further, there would be a safe harbor available if the rule 498B online fund documents were temporarily unavailable at the specified website, provided that the fund meets certain conditions.508 Those conditions would be substantially similar to the conditions associated with the proposed safe harbor provision addressing the website availability of the materials that the fund files on Form N–CSR.509 As with that safe harbor, we recognize that there may be times when, due to events beyond a fund’s control, a fund may temporarily not be in compliance with the web posting requirements of proposed rule 498B. Providing for this safe harbor by rule may obviate the need to provide exemptive relief from the proposed rule’s conditions under extenuating circumstances, as we have done from time to time.510 These website availability conditions are modeled on the parallel conditions that rule 498 includes, requiring funds that wish to rely on that rule’s summary prospectus option to make certain materials available online.511 We believe that this would create efficiencies for funds that wish to rely on proposed rule 498B, because many of these funds would likely be familiar with these conditions and would already have compliance processes in place pursuant to rule 498 to the extent that these funds choose to send or give summary prospectuses to new shareholders. We generally seek comment on the proposed website availability requirements, and specifically on the following issues:
188. Are the proposed website
availability requirements an appropriate condition to rely on proposed rule 498B? Why or why not?
189. Are the proposed rule 498B
online fund documents—the fund’s current summary and statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports— an appropriate set of materials for funds to have to make available online in order to rely on the proposed rule? Why or why not? Should this set of materials include any additional materials? Should we modify the proposed rule to reduce in any way the set of materials funds would have to make available online? Are there any revisions or simplifications that we should make to account for the information that the proposed amendments to rule 30e–1 would require a fund to post online? If so, should we make any conforming changes to proposed rule 30e–1? In addition to requiring the fund’s most recent annual and semi-annual shareholder report to appear online, should we also include a requirement that the fund (or a financial intermediary through which shares of the fund may be purchased or sold) must have provided existing shareholders with a paper or electronic copy of the fund’s most recent annual and semi-annual report as a condition of reliance on the proposed rule? Alternatively, should we include as a condition of reliance that the fund must adopt policies and procedures reasonably designed to ensure delivery of the fund’s most recent annual and semi-annual shareholder reports?
190. Is it appropriate effectively to
require funds that wish to rely on proposed rule 498B to prepare a summary prospectus that complies with the requirements outlined in rule 498(b)? To what extent is it important to make summary prospectuses available to investors? Should we, as proposed, include a summary prospectus among the list of rule 498B online fund documents? If we do not require a summary prospectus to be included, what would be the effects on investors? Would funds continue to prepare summary prospectuses, and if not, what would be the effects on investors? Under proposed rule 498B, updated prospectuses would generally be posted online instead of being printed and mailed to existing shareholders, and therefore there would be fewer economic incentives for funds to prepare and use a shorter summary prospectus in addition to the required statutory prospectus. If funds cease to prepare summary prospectuses, should we rescind rule 498 since that rule would essentially be moot? If so, what would be the effects on investors? 512
191. The website availability
conditions in proposed rule 498B are modeled on the parallel conditions in rule 498. If we modify any of the website availability conditions in proposed rule 498B that have parallel conditions in rule 498 (and rule 498A), should we similarly modify the parallel conditions of rule 498 and/or rule 498A? Should proposed rule 498B include parallel provisions to any other conditions in rule 498 and, if so, which ones and why? For example, should proposed rule 498B include a provision similar to that in rule 498(b)(3)(iii) specifying when information is conveyed to a person for purposes of 17 CFR 230.159 [rule 159 under the Securities Act]? Are there provisions not included in current rule 498 that we should include in rule 498B?
192. Although we estimate that 93%
of funds currently use a summary prospectus, are there significant issues that could prevent a fund from preparing a summary prospectus and that would therefore prevent the fund from relying on the proposed prospectus delivery option? If not, and to the extent that a summary prospectus would provide investors with summary information that they might be more likely to use and understand relative to the broader (and potentially more complex) disclosures in a statutory prospectus, should we require funds relying upon proposed rule 498B to use

513The time frame for posting current versions of the documents is on or before the time that the summary prospectus is sent or given and until 90 days after the date the fund security is carried or delivered (in the case of reliance on rule 498(c)) or the date that the communication is sent or given (in the case of reliance on rule 498(d)). 514See section 10(a)(3) of the Securities Act (requiring, among other things, that a prospectus used more than nine months after the effective date of a registration statement be updated so that the information contained therein shall not be more than 16 months old); see also section 11 of the Securities Act (providing a civil remedy for a registration statement that contains ‘‘an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading.’’); rule 408 under the Securities Act [17 CFR 230.408(a)] (requiring registrants to include, in addition to the information expressly required to be included in a registration statement, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading). Additionally, funds may supplement or ‘‘sticker’’ their prospectus or SAI. See generally rule 497 under the Securities Act. 515As discussed above, the proposed annual shareholder report would include a discussion of any material changes that have occurred since the beginning of the fund’s last fiscal year, or that the fund plans to make in connection with updating its prospectus under section 10(a)(3) of the Securities Act for the current fiscal year, with regard to certain topics. See supra Section II.B.2.f. Under our proposal, such disclosure of material changes could be optionally included in semi-annual shareholder reports, but would not be required. See supra text accompanying footnote 365. 516The fund also would have to file a posteffective amendment to its prospectus or a prospectus supplement with the Commission. See rules 485 and 497 under the Securities Act (providing requirements for filing post-effective amendments and prospectus supplements). 517See proposed rule 498B(c)(2) (referencing Item 27A(g) of Form N–1A with regard to the scope of topics for which notice of material changes would be required (and permitted) to be provided to existing shareholders); see also Item 27A(g) of proposed Form N–1A, which would require disclosure of any material changes with regard to:
(1) The fund’s name;
(2) The fund’s investment objectives or goals; (3) With respect to material increases, the fund’s ongoing annual fees, transaction fees, or maximum account fee; (4) The fund’s principal investment strategies; (5) The principal risks of investing in the fund; (6) The fund’s investment adviser(s); and (7) The fund’s portfolio manager(s). The fund also may describe other material changes that it would like to disclose to its shareholders under Item 27A(g) of proposed Form N–1A. 518For example, among other things, the proposed notice would require disclosure of changes in the fund’s investment objectives or goals, ongoing annual fees, principal investment strategies, and principal risks of investing in the fund, which generally align with summary and Continued a summary prospectus to satisfy prospectus delivery obligations (as opposed to allowing satisfaction of such obligations via a statutory prospectus)?
193. Are there any aspects of the
proposed website availability provisions of proposed rule 498B that should be harmonized, modified or clarified to reflect the different purposes of or interactions between rule 498 and proposed rule 498B? For example, to the extent that proposed rule 498B(c)(1) largely restates the web posting framework reflected in proposed rule 498(e), should proposed rule 498B instead reference, in whole or in part, the requirements of proposed rule 498(e)? If so, how should we address the fact that the website availability requirements of rule 498 are based upon the assumption that a summary prospectus will be sent or given to shareholders, which would not necessarily be the case under proposed rule 498B (because the rules would operate independently of one another, and a fund relying on rule 498B would not also have to rely on rule 498)? For example, rule 498 provides that the documents required to be made available online must appear at the website address specified in the summary prospectus sent or given to investors, whereas under proposed rule 498B existing shareholders would not be sent or given a summary prospectus.
194. Rule 498 specifies the time frame
for posting current versions of the documents it requires to appear online.513 Proposed rule 498B, on the other hand, specifies that ‘‘current’’ versions of the required online materials must appear online, and we envision that this requirement would in effect dictate the required time frame for posting (i.e., when the prospectus, SAI, or annual or semi-annual shareholder report is no longer current, it would be replaced online with a current version). Should we revise proposed rule 498B to parallel the provisions in rule 498(e) regarding when the required online materials must be accessible and when they must be removed? If so, how should we address the fact that no prospectuses would be delivered to existing investors under proposed rule 498B (whereas under rule 498, the time frame for web posting is triggered by the delivery of a summary prospectus)?
195. Are there alternate website
posting frameworks that would be more appropriate for us to incorporate into rule 498B, rather than—as proposed—a framework that reflects the website posting requirement of rule 498? b. Notice of Material Changes Funds generally maintain current prospectuses by filing annual posteffective amendments to their registration statement and, as necessary, supplementing or ‘‘stickering’’ the prospectus or SAI to reflect material or other changes to the information disclosed.514 Rather than bearing the expense of sending a prospectus with each confirmation of an investor’s purchase of additional shares, which often occurs on a periodic basis (e.g., monthly), most registrants instead send copies of the new prospectus (or prospectus supplement or sticker) to all investors each time it is updated (or whenever the supplement or sticker is issued). Under the layered disclosure framework that proposed rule 498B would create, existing shareholders would receive shareholder reports to keep them informed about their ongoing fund investments in lieu of receiving annual prospectus updates. Consequently, existing shareholders would no longer be required to have prospectus supplements or amended prospectuses delivered to them. Therefore, proposed rule 498B includes a requirement that is designed to help ensure that existing shareholders would continue to be informed in a timely manner regarding material changes to the fund (which, for shareholders in funds that are not relying on rule 498B, would otherwise be disclosed in updates to the prospectus). Absent this condition, existing shareholders potentially would not receive notice of a material change to the fund until the next annual shareholder report.515 Specifically, if there is a material change with respect to certain topics that the proposed rule specifies, a fund relying on proposed rule 498B would have to send or give existing shareholders notice of that change.516 This provision would not apply to changes previously disclosed in the fund’s most recent annual report to shareholders. The particular topics would be the same types of material changes in the proposed annual report.517 We believe this approach would have certain benefits over a more principles-based approach, such as a more general requirement that a fund must send notice of ‘‘any material change’’ to the fund. Specifically, we believe that the proposed approach would provide more certainty to funds about the types of changes that would necessitate notice to shareholders, and would enhance consistency of such disclosures across funds and across disclosure documents. These types of material changes also generally align with the prospectus disclosure items the Commission requires in summary prospectuses (and in the summary
section of statutory prospectuses) and
that we understand investors typically use to make investment decisions.518

