SEC wants to 'modernise' disclosure framework of funds and ETFs

On the 08/06/20 at 7:45AM


Adrien Paredes-Vanheule

US financial watchdog, the Securities and Exchange Commission, on Wednesday proposed amendments to the disclosure framework around prospectuses and reports of open-ended funds and ETFs.

The modifications sought by the US financial market regulator, according to its chairman Jay Clayton, would better highlight information that is particularly important for retail shareholders to assess and monitor their fund investments such as fund performance, fund fees, fund changes or risk level. This would make easier taking investment decisions, Clayton believes. 

Regarding the disclosure of fund fees, SEC wants to simplify and clarify the way funds fees are being showcased in prospectuses with more comprehensive terms for the targeted public (retail investors). “To improve fee- and expense-related information more broadly, the proposal would also amend investment company advertising rules to promote more transparent and balanced statements about investment costs,” the regulator said. As to investment risks, SEC’s proposal seeks to make open-ended funds and ETF prospectuses focusing on principal or ‘tailored’ risks rather than listing non-principal additional risks the regulator terms “often overwhelming.”

SEC also vows to amend the shape of prospectuses itself by fostering open-ended funds and ETFs to use graphic or text features — such as tables, bullet lists, and question-and-answer formats —to promote effective communication over their products and render their online shareholders reports more readable, more user-friendly and interactive. Instead of receiving both prospectus updates and shareholder reports, the investor would only receive one single report.

More... or less transparency

Nevertheless, if those amendments are expected to bring transparency in reports of US open-ended funds and ETFs for retail investors, they could actually be viewed as less transparent for individuals interested by more in-depth information like portfolio holdings.

SEC notes in its proposal that certain information currently required in annual and semi-annual reports of open-ended funds and ETFs “may be less relevant to retail shareholders, and of more interest to financial professionals and those investors who desire more in-depth information.”

“Under the proposal, this information would be available online, delivered free of charge upon request, and 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,” the US watchdog specified.

Also, it may be harder for experienced investors to analyse open-ended fund costs related to investments in other funds as the SEC clearly states that this type of information is less relevant too for the retail investor. “Specifically, the proposal would permit open-end funds that make limited investments in other funds to disclose the fees and expenses associated with those investments (“acquired fund fees and expenses”) in a footnote to the fee table and fee summary, rather than as a fee table line item,” it said.

The SEC’s proposal will be published on and public comments will be opened for 60 days.