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In January 2024, the staff of the SEC’s Division of Investment Management issued guidance in the form of frequently asked questions (FAQs) related to the adoption of rule and form amendments for mutual funds and exchange-traded funds to transmit “concise and visually engaging” tailored shareholder reports (the TSR reforms). Highlights of the FAQs are summarized below.

Appropriate Broad-Based Securities Market Index

The TSR reforms require a fund to show its performance against an “appropriate broad-based securities market index,” defined as “an index that represents the overall applicable domestic or international equity or debt markets, as appropriate.” The SEC’s adopting release includes certain general guidance and examples of the types of indexes that would qualify under the revised definition, noting, for instance, that for a fund that invests primarily in the equity securities of a non-U.S. country, an index representing the overall equity market of the non-U.S. country would satisfy the requirement. In contrast, the adopting release stated that a fund that invests primarily in the equity securities of a subset of the U.S. market, such as healthcare companies, should show its performance against the overall U.S. equity market, rather than a healthcare-focused index.

In the FAQs, the SEC staff provided the following additional guidance:

  • A fixed-income or equity index that pertains to a group of countries (such as Europe or Asia), a group of countries excluding a specific country or countries (such as Asia excluding Japan), or a group of markets with shared characteristics (such as emerging markets or developed markets) would qualify as an appropriate broad-based securities market index.
  • Because, in the SEC staff’s view, the national municipal securities market may be understood as a standalone overall market, rather than a subset of the fixed income market more broadly, a fund that invests primarily in tax-exempt municipal securities, including a fund that invests primarily in the municipal securities of a single state, may use an index that reflects the national municipal securities market as its broad-based index.

    Delivery of Materials for Funds Underlying Variable Annuity or Insurance Contracts

  • For funds that are investment options underlying variable annuity or insurance contracts, the requirements of Rule 30e-1 under the Investment Company Act of 1940 to make certain materials available on a website may be satisfied by having the required underlying fund materials appear either on the variable contract issuer’s website or on the fund’s website.
  • Where a variable contract issuer delivers an electronic shareholder report of an underlying fund to an investor who has opted into e-delivery, the shareholder report must comply with the hyperlinking requirements of Form N-1A. To the extent that the website address in the hyperlink becomes stale or is otherwise inaccurate, the safe harbor in Rule 30e-1 provides that a fund satisfies its obligations to transmit shareholder reports even if it did not meet the posting requirements of the rule for a temporary period of time, provided that the fund (i) has reasonable procedures in place to help ensure that the required materials appear online as required, and (ii) takes prompt action to correct noncompliance with the rule’s website availability requirements.
  • If an underlying fund has elected to include any of the online tools described in Instruction 8 to Item 27A(a) of Form N-1A—e.g., video or audio messages, mouse-over windows, pop-up definitions or explanations of difficult concepts, chat functionality, and expense calculators—the variable contract issuer does not need to deliver a version of the shareholder report that includes these optional online tools.

    Binding Individual Shareholder Reports of Multiple Funds

  • Where an investor has invested in multiple funds (or in multiple share classes of funds), or a variable contract investor has allocated contract value to multiple underlying funds, the individual shareholder reports of each of these funds (or, as applicable, share classes) may be bound, stapled or stitched together for transmission to the investor. The SEC staff added that a fund generally should consider including a table of contents to any such bound shareholder reports for investors’ ease of use.

    Permissible Methods of Electronic Delivery

  • In addition to sending an email which includes the body of the full tailored shareholder report, a fund may deliver an email, or otherwise electronically transmit a notification to investors, that (1) includes direct links to the shareholder report(s) of the fund(s) and share class(es) that the investor owns or (2) specifies the investor’s fund(s) and share class(es) and includes a link directing the investor to a website landing page that includes direct links that are limited to the shareholder report(s) for the fund(s) and share class(es) that the investor owns.

    Compliance Date and Form N-CSR Filing

  • A fund that transmits a shareholder report prior to the compliance date (July 24, 2024) (i.e., not a “tailored” shareholder report) but files Form N-CSR after the compliance date must include that shareholder report in its N-CSR filing and is not required to include a “tailored” shareholder report.

The full list of the SEC staff’s FAQs related to the TSR reforms is available here.

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