statutory prospectus disclosures required by Items 2, 3, and 4 respectively of Form N–1A. Compare Item 27A(g) of proposed Form N–1A with Items 2 through 8 of proposed Form N–1A. 519See proposed rule 498B(c)(2). If the shareholder does not specify a delivery preference, the proposed rule would require that the notice be provided in paper. However, notices of material changes could also be delivered electronically, consistent with current Commission guidance, if a shareholder elects electronic delivery. See, e.g., supra footnote 21. 520 If a fund sends a separate notice to existing shareholders, the fund must file that notice with the Commission as an attachment to the post-effective amendment or prospectus supplement filed with the Commission regarding that change. See rules 485 and 497 under the Securities Act (providing requirements for filing post-effective amendments and prospectus supplements). 521See proposed rule 498B(c)(2). 522Rule 154 provides, among other things, that prospectus delivery obligations may be satisfied if a person delivers a prospectus to investors at the same address, the prospectus is delivered to the investors as a group, and the investors consent to such group delivery. Rule 154 provides certain conditions under which consent may be implied, and further provides that the investors must receive annual notice regarding how they may revoke their consent. 523Proposed rule 498B(d)(1)(i); see also rule 498(f)(1) (parallel requirements for funds and intermediaries relying on rule 498). The threebusiness-day timeframe also appears in similar existing conditions with respect to requests for copies of other similar documents. See, e.g., Instruction 3 to Item 1 of Form N–1A (requiring the SAI and shareholder reports to be sent within three business days of receipt of a request). We understand that investors often use information about these topics to inform initial investment decisions, and similarly we believe that material changes to these items may affect an existing shareholder’s assessment of whether to continue to hold, buy, or sell fund shares. In addition funds could disclose other material changes on a discretionary basis, which we believe would provide flexibility to funds to highlight changes that they believe would be of significance to existing shareholders. To help ensure shareholders receive notice in a timely manner, the proposed rule would require the notice to be provided within three business days of either the effective date of the fund’s post-effective amendment filing or the filing date of the prospectus supplement filing, by first-class mail or other means designed to ensure equally prompt receipt.519 Further, the proposed rule would not specify the form of this notice. Therefore, a fund could satisfy this requirement, for example, by sending existing shareholders the prospectus supplement filed with the Commission, an amended prospectus which reflects the material change, or another form of notice that
discusses the change.520 Proposed rule 498B would allow ‘‘householding’’ of notices of material changes if the notice satisfies rule 154 under the Securities Act.521 Rule 154 generally provides that funds may deliver a single copy of a prospectus to investors who share the same address, pursuant to certain other requirements.522 Accordingly, funds that wish to household notices of material changes, based on implied consent, would send a notice to each investor at a shared address stating, among other things, that the investors at the shared address would receive one notice of material change(s) in the future unless the investors provide contrary instructions. In addition, at least once a year, funds relying on the householding provision would be required to explain to investors who have provided written or implied consent how they can revoke their consent, and this explanation must be reasonably designed to reach these investors. We anticipate that a fund would generally choose to provide this explanation in the notices of material changes that it provides under proposed rule 498B, and/or in the annual shareholder report. We generally seek comment on the proposed condition regarding notice of material changes, and specifically seek comment on the following issues:
196. Is the proposed requirement
regarding notices of material changes to the fund an appropriate condition to rely on proposed rule 498B? Why or why not?
197. Are the conditions that would
necessitate a notice of material changes appropriate? For example, are the categories of topics identified in proposed rule 498B for which material changes would require notice to existing shareholders appropriate? Are those the topics that are most relevant to fund shareholders and their investment decisions? Does the proposed provision allowing funds to disclose additional material changes on a discretionary basis provide funds with appropriate flexibility to address their individual facts and circumstances? To the extent that the Commission adopts rules that include changes to the conditions that would necessitate disclosure of fund changes in shareholder reports, should the Commission adopt those same changes to the corresponding notice of fund changes that would be required pursuant to proposed rule 498B? In contrast, are there any considerations with regard to the disclosure of fund changes that apply uniquely to the notice contemplated by proposed rule 498B, as opposed to the proposed disclosure of fund changes in shareholder reports?
198. Are the requirements for sending
the notice of material changes appropriate? Should the rule, as proposed, require the notice to be provided within three business days of either the effective date of the fund’s post-effective amendment filing or the filing date of the prospectus supplement filing? Would a longer or shorter period be appropriate? Should the rule, as proposed, require the notice be provided by first-class mail or other means designed to ensure equally prompt receipt? Is this requirement sufficiently clear, or should additional delivery methods be specified in the rule? Would these requirements, together with the requirements to post online updated prospectuses and other additional information, provide sufficient notice to investors of material fund changes? As an alternative to the proposed requirements for sending the notice of material changes, should the rule instead require a fund to post notices of material changes on its website? Would this approach provide investors with sufficient notice of material fund changes, if notice were not sent (either in paper or electronically) directly to investors?
199. Are there any revisions the
Commission should make to this aspect of the proposal? For example, instead of allowing flexibility regarding the form of this notice, should the Commission specify a particular format or presentation? If so, what format and why? Likewise, instead of identifying specific topics that would necessitate notice of material changes to existing shareholders, should the Commission adopt a more principles-based approach (that, for example, only requires a fund to send notices of ‘‘material changes’’)? If so, why, and what should the alternative approach require?
4. Other Requirements
a. Delivery Upon Request of Certain Fund Documents We are proposing to require a fund (or financial intermediary through which shares of the fund may be purchased or sold) to deliver, in a manner consistent with the person’s delivery preference, a copy of the rule 498B online fund documents to any person requesting such a copy. The fund or intermediary must send requested paper documents at no cost to the requestor, by U.S. first class mail or other reasonably prompt means, within three business days after receiving the request for a paper copy.523 The proposed rule would also require a fund or intermediary to send electronic copies of these documents upon request within three business

