Tailored Shareholder Reports: Navigating the SEC’s 2022 Regulatory Changes

The landscape of shareholder reports has undergone significant transformation following the Securities and Exchange Commission’s (SEC) introduction of new regulatory changes in October 2022. These changes mandate the use of Inline XBRL structured data language for Mutual Funds and Exchange-Traded Funds (ETFs), aiming to deliver clearer and more comprehensive information to investors. This blog post explores the evolution of Tailored Shareholder Reports (TSRs) and the implications of the SEC’s new rules.

Evolution of TSR Regulations

Under the previous Rule 30e-3, registered investment companies had the option to transmit shareholder reports and other materials through a specified website address, provided they met certain conditions. These included report accessibility, availability of quarterly holdings, investor notifications, and options for receiving paper copies.

However, in October 2022, the SEC introduced new rules requiring all Mutual Funds and ETFs to streamline the preparation and transmission of reports. These reports must now be annotated using Inline XBRL, highlighting critical information for investors.

Key Features of the New SEC Rules

1. Retail Investor Focus
   The new rules ensure shareholder reports are clear and concise, containing essential information for retail investors, such as fund expenses, performance, and portfolio holdings.
2. Additional Information Availability
   Investment information is available online and can be delivered in paper or electronic format upon request, ensuring accessibility for financial professionals and investors. This information includes a schedule of investments and other financial statements, which must be submitted to the SEC along with the annual and semi-annual N-CSR filing.
3. Scope Adjustment for Open-End Funds
   The SEC has removed open-end funds from the scope of Rule 30e-3 to ensure all fund investors benefit from the advantages of Tailored Shareholder Reports. This amendment guarantees the direct delivery of customized reports to open-end fund shareholders, either electronically or in paper format, reducing printing and mailing costs.
4. Fee and Expense Information in Advertisements
   Revisions to the advertising rules affect all registered investment companies and BDCs, ensuring that fee and cost statistics are accurately represented in advertisements. This change also addresses misleading claims about costs and fees.

Detailed Overview of the New Rule

The SEC adopted a new Item 27A to Form N-1A, which outlines the design and content requirements for shareholder reports. The following table presents the required content as per Item 27A:

Benefits to Investors and Funds

• Improved Transparency: Tailored reports provide clear and relevant information to investors.
• Cost Efficiency: Reduced printing and mailing costs benefit funds.
• Regulatory Compliance: Ensures compliance with SEC requirements.
• Investor Confidence: Increases transparency and trust among investors.
• Data Accuracy: Inline XBRL tagging improves the precision and reliability of financial data.

Mandating XBRL

The new rules require that each class’s shareholder report be generated and tagged with Inline XBRL. This tagging covers contents related to fund/class information, fund expenses, management discussion on fund performance, fund performance charts, statistics, material fund changes, fund holdings, changes in and disagreements with accountants, and availability of additional information.

The OEF taxonomy, introduced by the SEC, is used for tagging shareholder reports of open-end funds. Although specifically designed for Tailored Shareholder Reports, these files must also use certain tags from the “DEI” Document Entity Information Taxonomy, “US GAAP” United States Generally Accepted Accounting Principles Taxonomy, and “SRT” SEC Reporting Taxonomy.

The Inline XBRL of shareholder reports is subject to standard EFM and DQC validations, with limitations on using dimensions throughout the tagging process. Some information can only be tagged with a single dimension, while other data requires multiple dimensions, based on reporting and regulations. Generic fund information does not require tagging with any dimensional relationship.

Compliance and Implementation

SEC Compliance
Starting July 24, 2024, all annual and semi-annual reports must be tagged and filed with the SEC as Inline XBRL if they are anticipated to be filed on or after that date. Although the SEC’s requirement may seem straightforward, the process requires careful consideration. Filers must generate reports for each share class, gather the necessary information, and tag them with Inline XBRL for submission to the SEC.

Conclusion: Embracing the New Era of TSRs

The evolution of Tailored Shareholder Reports (TSRs) represents a significant shift in regulatory requirements, emphasizing the delivery of clear, comprehensive, and investor-focused information. The SEC’s 2022 changes ensure that shareholder reports are customized for retail investors, enhancing transparency and reducing costs.

Key takeaways include:

• Customization for Retail Investors: The new TSR rules ensure that reports cater specifically to retail investors, providing clear and relevant information on fund expenses, performance, and holdings.
• Enhanced Information Availability: Essential investment decision information is readily available online, in paper, or electronically at no cost.
• Scope Adjustment of Rule 30e-3: The SEC’s revision excludes open-end funds, ensuring all investors benefit from new, customized reports, leading to reduced costs.
• Advertising Rules Update: Amendments ensure that advertisements with fee and expense information are accurate and not misleading.
• Mandated XBRL Tagging: Detailed tagging using OEF taxonomy and others enhances data accuracy and compliance.

Adopting these rules brings substantial benefits to both investors and funds by promoting transparency, reducing costs, and enhancing compliance. The SEC’s commitment to protecting investors and ensuring market integrity is evident in these changes.

Tailored Shareholder Reports –  Frequently Asked Questions

About DataTracks

With 19 years of experience in delivering regulatory compliance services across 26 countries, serving over 28,000 clients, and facilitating the successful filing of 400,000 reports, DataTracks is a prominent player in the global regulatory reporting market. Our software, Rainbow by DataTracks, is specifically designed to meet SEC filing requirements in XBRL and EDGAR formats. We consistently meet deadlines and adhere to all necessary criteria when implementing new regulatory requirements.

For further information or assistance in navigating the new Tailored Shareholder Report regulations, please don’t hesitate to contact DataTracks.