The Division of Investment Management’s Disclosure Review and Accounting Office Publishes Takeaways on Common Issues Found in Review of Tailored Shareholder Reports

December 4, 2024

On November 8, 2024, the SEC’s Division of Investment Management’s Disclosure Review and Accounting Office (DRAO) published key takeaways based on their review and monitoring of Tailored Shareholder Report (TSR) implementation. The staff has identified several recurring issues in this report.

We recommend Funds review the full report published by the SEC to ensure their shareholder reports and associated website disclosures are compliant with rule 30e-1 under the Investment Company Act of 1940 (the “Investment Company Act”), Item 27A of Form N-1A and Form N-CSR.

The staff has observed the following recurring issues in its review of the tailored shareholder reports:

1. Expense Information
   • Several funds appear to have annualized the expenses in dollars paid on a $10,000 investment in their semi-annual shareholder report. According to Item 27A(c) of Form N-1A, the semi-annual report should reflect the dollar cost over the period and should, therefore, not be annualized. The expenses as a percent of an investor’s investment in the fund, on the other hand, must be on an annualized basis.
   • Several funds have incorrectly calculated the expenses by multiplying the percentage of costs paid by $10,000. Instead, Funds should multiply 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 according to Instruction 2(a) to Item 27A(c).
   • Expenses in dollars paid on a $10,000 investment (during the reporting period) should be rounded to the nearest dollar instead of the nearest cent. See Instruction 1(a) to Item 27A(c) of Form N-1A.
   • Funds should also consider noting that costs paid as a percentage of a $10,000 investment is an annualized figure to further assist investors.
2. Management’s Discussion of Fund Performance (MDFP)
   • In the performance table, several ETFs included their performance based on market value. This additional presentation is not permitted according to Instruction 3 to Item 27A(a) and Instruction 5 to Item 27A(d)(2) of Form N-1A.
   • Industry-focused indexes, indexes with characteristics such as “growth,” “value,” or “small or mid-cap,” do not qualify as an appropriate broad-based securities market index. See Instruction 7 to Item 27A(d)(2) of Form N-1A; see also TSR Adopting Release in text accompanying footnotes 230-233.
   • Funds are advised to use text features to make the statement that past performance is not a good predictor of the fund’s future performance noticeable and prominent. See Item 27A(d)(2)(iii)(A) of Form N-1A.
3. Fund Statistics
   • Portfolio-level statistics, such as average maturity or average credit rating, should be included under the heading “Fund Statistics” instead of under the heading “Graphical Representation of Holdings.” See Item 27A(e) of Form N-1A.
4. Graphical Representation of Holdings
   • When disclosing holdings as a percentage, the basis of the percentage should be specified as well (i.e., percentage based on net asset value, total investments, or total or net exposure). See Item 27A(f) of Form N-1A.
   • When disclosing portfolio holdings according to the credit quality, a brief description of how the credit quality of the holdings were determined, and if credit ratings assigned by a credit rating agency are used should be included. See Item 27A(f) of Form N-1A.
   • Funds should also consider selecting categories that are most helpful for investors to assess and monitor their investments.
5. Material Changes
   • If there are material fund changes disclosed in the report, the disclosure on the cover page is required. Additionally, if the cover page disclosure is included, there must be disclosures about material fund changes in the report.
6. Availability of Additional Information Online
   • Ensure all website links in the shareholder report are accurate and working.
   • The required link to the additional information on a fund’s website must be specific enough to lead investors directly to a specific item or a central site with links to the referenced information. See Instruction 9 to Item 27A(a) of Form N-1A; Instructions 1-2 to Item 27A(i) of Form N-1A.
   • Funds should consider referring to disclosures required by Items 7-11 of Form N-CSR by a term that is more descriptive of the collective information required. For example, some funds refer to these disclosures as “Annual Financial Statements and Additional Information.”
7. Inline XBRL Tagging
   • If additional indexes are tagged, they should be tagged as additional indexes with the separate tag intended for additional indexes instead of tagging all indexes as broad-based indexes.
8. Additional Issues
   • Some reports included lengthy disclosures that are not required or permitted. It is advised to remove these and only include contents that are required or permitted under Item 27A of Form N-1A.
   • Information in shareholder reports should be presented in the same order as is required under Item 27A of Form N-1A.
   • Disclosures that may be inapplicable may be omitted.

FilePoint’s team of regulatory experts has reviewed this report and can ensure we are meeting these requirements and recommendations provided by the SEC. If you have any questions, or if you need guidance on your next round of tailored shareholder reports, let us know and a regulatory expert will be in touch.