524Proposed rule 498B(d)(1)(ii); see also rule 498(f)(2) (parallel requirements for funds and intermediaries relying on rule 498). 525Proposed rule 498B(d)(1)(ii); see also rule 498(f)(1) (parallel requirements for funds and intermediaries relying on rule 498). 526The delivery upon request provisions in proposed rule 498 would be essentially identical to the parallel provisions in proposed rule 498B, including the scope of the documents that would be subject to those provisions. Compare proposed rule 498(f)(1) with proposed rule 498B(d). 527See proposed rule 498(f)(1). 528Proposed rule 498B(d)(2)(i); see also rule 498(f)(3)(i) (parallel provision in the rule governing the use of mutual fund summary prospectuses). We recognize that a format that is convenient for reading online might not be the same format that is convenient for printing on paper. A fund could comply with the proposed requirement by presenting the online fund documents on a website in a format that is convenient for reading online, and, separately, making these same documents available on the website in a format that is convenient for printing on paper (e.g., by making a ‘‘printer-friendly version’’ available). We understand that funds commonly use this approach in complying with rule 498. 529Proposed rule 498B(d)(2)(ii); see also rule 498(f)(3)(ii) (parallel provision in the rule governing the use of mutual fund summary prospectuses). days.524 The proposed rule would provide that the requirement to send an electronic copy of a document may be satisfied by sending a direct link to the online document, so long as certain conditions are met.525 First, a current version of the document would have to be directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent. Second, the email would have to explain both how long the link will remain useable and that, if the recipient desires to retain a copy of the document, he or she should access and save the document. Collectively, these requirements are designed to help ensure that an investor has prompt access to the required information in a format that he or she prefers. Under our proposal, an existing shareholder would no longer receive annual prospectus updates, or supplements or updates to the prospectus that the fund makes between annual updates, but would be able to review those and other relevant documents online and also receive those documents directly, in paper or electronic format, upon request. Rule 498 would continue to require a fund to send specified fund documents to shareholders upon request, if the fund relies upon rule 498 to satisfy its prospectus delivery obligations or to send communications after the effective date of the fund’s registration statement.526 However, the delivery upon request obligations of rule 498 would not apply with respect to existing shareholders if the fund were to rely on proposed rule 498B.527 Thus, under our
proposal, we are including delivery upon request provisions as conditions of proposed rule 498B that are parallel to the delivery upon request provisions of rule 498. We seek comment on the delivery upon request provisions of proposed rule 498B, and specifically on the following issues:
200. Are the delivery upon request
provisions of proposed rule 498B appropriate? Are they necessary in light of the parallel provisions in rule 498? Is it necessary to have delivery upon request provisions in proposed rule 498B, in light of the fact that the materials subject to these provisions would be required to be available online? Why or why not? Are these considerations different than in rule 498 and/or rule 498A, and should the delivery upon request provisions be retained in rule 498 and/or rule 498A? Why or why not?
201. Should we modify the delivery
upon request provisions of proposed rule 498B in any way, and if so, how? For example, should any of the terminology or concepts in the proposed requirement to deliver an electronic copy of a requested document be revised to reflect technological developments or to ensure that they are consistent with the goal of technological neutrality (e.g., email, direct link)? Should persons relying on proposed rule 498B be required to send the rule 498B online fund documents to any requestor within three business days of such request, as proposed? Likewise, if persons relying on proposed rule 498B send a direct link to an online document in response to a request for electronic delivery of that document, should we require a current version of that document to be directly accessible through the link from the time that the email is sent through the date that is six months after the date that the email is sent, as proposed? In either case, would a different time period be appropriate? If we do modify any of the delivery upon request provisions of proposed rule 498B, should we similarly modify the parallel provisions in rule 498 and/ or rule 498A?
202. How does the proposed rule
affect shareholders’ ability to request paper copies of the rule 498B online fund documents? Are there any changes to the proposed rule that we should consider to make the process for requesting paper copies more convenient for shareholders? Should we require funds to make available to shareholders a way to opt into automatic annual delivery of future summary or statutory prospectuses in a paper format without having to specifically request them each year? What would the operational challenges of this approach be? Should we allow funds to give shareholders the option of automatic delivery in paper?
203. The delivery upon request
provisions of proposed rule 498B would not apply to the information funds must post online pursuant to proposed rule 30e–1, because proposed rule 30e–1 has its own delivery upon request provisions. Should we revise proposed rule 498B’s delivery upon request provisions in any way to account for the information that proposed rule 30e–1 would address, and if so, are there any conforming changes that we should make to proposed rule 30e–1? b. Convenient for Reading and Printing In addition, the proposed rule would require the rule 498B online fund documents to be presented in a format that is convenient for both reading online and printing on paper.528 This requirement is designed to ensure that the information appearing online would be user-friendly, both online and when printed. In addition, the proposed rule would require persons accessing the rule 498B online fund documents to be able to retain electronic versions permanently, free of charge, in a format that is convenient for both reading online and printing on paper.529 Collectively, these requirements impose on the online information a standard of usability that is comparable to the readability and retention of a paper document. We seek comment on these ‘‘convenient for reading and printing’’ provisions of proposed rule 498B and specifically on the following issues:
204. Are the ‘‘convenient for reading
and printing’’ provisions of proposed rule 498B appropriate? Are they necessary in light of parallel provisions in rule 498? Should we modify these provisions in any way? If so, how, and should we also modify the parallel provisions of rule 498 and/or rule 498A? Is the phrase ‘‘convenient for reading and printing’’ sufficiently clear or should we provide additional guidance or rule text?
205. How would the proposed rule
affect shareholders’ ability to read and print rule 498B online fund documents? Are there any changes to the proposed rule that we should consider to make reading and printing such documents more convenient for shareholders?
206. The ‘‘convenient for reading and
printing’’ provisions of proposed rule 498B would not encompass the information funds would be required to post online pursuant to proposed rule

530See proposed rule 498B(d)(3); see also rule 498(f)(5) (parallel provision in the rule governing the use of mutual fund summary prospectuses). 531See 2009 Summary Prospectus Adopting Release, supra footnote 10, at nn.272 and 273 and accompanying text (relevant factors include the manner in which the online version renders charts, tables, and other graphics; the extent to which the online materials include search and other capabilities of the internet to enhance investors’ access to information and include access to any software necessary to view the online version; and the time required to download the online materials). 532Rule 30e–3 Adopting Release, supra footnote 14. 533See proposed Form N–1A; see rule 498(b)(1)(vi) and (vii); paragraph (a)(5) to Item 1 of Form N–1A; paragraph (d)(8) to Item 27 of Form N– 1A. 534See Rule 30e–3 Adopting Release, supra footnote 14, at paragraph accompanying n.18. 535 Id. 536 Id. at paragraph accompanying nn.20 and 21. 537 Id. at n.20 and accompanying text; see also Fund Investor Experience RFC, supra footnote 8. 538See supra Section I.B.1. 539See supra footnote 44 and accompanying text; see also supra footnote 100 and accompanying and following text (discussing Investor Advisory Committee recommendation that the Commission develop an approach to funds’ shareholder reports that would rely on summary disclosure and layered disclosure principles). 540See supra footnote 99 and accompanying text. 541See infra Section III.C.2.d (discussing the estimated reduction of printing and mailing costs under the proposed approach). 542See Rule 30e–3 Adopting Release, supra footnote 14, at text following n.257. 30e–1, because proposed rule 30e–1 contains similar ‘‘convenient for reading and printing’’ provisions that would cover that information. Should we revise proposed rule 498B’s ‘‘convenient for reading and printing’’ provisions in any way to account for the information that proposed rule 30e–1 would require funds to make available online and, if so, are there any conforming changes that we should make to proposed rule 30e–1?
c. Compliance With Other Requirements
The delivery upon request and ‘‘convenient for reading and printing’’ requirements would not be conditions of reliance on proposed rule 498B. We are proposing that failure to comply with these requirements would not negate a person’s ability to rely on proposed rule 498B to satisfy its delivery obligations under section 5(b)(2) of the Securities Act.530 Such failure would, however, constitute a violation of proposed rule 498B. We recognize that a fund could inadvertently violate the delivery upon request and ‘‘convenient for reading and printing’’ requirements of the rule. For example, weather issues or other forces outside of the fund’s control could present challenges for compliance with the three-business-day deadline. Likewise, whether a particular format is convenient for reading online and printing depends on a number of factors and must be decided on a case-by-case basis.531 In order to provide greater certainty to market participants and funds who seek to rely upon the rule, these requirements would not be conditions to rely upon proposed rule 498B, as discussed in the paragraph above. We seek comment on this provision of proposed rule 498B and specifically on the following issues:
207. Should compliance with any or
all of the proposed delivery upon request or ‘‘convenient for reading and printing’’ requirements be a condition of reliance on proposed rule 498B? That is, should failure to comply with these requirements result in a violation of
section 5(b)(2) of the Securities Act?
Alternatively, should the failure to comply with these requirements be a violation of Commission rules that does not result in an inability to rely on the rule or a violation of section 5(b)(2)? J. Amendments Narrowing Scope of Rule 30e–3 Subject to conditions, rule 30e–3 generally permits investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of that availability instead of directly mailing the report (or emailing an electronic version of the report) to shareholders.532 We are proposing to amend the scope of rule 30e–3 to exclude investment companies registered on Form N–1A, which would be sending tailored annual and semiannual reports under the proposal. We are also proposing conforming amendments to Form N–1A that would remove the current statement that rule 30e–3 requires to appear on a fund’s summary and statutory prospectus and annual and semi-annual reports informing investors of the change in delivery format options if the fund intends to rely on rule 30e–3 prior to January 1, 2022.533 When the Commission adopted rule 30e–3 in 2018, it stated that the rule’s new ‘‘notice and access’’ option for transmitting shareholder reports was intended to modernize the manner in which funds deliver periodic information to investors.534 The Commission also stated that it believed that the new rule would improve investors’ ability to access and use this information (for example, by providing investors with access to at least a full year of complete portfolio holdings information in one location), while reducing expenses associated with printing and mailing that are borne by funds, and ultimately, by their investors.535 Furthermore, the Commission stated that it continues to search for better ways of providing investors with the disclosure that they need to evaluate funds in which they are considering investing or currently hold shares.536 As part of these general efforts, the Commission noted that it was issuing—at the same time that it adopted rule 30e–3—the Fund Investor Experience RFC, which was directed at investors regarding ways in which fund disclosure, including shareholder reports, may be improved.537 As discussed above, the new proposed disclosure framework considers feedback that commenters provided in response to the Fund Investor Experience RFC and reflects the Commission’s continuing efforts to search for better ways of providing investors with the disclosure that they need. The proposed movement away from a notice and access model for open-end fund shareholder report transmission—and towards a model that contemplates direct transmission of concise shareholder reports—reflects our understanding based on responses to the Fund Investor Experience RFC, prior investor testing and surveys, and other disclosure reform initiatives that shareholders strongly prefer layered disclosure.538 It also reflects a model that certain commenters to the
Fund Investor Experience RFC specifically suggested fund investors would find to be useful.539 Furthermore, the proposed approach reflects the Commission’s recent experience with tailoring investment company disclosure requirements to the needs of new versus existing investors.540 In light of all of these considerations, we preliminarily believe that the proposed disclosure approach represents a more-effective means of improving investors’ ability to access and use fund information, and of reducing expenses associated with printing and mailing, than continuing to permit open-end funds to rely on rule 30e–3.541 Although funds can generally begin relying on rule 30e–3 on January 1, 2022, funds may rely on rule 30e–3 prior to that date if they include certain legends on fund prospectuses and shareholder reports stating that shareholder reports will eventually be available online and no longer will be sent to shareholders.542 We required an extended transition period and related disclosures in connection with implementation of rule 30e–3 to alert

