Rule permits electronic delivery of fund shareholder reports

The Securities and Exchange Commission (SEC) on June 4, 2018, approved a controversial rule to let mutual funds electronically provide annual and semiannual reports as their primary means of communications to shareholders.

The SEC is providing funds with an optional “notice and access” delivery method to make their shareholder reports available on a public website by amending Rule 30e-3 of the Investment Company Act of 1940.

The rule is based on a proposal the SEC issued in May 2015 in Release No. 33-9776, Investment Company Reporting Modernization. Rule 30e-3 requires mutual funds to send paper reports unless shareholders opt to receive them electronically. The change flips the default and let funds provide electronic versions of the reports unless shareholders request a paper copy.

The SEC voted 4-1 to approve the rule. It goes into effect on Jan. 1, 2021, and early adoption is not permitted.

The agency’s decision represents a victory for fund companies which have been heavily lobbying for the rule. They said electronic delivery will reduce printing and mailing costs and help protect the environment. The Investment Company Institute (ICI), the main trade group representing fund companies, said that the reduced costs of about $140 million a year on a net basis in the first three years will be passed on to the shareholders.

However, some investor and consumer advocates were opposed to the proposal because electronic delivery would harm individual investors who lack ready internet access. They objected to the rule’s requirement that investors have to specifically request a paper copy of a fund report, which is an extra hurdle for investors who prefer paper documents. As they see it, investors who prefer electronic delivery do not need a rule change to have their preferences met. Moreover, investor protection groups cited studies showing a general preference for paper documents because they heighten the ability to absorb and understand information.

The paper industry had also opposed the switch, fearing a loss in profits.

In voting for the rule, SEC Chairman Jay Clayton said website accessibility and electronic documents provide investors tools that are not available with paper documents.

“They can offer improved search functions, the ability to hyperlink and move quickly within a document and the option to more conveniently save a document for future reference,” Clayton said in a statement.

SEC Commissioner Robert Jackson, who voted against the rule, disagreed.

“The Commission today reverses the default rule for delivery of information to investors, a choice contrary to everything we know about how individual investors actually behave,” Jackson said in an emailed statement.

Barbara Roper, director of investor protection with the Consumer Federation of America, called it “an anti-investor vote.”

“After all, the policy prioritizes profits of the mutual fund industry over informed investor decision-making by erecting new barriers in the way of investors who prefer to have their disclosure documents delivered to them in paper through the mail,” said Roper, who serves as a member of the SEC’s Investor Advisory Committee (IAC). “The Commission adopted its anti-investor proposal without providing any evidence that investors who prefer electronic delivery face any difficulties in exercising that choice, without considering extensive evidence that the change is likely to reduce investor readership of key disclosures, and despite the fact that promised cost savings, to the extent they exist at all, are likely to amount to pocket change for typical main street investors.”

The ICI applauded the SEC’s decision.

“Once implemented, this new rule will create substantial savings, for the benefit of fund shareholders,” ICI president and CEO Paul Schott Stevens said in a statement. “This action will also allow shareholders to receive information in line with their preferences.”

In a related move, the commission issued Release No. 33-10503, Request for Comment on Fund Retail Investor Experience and Disclosure, to seek comment on additional ways to modernize fund information.

“The request for comment examines whether funds present information in a way that works best for investors,” Clayton said. “It requests feedback directly from retail fund investors on the design, delivery and content of fund disclosures, like prospectuses, shareholder reports and advertisements. It also solicits feedback on how to harness technology to make disclosure more interactive and personalized — and better meet the needs of 21st century investors.”

The SEC is also seeking comment in a separate document about the framework for certain processing fees that broker-dealers and other intermediaries charge funds for delivering fund shareholder reports and other materials to investors.

“In connection with Rule 30e-3’s proposal, questions were raised about the framework under New York Stock Exchange and self-regulatory organization rules for processing fees that intermediaries charge funds to forward fund shareholder reports, prospectuses and other materials to investors,” Clayton said. “The second request for comment will gather information on the assessment and appropriateness of these processing fees in advance of developing any recommendations for rulemaking or other Commission activity.”

Comments on the preliminary rulemaking documents are due Oct. 31, 2018.

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