543See supra footnote 275 and accompanying text. 544See generally Sections II.B through II.D and requests for comment in supra Section II.C.3.b. 545See supra Section II.A. 546See, e.g., Investor Bulletin: Mutual Fund Fees and Expenses (May 12, 2014), available at https:// www.investor.gov/additional-resources/news-alerts/ alerts-bulletins/investor-bulletin-mutual-fund-feesexpenses; How to Read a Mutual Fund Shareholder Report, supra footnote 316. 547See Items 3, 8A, and 27A of proposed Form N–1A. Similarly, we are proposing revisions to simplify fee and expense presentations in annual and semi-annual reports. See supra Sections II.B.2.b and II.C.1. 548The Fund Investor Experience RFC Feedback Flier solicited feedback on the presentation of fees. In response to the question, ‘‘Do you think funds clearly disclose their fees and expenses?’’ 21 of 34 commenters (or 62%) responded that fund fees are Continued investors that they would no longer be receiving reports in the mail and to provide time for affected investors to tell their fund or financial intermediary that they wished to continue receiving reports in paper, if that was their preference. Under this proposal, in contrast, investors would be receiving this information directly, and so there would not be a need to provide time for investors to express a different preference. Shareholders receiving the annual and semi-annual reports that this proposal contemplates would be receiving tailored information more directly than they would via the rule 30e–3 notice. However, if this proposal is adopted, a fund that has previously relied on rule 30e–3 might wish to communicate to investors the change and could, for example, do so in an annual report sent to investors.543 We generally seek comment on the proposed amendments to rule 30e–3, and specifically seek comment on the following issues:
208. The proposed amendments
would exclude investment companies registered on Form N–1A from relying on rule 30e–3. Is such exclusion appropriate, in light of our goals of ensuring that all investors in these funds experience the anticipated benefits of the new tailored disclosure framework? Is the proposed approach to the transmission of shareholder reports preferable to the optional shareholder report transmission method that rule 30e–3 currently provides, in terms of the goal of improving investors’ ability to access and use fund information, and reducing expenses associated with printing and mailing? Does the proposed approach more closely align with shareholders’ preferences than the approach under rule 30e–3? Does the proposed approach represent a better way of providing investors with the disclosure they need to monitor their fund investments and make informed investment decisions? Are there any other considerations we should take into account in evaluating whether to adopt the proposed approach in lieu of continuing to permit open-end funds to rely on rule 30e–3’s notice and access model?
209. If we were to adopt the proposed
rules and amendments for tailored shareholder reports, should we also allow open-end funds to continue to rely on rule 30e–3? 544 Why or why not? If we were to permit funds to continue relying on rule 30e–3, are there any changes we should make to the proposed rules and amendments in light of this? For example, should we prohibit funds that are relying on rule 30e–3 from also relying on proposed rule 498B?
210. To what extent, if any, should
the scope of these amendments be extended to exclude other types of investment companies from relying on rule 30e–3? If we were to do this, how should we modify the rule to apply (or not) in contexts where other types of investment companies (for example, registered closed-end funds and BDCs, and ETFs that are organized as unit investment trusts) have different shareholder report requirements and would not have the layered disclosure framework for existing investors that we propose for open-end management investment companies?
211. Under our proposal, funds
planning to rely or currently relying on rule 30e–3 would not be required to provide notice to investors of the proposed amendments to rule 30e–3 because the amendments would result in those investors directly receiving information tailored to their informational needs. Should we require such notice to investors and, if so, to what extent should we specify the form, timing, and substance of such notice?
212. Are there any difficulties that
funds that have already begun to rely on rule 30e–3 would encounter in complying with the proposed changes to the scope of rule 30e–3? What difficulties would these be, and what Commission actions could help mitigate these difficulties? Should the Commission, for example, provide a longer compliance period in connection with any adoption of the proposed amendments to rule 30e–3? If so, should we delay the effectiveness of rule 498B for the same period of time to avoid a period where existing shareholders do not directly receive either a shareholder report or an annual prospectus update? K. Proposed Amendments To Fund Prospectus Disclosure Requirements We are also proposing several amendments to the content of funds’ prospectuses. Specifically, two of the critical elements in prospectus disclosure relate to (1) fees and (2) risks, and we are proposing certain changes that we believe will improve disclosure regarding these topics. Our goal is to provide greater clarity and more comparable information with regard to fees and risks and by doing so, improve investor comprehension and facilitate investors’ ability to make informed investment decisions.545

Improved Prospectus Fee Disclosures
In addition to proposing amendments to fee presentation in shareholder reports, we are proposing improvements to prospectus disclosure about fund fees. These fee presentations are different because the annual report expense presentation is designed to help fund shareholders assess and monitor their ongoing fund investments looking back over the prior period, while the prospectus disclosure helps investors assess a prospective fund investment and is based on the fund’s current estimated fees. When considering investing in a fund, fees and expenses are an important factor investors should consider. Fees and expenses can significantly affect a fund’s returns. For example, a fund with higher costs must have higher returns than a fund with lower costs to generate the same performance. In addition, differences in costs that appear to be small, for example on an annual basis, may have a large impact when comparing returns of funds over time. Funds disclose their fees in the prospectus and the annual and semiannual reports. The presentations in each of these contexts disclose information about fees and expenses in a standardized format to help investors compare that information across funds. Despite these existing disclosure requirements and educational efforts, the degree to which investors understand fund fees and expenses remains a significant source of focus and attention, and the Commission and staff have continually sought to improve investors’ understanding in this area.546 We are proposing revisions to simplify the presentation of fees and expenses in the prospectus and help increase investor comprehension.547 These proposed amendments respond to feedback that commenters provided in response to the Fund Investor Experience RFC.548 We are proposing to

not clearly disclosed. In response to the question ‘‘How could funds improve the disclosure of fees and expenses?’’ 21 of 27 commenters (or 78%) responded that fund fee presentations should be simplified. See also Recommendation of the Investor Advisory Committee Regarding Mutual Fund Disclosure (Apr. 14, 2016), available at https:// www.sec.gov/spotlight/investor-advisorycommittee-2012/recommendation-mf-feedisclosure-041916.pdf (‘‘Through testing, the Commission could identify ways to simplify and clarify the fee table’’). 549See proposed Item 3 to Form N–1A. 550See proposed Item 8A of Form N–1A. 551See supra footnote 148 and accompanying text (noting that a fund’s shareholder expense presentation does not reflect AFFE because this is not included in a fund’s financial statements); see also infra footnotes 605 and 606 and accompanying text (discussing current AFFE disclosure requirements). 552See Item 3 of Form N–1A. 553 Id., see also 17 CFR 270.12b–1 [rule 12b–1 under the Investment Company Act]. 554 Instruction 3(e) to Item 3 Form N–1A. 555See Consolidated Disclosure of Mutual Fund Expenses, Investment Company Act Release No. 16244 (Feb. 1, 1988) [53 FR 3192 (Feb. 4, 1988)]. 556The example does not reflect purchase charges on reinvested dividends and other distributions (as applicable). If a fund imposes a fee or other charge when an investor sells (redeems) his or her shares, the fund must disclose two expense examples. The first example shows the estimated expenses of investing in the fund if the investor continues to hold his or her shares throughout the 1-, 3-, 5- and 10-year periods. The second example shows an investor’s estimated investment expense if he or she sells (redeems) shares at the end of the 1-, 3-, 5- or 10- year periods. 557 Item 3 of Form N–1A. 558Summary Prospectus Adopting Release, supra footnote 10, at Section III.A.3.d. 559Proposed Item 3 of Form N–1A; see also 2009 Summary Prospectus Adopting Release, supra footnote 10, at 41–42 (commenters suggest an abbreviated fee presentation and the Commission stated, ‘‘this idea deserves further consideration, and we will consider it for possible future rulemaking’’). 560The statutory prospectus, which would include the full fee table, would be available online if the fund relies on rule 498 and delivers a standalone summary prospectus. In cases where the fund does not rely on 498, the investor would receive the statutory prospectus on paper and could flip from the fee summary to the full fee table. replace the current fee table in the summary section of the statutory prospectus with a ‘‘fee summary.’’ 549 The goal of this simplified fee summary would be to streamline the presentation of fees and provide an easier-tounderstand presentation that includes fewer data points to help provide a clearer picture of the total costs of investing in a fund. The current fee
table, which includes additional detail,
would be moved to the statutory prospectus, where it could be used by investors who want additional details about fund fees to supplement the fee summary.550 In addition, we are proposing to replace certain terms in the current fee table with terms that we believe investors would more easily understand (these terms would also be used in the fee summary, as applicable). We are also proposing to permit funds that make limited investments in other funds to disclose AFFE, the fees and expenses associated with those investments, in a footnote to the fee
table and fee summary instead of
reflecting AFFE as a line item in the fee
table and fee summary (as all funds do
today).551 This proposed amendment is designed to enhance consistency of funds’ prospectus fee disclosure in recognition that, for funds whose investments in other funds are limited, the fees and expenses of the underlying funds may more closely resemble other costs of investment that are not currently reflected in the prospectus fee
table.
a. Current Prospectus Fee Disclosure Currently, funds must provide two separate presentations of fee information in the prospectus: (1) A
table under the heading ‘‘Fees and
Expenses of the Fund,’’ (the ‘‘fee table’’) which shows shareholder transaction fees and annual fund operating expenses, generally in terms of a percentage of the amount invested in the fund; and (2) an example, which is a hypothetical calculation that shows the estimated expenses, in dollars, that an investor will pay for investing in a fund over different time periods.552 The fee table currently includes two categories of fees: ‘‘shareholder fees’’ and ‘‘annual fund operating expenses.’’ Shareholder fees are charges that investors pay directly—they are deducted from the amount that an investor invests in the fund. These charges typically appear as a percentage of the amount invested, and include:

Sales charges (also known as
‘‘loads’’), which generally pay investment professionals compensation for selling shares of a fund to an investor; and
Other applicable fees related to
redemptions, exchanges, and account fees. Some shareholder transaction fees appear as a dollar amount in the fee
table.
Annual fund operating expenses are charges that an investor pays indirectly, because these charges are deducted from fund assets. Annual fund operating expenses appear as a percentage of net assets and generally include:
‘‘Management fees,’’ which a fund
pays to its investment adviser for deciding which investments the fund buys and sells and for providing other related services;
‘‘Rule 12b–1 fees,’’ which pay for
marketing and selling fund shares;
‘‘Other expenses,’’ which represent
various categories, such as auditing, legal, custodial, transfer agency fees, and interest expense; and
For funds that invest in other funds,
AFFE (the fees and expenses of acquired funds).553 A fund may also reflect certain waivers that may reduce the fund’s total fees.554 The example is a hypothetical calculation that shows the estimated expenses that an investor will pay for investing in a fund over different time periods. The goal of the example is to provide a means for investors to compare expense levels of funds with different fee structures over varying investment periods.555 The example appears in dollar amounts, based on a hypothetical investment of $10,000, and assumes a 5% annual return over the course of 1, 3, 5, and 10 years.556 Funds must also include brief disclosure regarding portfolio turnover immediately following the fee table example.557 Portfolio turnover measures how often a fund buys and sells its investments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when fund shares are held in a taxable account. The portfolio turnover rate will vary depending on the fund’s investment strategy. This disclosure is designed to help investors understand the effect of portfolio turnover, and the resulting transaction costs, on fund expenses and performance.558 b. Proposed Fee Summary We propose to require a simplified fee summary that would streamline the presentation of fees and focus on the total costs or ‘‘bottom line’’ of an investment in the fund.559 The fee summary would be included in the summary section of the statutory prospectus (or, for funds that rely on rule 498, the summary prospectus), which funds provide investors at their initial purchase. The full fee table would be included in the statutory prospectus for those who want the additional level of detail. This is a layered disclosure approach designed to provide investors with concise, key information relating to the fund in the summary fee disclosure, with access to more detailed information elsewhere.560 The information in the fee summary would incorporate a subset of the information that appears in the fee table, and the fees that appear in the fee

561Clean shares are share classes offered without sales loads or any asset-based distribution or sales fees. Investors purchasing and selling clean shares may be required to pay a commission to a broker. summary would be the same as any corresponding fees in the fee table. We are proposing that the fee summary begin with a narrative statement that the fee summary shows amounts the investor could pay to buy, hold, and sell shares of the fund and that these costs reduce the value of the investment. The narrative statement also would state that the investor may pay other fees, such as brokerage commissions and other fees to financial intermediaries. This would occur, for example, in the case of ETFs or ‘‘clean shares.’’ 561 The narrative must state that these charges are not reflected in the fee summary and example. We are not proposing to require that the fee summary and example include these fees, because we understand that financial intermediaries that distribute the fund typically determine such fees, and that the amount may vary across financial intermediaries and distribution channels. The body of the fee summary would consist of two sections: (1) A summary fee table showing the fund’s transaction fees, maximum account fee (if applicable), and ongoing annual fees, and (2) a simplified version of the example. The proposed requirements for the fee summary are shown in the following chart, with current fee table line items shown on the left and corresponding items in the fee summary on the right. We discuss the proposed changes in more detail below. BILLING CODE 8011–01–P

EP05NO20.001</GPH>

562These line items are currently titled ‘‘Maximum Sales Charge (Load) Imposed on Purchases’’ and ‘‘Maximum Deferred Sales Charge (Load),’’ respectively. See Item 3 of Form N–1A; see also supra Table 5. 563This line item is currently titled ‘‘Maximum Sales Charge (Load) Imposed on Reinvested Dividends [and Other Distributions].’’ See Item 3 of Form N–1A; see also supra Table 5. 564This line item is currently titled ‘‘Redemption Fee.’’ See Item 3 of Form N–1A; see also supra
Table 5.
565This line item title is the same as the line item title that currently appears in Form N–1A under the heading ‘‘Shareholder Fees.’’ See Item 3 of Form N– 1A; see also supra Table 5. 566Proposed Instruction 3 to Item 3 of Form N– 1A; see also supra Table 5. BILLING CODE 8011–01–C We seek comment on the proposed new fee summary, and specifically on the following issues:
213. Is the proposed new fee summary
appropriate? If so, is it also appropriate for the current full fee table to appear in the fund’s prospectus outside the summary section of the prospectus (or, for funds that rely on rule 498, outside of the fund’s summary prospectus)? Is this ‘‘layered’’ format appropriate for fee disclosure?
c. Proposed Summary Fee Table
We propose to require a simplified fee summary in the summary section of the prospectus that is designed to improve investor understanding of fees and expenses. The proposed summary fee
table would change the current fee table
heading ‘‘Shareholder Fees’’ to ‘‘Transaction Fees,’’ which we believe is a more plain-English term to describe fees paid each time an investor buys or sells shares of the fund. The line items under the heading ‘‘Transaction Fees’’ would generally encompass the same types of fees that currently appear as line items under the ‘‘Shareholder Fees’’ heading. However, we propose to re-title the line items with more plain-English descriptions, to increase investor comprehension. The proposed line items under the heading ‘‘Transaction Fees’’ that are parallel to line items currently appearing under the heading ‘‘Shareholder Fees’’ include:

Any ‘‘Purchase Charge’’ to purchase
shares, and any ‘‘Exit Charge’’ to sell shares; 562
The ‘‘Maximum Purchase Charge
Imposed on Reinvested Dividends [and Other Distributions]’’; 563
Any ‘‘Early Exit Fee,’’ which would
show the redemption fee charged for exiting the fund early (and is distinguished from sales charges, which are covered under the ‘‘Exit Charge’’ line item); 564
Any ‘‘Exchange Fee,’’ which is a
charge that may be imposed on an investor who wishes to move assets from one fund in a fund group to another.565 The one line item that currently appears under the heading ‘‘Shareholder Fees’’ that would not appear under the proposed ‘‘Transaction Fees’’ heading is the ‘‘Maximum Account Fee.’’ This fee is not a transaction fee, so we are proposing to include it as its own separate heading in the summary fee
table.566
EP05NO20.002</GPH>

567Proposed Instruction 2 to Item 3 of Form N– 1A. However, a multiclass fund that shows a charge and line item because one class imposes a charge may show 0 as the charge for other classes. Id. 568Proposed Instruction 2 to Item 3 of Form N– 1A. 569Proposed Instruction 4(b) to Item 3 of Form N– 1A. 570See current Instruction 3(e) to Item 3 of Form N–1A. Based on XBRL data filed on the EDGAR system as of June 1, 2019, of the more than 32,000 fund classes, approximately 53% described a fee waiver in the prospectus fee table. The proposed line item would be permitted, not required, just as the current provision on expense reimbursements or fee waivers is also permissive. Id. We believe that, as a practical matter, a fund would likely choose to disclose the ongoing annual fees with the expense reimbursements or fee waivers because that would be a lower amount than ongoing annual fees without those reductions. 571 Instruction 4(b) to Item 3 of proposed Form N– 1A; see also supra Table 5. 572Proposed Instruction 2, proposed Instruction 3, and proposed Instruction 4(c) to Item 3 of Form N–1A. 573Cf. Numerical Information Format and Investment Decisions: Implications for the Disposition Effect and the Status Quo Bias, Rubaltelli et al., The Journal of Behavioral Finance, 2005, Vol. 6, No. 1, 19–26); see also Government Accountability Office, Statement of Richard J. Hillman, Director, Financial Markets and Community Investment before the U.S. Senate Committee on Governmental Affairs Subcommittee on Financial Management, the Budget and International Security, ‘‘Mutual Funds: Additional Disclosures Could Increase Transparency of Fees and Other Practices,’’ (Jan. 27, 2004), available at http://www.gao.gov/assets/120/110547.pdf; Justine S. Hastings & Lydia Tejeda-Ashton, Financial Literacy, Information, and Demand Elasticity:
Survey and Experimental Evidence from Mexico, NBER Working Paper 14538 (Dec. 2008), available at https://www.nber.org/papers/w14538 (finding that providing fee disclosures to Mexican investors in peso rather than percentage terms caused financially inexperienced investors to focus on fees). 574See Variable Contract Summary Prospectus Adopting Release, supra footnote 27 (requiring a tabular presentation of fees in variable contract summary prospectuses). 575The ‘‘Ongoing Annual Fee’’ amount may differ from the currently reported ‘‘Total Annual Fund Operating Expenses’’ figure to the extent that a fund discloses AFFE in a footnote instead of reflecting that amount in the ‘‘Ongoing Annual Fee’’ figure under the proposed amendments. See infra Section II.H.1.g. 576See infra Section II.H.1.g (proposing certain amendments to the scope of AFFE disclosure). The fee summary is designed to be a focused presentation of transaction costs and, consequently, we are proposing to instruct funds that any transaction fee equaling $0 should not be included in the summary fee table (and the applicable line item that would appear in Form N–1A should be omitted from the summary fee table).567 We understand that certain of these fees are not common in practice (e.g., account fees, and increasingly, exit charges). Therefore, even though there are a number of line items that would appear under ‘‘Transaction Fees’’ in Form N– 1A, we do not expect that most funds would have to include all of these line items in their fee disclosure. As a result, we do not anticipate that the proposed amendments to the form would detract from the focused nature of the fee summary. While we are proposing to consolidate the line items that currently appear under ‘‘Annual Fund Operating Expenses,’’ as we discuss in more detail below, we are not similarly proposing to consolidate the corresponding line items that would appear under ‘‘Transaction Fees.’’ The imposition of transaction fees depends on whether an investor buys or sells shares of a fund, and will therefore be different for each investor. Accordingly, consolidation of transaction fees would be confusing to an investor who would be unable to determine whether and when he or she would bear those fees. For each of the line items under the ‘‘Transaction Fees’’ heading, and the ‘‘Maximum Account Fee,’’ a fund would have to indicate the maximum amount that the fee could be (and state that the fee is ‘‘up to’’ the stated amount), if the fund offers sales charge discounts.568 This presentation would indicate to the reader that the actual sales charge may in fact be lower than the maximum fee disclosed in the fee summary. The proposed fee summary would change the current fee table heading ‘‘Annual Fund Operating Expenses’’ to ‘‘Ongoing Annual Fees.’’ This new heading is designed to convey, in plain English, that there are charges that an investor will have to pay each year. The ‘‘Ongoing Annual Fees’’ entry in the proposed summary fee table
would consist of one line item showing the total amount that the investor would pay annually. Rather than an itemized list of Ongoing Annual Fees, this proposed fee presentation would show a total, ‘‘bottom line’’ figure that investors can expect to pay. This is a
figure that investors could compare
across funds in evaluating the ongoing annual fees associated with each fund. The proposed summary fee table would, like the current prospectus fee presentation, address expense reimbursements and fee waiver arrangements. If the fund’s full fee table in the statutory prospectus were to show an expense reimbursement or fee waiver arrangement (a ‘‘discount’’), our proposal would permit an additional line item in the proposed summary fee
table: ‘‘Ongoing Annual Fees with
Temporary Discount.’’ 569 This line item would reflect the amount of ongoing annual fees after any discount, which would more precisely reflect the fees that the investor will pay while the discount is in place.570 This line item would appear after the ‘‘Ongoing Annual Fees’’ line item that does not reflect the discount, because we believe that the ‘‘gross’’ figure should be the most prominent, given that expense reimbursement and fee waivers are generally only temporary. Further, we are proposing that this optional Ongoing Annual Fees line item be accompanied by a footnote stating the expected termination date of the discount.571 We propose to require that each line item in the summary fee table show the cost investors could pay in dollars assuming a $10,000 investment, as well as the same charge shown as a percentage of assets.572 Research suggests that investors may better appreciate the impact of costs when expressed as a dollar amount rather than a percentage of assets.573 While this proposed addition would add some marginal length to the fee summary, we do not believe the length is inappropriate when balanced against the need to communicate the impact of costs to investors effectively. Also, we believe that the proposed tabular presentation of the fee summary is an efficient way to present fee information, including the new dollar-based presentation, in a manner that investors can easily read and understand.574 Under the proposal, the ‘‘Ongoing Annual Fee’’ amount generally would be the same figure that funds currently report as ‘‘Total Annual Fund Operating Expenses’’ (i.e., the fund’s expense ratio).575 In addition to direct and fixed fees, such as management fees, this expense ratio figure currently includes certain performance expenses that are not operating costs reflected in a fund’s statement of operations but rather are indirect expenses paid by the fund to generate performance and excludes other such expenses. Performance expenses currently reflected in a fund’s expense ratio include AFFE, interest expense, and dividends paid on short sales (although AFFE is not included in the fund’s statement of operations).576 However, the expense ratio does not currently reflect all or even most of the material performance expenses that similarly affect the fund’s performance. These include costs associated with the fund’s securities lending activities and transaction costs. For example, funds that lend securities generate income from securities lending that is included in the fund’s performance. To generate that income, the fund incurs certain expenses, such as fees to the securities lending agent. Further, it is our understanding that the income generated is used to offset the fund’s

577Funds typically engage a securities lending agent to administer their securities lending programs and compensate these agents with a share of the revenue generated by the lending program. Some funds use securities lending agents that are affiliated with the fund’s investment adviser and so this additional revenue may be used to defray some of the fund’s direct costs, such as advisory fees. The portion of securities lending revenue paid to the securities lending agent is not reflected in the fund’s fee table. Thus, using this revenue to reduce other costs of investing in the fund (where that reduction is reflected in the fee table) may make the fund appear to be less expensive. 578Commissions generally refer to charges that a broker collects to act as agent for a customer when executing and clearing trades. Spread costs are incurred indirectly when a fund buys a security from a dealer at the ‘‘asked’’ price (which is above current value) or sells a security to a dealer at the ‘‘bid’’ price (which is below current value). Market impact costs are incurred when the price of a security changes as a result of the effort to purchase or sell the security. Opportunity cost is the cost of missed trades. For more information about these categories of costs, see Concept Release: Request for Comments on Measures to Improve Disclosure of Mutual Fund Transaction Costs, Investment Company Act Release No. 26313 (Dec. 18, 2003) [68 FR 74820 (Dec. 24, 2003)] (‘‘Transaction Costs Concept Release’’), at Section II. 579Transaction costs are included in a fund’s total return because, under generally accepted accounting principles, they are either included as
part of the cost basis of securities purchased or
subtracted from the net proceeds of securities sold and ultimately are reflected as changes in the realized and unrealized gain or loss on portfolio securities in the fund’s financial statements. 580See Item 19(i)(1) of Form N–1A. Among other things, this includes the dollar amount of fees or compensation paid by the fund for securities lending activities and related services, including fees paid to the securities lending agent from a revenue split, other fees that are not included in the revenue split (such as fees paid for cash collateral management services, administrative fees, and indemnification fees), and rebates paid to the borrower. 581See Item C.6 of Form N–CEN (requiring a fund to report certain information about its securities lending activity, including: (1) Whether it is authorized to engage in securities lending transactions; (2) whether it lent its securities during the relevant period; (3) certain information about its securities lending agent(s); (4) certain information about any cash collateral manager (who is not also the fund’s securities lending agent); (5) types of payments made to securities lending agents or cash collateral managers; (6) the monthly average of the value of the portfolio securities on loan during the relevant period; and (7) net income from securities lending activity). 582See Item 3 of current Form N–1A; Items 3 and 8A of proposed Form N–1A; and Item 21(a) of Form N–1A. Money market funds are not required to provide annual portfolio turnover rates because many of their investments would already be excluded from the portfolio turnover rate calculation (which excludes securities whose maturities or expiration dates at the time of acquisition were one year or less). See, e.g., Instruction 4(d) to Item 13 of Form N–1A (providing calculation instructions for portfolio turnover rates); see also MDFP Adopting Release, supra footnote 180, at n.3. 583See, e.g., Transaction Costs Concept Release, supra footnote 578, at paragraph accompanying n.4. 584See supra footnote 157 (discussing commenters’ views on the challenges associated with transaction cost disclosure in certain jurisdictions). 585See supra Section II.B.2.b. 586See, e.g., Waranowski Comment Letter:
Wilhelm Comment Letter; Fowler Comment Letter; Balke Comment Letter; Hague Comment Letter; Woods Comment Letter; Lee Comment Letter. Some commenters did not want to receive more personalized information, including personalized fee information, with a few of these commenters Continued operating costs.577 Transaction costs are the costs a fund incurs when it buys or sells portfolio investments. These costs include commissions, spread costs, market impact costs, and opportunity costs.578 Although a fund’s fee table does not reflect securities lending costs and fund transaction costs, a fund’s prospectus and SAI include, in locations other than the fee table, other information about these costs. For example, a fund’s total return in the prospectus performance presentation reflects these costs.579 However, an investor reviewing a fund’s total return cannot identify whether the fund’s securities lending or trading activity had a positive or negative effect on the fund’s returns, or the overall costs associated with these activities. In fact, an investor would likewise not be able to ascertain the effect of the performance expenses currently included on the fund’s return. However, beyond inclusion in the total return, funds also provide certain information about securities lending income, expenses, and services in their SAIs.580 Funds also report information about their securities lending activities on Form N–CEN.581 On transaction costs, prospectuses provide a fund’s portfolio turnover rate, and SAIs include the amount of brokerage commissions the fund paid.582 This information can help investors understand how fund transaction costs may vary among different funds.583 While we require funds to provide some information related to their securities lending costs and transaction costs, we understand that there could be benefits in providing investors a more complete or focused disclosure in one location regarding performance expenses. Among other benefits, this could include more transparent cost information that would allow investors to better compare funds. At the same time, there are complexities associated with requiring funds to disclose this information in their prospectus fee tables and in the proposed summary fee
table. For instance, what is the best way
to include the information in a manner that reflects the corresponding income (or loss) to the fund from the particular activity? Moreover, there are some challenges associated with measuring certain performance expenses, such as transaction costs, including the potential for inconsistent or inaccurate measurements that may confuse or mislead investors.584 While we are not, at this time, proposing to modify fund prospectus disclosure to address these performance expenses, we are soliciting input on whether and how to include these performance expenses in the fund’s prospectus. We note, in particular, our modifications of the shareholder report expense presentation that would take a new approach to the presentation of fees and expenses designed to reflect both the direct, fixed fees as well as the material performance expenses by requiring disclosure of the fund’s net performance together with qualitative disclosure on the material expenses to performance.585 We seek comment on the proposed summary fee table and on the scope of costs and performance expenses it would reflect, and specifically on the following issues:
214. Is it helpful to investors to
require simplified, ‘‘bottom line’’ disclosure of the ongoing annual fees they will pay with their fund investment in the fee summary, and more-detailed disclosure about the components of the ongoing annual fees in the full fee table? Is it investorfriendly to provide for one total figure for ongoing annual fees and not permit a fund to include subcategories of such expenses in the fee summary? Should we also consolidate any or all of the transaction fees reported in the proposed fee summary? If so, how should Form N–1A instruct funds to consolidate this information?
215. Is it appropriate, as proposed,
that the summary fee table show the fund’s transaction fees, maximum account fee, and ongoing annual fees? Are there any other general types of fees and charges that the summary fee table should include? If so, which ones?
216. Is it appropriate not to require in
the proposed summary or full fee table or example disclosure of brokerage commissions and other fees to financial intermediaries? Do commenters agree with our approach not to require such fees because financial intermediaries that distribute the fund typically determine such fees, and the amount may vary among financial intermediaries and distribution channels? Are there reasons such fees should be disclosed?
217. Some investors commenting on
the Fund Investor Experience RFC expressed interest in a single, ‘‘all-in’’ presentation of investment costs (or in personalized fee disclosure more generally) that would reflect both fund and intermediary costs.586 Other

expressing particular concern about sharing personal information. See, e.g., Grano Comment Letter; Wilhelm Comment Letter. 587See ICI Comment Letter I. 588See, e.g., Item 3.A of Form CRS (requiring a relationship summary to include summary information about principal fees and costs, a description of other fees and costs, and specific references to more detailed information about fees and costs); Form CRS Adopting Release, supra footnote 27. 589A wrap fee program generally involves an investment account where an investor is charged a single, bundled, or ‘‘wrap’’ fee for investment advice, brokerage services, administrative expenses, and other fees and expenses. 590See, e.g., ICI Comment Letter I; Comment Letter of Teachers Insurance and Annuity Association of America (Oct. 31, 2018). These two commenters suggested that funds should no longer be required to disclose interest expense and dividends paid on short sales in prospectus fee tables to: (1) Enhance consistency with the approach to other investing costs, such as transaction costs; (2) provide a more stable measure of ongoing operating expenses; and (3) address concerns that fee table disclosure may focus investors on these costs without explaining that the strategy leading to these costs may also lead to higher net returns. These commenters suggested that disclosure about these costs should appear in fund financial statements and the SAI. AFFE is another type of performance expense currently included in the expense ratio. We discuss and request comment on AFFE disclosure more specifically below. See infra Section II.H.1.g. 591Unlike a fund’s direct costs, many performance expenses are not reported in a fund’s financial statements and therefore are not included in the fund’s expense ratio. 592See supra paragraph accompanying footnote 164 (discussing the proposed shareholder report requirement). commenters indicated that preparing combined or personalized expense information could present some challenges, including the potential need for coordination and informationsharing between funds and intermediaries.587 Should funds provide more comprehensive fee and expense presentations that account for both fund and intermediary costs? If so, how? For example, are there ways we could better integrate information an investor receives about fund costs in fund prospectuses and information an investor receives about intermediary costs in a Form CRS relationship summary? 588 If so, how? Should any integrated presentation of costs provide illustrative, standardized information about fund and intermediary costs, or should it provide investor-specific information? As another example, if a fund is only or primarily offered through one or more known wrap fee programs, should fund disclosure materials recognize the wrap fee program costs? 589 Would this approach present challenges to funds or intermediaries? If so, what are those challenges, and how could we address them? If we modify fee and expense
presentations to account for both fund and intermediary costs, should we also require performance information that recognizes both sets of costs? Would the proposed presentation of fees in terms of dollar amounts, in addition to the currently required percentage amounts, be useful to investors? Should an investment amount other than $10,000 be used? If so, what would be the appropriate amount?
218. Is the narrative statement that we
are proposing to precede the fee summary useful and appropriate? Is it helpful to note that fees reduce the value of an investment? Is it helpful to include the statement, as proposed, that investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the summary fee table or the expense example? What changes, if any, should the Commission make to the proposed narrative statement?
219. As proposed, the ‘‘Transaction
Fees’’ heading in the summary fee table would include specified line items:
Purchase Charge, Exit Charge, Maximum Purchase Charge Imposed on Reinvested Dividends, Early Exit Fee, and Exchange Fee. Should the ‘‘Transaction Fees’’ heading include all of these line items, or should the Commission limit this fee presentation in any way (e.g., by only permitting a fund to include the purchase charge and exit fee in the summary fee table)? Would the proposed inclusion of all of these line items detract from a focused presentation of transaction costs? Do commenters agree with our expectation that most funds would not include all of these line items, given the proposed instruction that any transaction fee equaling $0 should not be included?
220. Is it appropriate to move the
current ‘‘Maximum Account Fee’’ line item to its own section in the summary fee table in light of the proposed change of the headings in the fee table from ‘‘Shareholder Fees’’ to ‘‘Transaction Fees’’?
221. Is it appropriate to require a fund
to indicate the highest amount that the fee could be (and to state in its disclosure, as proposed, that a particular fee is ‘‘up to’’ that amount if the fund offers fee discounts)? Is this an effective means of indicating that charges may be lower than the maximum fee that the fund discloses in the summary?
222. Is the proposed optional
‘‘Ongoing Annual Fees with Temporary Discount’’ line item appropriate? If so, is it also appropriate to require a fund to disclose the gross figure before any such waivers, as proposed? Should these two line items appear adjacent to one another in the summary fee table, as proposed?
223. Should we modify the types of
fund costs that funds currently must include in their expense ratios, which funds would disclose in the proposed summary fee table and the full fee table? For example, should the reported expense ratio include any performance expenses—such as securities lending costs or fund transaction costs—that it does not currently include? If so, how should funds measure each newly disclosed category of performance expenses? For example, should securities lending costs be disclosed as a percentage of net assets in the prospectus, based on current disclosure of these costs in the SAI? Alternatively, should performance expenses that are currently included in the expense ratio, such as interest expense or dividends paid on short sales, not be included as a component of the expense ratio? 590 Should the presentation distinguish between direct fees and expenses (i.e., operating expenses) versus performance expenses associated with portfolio management activities that detract from fund performance (such as interest expenses, dividends paid on short sales, AFFE, securities lending costs, and fund transaction costs) and, if so, how?
224. Should a fund’s prospectus
include additional disclosure about performance expenses, in lieu of including these expenses in the fund’s expense ratio? If so, should the disclosure be quantitative or qualitative? If quantitative, how should funds measure each newly disclosed category of fund cost? 591 If qualitative, how should funds concisely describe the fee or expense? Where should the additional information appear? For instance, should funds disclose these costs in a footnote accompanying the fee
table and fee summary? As one
example, should a fund that qualitatively or quantitatively discloses these costs, if material to the fund, in a footnote to its shareholder report expense presentation under the proposal also qualitatively or quantitatively disclose these costs in a footnote to its prospectus fee table and fee summary? 592 Why or why not? Alternatively, should funds disclose these costs in connection with the prospectus’s presentation of fund performance under Item 4 of Form N– 1A given they can detract from performance? If so, should they, for example, be required to disclose the top three—or some other number—types of costs that detracted from fund performance?
225. If funds were to provide
additional disclosure of securities

593See supra footnote 577.
594For example, FINRA’s Fund Analyzer tool can help investors compare the costs of different fund investments. This tool is available at https:// tools.finra.org/fund_analyzer/. 595The current narrative states, ‘‘This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.’’ The proposed narrative states, more simply, ‘‘This example may help you understand the costs of investing in the Fund.’’ See supra Table 5. The assumptions in the proposed example relating to the amount invested in the fund, investment return, and the fund’s operating expenses are substantively identical to those in the current form, with slight changes designed to state them more simply. In addition, the current form shows, first, expenses if the investor redeems shares at the end of the period, and, second, expenses if the investor does not redeem. The proposal reverses this order because we believe that most investors treat these as long-term investments and so are less likely to redeem their shares. 596 Instruction 5(a) to Item 3 of proposed Form N– 1A; see also Item 3 of Form N–1A and Item 8A of proposed Form N–1A; supra Table 5. 597We are not proposing similar changes for the performance presentation (average annual returns), see Items 4(b)(2) and 27(b)(7)(ii) of Form N–1A; Item 27A(d)(2) of proposed Form N–1A) which, in addition, presents information over an interim period (five years), because unlike the expense example where the fees reflected are consistent over the period shown, performance information changes from year-to-year, and we believe it is important to illustrate this variability of returns over an interim period. 598See Broadridge Comment Letter II. lending costs, should they also be permitted and/or required to explain that these costs may improve a fund’s performance or, in certain cases, permit a fund to reduce its fees? If so, how could this information best be presented to help investors understand these potential considerations without adding unnecessary length or complexity to the prospectus?
226. If funds were to provide
additional disclosure about securities lending costs or fund transaction costs in prospectuses, would this disclosure complement existing disclosure requirements in the prospectus, SAI, and Form N–CEN? Or should we remove or modify those existing disclosure requirements?
227. How would modifying
prospectus disclosure to reflect securities lending costs, fund transaction costs, or other performance expenses of a fund’s portfolio management activities affect investors? What disclosure modifications would help investors better understand these costs, and conversely, are there any disclosure modifications that would contribute to investor confusion or potential misinterpretation? For example, how would reflecting additional costs in the proposed summary fee table or other quantitative presentation affect investment decisions? If we were to modify the fee presentation in a way that might change a fund’s fees, how should we inform investors of the changed requirements or transition to the new requirements in a way that minimizes investor confusion? For example, if a fund’s fee under current requirements is 0.50%, but under any new requirements that same fund, operating in the same manner, might have a fee of 0.75%. How can we help investors understand this change?
228. Do investors need more
information about how a fund’s adviser and its affiliates may receive compensation from a fund, either to better understand fund costs or to understand potential conflicts of interest? For example, some funds use securities lending agents that are affiliated with the fund’s investment adviser, which can result in the adviser and its affiliates receiving compensation from a fund in a way that the prospectus fee table does not reflect.593 As another example, some funds use affiliated broker-dealers when transacting in portfolio investments, which can result in the costs associated with these transactions accruing to affiliated persons of the fund. However, affiliated parties also could be less expensive or provide better services than those provided by unaffiliated parties. If investors would benefit from additional information about compensation that the fund’s adviser and its affiliates may receive from the fund, where should this disclosure appear? Should it be quantitative or qualitative? For instance, should funds disclose any revenue paid to the fund’s adviser or its affiliates that the fee table does not reflect (e.g., outside of the management fee), as a percent of fund assets or a percent of the fund’s total expenses? If so, where should this disclosure appear (e.g., in the prospectus fee table, a discussion accompanying the table, or elsewhere)? Should a fund be permitted or required to disclose why it selected an affiliated service provider instead of an unaffiliated third party?
229. Do investors need additional
information to help them compare the fees and expenses of different classes of a fund, or other aspects of a fund investment that differ between classes (e.g., fund performance)? For instance, do investors need more information to help them determine whether they are eligible to invest in a particular class or to compare fees, performance, or other aspects of different classes? If so, how should funds provide this information? How could we help investors better understand class eligibility, particularly when a prospectus (or shareholder report) could only cover a subset of a fund’s classes?
230. Are there ways we could reduce
complexities associated with funds offering multiple share classes with different fee structures? For example, should funds more clearly present their classes based on investor eligibility? What are the challenges of such an approach?
231. Are there ways we could
facilitate an investor’s ability to calculate costs and compare different funds? For instance, are there steps we could take to improve investors’ familiarity with, or access to, interactive calculators or fund comparison tools? 594 d. Proposed Simplified Example In addition, we propose to simplify the example in the fee summary. We are proposing to modify the current narrative that precedes the example slightly, to enhance clarity and brevity.595 We are also proposing to decrease the number of time periods that the expense example must show. While the current example shows expenses over 1, 3, 5, and 10-year periods, the proposed example would show costs over 1 year and 10 years (or 1 year and 3 years in the case of a new fund).596 We believe that having fewer time periods would help to simplify the example. At the same time, we believe that requiring a fund to present expenses over 1 and 10 years would provide meaningful disclosure regarding the effect of fees in both the short-term and long-term.597 We understand that investors typically hold mutual fund shares for a relatively long term. For example, one commenter estimated that two-thirds of fund investors have owned their funds for at least 10 years, and 80% of fund investors have held their fund investments for 5 years or more.598 The 10-year time frame is addressed to the long-term nature of many fund investments. Investors wishing information for the interim 3 and 5 year periods could find that information in the full fee table. We considered proposing to incorporate elements of the proposed shareholder report expense presentation into the prospectus in lieu of simplifying the current fee example. As discussed above, the proposed shareholder report expense presentation would disclose costs directly deducted from the fund’s assets alongside the fund’s return, which in turn would reflect direct costs as well as any performance expenses associated with the fund’s portfolio management

599See supra Section II.B.2.b.
600See supra footnote 164 and accompanying text. 601See proposed Instruction 1(c) to Item 3 of Form N–1A. 602See Fund Investor Experience RFC, supra footnote 8, at Section II.C.1. activities.599 While the shareholder report expense presentation would not itemize these performance expenses, funds would be required to discuss them qualitatively if material to the fund, in a footnote to the expense presentation.600 In addition to helping investors understand that a fund has performance expenses that are in addition to a fund’s direct costs, the proposed shareholder report presentation has other benefits. For example, the shareholder report presents a fund’s fees alongside its performance to help shareholders understand how costs and performance each affect the value of his or her investment. However, unlike the shareholder report presentation, the prospectus fee
table, fee summary, and example reflect
hypothetical future expenses (i.e., forward-looking expenses). The prospectus fee presentation—while also based on a fund’s financial statements— reflects sales loads, the expenses associated with the fund’s investments in other funds, material changes to fund expenses, estimated expenses for new funds, and only certain fee waiver arrangements. These additional fee elements make it difficult to import a presentation similar to the backwardlooking shareholder report expense presentation into the prospectus. Also, a shareholder report-type approach based on backward-looking information would be difficult to implement for new funds with short or no performance history. Moreover, because the proposed shareholder report presentation shows expenses for the past fiscal year only, it would not illustrate the long-term effect of fund fees for investors. Given these considerations, we are not proposing to incorporate elements of the proposed shareholder report presentation into the prospectus. We seek comment on the proposed simplified example, and specifically on the following issues:
232. Is the proposed simplified
example presentation appropriate, and would it be useful to investors? Would restricting the example to including expense information for 1- and 10-year periods accomplish the goal of streamlining the fee summary, while providing meaningful disclosure? Should the simplified example include different time periods, and if so, which ones? Is the proposal to require new funds to present expense information for 1- and 3-year periods appropriate?
233. Instead of providing an expense
example in the prospectus that shows estimated costs over set intervals of time based on an assumed 5% annual return, should funds base their expense example on the fund’s actual historic performance? For example, should the expense example be based on the fund’s gross performance over the past 1, 5 and 10 years? If so, how should funds that do not have a long-enough performance history be treated? Would investors benefit from a presentation based on actual rather than hypothetical investment returns? If not, why not?
234. If we were to require using an
assumed annual return, as is the case today, would the assumed 5% annual return continue to be appropriate? If not, what is a more appropriate assumption and why? Should the assumption be different for different fund types? For example, should a money market fund have a lower assumed investment return than an equity fund? What are the benefits and drawbacks of using a higher or lower assumed annual return?
235. Instead of the current fee table
example and the proposed simplified example in the prospectus, should the examples more closely resemble the expense presentation in the proposed shareholder report? If so, how should the proposed annual report presentation be modified to show the impact of transaction fees (such as purchase and exit charges)? Should the presentation be based only on costs that are directly deducted from fund assets, or all of the fees reflected in the fee table (which may include AFFE)? How should the longer-term impact of fees be reflected? For example, certain fund share classes may be intended for investors with a short time horizon and have higher ongoing annual expenses while other classes may be intended for longer-term investors and have higher up-front charges but over the long run may be less expensive. How should the proposed annual report presentation be modified for use in the prospectus to help distinguish the differences in share classes over both the short and long term? How should new funds that do not have any performance history present an example?
236. Do the different presentations of
fund fees and expenses in prospectuses and shareholder reports currently contribute to investor confusion? Would our proposed amendments to fee and expense presentations in both documents increase, reduce, or have minimal effect on the potential for investor confusion? How could we modify the presentations to reduce the potential for investor confusion? For instance, one difference is that the prospectus fee table may reflect the costs associated with investments in other funds (i.e., AFFE) while the annual report does not directly reflect these expenses. For example, a fund of funds may show an expense ratio of 0.20% in its annual report but reflect expenses of 1.00% in its prospectus fee
table because the prospectus
presentation also reflects the costs associated with investment in other funds. How can we address these differences to minimize the potential for investor confusion? e. Proposed Fee Summary Formatting Requirements We are proposing that a fund generally would not be permitted to include footnotes and other extraneous disclosure in the fee summary. We believe this is consistent with the goal of the proposed simplified fee table, which is to streamline the presentation of fees and to provide an easier-tounderstand presentation with fewer data points and a clearer picture of the total costs of investing in the fund. We are proposing an exception if omitting a footnote would cause the disclosure to be materially misleading such that the fees borne by investors would be materially higher than presented in the fee summary.601 For example, if a fund charges a ‘‘fulcrum fee,’’ by which the advisory fee varies depending on the performance of the fund, the fee in the current year could be greater than the fee reflected in the fee summary. We seek comment on the proposed fee summary formatting requirements, and specifically on the following issues:
237. Is it appropriate to limit the use
of footnotes in the fee summary, as proposed? Are there circumstances where footnotes would be useful to investors that the proposed instruction would not permit? f. New, Simplified Fee Terminology In addition to proposing to create the fee summary, we are also proposing changes in some terminology that funds would use to describe fees in the prospectus. These changes are designed to enhance the presentation of fees and investors’ understanding of these fees. The changes we are proposing in the terminology used in the fee table would flow through to the fee summary, as applicable. Plain language plays an important role in investors’ ability to use and understand fund disclosures.602 The terminology changes we propose

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